Quality Costing• Involves quantifying the total cost of quality-related efforts and

deficiencies. • Shows the importance of quality-related activities to management;

demonstrate the cost of non-quality to an organization; track the causes and effects of the problem, enabling the working out of solutions using quality improvement teams, and then monitoring progress.

• Its a powerful tool for enhancing a company’s effectiveness as it is used as a technique in the introduction and development of Total Quality Management (TMQ).

• Provides practical advice on how to set about introducing and developing a quality costing system and using the data that emerges.

Approaches to Measure Cost of Quality

• The Quality costs are categorised into Prevention-Appraisal-Failure (PAF). This approach is most widely accepted for quality costing. The failure costs in this approach can be further classified into 2 subcategories- Internal failure & External failure. The 3 categories of costs can be described as:

• Prevention costs• Appraisal costs• Failure Costs Internal failure costs External failure costs

Total Cost of Quality = Prevention Costs + Appraisal Costs + Internal Failure Costs + External Failure Costs

Process for undertaking an Initial Cost study

Salient Points for an Initial Cost Study

• 1. Established expense accounts• 2. Define and analysis the ingredients of

established expense accounts• 3. Improve accounting documents• 4. Include estimates• 5. Use temporary records• 6. Utilize work sampling• 7. Improve allocation of total resources• 8. Track unit cost data• 9. Utilize market research data

Disadvantages of PAF approach• It is difficult to decide which activities stand for prevention of quality failures

since almost everything a well-managed company does has something to do with preventing quality problems.

• There are a range of prevention activities in any company which are integral

to ensuring quality but may never be included in the report of quality costs. • Practical experience indicates that firms which have achieved notable

reductions in quality costs do not always seem to have greatly increased their expenditure on prevention.

• Original PAF model does not include intangible quality costs such as “loss of

customer goodwill” and “loss of sales”.

Contd….• It is sometimes difficult to uniquely classify costs (e.g. design reviews) into

prevention, appraisal, internal failure, or external failure costs. • The PAF model focuses attention on cost reduction and ignores the

positive contribution to price and sales volume by improved quality. • As mentioned above, the classic view of an optimal quality level is not in

accordance with the continuous quality improvement philosophy of Total Quality Management.

• The key focus of Total Quality Management is on process improvement,

while the PAF categorization scheme does not consider process costs. Therefore, the PAF model is of limited use in a Total Quality Management program.