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QUALITY COSTING

QUALITY COSTINGQUALITY COSTING

Quality Cost :The expenditure incurred by theproducer, by the user and by the community,associated with product or service quality. (BS

4778-2)

Quality Related cost : The expenditure incurred

in defect prevention and appraisal activities plusthe losses due to internal and external failure.(BS 4778-2)

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THE ROLE OF QUALITY COSTING IN TOTALTHE ROLE OF QUALITY COSTING IN TOTAL

QUALITY MANAGEMENTQUALITY MANAGEMENT

What is TQM?

A management philosophy embracing all activitiesthrough which the needs and expectations of the

customer and the community, and the objectivesof the organization are satisfied in the mostefficient and cost effective way by maximizing the

potential of all employees in a continuing drivefor improvement.( BS 4478: Part 2)

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THE ROLE OF QUALITY COSTING IN TOTALTHE ROLE OF QUALITY COSTING IN TOTAL

QUALITY MANAGEMENTQUALITY MANAGEMENT

The evolution of Quality

Management.

The importance of Quality in aBusiness context.

The case for quality costing.

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QUALITYQUALITY

MANAGEMENTMANAGEMENT

QUALITY COSTING

Coordinated activities to direct and control an organization withregard to quality. (ISO 9000:2005)

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DEFINITIONS OF QUALITYDEFINITIONS OF QUALITY

Quality is fitness for use (Juran)

Quality is conformance to requirements (Crosby)

Quality should be aimed at the needs of the

consumer, present and future (Deming)

Quality is the loss a product causes to societyafter being shipped, other than any losses caused

by its intrinsic functions. (Taguchi)

QUALITY COSTING

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Definition of Quality (ISODefinition of Quality (ISO

9000:2005)9000:2005) Degree to which a set of inherent characteristics

fulfils requirements

Note1. the term quality can be used with adjectivessuch as poor, good or excellent.

Note2. inherent, as opposed to assigned, meansexisting in something, especially as a permanentcharacteristics.

Note3.requirement need or expectation that isstated, generally implied or obligatory

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What is a Quality product?What is a Quality product? Has the right configuration according to

specifications

Is reliable

Is delivered on time

Does what it is supposed to do

QUALITY COSTING

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WHY QUALITY?WHY QUALITY? MORAL ASPECTS

We do not want to make products that will harm or kill someone

TO COMPLY WITH EXTERNAL REQUIREMENTS

TO AVOID PRODUCT LIABILITY

LACK OF QUALITY COSTS MONEY

MARKETING

QUALITY COSTING

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EVOLUTION OF QUALITYEVOLUTION OF QUALITY Inspection Activities such as measuring, examining,

testing, gauging one or more characteristics of a product or

service and comparing these with specified requirements todetermine conformity

Quality control part of quality management focused on

fulfilling quality requirements

Quality assurance part of quality management focused onproviding confidence that quality requirements will be

fulfilled.

Quality Management - Coordinated activities to direct andcontrol an organization with regard to quality

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EVOLUTION OF QUALITYEVOLUTION OF QUALITY TQM- A management philosophy embracing all

activities through which the needs andexpectations of the customer and the community,and the objectives of the organization aresatisfied in the most efficient and cost effective

way by maximizing the potential of all employeesin a continuing drive for improvement.

( BS 4478: Part 2)

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EVOLUTION OF QUALITYEVOLUTION OF QUALITY QUALITY INSPECTION / CONTROL

Too late 100% inspection do not work

Expensive

Inspector Scrap, rework, unhappy customers

Creates a barrier between operator and customer

INPUT OUTPUTINSPECTIONPROCESS

REWORK

SCRAP

QUALITY COSTING

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EVOLUTION OF QUALITYEVOLUTION OF QUALITY QUALITY TOOLS ASSURANCE

QUALITY CANNOT BE INSPECTED INTO A PRODUCT QUALITY

HAS TO BE BUILT INTO EACH PROCESS

INPUTOUTPUT

PROCESS

QUALITY

TOOLS(SPC)

QUALITY COSTING

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INTRODUCTIONINTRODUCTION

What is the cost of quality?

