The document discusses the costs of quality and their categorization. It defines cost of quality as the cost of nonconformance or doing things wrong. Costs of quality are categorized as internal failure costs, external failure costs, appraisal costs, and prevention costs. Internal failure costs occur before delivery due to failures to meet requirements. External failure costs happen after delivery due to customer issues. Appraisal and prevention costs support conformance evaluation and defect reduction activities. Quantifying and analyzing quality costs can help identify opportunities to improve quality and reduce costs. Prevention is emphasized as the most effective approach.

1. AQM
QUALITY AND COSTS
DFT (AP-06)
NIFT BANGALORE
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2. AQM Cost of Quality
“Cost of quality is …
the expense of nonconformance –
Chapter 1
the cost of doing things wrong.”
DEFINITION • The "cost of quality" is not the price of
& MEANING creating a quality product or service. It is
the cost of NOT creating a quality product
or service.
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3. AQM Cost of Quality
• A product that meets or exceeds its
design specifications and is free of
defects that mar its appearance or
Chapter 1 degrade its performance is said to have
high quality of conformance.
DEFINITION
& MEANING
• Preventing, detecting and dealing with
defects cause costs that are called
quality costs or costs of quality.
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4. AQM Cost of Quality
Opportunity to Reduce Real Costs
Chapter 1
• Quality costs enables to
Understand hidden costs.
DEFINITION Reduce and eliminate unnecessary costs.
& MEANING • Prevent problems from happening.
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5. AQM Cost of Quality
Understated Quality Costs
Chapter 1
• Quality costs are real and estimated at:
25% of costs in manufacturing
DEFINITION 35% of costs in service industry
& MEANING • Quality costs can be categorised to
enable better understanding.
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6. AQM Cost of Quality
• Quantify the size of the quality problem in
language that will have an impact on upper
management.
Chapter 2 • Identify major opportunities for reduction in
cost of poor quality throughout all activities in
OBJECTIVES an organisation.
OF • Identify opportunities for reducing customer
EVALUATION dissatisfaction and associated threats to
sales revenues.
• Provide a mean of measuring the result of
quality improvement activities instituted to
achieve the above mentioned opportunities.
• Align quality goals with organisation goals.
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7. AQM Cost of Quality
QUALITY COSTS
Chapter 3
CATEGORIES
OF QUALITY
COSTS
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8. AQM Cost of Quality
Internal Failure Costs
Chapter 3 “ The costs of deficiencies discovered
before delivery which are associated with
CATEGORIES the failure (nonconformities) to meet
OF QUALITY explicit requirements or implicit needs of
COSTS external or internal customers.”
• Also include avoidable losses and
inefficiencies that occur even when
requirements and needs are met.
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9. AQM Cost of Quality
Internal Failure Costs
• Failure to Meet Customer Requirements
and Needs
Chapter 3 • Scrap
• Rework
CATEGORIES • Lost or missing information
OF QUALITY • Failure analysis
COSTS • Scrap and rework- supplier
• Reinspection, retest
• Changing processes
• Redesign of hardware/software
• Rework in internal support operations
• Downgrading
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10. AQM Cost of Quality
Internal Failure Costs
• Cost of Inefficient Processes
• Variability of product characteristics
Chapter 3 • Unplanned downtime of equipment
• Inventory shrinkage
CATEGORIES • Variation of process characteristics from “best
OF QUALITY practice”
COSTS • Non-value added activities.
• “These are the costs that would disappear
if no deficiencies existed.”
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11. AQM Cost of Quality
External Failure Costs
Chapter 3 “ The costs associated with the
CATEGORIES deficiencies that is found after
OF QUALITY product is received by the
COSTS customer.”
• Also includes the lost opportunities for
sales revenue.
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12. AQM Cost of Quality
External Failure Costs
• Failure to Meet Customer Requirements
and Needs
Chapter 3 • Warranty charges
• Complaint adjustment
CATEGORIES • Returned material
OF QUALITY • Allowances
COSTS • Penalties due to poor quality
• Rework on support operations
• Revenue losses in support operations.
