Overview
Quality Costs are the expenses associated with maintaining and improving the quality of products or services. Quality costs are often called the “Cost of Quality” (COQ). This approach helps to understand and manage expenses associated with achieving and maintaining product or service quality.
Types of Quality Costs
Quality Costs include prevention, appraisal, internal failure, and external failure costs incurred to prevent, detect, and remove product defects. Quality costs are categorized into the following types:
Costs of Good Quality
- Prevention Costs
- Appraisal Costs
Costs of Bad Quality
- Internal Failure Costs
- External Failure Costs
Prevention costs
Preventing defects is more cost-effective than removing them later. Costs to avoid defects are known as prevention costs. These are costs incurred to prevent defects or errors from occurring in the first place. Prevention costs are proactive. Some examples of prevention costs are as follows:
- Quality planning
- Employee and worker training
- Implementing quality management systems like Six Sigma or ISO standards.
- Process documentation, supplier quality management
- Statistical process control, etc.
Appraisal costs
Appraisal costs are incurred to assess and verify the quality of products or services. These costs are incurred after the products or services are produced before they are shipped to customers. Appraisal costs are also known as inspection costs.
All costs associated with ensuring required quality standards during manufacturing processes, including identifying defective products before they are shipped, are included in this category. Some examples of appraisal costs are as follows. They include activities such as
- Inspection
- Testing
- Quality Audits.
Internal failure costs
Internal failure costs are associated with defects or quality problems identified within the organization before the product or service reaches the customer. The costs are incurred to remove product defects before shipping them to customers. Examples of internal failure costs are:
- Scrap
- Cost of Rework
- Machine downtime
- Cost of labor and materials used to fix the issues
External failure costs
External failure costs arise when customers discover defects or quality problems after they have received the product or service. When customers receive defective products, it leads to external failure costs. Shipment of faulty products can cause customer dissatisfaction, harm goodwill, and decrease sales and profits. Examples of external failure costs are:
- Warranty claims
- Product recalls
- Legal expenses
- Product Damages
- Lost sales due to bad reputation
- Product replacements, etc
Proper management of quality costs is crucial for achieving high-quality products or services while minimizing waste and maximizing customer satisfaction.