Cost of Quality

APPENDIX 1A

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

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 1A-2

Learning Objective 7

Identify the four types

of quality costs and
explain how they
interact.

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 1A-3

Quality of Conformance
Costs incurred to prevent defects or that
result from defects in products are known as
quality costs. Many companies are working
hard to reduce their quality costs.

When the overwhelming majority of products

produced conform to design specifications
and are free from defects.

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Prevention and Appraisal
1A-4

Costs
Support activities
Prevention whose purpose is to
Costs reduce the number
of defects

Incurred to identify
defective products
Appraisal Costs before the products
are shipped to
customers

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Internal and External Failure
1A-5

Costs
Incurred as a result
Internal Failure of identifying defects
Costs before they are
shipped

Incurred as a result
of defective
External Failure
products being
Costs
delivered to
customers

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Examples of Quality Costs

Prevention Costs Appraisal Costs
• Testing and inspecting
• Quality training
• Quality circles incoming materials
• Final product testing
• Statistical process
• Depreciation of testing
control activities
equipment

Internal Failure Costs External Failure Costs

• Cost of field servicing and
• Scrap
• Spoilage handling complaints
• Warranty repairs
• Rework
• Lost sales

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 1A-7

Distribution of Quality Costs

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Learning Objective 8

Prepare and
interpret a quality
cost report.

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 1A-9

Quality Cost Reports

Quality cost reports provide an estimate of the financial consequences
of the company’s current defect rate.

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 Quality Cost Reports in
1A-10

Graphic Form
$10 20

18
9
Quality

Quality Cost as a Percentage of Sales

8 16
reports
Quality Cost (in millions)

7 14
External External can also External External
6 Failure Failure 12 Failure Failure

5
be 10

4 Internal
prepared 8 Internal

3 Internal
Failure in graphic 6 Internal
Failure

2
Failure
form. 4
Failure
Appraisal Appraisal
Appraisal Appraisal
1 2
Prevention Prevention Prevention Prevention
0 0
1 2 1 2
Year Year

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 Uses of Quality Cost
1A-11

Information

Help managers see the financial

significance of defects.

Help managers identify the relative

importance of the quality problems.

Help managers see whether their

quality costs are poorly distributed.

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 1A-12

Limitations of Quality Cost

Information

Simply measuring and reporting quality cost

problems does not solve quality problems.

Results usually lag behind quality

improvement programs.

The most important quality cost, lost sales,

is often omitted from quality cost reports.

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 1A-13

ISO 9000 Standards

ISO 9000 standards have become
international measures of quality.
To become ISO 9000 certified, a
company must demonstrate:
1. A quality control system is in use, and the system clearly
defines an expected level of quality.
2. The system is fully operational and is backed up with detailed
documentation of quality control procedures.
3. The intended level of quality is being achieved on a sustained
basis.

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 1A-14

End of Appendix 1A

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