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13. AQM Cost of Quality
External Failure Costs
• Lost Opportunities for Sales Revenue
• Customer defections
Chapter 3 • New customer lost because of quality
• New customer lost because of lack of capability.
CATEGORIES
OF QUALITY
COSTS • “These costs also would disappear if no
deficiencies existed.”
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14. AQM Cost of Quality
External Failure Costs
• Those costs incurred if poor quality
Chapter 3 products receive further processing
CATEGORIES • If this occurs then the previous processing
OF QUALITY is wasted •cost
Why would you do this?
COSTS
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15. AQM Cost of Quality
Appraisal Costs
Chapter 3 “Appraisal costs support activities
CATEGORIES whose purpose is to determine the
OF QUALITY degree of conformance to the
COSTS quality requirements.”
• Any defective parts and products should
be caught as early as possible in the
production process.
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• Sometimes called inspection costs.

16. AQM Cost of Quality
Appraisal Costs
• Examples
• Incoming inspection and test
Chapter 3 • In-process inspection and test
CATEGORIES • Final inspection and test
OF QUALITY • Document review
COSTS • Balancing
• Product quality audits
• Managing accuracy of test equipments
• Inspection and test materials and services.
• The kind of the work done is decisive, not
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17. AQM Cost of Quality
Appraisal Costs
Chapter 3 • Those costs incurred because poor
quality products might exist
CATEGORIES
OF QUALITY
• If these costs are necessarythis? the
•Why would you permit then
process is flawed and management is
COSTS
guilty.
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18. AQM Cost of Quality
Prevention Costs
“Prevention costs support activities
Chapter 3 whose purpose is to reduce the
number of defects.”
CATEGORIES
OF QUALITY
COSTS • The most effective way to manage quality
costs is to avoid having defects in the first
place.
• much less costly to prevent a problem
from ever happening than it is to find and
correct the problem after it has occurred.
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19. AQM Cost of Quality
Prevention Costs
• Examples
• Quality planning
Chapter 3 • New-product review
CATEGORIES • Process planning
OF QUALITY • Process control
COSTS • Quality audits
• Supplier quality evaluation
• Training.
• Do not include basic activities.
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20. AQM Cost of Quality
Prevention Costs
Chapter 3 • Those costs incurred because
management is committed to
CATEGORIES prevent poor quality products from
OF QUALITY happening
COSTS
• Why would you not do this?
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21. AQM Cost of Quality
• Important points to be kept in mind
• Definitions should be tailor-made for each
organization.
Chapter 4
• Failure cost elements are key categories.
FINALIZING • Agreement should be reached on the categories
THE of cost to include before any data are collected.
DEFINITIONS • Certain costs routinely incurred may have been
accepted as inevitable but are really part of the
cost of poor quality.
• As the detailed categories of the cost of poor
quality are identified, some categories will be
controversial.
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22. AQM Cost of Quality
• ISO 9004-1 (1994), Quality
Management and Quality System
Elements- Guidelines, Section 6,
“Financial Consideration of Quality
Chapter 5
Systems.”
INTERNATIONAL
STANDARDS • Identifies the approaches to data collection
and reporting.
• Quality costing approach
• Process cost approach
• Quality loss approach.
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23. AQM Cost of Quality
• Quality Costing Approach
• Failure, appraisal and prevention approach.
Chapter 5 • Process Cost Approach
INTERNATIONAL • Collects data for a process rather than a
product.
STANDARDS
• Costs are divided into cost of conformity and
cost of nonconformity.
• Quality Loss Approach
• Collects data on many of the “hidden” costs.
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24. AQM Cost of Quality
Benefits of an improvement effort
• Reduced costs of errors
6
Chapter
• Improved process capability
RETURN ON • Reduced customer defections
QUALITY • Increase in new customers.
