Total Quality Management

Cost of Quality

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Understand Quality Costs
• Understand quality costs enables you to
– Understand hidden costs
– Reduce and eliminate unnecessary cost
• Prevent problems from happening
• Management responsibility to enable this

• Quality costs are real and estimated at:

– 25% of costs in manufacturing
– 35% of costs in service industry
• Quality costs can be categorised to enable better
understanding

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Why calculate Quality Cost

 Management will give special attention when quality is measured in

monetary terms
 Quality costing is one of the tools
◦ to provide initial assessments and hard evidence that improvement is
needed or had been made
◦ To monitor the effectiveness of quality improvement initiatives
◦ To be used in a generic term by senior management, shareholders and
financial institutions, so that they can readily understand implication of
quality in the term of money
◦ Cost of quality failure is calculated as a percentage of profit or annual
turnover
◦ It is easy to understand
 By front-line operator
 By middle management

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Benefits of using quality costing

 Greater accuracy in the evaluation and forecasting of resource use

 Justification for investment in the prevention and appraisal of

failures

 Ability to cost and compare performance across all departments

functions and activities

 Identification and prioritization of activities, processes and

departments in terms of corrective action, investment, or quality
improvement initiatives

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Benefits of using quality costing (2)

 Ability to set cost-reduction targets and then to measure and report

progress

 Ability to produce “local” data which improves understanding of resource

utilization objectives and targets at all levels throughout the company

 Provision of data to support formal quality management system (including,

especially; those based upon the ISO9000)

 Enable decisions about quality to be made in an objective and systematic

manner

 Promoting TQM and a company-wide quality improvement culture

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 COST OF QUALITY
 Qualitycosts are defined as costs associated with non-
achievement of product/service quality. In simple
terms, quality cost is the cost of poor products/services.

 The cost of poor quality can add to other costs such as

design, production, maintenance, inspection, sales, etc.
Quality costs cross department boundaries by involving
all activities of the organization – marketing,
purchasing, design, manufacturing, service, etc.

 The price of nonconformance (Philip Crosby) or the

cost of poor quality (Joseph Juran), the term 'Cost of
Quality', refers to the costs associated with providing
poor quality product or service.
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 Founders Point of View
• Phillip B. Crosby (Quality is free . . . ):
• The system for causing quality is prevention, not
appraisal – Quality is Free
• The performance standard must be Zero Defects,
not "that's close enough"
• The measurement of quality is the Price of Non-
conformance.
• Cost of quality is only the measure of operational
performance
• “Quality is free. It’s not a gift, but it is free. What
costs money are the unquality things -- all the
actions that involve not doing jobs right the first
time.”

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 Total Quality Management (TQM)

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 Total Quality Management (TQM)
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Revenues

Max Profit

Cost

Max Quality

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 Founders Point of View
• Feigenbaum (Originator of ‘Total Quality’
concept)
Definition of Quality costs (1956)
Appraisal costs
Prevention costs
Failure costs

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Cost of Quality
 Cost of Achieving Good Quality
◦ Prevention costs
 costs incurred during product design
◦ Appraisal costs
 costs of measuring, testing, and analyzing
 Cost of Poor Quality
◦ Internal failure costs
 include scrap, rework, process failure, downtime, and
price reductions
◦ External failure costs
 include complaints, returns, warranty claims, liability,
and lost sales
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 Prevention Costs
 Quality planning costs  Training costs
◦ costs of developing and ◦ costs of developing and
implementing quality putting on quality training
management program programs for employees
 Product-design costs and management
◦ costs of designing  Information costs
products with quality
characteristics ◦ costs of acquiring and
 Process costs maintaining data related to
quality, and development of
◦ costs expended to make reports on quality
sure productive process
conforms to quality performance
specifications

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Examples of prevention Cost
◦ Application screening
◦ Capability studies
◦ Controlled storage
◦ Design review
◦ Equipment maintenance &
repair
◦ Field testing
◦ Fixture design and fabrication
◦ Forecasting
◦ Housekeeping
◦ Job descriptions
◦ Market analysis
◦ Pilot projects
◦ Procedure writing
◦ Prototype testing
◦ Procedure reviews
◦ Quality incentives
◦ Safety reviews
◦ Time and motion studies
◦ Survey
◦ Quality training
◦ salesperson evaluation and
selection
◦ Personnel reviews
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 Appraisal Costs
Inspection and testing
◦ costs of testing and inspecting materials, parts, and
product at various stages and at the end of a process
Test equipment costs
◦ costs of maintaining equipment used in testing quality
characteristics of products
Operator costs
◦ costs of 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

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Examples of appraisal cost
 Audit  Laboratory test
 Document checking  Personnel testing
 Diagram checking  Procedure testing
 Equipment calibration  Prototype inspection
 Final inspection  Receiving inspection
 In-process inspection  Shipping inspection

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 Internal Failure Costs
 Scrap costs
◦ costs of poor-quality
products that must be
discarded, including labor,
material, and indirect costs
 Rework costs
◦ costs of fixing defective
products to conform to
quality specifications
 Process failure costs
◦ costs of determining why
production process is
producing poor-quality
products
 Process downtime costs
◦ costs of shutting down
productive process to fix
problem
 Price-downgrading costs
◦ costs of discounting poor-
quality products—that is,
selling products as
“seconds”
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 External Failure Costs
 Customer complaint costs
◦ costs of investigating and
satisfactorily responding to a
customer complaint resulting
from a poor-quality product
 Product
return costs
◦ costs of handling and replacing
poor-quality products returned
by customer
 Warranty claims costs
◦ costs of complying with
product warranties
 Product liability costs
◦ litigation costs resulting
from product liability
and customer injury
 Lost sales costs
◦ costs incurred because
customers are
dissatisfied with poor
quality products and do
not make additional
purchases
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Difficulties in using Quality costing

 Management have not believed in the possibilities of improvement

 Quality costing is demanding

◦ It requires a lot of data of each activity related to quality

 Other limitations

◦ Does not resolve quality problems

◦ Does not provide specific actions
◦ vulnerable to short-term mismanagement
◦ difficult to match effort and accomplishment
◦ subject to measurement errors
◦ may neglect important or include inappropriate costs

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Steps in implementing quality cost

1. Involve accountants right from the start

2. Decide purpose and objectives
3. Decide how to deal with overheads
4. Distinguish between basic work and quality related activities
5. Collection data which offers the prospect of real gains
6. Start by examining failure costs
7. Evaluate the costs of inspection
8. Analyze and use the data
9. Collecting and reporting quality cost data

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 Determine Quality Cost Categories

• Understand your product

• Understand your process
• Understand where problems occur
• Determine precisely what goes wrong
• Determine what costs represents each
problem

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