IEN206

COST OF QUALITY March 22, 2021

Engr. Charlon Adrian C. Ruiz
What is Cost of Quality?
 “Quality is measured by the
cost of quality which is the
WHAT IS COST expense of non conformance
OF QUALITY? — the cost of doing things
wrong.”
- Philip Crosby
 “…quality cost equals actual cost minus no failure cost. That is, the cost of quality is the difference between the actual
cost of making and selling products and services and the cost if there were no failures during manufacture or use and no
possibility of failure.”

“Quality costs usually are defined as costs incurred because poor quality may or does
exist.”

“The cost of not meeting the customer’s requirements — the cost of doing things wrong.”

“All activities that are carried out that are not needed directly to support departmental
[quality] objectives are considered the cost of quality.”

WHAT IS COST OF QUALITY?

 an approach to
WHAT IS COST measure and track
OF QUALITY? financial impact of
various quality activities
Why do Organizations Need to
Analyze Quality Related Cost?
 Iceberg of Cost of Poor Quality

WHY DO
ORGANIZATIONS
NEED TO
ANALYZE
QUALITY
RELATED COST?
 To assess the
WHY DO effectiveness of the
ORGANIZATIONS management of quality.
NEED TO
ANALYZE To determine problem
QUALITY areas, opportunities,
RELATED COST? savings and action
priorities.
Categories of Cost of Quality
 Prevention Costs
CATEGORIES OF Appraisal Costs
COST OF
QUALITY Internal Failure Costs

External Failure Costs

 Prevention Costs
• costs associated with efforts in design and
manufacturing that are directed toward the
prevention of nonconformance. Broadly speaking,
prevention costs are all costs incurred in an effort to
CATEGORIES OF “make it right the first time.”
COST OF • Quality planning and engineering
QUALITY • New products review
• Products/ process design
• Process control
• Burn-in
• Training
• Quality data acquisition and analysis
 Appraisal Costs
• costs associated with measuring, evaluating, or
auditing products, components, and purchased
materials to ensure conformance to the standards
CATEGORIES OF that have been imposed. These costs are incurred
to determine the condition of the product from a
COST OF quality viewpoint and ensure that it conforms to
specifications.
QUALITY
• Inspection and test of incoming material
• Product inspection and test
• Materials and services consumed
• Maintaining accuracy of test equipment
 Internal Failure Costs
• incurred when products, components, materials, and
services fail to meet quality requirements, and this
failure is discovered prior to delivery of the product
to the customer. These costs would disappear if there
CATEGORIES OF were no defects in the product.
COST OF • Scrap
QUALITY • Rework
• Retest
• Failure analysis
• Downtime
• Yield losses
• Downgrading/ off-specing
 External Failure Costs
• occur when the product does not perform
satisfactorily after it is delivered to the customer.
CATEGORIES OF These costs would also disappear if every unit of
product conformed to requirements.
COST OF
QUALITY •
•
Complaint adjustment
Returned product/ material
• Warranty charges
• Liability costs
• Indirect costs
CATEGORIES OF
COST OF
QUALITY

Relationship between Prevention and Appraisal Costs, and

Failure Cost
Analysis of Costs of Quality
ANALYSIS OF COSTS
OF QUALITY
The usefulness of costs of
quality stems from the
leverage effect; that is,
invested in prevention and
appraisal have a payoff
in reducing dollars
incurred in internal and
external failures that
exceeds the original
investment.
ANALYSIS OF COSTS
OF QUALITY
The usefulness of costs of
quality stems from the
leverage effect; that is,
invested in prevention and
appraisal have a payoff
in reducing dollars
incurred in internal and
external failures that
1-10-100 Rule. One dollar spent on prevention will save
exceeds the original $10 on appraisal and $100 on failure costs.
investment.
 Identification of Improvement Analysis using
Pareto Analysis

Pareto Analysis - A tool used to establish

priorities, dividing contributing effects into the “vital
ANALYSIS OF few” and “useful many.” The analysis is based on
Pareto principle, which states that for any given
COSTS OF effect (an output of a process or a symptom in this
case), there are a number of contributors. A
QUALITY relatively few contributors make the greatest
contribution, or also known as vital few. Data are
presented using a Pareto diagram or Pareto chart.
The Pareto analysis consists of identifying cost of
quality by category, or by product, or by type of
defect or nonconformity.
ANALYSIS OF
COSTS OF
QUALITY
 Example:

Number of Scrap and

Type of Defects
Defects Rework Works

Defective Components 18 ₱ 320,000.00

ANALYSIS OF Cold solder joints 9 ₱ 200,000.00
COSTS OF Insufficient solder 51 ₱ 1,500,000.00
QUALITY Misaligned components 26 ₱ 480,000.00

All other causes 6 ₱ 184,000.00

Missing components 12 ₱ 204,000.00

 Relating Quality Costs to Business Measures
The reporting of quality costs is usually done on a
basis that permits straightforward evaluation by
management.
Managers want quality costs expressed in an index
that compares quality cost with the opportunity for
ANALYSIS OF quality cost.

COSTS OF The usual method of reporting quality costs is in the

form of a ratio, where the numerator is quality-cost
QUALITY amount and the denominator is some measure of
activity, such as:
a. hours of direct production labor;
b. amount of direct production labor;
c. amount of processing costs;
d. amount of manufacturing cost;
e. amount of sales;
f. units of product.
 Relating Quality Costs to Business Measures

ANALYSIS OF
COSTS OF
QUALITY
 Example: Procurement Appraisal Cost vs. Total Purchased
Material Cost for a Microwave Manufacturer

Procurement Purchased Material

Month
Appraisal Costs Costs
ANALYSIS OF June ₱ 340,000.00 ₱ 4,080,000.00
COSTS OF July ₱ 316,000.00 ₱ 5,080,000.00

QUALITY August
September
₱ 396,000.00
₱ 288,000.00
₱ 4,640,000.00
₱ 4,600,000.00
October ₱ 308,000.00 ₱ 4,320,000.00
November ₱ 248,000.00 ₱ 4,480,000.00
THANK YOU!
REFERENCES
Besterfield, D. H., Besterfield-Michna, C., Besterfield, G. H., Besterfield-Sacre, M.,
Urdhwareshe, H., & Urdhwareshe, R. (2012). Total Quality Management. New
Delhi: Pearson Education, Inc.
Juran, J. M., & De Feo, J. A. (2010). Juran's Quality Handbook: The Complete Guide to
Performance Excellence. New York: The McGraw-Hill Companies, Inc.
Montgomery, D. C. (2009). Introduction to Statistical Quality Control. Hoboken, NJ:
John Wiley & Sons, Inc.
Oakland, J. S. (2014). Total Quality Management and Operational Excellence. New
York, NY: Routledge.
Omachonu, V. K., & Ross, J. E. (2005). Principles of Total Quality. Boca Raton, FL: CRC
Press LLC.