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25. AQM
Cost of Quality
Return on Quality
Prevention Costs Benefit
costs
Appraisal Costs
Prevention Costs
Failure Costs
• Internal Appraisal Costs
• External
Failure Costs
Before Quality After Quality
Cost Alignment Cost Alignment
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26. AQM Cost of Quality
Optimum Cost of Poor Quality
• Minimum level of total quality costs when the
quality of conformance is 100%, i.e., perfection.
Chapter 6
RETURN ON
QUALITY
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27. AQM Cost of Quality
• Would it not make sense to prevent
Chapter 7 poor quality products from happening?
PREVENTION OF • How can this be done?
POOR QUALITY • Whose responsibility is this?
PAYS
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28. AQM Cost of Quality
How to Prevent Poor Quality
Chapter 7 • Prepare to measure costs of quality
PREVENTION OF
– Determine categories of quality
costs
POOR QUALITY
PAYS – Create measurement system that
captures categories of quality
costs
• Assign responsibility to collect data
• Analyse collected data.
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29. AQM Cost of Quality
Determine Quality Cost Categories
Chapter 7 • Understand product
PREVENTION OF
• Understand process
POOR QUALITY • Understand where problems occur
PAYS • Determine precisely what goes wrong
• Determine what costs represents each
problem.
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30. AQM Cost of Quality
Assign Responsibility
Chapter 7 • Make individuals at all levels
responsible for collecting quality cost
PREVENTION OF data:
POOR QUALITY – If quality cost data is required then
PAYS make it the responsibility of the
person who creates the cost to
collect the data
• If no one is responsible no one will
bother.
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31. AQM Cost of Quality
Analyse Collected Data
Chapter 7 • Data on its own is useless
PREVENTION OF
• Data must be analysed to extract
meaning.
POOR QUALITY
PAYS • Determine what knowledge is required.
• Develop an analysis system that
provides the knowledge which is
required.
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32. AQM Cost of Quality
Data Collection Approaches
• Established accounts
Chapter 7
• Analysis of ingredients of established
accounts
PREVENTION OF • Basic accounting documents
POOR QUALITY • Estimates
PAYS
• Temporary records
• Work sampling
• Allocation of total resources
• Unit cost data
• Market research data
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33. AQM Cost of Quality
Useful Quality Cost Knowledge
Chapter 7 • What needed to be known is useful.
PREVENTION OF
• What do not need to be known is
useless.
POOR QUALITY
PAYS • Only ask for knowledge that is needed to
be known.
• Demand that knowledge is presented so
that it can be understood easily.
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34. AQM Cost of Quality
Summarize Collected Data
Chapter 7 The most basic ways are:
PREVENTION OF
• By product, process, component, defect
type, or other likely defect concentration
POOR QUALITY pattern.
PAYS
• By organizational unit.
• By category cost of poor quality.
• By time.
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35. AQM Cost of Quality
Reporting the Results
Chapter 7 Must provide the following perspective with
integration into overall performance
PREVENTION OF reporting system of organisation.
POOR QUALITY • How do customer see us? (customer
PAYS perspective)
• What must we excel at? (internal
perspective)
• Can we continue to improve and create
value? (innovation and learning perspective)
• How do we look to shareholders? (financial
perspective)
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36. AQM Cost of Quality
Gaining approval for the improvement
program
• Establish that costs are large enough to
justify the action
Chapter 7 • Use the grand total to demonstrate the need.
PREVENTION • Relate the grand total to business measures.
OF POOR • Show the subtotals for the broad major
QUALITY PAYS groupings of quality costs.
• Estimate the savings and other benefits.
• Calculate the return on investment.
• Use a successful case history.
• Identify the specific improvement projects.
• Propose the structure of the improvement
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program.

37. AQM Cost of Quality
Management is Responsible
Chapter 7 • Management decides what to produce in
terms of Products (goods and / or
PREVENTION OF services).
POOR QUALITY • Management assigns responsibilities to
PAYS produce products.
• Management is accountable for
effectively using resources to produce
products.
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38. “Cost of quality is …
the expense of nonconformance –
the cost of doing things wrong.”
Crosby, P. 1979, Quality is Free, McGraw-Hill, Toronto
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