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The use of the term "quality cost" is

confusing to some people. It does not refer to


costs such as using a higher grade leather to
make a wallet or using 14K gold instead of
gold plating in jewelry. Instead the term
quality cost refers to all of the costs that are
incurred to prevent defects or that result
from defects in products.



the policies, procedures, techniques, and
mechanisms that help ensure that
management's response to reduce risks
identified during the risk assessment process
is carried out. In other words, control
activities are actions taken to minimize risk.


Preventive activities are designed to deter the
occurrence of an undesirable event. The
development of these controls involves
predicting potential problems before they
occur and implementing procedures to avoid
them.



Detective activities are designed to identify
undesirable events that do occur and alert
management about what has happened. This
enables management to take corrective action
promptly.


Policies
Procedures
Sequences or combinations of procedures
Assignments of duties, responsibilities, and
authorities
Physical arrangements or processes
Combinations of the above.



of activities performed because contaminants
and waste have been produced but not
discharge into the environment.


To ensure that the contaminants and waste
produced are not released to the environment

To ensure that the level of the contaminants
released to an amount that complies with
environmental standards



the cost of activities performed after
discharging contaminants and waste into
the environment.

Realized external failure cost are those
incurred and paid for by the firm.

Unrealized external failure cost, or societal
costs, are caused by the firm but are
incurred and paid for by parties outside the
firm.
A compliance cost is expenditure of time or
money in conforming with government
requirements such
as legislation or regulation. For example,
people or organizations registered for value
added taxhave the extra burden of having to
keep detailed records of all input tax and
output tax to facilitate the completion of VAT
returns. This may necessitate them having to
employ someone skilled in this field, which
would be regarded a compliance cost.



Meeting Obligations Imposed by Regulation
A Working Definition
Some Costs Are Less tangible
Some Are Non-Quantifiable
Compliance Cost versus Administrative and
Economic Costs


regulations that facilitate the collection of
taxation

regulations that require businesses to record
information

regulations that impose obligations on
business for the benefit of third parties



Because the cascading effects of ongoing
noncompliance can geometrically accelerate
the costs of and number of people affected
by a given case, prevention or, failing that,
early recognition and intervention are vital.
The overall costs of government action have
to be set against the expected benefits. A
fundamental requirement of sound policy
analysis is that the expected benefits to
society as a whole from government action
will exceed the overall costs.

Net Benefit = Benefits less Costs
(administration/compliance/direct/economic)


PREVENTION COST
APPRAISAL COST
INTERNAL FAILURE COST
EXTERNAL FAILURE COST

Prevention costs support activities whose
purpose is to reduce the number of defects.
Companies employ many techniques to
prevent defects for example statistical
process control, quality engineering, training,
and a variety of tools from total quality
management (TQM).
Appraisal costs, which are sometimes
called inspection costs, are incurred to
identify defective products before the
products are shipped to customers.


External failure costs include warranty,
repairs and replacements, product recalls,
liability arising from legal actions against a
company, and lost sales arising from a
reputation for poor quality. Such costs can
decimate profits.


Internal failure costs result from
identification of defects before they are
shipped to customers. These costs include
scrap, rejected products, reworking of
defective units, and downtime caused by
quality problem.

A quality cost report details the prevention
costs, appraisal costs, and internal failure
costand external failure cost that arise from
company's current level of defective products
or services. Companies often construct
a quality cost report that provides an
estimate of the financial consequences of the
company's current level of defects.


Time to correct (in hours) Plus out-of-pocket
cost (including material & services) = Event
cost to fix
Then
Event Cost to fix Times Frequency of
occurrence Equals Cost of Quality

If sales of 100,000 pcs. Of item A requires
production of 110,000 units( an 11% reject
rate), and each replacement piece contains
$10 labor and $5 material, then the cost of
quality equals $150,000. If sales of $10,000
of item B requires 11,000 to be made (also an
11% reject ion), and each replacement
contains $20 labor and $30 material, its cost
of quality equals to $50,000

*Loss of Money
*Loss of Time

Two other types of loss:
*Loss of Control
*Loss of Reputation



To benchmark current operations
To identify opportunities for improvement
To set relative priorities
To monitor progress and validate
improvement actions
Use of Cost of Quality measurement does not
account for variation in process or product
quality in a single capture.
Capture of Cost of quality measures can be
seen as threatening to many workers
Cost of Quality can be skewed by poor
measurement tools, subjective data and bad
reporting. Accurate global data are generally
better than inaccurate tactical data.




THE END