Does it raise the price of goods andservices?

Are huge savings possible byimplementing continual improvement

efforts?

QUALITY COSTING

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MEANING OF QUALITY COSTSMEANING OF QUALITY COSTS

DIFFERENT INTERPRETATIONS:

COSTS OF ATTAINING QUALITY

COSTS OF RUNNING THE QUALITYDEPARTMENT

COST OF POOR QUALITY

QUALITY COSTING

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DEFINITIONDEFINITION -- QUALITY COSTSQUALITY COSTSQUALITY COSTS are the total of the cost incurred by:

Investing in the prevention of non-conformance to

requirements Appraising a product or service for conformance to

requirements

Failing to meet requirements

Total Quality Costs= prevention costs+ failure costs +

appraisal costs

QUALITY COSTING

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WHY ZERO DEFECTS?WHY ZERO DEFECTS?ASK YOURSELF

IS IT NECESSARY TO GO FOR ZERO

DEFECTS?

WHY ISNT 99.9% GOOD ENOUGH?

QUALITY COSTING

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WHY ZERO DEFECTS?WHY ZERO DEFECTS? FIVE MINUTES OF UNSAFE DRINKING WATER

EVERY MONTH!

TWO UNSAFE LANDINGS PER WEEK AT ONE OFTHE BUSIEST AIRPORT!

QUALITY COSTING

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WHY ZERO DEFECTS?WHY ZERO DEFECTS?

SUDDENLY THE QUESTFOR

ZERO DEFECTSMAKES A LOT MORE SENSE!

QUALITY COSTING

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WHY QUALITY COSTS?WHY QUALITY COSTS? SPEAK IN MONETARY TERMS

QUANTIFY THE SIZE OF THE QUALITY PROBLEM INA LANGUAGE THAT WILL HAVE AN IMPACT ONTOP MANAGEMENT.

THE OVERALL SIZE OF QUALITY COSTS

THEIR PREVALENCE IN AREAS BEYOND MANUFACTURE

THE MAJOR AREAS FOR IMPROVEMENT

QUALITY COSTING

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WHY QUALITY COSTS?WHY QUALITY COSTS? IDENTIFY MAJOR OPPORTUNITIES FOR COST

REDUCTION

IDENTIFY OPPORTUNITIES FOR REDUCINGCUSTOMER DISSATISFACTION AND ASSOCIATED

THREATS TO INCREASE SALES

EXPAND BUDGETARY AND COST CONTROLS

STIMULATE IMPROVEMENT THROUGHPUBLICATION

QUALITY COSTING

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WHY QUALITY COSTS?WHY QUALITY COSTS?

More and more companies arediscovering that controlling the

cost of quality helpseliminate problems, reduce excess

inventory and increasecommunication.(P. Crosby)

QUALITY COSTING

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CATEGORIES OF QUALITYCATEGORIES OF QUALITY

COSTSCOSTS

QUALITY COSTING

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SIGNIFICANCE OF QUALITYSIGNIFICANCE OF QUALITY

COSTSCOSTS QUALITY COSTS COME RIGHT OFF

YOUR BOTTOM LINE

QUALITY COSTS CAN BE UP TO 30%

OF COMPANY TURNOVER

JURAN CALLS THIS AS THE GOLDIN THE MINE

QUALITY COSTING

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COSTSCOSTSLike all things there is a price to pay for

quality. This total cost can be split into twofundamental areas: Non Conformance.

This area covers the price paid by not havingquality systems or a quality product.

Conformance.Conformance is an aim of quality assurance.This aim is achieved at a price.

