Quality costs are all the costs incurred by a business to ensure that the total service it provides to customers

conforms to the customers requirement First suggested by Quality expert Philip Crosby
In his book Quality is Free introduced the concept of quality cost Quality is free It is not the quality that costs, but the lack of quality He estimated 30% of a companys expenditure are quality costs

related

Quality control costs

Prevention costs Appraisal costs

Quality failure costs

Internal failure costs External failure costs

Prevention cost
All costs associated with error prevention in a product, process or service

Appraisal cost
All costs associated with the assurance to conformance of quality

standards/requirements, inspection, testing or observation

Internal failure cost

All costs associated with the evaluation and correction of the design

before it is released for construction, and all costs for rework on a project before it is turned over to the owner

External failure cost

Similar to internal failure costs except that they occur after the output

has been turned over to the next processor or user Often include significant intangible costs of lost reputation and good will

Quality planning costs Product-design costs Process costs Training costs Information costs

Inspection and testing costs Test equipment costs Operator costs

Scrap costs Rework costs Process failure costs Process downtime costs Price-downgrading costs

Customer complaint costs Product return costs Warranty claims costs Product liability costs Lost sales costs

Index numbers

Ratios that measure quality costs against a base value

o Labor index
Ratio of quality cost to labor hours

o Cost index
Ratio of quality cost to manufacturing cost

o Sales index
Ratio of quality cost to sales

o Production index
Ratio of quality cost to units of final product

Apparent optimum Defect level

Zone of indifference Prevention Total

Cost
Failure Apparent minimum Total quality cost

Appraisal

High

Defect level

Low

Quality Costs represent 20-30% of total costs Management will give special attention if 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 has been made To monitor the effectiveness of quality improvement initiatives

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 Ability to set cost-reduction targets and then to measure and report progress Provision of data to support formal quality management system (including, especially; those based upon the ISO9000)

1.

2.
3. 4. 5. 6. 7. 8.

Involve accountants right from the outset Decide purpose and objectives Decide how to deal with overheads Distinguish between basic work and quality related activities Collect data which offers the prospect of real gains Start by examining failure costs Evaluate the costs of inspection Collect, analyze and report quality cost data

NAC = Normal Activity base Cost

Cost
P A

P
A

F F

NAC

NAC

Time