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Collecting quality related cost data Introduction

Dale and Plunkett state that the collection and synthesis of quality costs is very much a matter of searching and shifting through data which have been gathered for other purposes ((1991), Quality Costing, Chapman & Hall, London.Dale and Plunkett, 1991, p. 38). The cost of quality refers to the total expenditure that an organization incurred for its overall quality. Campanella (1999, p.4) Purpose of collecting quality related cost. To display the importance of quality related cost to top management.

The prime purpose of the quality improvement is to gradually eliminate or reduce the cost of poor quality, i.e. to improve the activities related to the appraisal and failure costs, these data will tell management the accurate cost of poor quality and indicate which activities are the most expensive through Pareto analysis. Accordingly, management can identify the directions and magnitude of the quality improvement opportunities. This information is useful in the investment justification of the quality improvement alternatives such as investment in prevention activities or equipment.

To show the impact of quality-related activities on business criteria;i.e. prime cost, profit and loss accounts If scrap costs result from worker errors, the scrap costs are assigned to the processs overheads. This will provide management with clear pictures of who is causing defects and how much they cost. In addition, by tracing quality losses to product attributes, parts, processes, engineering, and vendors, management can take corrective actions toward the right direction. To assist in identifying projects and opportunities for improvement.
Improvement targets may be set after quality improvement actions are evaluated and selected. Under this circumstance, improvement targets are set and quality cost budgets are prepared according to the savings of required activity driver quantities for each quality-activity of the selected quality improvement actions.

To enable comparison of performance with other division or companies Collection of Quality related cost enables a company to demonstrate his commitment to quality and its ability to continuously improve its system. To establish bases for budgets with view to exercising budgetary control over the whole quality operation.
Some defects are more costly than others and some mean much more to the customers than others. Thus, the data of quality related can tell the quality department where to concentrate its quality improvement efforts

Reasons not collecting quality related cost A Lack of understsanding of the concept and principles of quality costing amongst the management team. An acute lack of information and data The profitable nature of busisness.

Uses of COQ information To identify the magnitude of the quality improvement opportunities ABC, together with other techniques such as work sampling, can trace resource costs (including overhead costs) to various activities in a rational way which avoids double-counting. Thus, ABC can create the accurate costs of PAF-related activities for the PAF approach and of COCand CONC-related activities for the process cost approach. The prime purpose of the quality improvement is to gradually eliminate or reduce the cost of poor quality, i.e. to improve the activities related to the appraisal and failure costs for the PAF approach and to the CONC for the process cost approach. ABC will tell management the accurate cost of poor quality and indicate which activities are the most expensive through Pareto analysis. Accordingly, management can identify the directions and magnitude of the quality improvement opportunities. This information is useful in the investment justification of the quality improvement alternatives such as investment in prevention activities or equipment. To identify where the quality improvement opportunities exist By integrating the ABC system and the quality system, the cost of poor quality can be traced to its sources. Hence, the integrated system can identify where the quality improvement opportunities exist and provide the following benefits (OGuin, 1991, p. 72): By tracing quality losses to product attributes, parts, processes, engineering, and vendors, management can take corrective actions toward the right direction. By tracing and costing vendor returns by vendor and parts, purchasing managers will understand the true costs of buying from particular vendors. This will avoid forcing purchasing managers to buy strictly on price. If scrap costs result from worker errors, the scrap costs are assigned to the processs overheads. This will provide management with clear pictures of who is causing defects and how much they cost. The integrated system arms the quality department with defect and rework cost information. Some defects are more costly than others and some mean much more to the customers than others. Thus, the system can tell the quality department where to concentrate its quality improvement efforts. By tracing warranty and return costs to their products, it will eliminate the tendency for product managers to rush a product through testing, or ship defective goods to achieve their sales targets. Before tracing quality costs to their sources, we should dig out their root causes by using the cost driver analysis of ABC process view in order to direct improvement efforts to the cause of cost and avoid treating the symptom. Table IV gives a list of some possible cost drivers of four COQ components. For example, the root causes of the internal failure rework could be design error, defective purchased material, deficient tooling and maintenance, and worker error. If we find out the real root cause of excessive rework cost is defective purchased material, then we could effectively

solve the problem by helping improve the suppliers quality system or searching another supplier. For another example, if excessive in-process inspections are due to complex design, then we can encourage designers to simplify the design by using the number of different part numbers as a performance measure or activity driver. To plan the quality improvement programs A quality improvement program should depict quality improvement actions, improvement targets, and quality cost budgets. Improvement targets may be set after quality improvement actions are evaluated and selected. Under this circumstance, improvement targets are set and quality cost budgets are prepared according to the savings of required activity driver quantities for each quality-activity of the selected quality improvement actions. On the contrary, quality improvement actions may be worked out according to improvement targets set by management just like the approach of target costing. In this scenario, management may establish quality improvement targets for every unit of the organization. Management may request purchasing to reduce vendor quality costs by 20 or 40 percent in a year. The amount of rework, which is the activity driver of rework activity, may be targeted to be cut by 30 percent. Target quality costs are derived from the quality improvement targets under the present operational conditions. Then, various quality improvement actions are evaluated one by one till the ones, whose budgeted quality costs are not greater than target quality costs, are found. In either case, quality cost budgets are constructed incorporating improvement targets by using the budgeted activity driver quantities based on improved activities and the moving average rates (or the last periods rate) of activity drivers. This method can be applied in either the PAF approach or the process cost approach (Sharman, 1996). To control quality costs Since management establishes quality improvement targets for every unit of the organization, management can then track actual performance to these targets after one periods operation. If improvement targets are not met, the variances between actual and budgeted quality costs will emerge. The variances may represent unanticipated quality loss. The variances force management to exploit what is causing the variance and encourage management to eliminate the source of quality loss. This feedback allows management to continuously plan the quality improvement programs and control quality costs (OGuin, 1991, p. 74). The method described above is the budget control of quality costs. It may report quality costs monthly. However, it is not fit for daily operation control. Turney (1991, pp. 197-9) demonstrated how ABC was used for total quality control by utilizing daily COQ reporting in a printed circuit board (PCB) plant. The ABC system was used to prepare a report on the cost of poor quality for each activity immediately after each of the three daily shifts and to show graphically the trend in physical defects and cost. The report allows management to focus immediately on the quality problems with the biggest cost impact. The ABC system also prepared daily a top ten offenders list that reports the ten products with the highest cost of poor quality on the previous day. It pinpointed the poor quality products and provided the greatest potential for redemption. When a product unit on this list was scrapped, a report, which showed the cause of the problem as well as the cost, was prepared and sent to the person most likely to correct the problem. This use of ABC made quality problems visible within a matter of hours, or even minutes. Turney suggested linking ABC with computer-integrated manufacturing (CIM) to prepare COQ reports for real-time and cost-effective control.