IS: 10708 - 1985

Indian Standard
GUIDE FOR
THE ANALYSIS OF QUALITY COSTS
(First Revision )
Quality Control and Industrial Statistics Sectional Committee, EC 3
Chairman Representing
Dn P. K. Bosn Indian Association for Productivity, Quality and

Iv[embers
Ssnr B. IltnrlrsrNsxl^ ( Alternatc
Dr P. K. Bose )
Snnr B. ANeNru KR:sRlrarceNp
Ssnr R. S. Gupra ( Altcrnatc )
Snnr P. N. AnulruGEAM
Sunr M. G. Bsanp
Sunr N. C. Crrerrnn..rup
Dn S. Renur ( Altcrnate )
Sunr H" K. Cnawr,,c
Snnr A. D. CnorvoguR:r
Snnr U. MoHa.N Rao ( Alternatc )
Sunr C. A. Ceesro
DrnncroR
Snnr P. K. Kut x.q,n xr ( Altcrnale )
Drnr,cron
Dn S. S. Prr,r,er ( Alternatc )
SHU A. Lasrnr
Snnr.U. Durre ( Alternatd)
Snnr JIN-lx MeHr-q.
Srnr A. SrNon ( Ahernate
Ssnr R. N. Mounal
Dn S. P. Muxsrn,rnp
Pnor A; N. Nerrxar.Ie
Snnr M. K. V. Nana:reN
Snnr P. N. Gupra ( Altcrnatc
@ry
/ffia
"Mii, Council, New Delhi
Bharat Heavy'Elecricals Ltd, New Delhi
The Tata Iron and Steel Co Ltd, Jamshedpur
National Test House, Calcutta
Central Statistical Organization, New Delhi
Lucas-TVS, Madras
The Cotton Textile Export Promotion Council,
Bombay
National Institute of Occupational Health
Ahmadabad
Indian Agricultural Statistics Research Institute
( ICAR ), New Delhi
Indian Jute Industries Research Association, Calcutta
Association of Indian Engineering Industrles, New
Delhi
)
Tea Board, Calcutta
Calcutta IJniversity, Calcutta
Indian Statistical fnstitute, Calcutta
Tata Iron &. Steel Co Ltd ( Tubes Division ),
jamshedpur
)

( Continued on page 2 )

@ Copyrigh, 1986
TNDIAN STANDARDS INSTITUTION
T'lris publication is protected under the Indian Copltright Act ( XIV of lg57 and
reproduct-ion in whole or in pait by any )
-means
."c"pt ilith wriiten permission of the
publisher shall be deemed to be an infriusemerrt of unie, ;hi-iuid A.,.
"oplrright
IS:1070S-1985
( Continued from pagc I )

Mcmbers Rcprcscnting
Sun rT. R. Punr Army Statistical Organization, Idinistry of Defence,
New Delhi
Ssnr V. K. Anona ( Altcrnatc )
Ssnr P. S. K. Pne.seo Bharat Electronics Ltd, Bangalore
Sunr N. DslrsespxEAn,AN ( Altcrnatc )
Ssnr Reuuss Ssaxxen Directorate General of Inspection, Ministry of
Defence, New Delhi
Snar N. S. Saroen ( Ahernatc)
Srer A, Reueras NGEF Ltd, Bangaloro
Ssnr A. R. SsrsonAldAn,ao ( Altunatc )
Ssnr T. V. RerNau The South Indian Textile Research Association,
Coimbatore
Ssnr P. V. Rso Indian Telephone Industries Ltd, Bangalore
Ssnr K. MoaeN Reo ( Alternatc )
Dn D. Rev Defence Research and Development Organization,
Delhi
Srnr A. S.rs.rrcnva Reo Shriram Fibres Ltd, Madras
Ssnr R. Sursuneae,tx Electronics Trade and Technology Development
Corporation Ltd, New Delbi
Ssnr MINoJ CEAwr, s ( Allernote )
Ssnr S. Survaneu The State Trading Corporation of India Ltd, New
Delhi
Ssnr S. Suspeuu Steel Authority of India Ltd, New Delhi
Snnr S. S. Gupre ( Alternatc )
Srnr G. W. Darnn, Director General, ISI ( Ex-of cio Mcmbcr )
Director ( Stat )
Sccrdar2
Ssx,r P. K. Geussre
Deputy Director ( Stat ), ISI

