NAME: Carlos Manuel S.

Abalos DATE: August 23, 2017

SUBJECT: BEC102 – Total Quality Management SECTION: III-BSBA-H

CHAPTER 2 Quality Costs

Introduction

 Quality means cost-effectiveness. It means reducing expenditure by eliminating wastes through

systematic quality management approach
 Quality cost is a tool to demonstrate cost of poor quality to the management as well as the entire
organization. It will also highlight the importance of TQM activities to the top management.
 TQM aims at gradual reduction of wasteful expenditure and eventually their total elimination.

Cost of Quality

 Cost of quality (COQ) is the sum of costs incurred by an organization in preventing poor quality.

PREVENTION APPRAISAL

FAILURE

Internal External

 This is called the PAF model, name abbreviated from the first three letters of the categories of
quality cost which will be discussed below.

Category Definition
These are the planned costs incurred by an organization to ensure that
no defects occur in any of the stages such as design, development,
production, and delivery of a product of a service. They are incurred
to reduce the inspection as well as the failure costs.

These include:
Prevention Costs  TQM implementation
 Education and training of employees
 Process improvement efforts
 Process control
 Market research
 Product qualification
 Field testing
  Preventive maintenance
 Calibration of instruments
 Audits
 Quality assurance staff
These are incurred in verifying, checking or evaluating a product or
service. They are incurred due to lack of confidence in the quality of
product or service either due to the incoming material or due to
process.

Appraisal costs These include:

 Incoming inspection
 Internal product audit
 Supplier evaluation and audit
 Inspection during process
 Final inspection
These are incurred by an organization because the product or service
did not meet the expected requirements and the product had to be fixed
or replaced or the service had to be repeated. These are due to the
incurred failure of the organization to control defects in the product

Classification of Failure Cost

 Internal failure cost – includes costs of every failure that
takes place before the product is delivered to the customers. It
accrues due to defective processes. These include:
o Rejected material supplied by vendor
o Rejected pieces of sub-assemblies
o Rejected products at final inspection
Failure costs
o Scrap on account of poor workmanship
o Overtime due to non-conforming products
 External failure costs – these are on-cost failure of the
product after its delivery to the customers
o Warranty costs
o Free replacements given due to failure of items
supplied
o Cost incurred to travel to customer’s site for repair
o Cost of products returned
o Cost of customer complaint administration
o Cost of customer follow up and field service
department

Reducing Costs

Category Pointers
 The establishment of a Quality System in every organization calls for
Reduction of prevention cost
the preparation of a quality manual and a set of procedures.
  Prevention cost means expenditure.
 Information generated from inspection should be utilized carefully
by the organization to reduce future costs.
Progressive reduction of
 An organization should try to make best use of the available data
appraisal costs
within the organization in the form of inspection records to improve
quality and reduce the need for inspection.
 There should be no occasion to reject a product or service either at
the initial stage, the intermediate stage or the final stages
 Right the first time will only happen if the processes are streamlined
Reduction of failure costs and made effective and efficient.
 Scraps and reworks are the biggest waste in any organization.
 Systematic action should be taken to reduce the rework and the scrap
by following TQM principles
 Costs which cannot be identified easily. These include customer-
Hidden costs
incurred costs, lost reputation costs and customer dissatisfaction costs.

Juran’s Model of Optimum Quality Costs

 Relationship 1: The quality level increases when the number of the defects in the product or service
reduces
 Relationship 2: The cost of non-conformance (failure cost) decreases as quality level improves
 Relationship 3: The quality level increases when the cost of conformance (sum of prevention and
appraisal cost) increases
 Relationship 4: Total quality cost is the sum of both non-conformance and conformance.
 The lowest tip is optimal cost.

Analysis of COQ for improvement

 Management should use the COQ data to identify and prioritize improvement opportunities. The
first priority is to eliminate external failures and then internal failures
 COQ Analysis brings the following benefits to the organization:
o Brings out the magnitude of quality improvement in the organization. It further leads
to establishing goals for the organization to improve quality
o Enables cost reduction owing to steps taken for improvement based on the analysis
o Enables taking steps to improve customer satisfaction
o Displaying the results motivates employees to improve further