QUALITY COSTING

CATEGORIES OF QUALITY

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COSTSCOSTSNON-CONFORMANCE:

INTERNAL FAILURE COSTS

EXTERNAL FAILURE COSTS

QUALITY COSTING

C GO S O QCATEGORIES OF QUALITY

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COSTSCOSTSINTERNAL FAILURE COSTS

SCRAP

REWORK

FAILURE ANALYSIS

REINSPECTION / RETEST

DOWNGRADING

DOWNTIME

QUALITY COSTING


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COSTSCOSTSEXTERNAL FAILURE COSTS

WARRANTY CHARGES

COMPLAINT ADJUSTMENT

RETURNED MATERIAL

ALLOWANCES

RECALL

QUALITY COSTING


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COSTSCOSTSCONFORMANCE:

APPRAISAL COSTS

PREVENTION COSTS

QUALITY COSTING


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COSTSCOSTSAPPRAISAL COSTS(Costs incurred to determine the

degree of conformance to qualityrequirements) Incoming inspection and test

In-process inspection and test

Final inspection and test

Product quality auditMaintaining accuracy of test accuracy

Inspection and test materialsQUALITY COSTING


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COSTSCOSTSPREVENTION COSTS

(Costs incurred to keep failure and appraisalcosts to a minimum)

Quality planning New products review

Process planning Process control Quality audits

Supplier quality evaluation Training Preventive maintenance

QUALITY COSTING

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Quality Cost ElementsQuality Cost ElementsQuality Cost Elements are the detailed functions,

tasks, or expenses which, when properly

combined, make up the quality cost categories.

For e.g. quality planning is an element of

prevention, in-process inspection is an element ofappraisal, rework is an element of (?), andcustomer returns are an element of external

failure costs.

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Quality Cost ElementsQuality Cost ElementsThe elements making quality cost categories are

different from industry to industry.

Quality Cost Elements in health care differ significantlyfrom those in manufacturing.

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Quality Cost ElementsQuality Cost ElementsIn developing detailed elements for your organization,the approach taken is to describe the activities or

work being performed, which can be consideredquality costs- i.e. work that would not have to beperformed if quality were, always would be, perfect.

Using the category definitions as a guide, fit thesetasks into proper categories. For e.g. if the task is

being accomplished to prevent poor quality, the costof the task is a prevention cost.

Quality Cost BasesQuality Cost Bases

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The prime value of a quality cost system is identifyingopportunities for improvement and then providing ameasurement of that improvement over time.

Since the volume of business in total, or in any particularproduct or service line, will vary with time, realdifferences (improvements) in the cost of quality canbest be measured as a percent of, or in relation to a

base.

The base should be representative of, and sensitive to,

fluctuations in business activity.


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Measurement bases against which quality costsmay be compared

A labour base- such as total labour, direct labour

A sales base such as net sales billed or sales valueof finished goods/services

A unit base such as the number of units produced,the number of services performed, or the volume ofoutput


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For effective use of a quality cost system, it is preferable to havemore than one base. For long-range planning purposes, totalquality costs as a percent of net sales is used. For current,ongoing applications, the bases selected should be related to

the specific areas for improvement.

Internal failure costs as a percent of total production/servicecosts

External failure costs as an average of net sales

Procurement appraisal costs as a percent of total purchased

material costs.

Quality CostQuality Cost

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Quality CostQuality Cost

YEARYEAR

19991999 20002000 20012001 20022002

Quality CostsQuality Costs

PreventionPrevention $ 27,000$ 27,000 41,50041,500 74,60074,600 112,300112,300

AppraisalAppraisal 155,000155,000 122,500122,500 113,400113,400 107,000107,000

Internal failureInternal failure 386,400386,400 469,200469,200 347,800347,800 219,100219,100

External failureExternal failure 242,000242,000 196,000196,000 103,500103,500 106,000106,000

TotalTotal $ 810,400$ 810,400 829,200829,200 639,300639,300 544,400544,400

Accounting MeasuresAccounting Measures

SalesSales $ 4,360,000$ 4,360,000 4,450,0004,450,000 5,050,0005,050,000 5,190,0005,190,000

Mfg costsMfg costs 1,760,0001,760,000 1,810,0001,810,000 1,880,0001,880,000 1,890,0001,890,000