Process and Product Control Subcommittee, EC 3 : 6

Conacncr
Dn P. K. Bosr Indian Association for Productivity, Quality and
Reliability ( IAPQR ), calcutta
Mtmbers
Snnr B. K. Cxoworrun,y ( Altcrnate to
' Dr P. K. Bose )
Sner B. Arqe.Nru KnrsxNaNeNo National Productivity Couucil, New Delhi
Ssar R. S. Gurra. ( Altcrnate )
Srnr R. S. CrrauxeN Indian Association for Quality and Reliability
( IAQR ), Bangalore
Ssnr A. D. Csowpr{uR:r Lucas-TVS, Madras
Ssnr C. ReNeer.retueN ( Alternate )

{ Continued on page 20 )

2
 ISr10708-l98s

Indian Standard
GUIDE FOR
THE ANALYSIS OF QUALITY COSTS
(First Revision )

0. FOREWORD
O.l This Indian Standard ( First Revision ) was adopted by the Indian
Standards Institution on 14 Feburary tS86, after irr. a.uit i"atized [y
Quality Control and Industrial Statistics Sectional Committ"u trua been
approved by the Executive Committee.
0.2 The considerations of cost are paramount importance in any
successful business administration of_of an- organization. Whereas com-
petitiveness is a direct function of the sale pric6 of a product, the relation-
ship between cost ?"9 quality is more subtle. ail th" ,u*", it is now
universally accepted that-optimum quality of any product is determined
taking into account the cost factor also. 'Consequently, u.ry .uJrction in
the cost withoutaffecting the quali.tl of the.pro-duct adverseiy would go,
long way in improving its competiiiveness in the market o" i., enhaniing
the profit margin or both.
0.3 The.operating.quality costs of product, consisting of prevention,
appraisal and failure costs, providel- an excellent
fieli for iost control
efforts through reduction of re-work, re-in;pection, delays, loss oi produc-
tion potential, etc. It is obvious that faiiure costs reduce the ^profits.
The _ preventive quality corylrol activities and appraisal oi quality
standards also cost money. The increase in pr"rr*riion costs results in
reduction of failure and appraisal _costs, bui the relationship is not pro-
portional. Therefore, the
should be done,by evaluating .optimization of the operating qiality costs
and analysing variols qrufity Tlis
will help in identifying the areas of conc-entration q".iity"o.tr. losses and
measure_overall effectiveness of the quality programme. "f
0.4 This standard was originally pubrished in 1g83. The panel for
Handbook on Statistical Qu-11ity iontrol, u,hile reviewing tl:is standard
for inclusion in the Handbook, felt that this standarE needs a Iarge
number of changes and aJso the presentation can be improved 6v
condensilg -the write-up. The committee, therefore, decidJJ to rerrise
this standard. In this revision, apart from oth". .o..""iiorrs, Fig. I and 2
IS: 10708 - r9B5
have been re-drawn by taking the quality level in non-decreasing order
on the horizontal axis. The write-up on various components of operating
quality costs, and the measurement bases for quality costs, have been
abridged so as to make the contents more clear. The write-up on
collection of cost data and also an example of operating quality costs
are included in this revision.
0.5 quulity costs shall be evaluated and analysed periodically and the
results shall be flashed to the management. The management shall
maintain a close watch on the continuing score board of quality costs and
initiate action to minimize avoidable quality costs.

r. scoPE
l.l This standard gives the broad guidelines for the collection and
analysis of operating quality costs of an organization with an objective
of achieving the desired balance among various components, so that
control of these costs may lead to an effective and profitable business
rnanagement.

