Quality Costs

Quality is the total features and characteristics of a product/service made/performed according to specifications to satisfy customers at the time of purchase and during use. Costs of quality are costs incurred to prevent or the cost arising as a result of, producing a low quality product. Such costs are categorised into prevention costs, quality appraisal (detection) costs, internal failure costs and external failure costs.
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Prevention Costs

Prevention costs are incurred to prevent defects and other quality problems/to preclude the production of goods that do into conform to specifications.
Quality Appraisal (Detection) Costs Quality appraisal costs are incurred to detect which individual unit of a product does not conform to specifications. Internal Failure Costs These costs are incurred as a result of the appraisal activities. These are incurred on a defective product before it is despatched to customers.

External Failure Costs

External failure costs are costs of making things right when a quality problem has occurred after the product has been delivered to the customer.
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Quality Costs Illustrated

Step 1: Identify the Chosen Product. Step 2: Select Cost-Allocation Base for Allocating Indirect Costs of Quality. Step 3: Identify Indirect Costs Associated With Each Cost-Allocation Base. Step 4: Compute the Rate Per Unit of Each Cost Allocation Base Used to Allocate Indirect Costs of Quality to Product. Step 5: Compute the Indirect Costs of Quality Allocated to the Product. Step 6: Compute the Total Costs of Quality by Adding All Costs of Quality Assigned to the Product. This is shown in Column 5 of Exhibit 1.
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Exhibit 1
Analysis of Activity-based Cost of Quality of Photocopying Machines of Modi Xerox Ltd. Cost of Quality Activities Rate (1) Prevention Costs: Design Engineering Process Engineering Total Appraisal Costs: Inspection Total Internal Failure Costs: Rework Total External Failure Costs: Customer support Transportation Warranty repair Total Total Cost of Quality (2) Rs 400 per hour 300 per hour 200 per hour 500 per hour 250 per hour 1,200 per hour 550 per hour Allocation Base/Cost Driver Quantity (3) 20,000 hours 22,500 hours 1,20,000 hours 50,000 hours 6,000 hours 1,500 hours 60,000 hours Total costs [(2) (3)] (4) Rs 80,00,000 67,50,000 1,47,50,000 2,40,00,000 2,40,00,000 2,50,00,000 2,50,00,000 15,00,000 18,00,000 3,30,00,000 3,63,00,000 10,00,50,000 Percentage of revenue [(4) Rs 70 crore] % (5) 1.1% 1.0 2.1 3.4 3.4 3.6 3.6 0.2 0.3 4.7 5.2 14.3 18-4

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Non-Financial Measures of Quality and Customer Satisfaction

Financial measures of quality focus on the short-run. Non-financial measures indicate the future needs and preferences of customers as well as the specific areas that need improvement.
The non-financial measures of customer satisfaction, inter-alia, include the following: Market research information on customer preferences/satisfaction with specific product features. Number of defective units delivered to customers as percentage of total units delivered. Number of customer complaints. Percentage of products that fail soon/often. Delivery delays in terms of differences between the scheduled delivery date and the date requested by the customers. On-time delivery rate (i.e. percentage of delivery made on/before the scheduled delivery date). Surveys to measure customer satisfaction.
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