Question: what are Quality Costs? How are they used in an organization?

Definition of cost of Quality

Its a term thats widely used and widely misunderstood.
The cost of quality isnt the price of creating a quality product or service. Its the cost of NOT creating a quality
product or service.
very time wor! is redone" the cost of quality increases. O#vious e$amples include%
The rewor!ing of a manufactured item.
The retesting of an assem#ly
The re#uilding of a tool
The correction of a #an! statement
The rewor!ing of a service" such as the reprocessing of a loan operation or the replacement of a food order in a
restaurant
`Three different views held by the management professionals about Cost of Quality
Today view of quality cost among practitioners seems fall into three categories%
Higher quality means higher cost: &uality attri#utes such as performance and features cost more in terms of
la#or" material" design" and other costly resources. The additional #enefits from improved quality do not
compensate for the additional e$penses.
The cost of improving quality is less than the resultant savings: 'eming promoted this view" which is still
widely accepted in (apan. The savings result from less rewor!" scrap" and other direct e$penses related to defects.
This paved the way of continuous process improvement among (apanese firms.
Quality costs are those incurred in excess of those that would have been incurred if product were built or
service performed exactly right the first time:
This view is held #y adherents of the T&) philosophy. *osts include not only those that are direct" #ut also those
resulting from lost customers" lost mar!et share" and many hidden costs and foregone opportunities not identified
#y modern cost accounting systems.
Categorization of Quality Costs
The cost of quality is generally classified into four categories%
+. $ternal ,ailure *ost
-. Internal ,ailure *ost
.. Inspection /appraisal0 *ost
1. 2revention *ost
! "#ternal $ailure Cost: *ost associated with defects found after the customer receives the product or
service. $ample% 2rocessing customer complaints" customer returns" warranty claims" product recalls.
%! &nternal $ailure Cost: *ost associated with defects found #efore the customer receives the product or
service. $ample% 3crap" rewor!" re4inspection" re4testing" material review" material downgrades
'! &nspection (appraisal) Cost: *ost incurred to determine the degree of conformance to quality requirements
/measuring" evaluating or auditing0. $ample% Inspection" testing" process or service audits" cali#ration of
measuring and test equipment.
*! +revention Cost: *ost incurred to prevent /!eep failure and appraisal cost to a minimum0 poor quality.
$ample% New product review" quality planning" supplier surveys" process reviews" quality improvement teams"
education and training.
*ost of &uality /5*O&50 can #e used to identify the glo#al optimum for a process" and monitor
that process6 progress towards its glo#al optimum. 7lo#al optimum is defined as the #est
possi#le outcome from all physically possi#le operating modes" com#inations" and permutations
of the current process.
8hat is coq9
: financial measure of quality performance of an organi;ation. It is essentially a measure of lac!
of quality and can also #e termed as cost of #ad quality.
&mportance of cost of ,uality
<nderstanding cost of quality helps organi;ations to develop quality conformance as a useful
strategic #usiness tool that improves their product" service and #rand image. This is vital in
achieving the o#=ectives of a successful organi;ation.