2. TERMINOLOGY
2.0 For the purpose of this standard, the following definitions shall apply.
2.1 Operating Quality Costs The expenditure incurred in defect
-
prevention and appraisal activities together with the losses due to
internal and external failures.
2,2 Prevention Costs The costs of any action taken to investigate
-
and prevent or reduce defects and failures.
Norn costs include the cost of planuing, -setting-up and maintain-
- Prevention
ing the quality control system.
2.3 Appraisal Costs 'Ihe costs of assessing the quality mainly
-
during the'first time through'.
Norr Appraisal costs include the cost of a inspection, testing, etc, carried out
- materials. during and.on completion of m.anufacture, b) materials and
for incoming
services consumed in testing, and c) evaluation of quality of stocks.

2.4'Faifure Costs, fnternal * The costs arising within the organiza-

tion of the failure to achieve quality specified.
Norn, The term includes the cost of scrap, re-work and re-inspection and also
- losses
consequent within the organization.
2.5 failure Costs, External The costs arising outside the organiza-
tion of the failure to achieve the- quality specified.
Notn- The term includes the costs of claims against warranty such as, replace-
ments and repair.
 ISI10708-tg8s
2.6 Quality Lur.l general indication of the extent of departure
- Aa numerical
froT the ideal, usually value indicating either the delrees of
conformity or fhe degree of non-conlormiry.
Notr - Qualit;z level is a tem usecl in a comparative scnse. Where possible a
more precise usr,d, for exarrple, 'proportion efl-e<:tive', 'fraction
term should be(acceptable
effective','fraction defective', quality level;, 'iimiting quality level'. and
oaverage outgoing quality limit'.

2.7 Econornic Quality Level -- A quality level at which the operating

quality costs are minimum.
3. MODBL FOR OPERATING QUALITY COSTS
3.1 This standard is mainly concerned with the analysis and control of
direct .operating quality costs ( and not indirect operating quality costs,
see 3,n ). This consist of the following four rnain components:

a) Prevention costs,
b) Appraisal costs,
c) Costs of internal failures, and
d) Costs of external failures.
3.2 The operating quality costs of prevention and appraisal activities are
considered to be a controJlable quality costs whereas the internal and
external failure costs are not directly controllable. It is easy to visualize
that the quality level increases r,vith the increase in prevention and
appraisal costs. Again, as the prevention and appraisal costs increase,
the internal and external faiiure costs decrease. 'fhe typical curves
corresponding to prevention and appraisal costs and also internal and
external failure costs, plotted against the quality Ievel of the product are
shown in Fig. l. Combining these two curves the total direcr operating
quality costs curve is obtained. Theoretically, it can be presumed that
the quality level corresponding to the minimum of total direct operating
quality costs is the economic quality level.
3.2.1 It,has been observed that the curve of the total direct operating
quality costs tends to be rather flat near its minimum. In the case of
a market which inclines towards consistently higher quality demands,
it may be useful to go lor little higher quality level, whiih means paying
relatively more attention to prevention and appraisal efforts.
- 3.2.2 rn practical situations, the price which one gets for product
depend-s yPon supply, demand and quality Jevel. 'fherefore the optimisa-
tion of the quality costs is not the only criteria for cleciding upon the
quality level.
3.2,3 In the event of the quality level changing due to an essential
change of the process (for example, the introduction of new machinery ),
the trend of operating quality costs rnust be determined again for this
new situation.
IS :10708 - I9B5

I
I I
1
t
I
F
(J
fr'\
t I

I
o
v-
TOIAL o
o-
COSTS t) I
-
lt o
zo
I

o (J I
lrJ
I
3
= FA'LURE
I
COSTS
oa
lrl I
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F J
a
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PREVENIION AND
I

