Costs of

QUALITY
“Quality costs are the foundation for quality
systems economics.”
Armand Feigenbaum
Quality costs have traditionally
served as the basis for EVALUATING
investments in quality programs.
 1 Cost Of Quality Assurance or cost of
achieving good quality

Cost Of Non Conformance or cost

associated with poor-quality products 2
Cost Of Quality Assurance

• Prevention Costs

• Appraisal Costs
PREVENTION COSTS

Prevention costs are incurred in planning,

implementing, and maintaining a quality system
to prevent poor quality in products and services.
PREVENTION COSTS
• Quality planning costs: The costs of developing and implementing
the quality management program.

• Product-design costs: The costs of designing products with quality

characteristics.

• Process costs: The costs expended to make sure the productive

process conforms to quality specifications.
PREVENTION COSTS
• Training costs: The costs of developing and putting on quality
training programs for employees and management.

• Information costs: The costs of acquiring and maintaining (typically

on computers) data related to quality, and the development and
analysis of reports on quality performance.
APPRAISAL COSTS

Appraisal costs are those associated with measuring,

evaluating, or auditing products, components,
purchased materials, or services to determine their
degree of conformance to the specified standards.
APPRAISAL COSTS
Inspection and testing: The costs of testing and inspecting materials, parts,
and the product at various stages and at the end of the process.

Test equipment costs: The costs of maintaining equipment used in testing

the quality characteristics of products.

Operator costs: The costs of the time spent by operators to gather data for
testing product quality, to make equipment adjustments to maintain quality,
and to stop work to assess quality.
Cost of Non Conformance

• Internal Failure Costs

• External Failure Costs

INTERNAL FAILURE COSTS

Internal failure costs are incurred when

products, components, materials, and services
fail to meet quality requirements prior to the
transfer of ownership to the customer.
INTERNAL FAILURE COSTS
Scrap costs: The costs of poor-quality products that must be discarded,
including labor, material, and indirect costs.

Rework costs: The costs of fixing defective products to conform to

quality specifications.

Process failure costs: The costs of determining why the production

process is producing poor quality products.
INTERNAL FAILURE COSTS
Process downtime costs: The costs of shutting down the
productive process to fix the problem.

Price-downgrading costs: The costs of discounting poor-

quality products—that is, selling products as “seconds.”
EXTERNAL FAILURE COSTS

External failure costs are incurred when a

product does not perform satisfactorily after
ownership is transferred to the customer or
services offered are nonconforming.
EXTERNAL FAILURE COSTS
Customer complaint costs: The costs of investigating and
satisfactorily responding to a customer complaint resulting
from a poor-quality product.

Product return costs: The costs of handling and replacing

poor-quality products returned by the customer.
EXTERNAL FAILURE COSTS
Warranty claims costs: The costs of complying with product warranties.

Product liability costs: The litigation costs resulting from product

liability and customer injury.

Lost sales costs: The costs incurred because customers are dissatisfied
with poor-quality products and do not make additional purchases.
 Industrial Engineers wants quality costs reported in a
manner that can be easily interpreted and is meaningful.

One format for reporting quality costs is with index

numbers, or indices.

Index numbers are ratios that measure quality costs

relative to some base value
 Measuring and Reporting Quality Cost

Labor Cost Sales Production

index index index index

The ratio of The ratio of The ratio of The ratio of

quality cost to quality cost to quality cost quality cost to
direct labor manufacturing to sales units of final
hours cost product
Problem # 1: The H&S Motor Company produces small motors for use in
lawnmowers and garden equipment. On 2006, the Cost of Quality Assurance is
how many percentage of the year’s total Quality Cost? ANSWER: 22.46%
Problem # 2: H&M Company’s 2006 Cost of Non Conformance is how many
percentage of the year’s total Quality Cost? ANSWER: 77.54%
Problem # 3: H&M Company’s prevention costs increased by what
percentage from 2006 to 2009? ANSWER: 315.93%
Problem # 4: H&M Company’s and appraisal costs thus
decline by how many percentage? ANSWER: -30.97%
Why H&M Company has increased prevention costs and a
decline on appraisal costs?
ANSWER
Prevention is critical in reducing both internal and external
failures. By instituting quality training programs, redesigning
the production process, and planning how to build in product
quality, companies are able to reduce poor-quality products
within the production process and prevent them from
reaching the customer.

Since fewer poor-quality products are being made from 2006

to 2009, less monitoring and inspection is necessary
Problem # 5: What is H&M Company’s Quality Sales Index in 2008?
ANSWER: 12.66%
Problem # 6: What is H&M Company’s Quality Manufacturing
Cost Index in 2007? ANSWER: 45.18%
References:

• Operations Management by William Stevenson

• Operations Management by Russell and Taylor