QUALITY COSTING

Quality Costing involves quantifying the total cost of quality-related efforts and deficiencies. Quality costs help to show the importance of quality-related activities to management; they demonstrate the cost of non-quality to an organization; they track the causes and effects of the problem, enabling the working out of solutions using quality improvement teams, and then monitoring progress. Quality costing is a powerful tool for enhancing a companys effectiveness as it is used as a technique in the introduction and development of Total Quality Management (TMQ). Quality Costing 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

PAF Approach
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: These costs are associated with the design, implementation and maintenance of the Total Quality Management system. Prevention costs are planned and are incurred before actual operation. Appraisal costs: These costs are associated with the suppliers and customers evaluation of purchased materials, processes, intermediates, products and services to assure conformance with the specified requirements. Failure Costs: Costs that result from poor quality, such as the cost of fixing bugs and the cost of dealing with customer complaints. Internal failure costs: These costs occur when the results of work fail to reach designed quality standards and are detected before transfer to customer takes place External failure costs: These costs occur when products or services fail to reach design quality standards but are not detected until after transfer to the customer. Total Cost of Quality = Prevention Costs + Appraisal Costs + Internal Failure Costs + External Failure Costs

The manufacturer and seller are definitely not the only people who suffer qualityrelated costs. The customer suffers quality-related costs too. If a manufacturer sells a bad product, the customer faces significant expenses in dealing with that bad product. Many of the external failure costs, such as goodwill, are difficult to quantify, and many companies therefore ignore them when calculating their cost-benefit tradeoffs. Other external failure costs can be reduced (e.g. by providing cheaper, lower-quality, post-sale support, or by charging customers for support) without increasing customer satisfaction.) By ignoring the costs to our customers of bad products, quality engineers encourage quality-related decision-making that victimizes our customers, rather than delighting them. Present the initial and final quality cost results from the quality improvement project to management. Request authorization to proceed with a broader companywide program of measuring the costs and pursuing projects.

In the following, the total quality cost is shown in the upper bathtub-shaped curve. On the bottom axis is the quality of performance, ranging from totally defective to zero defects. On the left axis is the cost per good unit of product. You can see that with highly defective software, your prevention and appraisal costs are very low, but your failure costs are very high, yielding a high total quality cost. With zero defect software, likewise, your failure costs are very low, but your prevention and appraisal costs are very high. To optimize your total quality costs, you want to be between these extremes, at the bottom of the bathtub curve.

Process for undertaking an Initial Cost

study

Salient Points for an Initial Cost Study

1. Established expense accounts: Examples include inspection department appraisal activities and customer response warranty expenses. 2. Define and analysis the ingredients of established expense accounts: For example, suppose an account called customer returns reports the cost of all goods returned. Some customers returned defective goods. Categorize these as cost of poor quality. Some customers return goods to reduce inventory. These are not cost of poor quality. You must break the customer returns into two separate expense accounts. To help distinguish the quality costs returns, someone must study of the return documents and classify all returns. 3. Improve accounting documents: For example, some production department employees conduct product inspection. By securing their names, the associated payroll data, and inspection time you can quantify these costs of quality. 4. Include estimates: Input from knowledgeable personnel is clearly important. 5. Use temporary records. For example, some production workers spend part of their time repairing defective product. Here you can create a temporary record to determine the repair time and thereby the repair cost. This cost can then be projected for the study time period. 6. Utilize work sampling: Take random observations of activities. Within a few sampling you can calculate the percent of time spent in each of a number of predefined quality cost categories. Ask employees to record the observation as prevention, appraisal, failure, or first time work. 7. Improve allocation of total resources: For example, some engineers are part-time engaged in making product failure analyses. The engineering department, however, makes no provision for charging engineering time to multiple accounts. Ask each engineer to make an estimate of time spent on product failure analysis. Do this by keeping a temporary engineering activity log for several representative weeks. Categorized time spent due to a product failure as a failure cost. 8. Track unit cost data: Here, the cost of correcting one error is estimated and multiplied by the number of errors per year. Examples include billing errors and scrap. Note that the unit cost per error may consist of corrections costs from several departments. 9. Utilize market research data: Cost of quality includes lost sales revenue due to poor quality. Although difficult to estimate, market research studies on customer satisfaction and loyalty can provide input data on dissatisfied customers and customer defections.

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. 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.