APPRATSAL COSTS

QUALITY LEVEL->
Frc. 1 Dreecr OpsnetrNc Quelrrv Cosrs Cunvr,s
3.3 In addition to the direct operating quality costs, the in direct quality
costs and their effect on the total cost curve should also be considered.
Although it is not the intention of this standard to try to quantify the
indirect quality costs, the attention of,the users of the standard is drawn
to the indirect quality costs to highlight their importance. The important
indirect quality costs may be the following:
a) Consumer incurred quality costs ( including the cost to the
consumer due to equipment down time, repair cost after the
warranty period, transportation cost, etc ), and
' b) Consumer dissatisfaction quality costs.
3.3.1 Although it is difficult to measure these intangible indirect quality
costs, they do affect the total cost curve. A typical indirect cost curve
is_ given in Fig. 2. It is easy to visualize that the indirect cost curve is
high for low' quality level and drops off as the quality level increases.
Taking the direct operating cost curve and indirect cost curve together,
a total cost curve may be drawn as shown in Fig. 2. It may be noted
that the economic quality level for the total cost curve has moved to the
 IS: 10708 - 1985
fs.!t than that obtained by ,h". direct
indicating that there is a- need for a _operating
cost curve, thereby
higher qrlality le,.,el. A higher
quality_ l.eyel can be obtained by increasing ihe pieueniion and appriisal
costs which subsequently reduce the internil ancl external failure costs.

I
I
I
TOTAL =
J
() COSTS
=
o
t=J
o
u =
=
o- t0-
ll- o
o
F
z
1!
0- OIRECI
F COSlS
a
o
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INOIRCT
cos

QUALTTY LEVEL __>

Frc. 2 Drnncr ahrp INolnrcr Qu.o,urv Cosrs Cunvns
4. COMPONENTS OF OPERATING QUALITY COSTS
4.1 Since the working and set up of different organizations vary enorrno-
..-ly, it i's noi possible to give an exhausiive and foolpi"oof iheck list
of the various componenls which contribute to the operating quality
costs. ft is essential that the classification of cost data should be-"re-levant
and consistent with other accounting practices within the organization
sor_that.comparisons inay be made between costing periods of relatecl
activities.
4.2 For conirol piirposes, it is necessarr* to allocaie quaiity costs to the
accountable area,. The use of account codes within coit cerrtres is the
convenient method. The allocation of cost is important for the analysis
and Prevention of failure. Ther:e is likely to be a need for arbitrrtio.,
when accountability is disputed. The decision for allocation of cost
 IS:10708. i9B5
should not be made sorery bv
lhu accountant. Arbitration may need
to be carried out by. an intcpendcnt t""trrri"ri authonty such as technical
director or engine"ling rrrrnig"r. In some it may be necessary
to refer the allocation to ,lpropriate "ur"r, committee.
"r, "rtit*ri"n
4.3 Preventiou Costs
This is usually-. reported in
^{.3...I controlienginee.irie --and process
QuatitL-,Eng.ineering two parrs:
Q_ualitv contrtUeneineering.
. . 4'3'l'1 Q'olip controlf engineering
with - Represents
planning. tlie quariiy "ryrt"rri and
those costs associated
ua.rsrating product design and
customer qualitv. requirements into manufact"riir| q""tiiv
quality of 'materi."ft, o,
.proc"* a_nd products. The areas and "tntror,
titles of
personnel performing tliis type of
*ork may include the following:
a) O_ualitv control engineers,
b) Quality con-trol.systems engineers ( includes procedures, standards
and manual writers ),
c) Qualit;, planning engineers,
d) Assembly inspection and test planning personnel,
e) Final inspection and test pJanning personnel,
f ) Special process engineers,
g) Reliability engineers,
h) Engineering statisticians, and
j) Formal design review and reliability committee activities.
4'3'l'2 Process controllengineering Represents those costs associated
with implementing and malntainiig- qruriiy-piu", u.a p*""a,rr.r.
areas and titles of personner perTor*i,g'tfii, iype of The
the lollowing: ;;;k;;y include
a) Process control engineers,
b) Process control testing engineers,
c) R-eliability testing engineers,
d) Defect analysis engineers, and.
c) Process or capability study engineers.
Dcsign and Deuelopmcnt ,f
^4.?,2
Equipment euatifit Measurement and Contral
The areas and titres 6r fr.r";'rer
work may -include the following:
performing this type of
a) Test equipment engineers,
' b) Test equipment planners
and designers,
c) Inspection eq-,iipirieni ergineers, and
d) Gauge engineers and designers.
 ISr10708-1985

