What do we mean by Quality Cost?

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Module I. Introduction to Quality Management

Lecture 5 -What do we mean by Quality Cost?

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Quality costs are defined as those costs that are associated with the non-achievement of product or service quality as defined by the requirements established by the organization and its contracts (agreements) with customers. In simple terms, quality cost is the cost incurred by the firm because of producing poor quality products. Measurement and analysis of various cost aids in tracking the impact of an effective quality management system. Quality costs can be summed up as costs of preventing of non-conformance of requirements, inspecting product/service for non- conformances and failure in meeting specifications. The American Society for Quality Control (1971) has defined four major categories for quality costs, which are provided below:

Prevention Costs

Prevention costs are incurred in planning, implementing, and maintaining of a quality practice. It include salaries and developmental costs for process control approaches, information systems, and all other costs associated with making the product right the first time. Also, costs associated with education and training is included in this category. Defect identification and removal and the cost of a quality audit are included in the prevention cost.

External Failure Costs

External failure costs are incurred when the product does not perform satisfactorily after it is shipped to the end customer. If there are no defective units, the external failure cost can be zero. However, cost incurred due to customer complaints, costs of investigation and adjustments if required, and those associated with receipt, handling, repair (if possible), and replacement of defective products comes within the external failure cost. Warranty cost (failure of a product within the warranty time) which is specifically monitored in industries also fall under this category.

Appraisal Costs

Appraisal costs are related with measuring, evaluating, or inspecting products, components, or purchased materials to determine their degree of conformance to specified design standards. Such costs include dealing with the inspection and test of incoming materials as well as product inspection and testing at various stages of manufacturing till final acceptance. Appraisal costs are associated with managing the outcome, whereas prevention costs are associated with managing the goal.

Internal Failure Costs

Internal failure costs are incurred when products, sub assemblies, components or materials fail to meet quality requirements prior to the transfer of ownership to the internal customer. These costs will disappear if there were no defects or defective in the product while it is manufactured in- house. Internal failure costs also include labor and overhead cost associated with any internal repair.

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