QualityCost

QUALITY COST

All business organizations use financial controls. These financial controls involve a comparison of actual and budgeted costs, along with an associated analysis and action on the difference between actual and budget. Quality costs are those categories of costs that are associated with producing, identifying, avoiding, or repairing products that do not meet requirements. It emerged as a financial control tool for management and as an aid in identifying opportunities for reducing manufacturing cost. Engineers or quality control professionals should know the quality cost in order to effectively communicate in the language of general management ?? namely, money. Moreover, quality cost is an effective tool to convince top management to commit on quality improvement.

There are four categories of quality cost:

1. Prevention costs
These are 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 "make it right the first time."
The important subcategories include:
a. Quality planning and engineering
b. New products review
c. Product/process design
d. Process control
e. Burn?in
f. Training
g. Quality data acquisition and analysis

Prevention cost also include assurance costs. (Some treat it as an independent category as in the figures of this handout.)

The costs of the activities that adequately prepare inputs to the manufacturing process in the production of equipment at required quality levels and, through system and product audits, that assure quality plans and procedures are being effectively implemented.

ISO 9000 quality system certification would be one of the examples.

2. Appraisal costs
Appraisal costs are those costs associated with measuring, evaluating products, components, and purchased materials to ensure conformance to the standards that have been imposed. These costs are incurred to determine the condition of the product from a quality viewpoint and ensure that it conforms to specifications.

The major subcategories are:
a. Inspection and test of incoming materials
b. Product inspection and test
c. Materials and services consumed for inspection or testing
d. Maintaining accuracy of test equipment

3. Internal failure costs
Internal failure costs are incurred when products, components, materials and services fail to meet quality requirements, and this failure is discovered prior to delivery of the product to customer. These costs would disappear if there were no defects in the product.

The major subcategories are:
a. Scrap
b. Rework
c. Retest
d. Failure analysis
e. Downtime
f. Yield losses
g. Downgrading

4. External failure costs
External failure costs occur when the product dose not perform satisfactorily after it is supplied to the customer. These costs would also disappear if every unit of product conformed to requirements or specifications.

The major subcategories are:
a. Complaint adjustment
b. Returned product/materials
c. Warranty charges
d. Liability cost
e. Indirect costs and market erosion

There is no definite or universal proportion among the four categories of quality cost. It varies depending upon the business or industry. In order to find the best standards in certain industry, BENCHMARK technique may be used. The following is an example for a farm electrical firm.