than fuatity Assuran'ce * This

4.3,g fualitl Planning bT..Functions Other
represents the piurrning-i,'c'rre'i-bv per'so-r'rrei who do
quality
not report to"..;;";fa;ii,y
brrtside the
a qu.ality frn.tio".---hti" pt:1ot*'"I
functions include the
assurance function who may perform
prevention
fcllowing:
of incoming' inprocess
a) Laboratory engineers who plan the testing
' .rrd final Products;
b) Manufacturing engineerings who plan insPection and/or test

equiPment;
develop inspection and
c) Manufacturing or jnclustrial engineers who
as iequired by the
test procecluies for quality i-reasurements
qualitY Pian;
initial product
d) Engineering personnel who Plan ancl direct
qualification;
e)Salespersonnelw}rodevelopvisualquaiitystandards;and
acceptance standards'
f ) F,ngineering personnel wiro develop
Production Equipment Use"d to Eaaluate
+.I.q Catibration and. Maintenance of of calibrati6n and maintenance of
ouatity_ This includes the "or,J
[i"fiu,"=, jigt, fixtures and sirniiar i'rerrrs'
Insltection Equipnent Used in
4.3.5 Maintenance and Catibration of Test and
Control of fual$'
4.g.6 Supptitr Assufance.- This represents
the costs of personnei
t,t,:., prevenliy3 activities of a supplier
qualitv assurance
"";;;;J-if
programme. llhese activities include the follor'ving:
Evaluation:
")
l) supplier survevs' audits and ratings;
2) iclentifying new sources of supply;
'3)ctesignevaluationandtestingofalternativeproducts;and
4) purchase orcier review beibre piacenrent'
b) Planning:
.i)<ieterminingancidocunrentingmethodsoisuppiiercontroi;
2)planningincominginspectionandtestrequirements;and
3) carryinf out supplier process c:rpabilit)' eXercises'
4.S.lQuatityTraining-Thisre^presentstheCostsofdeveloping,
formal quality training
implementing, operating u.ri-'-*ui'ntaining
program1Iles.
IS: 10708 - 1985
4.3.8 Administration, Audit and Improaement
4.3.8.I Administration represents all other expenses associated with
planning, implementing and maintaining a quality system not specifically
included elsewhere, such as secretaries, telepEone, rent and travelling.
4,3.8.2 Audit represents the costs of personnel engaged in planning
documenting, implementing and maintaining audits on the quality system.
4.3;8.3 Improvement represents the costs of formal quality improve-
ment programmes and motivational activities.
4.4 Appraisal Costs
4.*.1 Laborator2 Acceptance Testing
- Thismaterials
tests to evaluate the quality of purchased
represents the costs related to
( raw, semi-finished
or finished ) which become part of the final product or that are consumed
during production operations.
4.4,2 Inspection and Test
and test personnel, including- This represents the payroll cost of inspection
supervision and clerical support ( iniluding
receiving inspection ). The costs associated with inspectors or testers
visiting or stationed at vendor operations to perform or - witness evalua-
tions should be included.
4.4.3 fn'process Inspection represents the costs of personnel ( not
- This
inspectors by job classification ) engaged in the in-procesi evaluation of
product conformance to quality requirements" I

4,4.4 Set-Up for Inspectionand Test This includes the payroll cost of
setting up equipment or products for-inspection or functional testing.
4.4.5 Inspection andTest Materials This includes the costs of materials
consumed or destroyed in control of- quality.
4.4.6 Product Quality Audits Payroll costs of performing quality audits
-
on in-process or finished products.
4.4,7 Reaiew of Test and Inspection Data costs incurred for
regularly reviewing inspection and test data-The
before release of the product
for shipment, for example, to determine whether product quality iequire-
ments have been rnet.
+.*.S Field ( on-Site ) Performance Testing -- Costs incurred in testing for
product acceprance on site.
4.4.9 Internal Testing and Release The costs of setting-up and testing
-
in-house of the complete product for customer acceptance.
4.4.10 Eaaluation of Site Material, ( F;eld Stock) and Spare Parts The
- from
costs of evaluation, testing or inspection of site material, resulting
engineering charges, storage time ( excessive self tife ) or other suspected
problems.
l0
 IS: 10708 - 1985

