COST OF QUALITY

MODELS
 P-A-F METHOD

 The traditional P-A-F method

suggested by Juran (1951) and
Feigenbaum (1956) classifies
quality costs into prevention,
appraisal and failure costs.
 P-A-F METHOD
 PREVENTION COSTS
 APPRAISAL COSTS
 FAILURE COSTS :  
- Internal failure costs
- External failure costs
 PREVENTION
 Scraps and rejects  Direct cost of late shipment
 Repair and Rework  Opportunity cost of late
 Downtime shipment
 Bug fixes  Retesting

 Wasted in-house user time  Material review

 Wasted tester time

 Sales and discounts for
inferior product
 Wasted marketer time
 APPRAISAL COSTS
 Design review
 Code inspection
 Usability Testing
 Calibration cost
 Laboratory expenses
 FAILURE COSTS
INTERNAL FAILURE COSTS

 Scraps and rejects  Wasted

 Repair and Rework advertisements
 Downtime  Direct cost of late
 Bug fixes shipment
 Wasted in-house user
 Opportunity cost of
time late shipment
 Wasted tester time
 Retesting &Material
review
 Wasted marketer time
 Sales and discounts
for inferior product
 EXTERNAL FAILURE COSTS
 Warranty costs and  Refunds and
Off warranty repairs replacement with
and replacement updated product
 Customer complaints  Lost sales
 Product liability  Lost customer
 Transportation losses goodwill
 Technical support  Costs imposed by law
calls  Customer returns
 Preparation of
support answer books
 Typical Descriptions (may

COQ Category vary between different

Examples
Organizations)

Internal Costs associated with internal losses (i.e.

within the process being analyzed)
off-cuts, equipment breakdowns,
spills, scrap, yield, productivity.

Costs external the process being

analyzed (i.e. occur outside, not
within).  These costs are usually
discovered by, or affect third parties
(e.g.. customers).  Some External
customer complaints, latent
External costs may have originated from
within, or been caused, created by,
defects found by the customer,

or made worse by the process being

warranty.
analyzed.  They are defined as
External because of where they were
discovered, or who is primarily or
initially affected.
 Typical Descriptions
COQ
(may vary between Examples
Category
different Organizations)
Costs associated with the
prevention of future losses: (e.g..
planning, mistake-proofing,
unplanned or undesired problems,
Preventive losses, lost opportunities,
scheduled maintenance, quality
assurance
breakdowns, work stoppages,
waste, etc.)

KPI's, inspection, quality check, dock

Costs associated with measurement audits, third party audits, measuring
Assessment and assessment of the process. devices, reporting systems, data
collection systems, forms
Money is the language of
management, you need to
show them the numbers

Crosby
 CROSBY’S MODEL
 Given by Crosby, 1979
 Similar to the P-A-F scheme.
 Crosby sees quality as “CONFORMANCE TO
REQUIREMENTS”.
 Defines the COST OF QUALITY as the sum of
price of conformance and price of non-
conformance (Crosby, 1979). The price of
conformance is the cost involved in making
certain that things are done right the first time
and the price of non-conformance is the money
wasted when work fails to conform to customer
requirements.
 Crosby’s categories

• Price of Conformance (POC/COC)

– Prevention costs
– Appraisal costs

• Price of Nonconformance (PONC/CONC)

– Internal defect costs
– External defect costs
The cost of poor quality (COPQ = PONC):

“COPQ is the sum of all costs that would

disappear if there were no quality problems.”
- Juran

“You can easily spend 15 - 30% of your sales

dollars on PONC.” - Crosby
OPPORTUNITY AND INTANGIBLE COSTS

Several references propose CoQ models that

include the additional category of intangible
costs. These are costs that can be only
estimated such as profits not earned because of
lost customers and reduction in revenue owing
to non-conformance. The importance of
opportunity and intangible costs for quality
costing has been described as a less formal
method based on collecting quality costs by
department.
 · Materials scrapped or junked
· Labor and burden on product scrapped
or
junked
· Labor, materials, and burden necessary
to
Tangible costs — effect repairs on salvageable product
· Extra operations added because of
factory accounts
presence of defectives
· Burden arising from excess production
capacity necessitated by defectives
· Excess inspection costs
· Investigation of causes of defects
 · Discount on seconds
Tangible costs—
· Customer complaints
sales accounts
· Charges to quality guarantee account

· Delays and stoppages caused by

defectives
Intangible costs · Customer good will
· Loss in morale due to friction between
Departments
 PROCESS COST MODEL
 developed by Ross (1977) and first
used for quality costing by Marsh
(1989).
 it represents quality cost systems
that focus on process rather than
products or services.
 Process cost is the total cost of
conformance and non-conformance
for a particular process.
 The process model has wider application in
that it facilitates the collection and analysis
of quality costs for both direct and indirect
functions. However, the process cost model is
not in widespread use.
 The quality cost categorization is simpler and
more relevant than the P-A-F scheme
ACTIVITY BASED QUALITY MODEL
 An activity-based costing (ABC) model was
developed by Cooper and Kaplan
 Under ABC, accurate costs for various cost
objects by tracing resource costs to their
respective activities and the cost of activities to
cost objects are achieved
 It is an alternative approach that can be used to
identify, quantify and allocate quality costs
among products, and therefore, helps to
manage quality costs more effectively.

 The long- term goal of ABC systems is to

eliminate non-value added activities and to
continuously improve processes, activities and
quality so that no defects are produced.