1
DEFINITION
• Cost of Quality (COQ) is the sum of the costs incurred by a company in preventing poor quality, the costs incurred to ensure and evaluate that the quality requirements are being met, and any other costs incurred as a result of poor quality being produced.
2
Placing a cost figure on quality is difficult and that accounting is unable to capture the “true” costs of quality. Some concerns: 1. Quality costs do not readily appear in the accounting journals. 2. Large timing delays between quality costs and benefits create distortions. 3. Accounting rules (product & period costs) do not lend themselves to measuring quality. 4. Numerous cost estimates are needed. 5. There are hidden costs never captured.
3
4
Internal Failure Costs
Costs incurred prior to the shipment of the product or the delivery of the service. • These costs are associated with defects that are found prior to customer delivery. • These include the net cost of scrap, re-inspection and retest, downtime due to quality problems, opportunity cost of product classified as seconds, or other product downgrades. • These costs would disappear if there were no defects in the product. • Example 1. Scrap costs 2. extra direct labor, machine time 3. supplies costs •
5
EXTERNAL FAILURE COSTS
• The costs of discovered defects occurring after product shipment or service delivery. • These costs include warranty charges, customer complaint adjustments, returned merchandise, product recalls, allowances, and product liability. • They also include the direct and indirect costs such as labor and travel associated with the investigation of customer complaints, warranty field inspection, tests and repairs.
6
Appraisal Cost
The costs associated with measuring and evaluating the product or service quality to ensure conformance. • These include the cost of inspection, test or audit of purchases, manufacturing or process operations and finished goods or services. • Example 1. Receiving inspection & test 2. Final acceptance testing 3. Packing and shipping checks •
7
Prevention Cost
• • Costs associated with all activities designed to prevent defects in product or service. It includes The direct and indirect costs related to quality training and education, pilot studies, quality circles, quality engineering, etc. These costs are used to build awareness of the quality program and to keep the costs of appraisal and failure to a minimum. Prevention costs are all costs incurred in an effort to “make it
•
•
• 1. Creation of the overall quality plan, 2. The inspection plan, 3. Evaluation of new designs
right the first time”. Example:-
8
THE TRADITIONAL COST OF QUALITY MODEL
The study of the relationship of the COQ categories led to the development of a significant body of economic literature offering various models to explain the interrelationship of the COQ categories.
9
THE ORIGINAL OR CLASSICAL COQ MODEL
?
Total quality costs
?
Cost per good unit of product
0
Failure costs
Costs of appraisal plus prevention
Quality of conformance %
100
10
• In this case, the costs of prevention and appraisal are zero with a 100% failure rate. • The costs of prevention & appraisal rise to infinity as perfection (no failures) is reached. • This hypothetical model shows that total quality cost is higher when quality is low and falls as quality improves. • According to the model, a company greatly reduce failure costs by adding relatively low-cost prevention and appraisal measures.
11
• As prevention and appraisal expenditures continue to rise, the rate of improvement begins to diminish until additional expenditures produce little decrease in failure. • The model suggests that a relationship exists between conformance and nonconformance quality costs, with a minimal total quality cost at the optimal balance. • Implicit in this model is the trade off of conformance costs for nonconformance costs to achieve the lowest total quality cost.
12
BEHAVIOR OF COST COMPONENTS DURING TQM IMPLEMENTATION
The general behavior of the four quality cost components for a company starting TQM is as follows: Prevention costs remain relatively consistent as the awareness of TQM is built and maintained. Appraisal costs will initially increase as inspection programs are initiated but should eventually level off. Internal failure costs will initially increase as the inspection programs are implemented, but should the gradually decrease with learning. External failure costs should continue to fall as various TQM programs are brought on line.
13
• • • •
Kapil Oberoi
S.Y.Bms B
92
14
doc_777465366.ppt
DEFINITION
• Cost of Quality (COQ) is the sum of the costs incurred by a company in preventing poor quality, the costs incurred to ensure and evaluate that the quality requirements are being met, and any other costs incurred as a result of poor quality being produced.
2
Placing a cost figure on quality is difficult and that accounting is unable to capture the “true” costs of quality. Some concerns: 1. Quality costs do not readily appear in the accounting journals. 2. Large timing delays between quality costs and benefits create distortions. 3. Accounting rules (product & period costs) do not lend themselves to measuring quality. 4. Numerous cost estimates are needed. 5. There are hidden costs never captured.
3
4
Internal Failure Costs
Costs incurred prior to the shipment of the product or the delivery of the service. • These costs are associated with defects that are found prior to customer delivery. • These include the net cost of scrap, re-inspection and retest, downtime due to quality problems, opportunity cost of product classified as seconds, or other product downgrades. • These costs would disappear if there were no defects in the product. • Example 1. Scrap costs 2. extra direct labor, machine time 3. supplies costs •
5
EXTERNAL FAILURE COSTS
• The costs of discovered defects occurring after product shipment or service delivery. • These costs include warranty charges, customer complaint adjustments, returned merchandise, product recalls, allowances, and product liability. • They also include the direct and indirect costs such as labor and travel associated with the investigation of customer complaints, warranty field inspection, tests and repairs.
6
Appraisal Cost
The costs associated with measuring and evaluating the product or service quality to ensure conformance. • These include the cost of inspection, test or audit of purchases, manufacturing or process operations and finished goods or services. • Example 1. Receiving inspection & test 2. Final acceptance testing 3. Packing and shipping checks •
7
Prevention Cost
• • Costs associated with all activities designed to prevent defects in product or service. It includes The direct and indirect costs related to quality training and education, pilot studies, quality circles, quality engineering, etc. These costs are used to build awareness of the quality program and to keep the costs of appraisal and failure to a minimum. Prevention costs are all costs incurred in an effort to “make it
•
•
• 1. Creation of the overall quality plan, 2. The inspection plan, 3. Evaluation of new designs
right the first time”. Example:-
8
THE TRADITIONAL COST OF QUALITY MODEL
The study of the relationship of the COQ categories led to the development of a significant body of economic literature offering various models to explain the interrelationship of the COQ categories.
9
THE ORIGINAL OR CLASSICAL COQ MODEL
?
Total quality costs
?
Cost per good unit of product
0
Failure costs
Costs of appraisal plus prevention
Quality of conformance %
100
10
• In this case, the costs of prevention and appraisal are zero with a 100% failure rate. • The costs of prevention & appraisal rise to infinity as perfection (no failures) is reached. • This hypothetical model shows that total quality cost is higher when quality is low and falls as quality improves. • According to the model, a company greatly reduce failure costs by adding relatively low-cost prevention and appraisal measures.
11
• As prevention and appraisal expenditures continue to rise, the rate of improvement begins to diminish until additional expenditures produce little decrease in failure. • The model suggests that a relationship exists between conformance and nonconformance quality costs, with a minimal total quality cost at the optimal balance. • Implicit in this model is the trade off of conformance costs for nonconformance costs to achieve the lowest total quality cost.
12
BEHAVIOR OF COST COMPONENTS DURING TQM IMPLEMENTATION
The general behavior of the four quality cost components for a company starting TQM is as follows: Prevention costs remain relatively consistent as the awareness of TQM is built and maintained. Appraisal costs will initially increase as inspection programs are initiated but should eventually level off. Internal failure costs will initially increase as the inspection programs are implemented, but should the gradually decrease with learning. External failure costs should continue to fall as various TQM programs are brought on line.
13
• • • •
Kapil Oberoi
S.Y.Bms B
92
14
doc_777465366.ppt