4.4.11 Data Processing Inspection andTest Reports - The costs incurred

in accumulating and prdcessing rest and inspection data used in evaluation
work.
4.5 fnternal Failure Costs
4.5.1 Scrap All scrap losses incurred in the course of meeting quality
requirements. -
4.5.2 Rework ancl Repair - The costs incurred in meeting quality
requirements where material can be restored for use.
4.5.3 Troubleshooting DefectlFaiture Anati,sis -- The cost incurred in
0r
analysing non-conforirirtg miterials, components or products to determine
CAUSES.

4,5.4 Reinspect, Retest .- The costs of reinspection or retesting material

that has failed previouslY.
4.5.5 Scrap and Rework; Fault of Supptier; Downtime - The losses incurred
due to failuie of purchased maierial'to meet quality requirements, and
payroll costs incurred.
Modifcations Permits and Concessions The costs of the time spent
.rn 4,5.9 -
revrewrng products, designs and specifications.
4.5.7 Downgradirg The losses due to non-conformance for quality
-
reasons, resuliing in a reduced selling price.
4.6 External Failure Costs
4.6.1 Complaints Administration The payroll costs of administrating
complaints.
-
4.G.2 Prod,uct or Customer Seraice; Product Liabilitjt - The costs of product
services directly attributable to correcting imperfections, including any
product iiability costs.
4.6.3 Products Rejected and Returned; Re.call; Retrofit * The costs of
handling ancl acco-unting for rejected products, including any recall and
retrofit costs.
4.G,4 Returned Material Reltair The costs associated with analysing
and iepairing customer returned
- material.
4,6.5 Warranty Replacement The costs of replacing failures within the
warrantY period.
-
4.6.5.1 Marketingertnrs The costs cf replacing products due to
-
marketing error, th"at is, wrong interpretation of customer specifications
requirements.