Quality Costs and IndexQuality Costs and Index

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Quality Costs and IndexQuality Costs and Index

Quality index = (100)

total quality costs

base

Quality cost per sale = = 18.58$810,400(100)

4,360,000QUALITY QUALITY MANUFACTURING

YEAR SALES INDEX COST INDEX

1999 18.58 46.042000 18.63 45.182001 12.66 34.002002 10.49 28.80

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HOW DO WE IMPROVE?HOW DO WE IMPROVE? EFFICIENCY Relationship between

the result achieved and theresources used.(ISO 9000:2005) DOING THE SAME THINGS WE DO NOW, BUT WITH FEWER RESOURCES

EFFECTIVENESS- Extent to whichplanned activities are realized and

planned results achieved. (ISO 9000:2005) DOING THINGS WHICH ARE MORE SUITED TO THE NEEDS OF THE BUSINESS

THAN THE ONES WE DO NOW.

QUALITY COSTING

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QualityQualityCost RelationshipCost Relationship

Increased prevention costs lead toIncreased prevention costs lead to

decreased failure costsdecreased failure costs

Improved quality leads toImproved quality leads to

increased sales and market shareincreased sales and market shareQuality improvement at the designQuality improvement at the design

stagestageHigher quality products canHigher quality products can

command higher pricescommand higher prices

Quality costs reductionQuality costs reduction

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It helps businessto:

Satisfy therequirements oftheir customers.

Makes the workof their

employees moreinteresting.

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SummarySummary Quality cost cannot eliminate the

costs of non-conformance, it is only atool to measure.

Quality cost is measure ofeffectiveness and efficiency of a

Quality Improvement Programme

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EXERCISE 1EXERCISE 1COMPARE THE EXTERNAL FAILURE COSTS BORNE BY THE BUYERAND THE SELLER

Technical support calls

Preparation of support answer books

fix releases

Shipping of updated product

Added expense of supporting multiple versions of the product in the field

Wasted time

Lost data

Investigation of customer complaints

Refunds and recalls

Coding / testing of interim bug

Lost business

EmbarrassmentFrustrated employees quit

Demos or presentations to potential customers fail because of the software

Failure when attempting other tasks that can only be done once

QUALITY COSTING

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SOLUTIONSOLUTIONSe l ler : ex t e rna l f a i l u re cos ts These are the types of costs absorbed bythe seller that releases a defectiveproduct.

Cust om er : fa i lu r e cost s

These are the types of costs absorbed bythe customer who buys a defectiveproduct.

QUALITY COSTING

EXERCISE 2EXERCISE 2

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ASSIGNING QUALITY COSTS TO THE APPROPRIATE CATEGORY

A textile manufacturer was attempting to calculate its quality-related costs for the first time. Themanagers decided that the following activities were quality costs:

Administration, audit and improvement

Air conditioning

Calibration and maintenance of production equipment used to evaluate quality

Colour matchingscrap

Complaints handling

Downgrading

Inspection and test

Production operators

How would you classify each of these elements?

A prevention cost? (P)

An appraisal cost? (A)

An internal failure cost?( I)

An external failure cost? (E)

Not a quality cost at all? (N)

Write the code for your answer(P, A, I, E or E) against each element.

EXERCISE 3EXERCISE 3

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RANKING PRIORITIES FOR ACTIONRANKING PRIORITIES FOR ACTION

An organisation obtains this failure cost information on itsdifferent product lines:

PRODUCT FAILURE COSTS $ MANUFACTURING

COST $

FAILURE COSTS AS

% MANUFACTURINGCOSTS

A 45,000 1,350,000 3.3

B 30,000 400,000 7.5

C 5,600 100,000 5.6

D 5,000 27,500 18.2

E 3,300 300,000 1.1

Which product line(s) should be given top priority for investigating andReducing failure costs? Ring your choice(s) in the product column.

Give explanations for your answers.

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Thank You for your attention.

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