tl
I$r10708-1985
4,6.5.2 Designlspe_cifcation errlrs The costs of replacing products
due. to suppliei's 'ae"sign andlor-engineering specidcation- errors o,
inadequacies.
{,6.5.3 Factory or installation errars
due to production or installation errors. - The costs of replacing products
5. COSTS DATA
5.1 Collection of Costs Data When the list of costs elements has
been identified ( see *.3 to 4.5-), the collection of costs dara can begin.
More analysis may be needed in an organization that does not alreidy
have a departmental costing system than in one that has. The guidance
that follows, however, gives all organizations enough information to see
what depth of analysis will be needed.
I.r.l rhe steps given in 5.L.1.1 to 5.I.I.5 refer to a 'quality' function
as being an existing budget centre. The analysis may require'all or mosr
of these five steps to identify the quality costs.
5.l.l.l Calculate those costs that are clirectly attributable to the
'quality' function. These will norrnally include:
a) payroll costs -of people specifically controlled by the quaiity
function or deparrment, and will include wages, salaribs and
pension costs;
b) a proportion of builcting occupation costs related to the persons
rn-entioned in (a) above, for example, rents rates) insurance, heat-
ing lighting and security;
c) a proportion of canteen costs, offi.ce services and other admini-
stration costs;
d) the costs of depreciation of specialized quality control and
assessment equipment; and
e) the costs of srnaller items that the organization does not capitalize.
5.1.I.2 Identify costs that are not directly the responsibility of the
'quality' function but which should be counted as part of the total
quality costs of the organization. These costs will usr"rally be incurred
by other departments and organizations. It is not necessaly to make a
lormal accounting transfer to the 'quality' function costs centre, but they
should 'be included in memorendum account. A number of depart-
ments may incur these costs, for exarrple, purchasing, stores planning.
Costs in this category should be apportioned to quality on an equitable
basis.
The costs identifiecl in 5.1.1.1 and 5.I.1.2 will be mainly concerned
with prevention and appraisal, and those in 5.1.1.3 to 5.1.1.5 deal with
failure costs.
t2
 IS310708'1985
5.1.1.3 Identify and enter in the memorandum account the internal
costs of 'budgeted failures'. For example it may be normal practice to
make a product in batches of I00. To be certain o[ completing I00 it
may be a matter of routine to plan I l0 starts. Only experience will
eventually tell whether it is worth calculating the cost of the additional
I0, but the costs should be calculated, at least for a trial period.
5.1.1.4 Identify the internal costs of unplanned failures, where
failures are not allowed for in the initial production planning. ( It is
common to find the costs of failures in the accounts of manufacturing
overheads ). Related costs may include materials that have been scrap-
ped or the cost of reworking to put the defective item right, or even of
completely remaking. The costs will usually lie either in the accounts of
the department causing the failure or in the department doing the recti-
fication. Wherever they lie the costs should be noted in the memorandum
account.
5.1.1.5 Identify the cost of failures after change of ownership. Costs
will include the time spent by the quality department in investigations
and of other department, such as, marketing, customer servicing, and
accounts. These costs will rarely be identified at all in existing systems.
An initial estimate should be made and the results entered in the memo-
randum account. Where the custorner is eventually charged for the
investigation and any costs of rectification, the income should be no.ted
in the memorandum.
5.2 Cost Data Sources
- It is advisable to confer with the management
accountaxts to review the list of elements and data sources. It will be
found that a good percentage of the desired information is available in
one form or another, though this might not appear to be the case at first.
5.2.1 Although there are no established rules for searching out data,
the following are recommended as valuable source documents:
a) Payroll analysis;
b) Manufacturing expense reports;
.c) Scrap reportsl
d) Rework or rectification authorizations/reports;
e) Travel expense claimsl
. f ) Product cost information;
g) Field repair, replacement and warranty costs reports;
h) Inspection and test records; and
j) Materiai review records.
5.2.2 Data extracted from source documents should be transposed by
appropriate collection work sheets and coded for easy tabulation. The
aim is to have all cost data reported by code. The use of coding permits
consistency of collection regardless of the source or size of the costs.
l3
IS: 10708 - l9S5
Each department should report its costs, Data from all sources
should then be accumulated by code.
5.2.3 Where actual costs cannot be directly associated with specific
elements, it rnay be necessary to make an expense allocation by aibitra-
tion. If these costs are significant, it is recommended that the necessary
records be established in order to record the data factually.
5.3 Data Tabulation After all costs have been collected, they should
-
be tabulated to give a breakdown of costs by element code. An example
of a proflorma for quality costs period reporting and breakdown of costs
elements, period and category is shown in Appendix A.
6. MEASUREMENT BASE FOR QUALTTY COSTS
6.I Operating quality costs by themselves present insufficient information
for analysis. A measurement base is required which will relate operating
quality costs to some aspect of the busin-ess which is sensitive to change.
Some typical measurement bases are given below. An organization
may not have all the measurement bases. The choice of a base depends
upon the activity of an organization.
6,2 Labour Base _- Internal failure costs related to total labour or
direct labour costs, that is,
Internal failure costs
Total ( or direct ) labour costs
6.3 Costs Base Total failure costs related to manufacturing costs or"
total material and- Jabour costs, that is,
Total failure costs
Nlanufacturing costs
6,4 Sales Base Total quality costs related to nett saies billed or
value of finished- goods transferred to inventory, that is,

m
Total quality costs

6.5 Unit Base - Test and inspection costs related to the number of
units produced, that is,

Units of production
6.6 Value Added Base
- Totalbyquality
manufacturing activity unaffbcted
costs related to a measure of
fluctuations in sales price, that is,
Total quality costs
Value added
14
 IS: 10708 - 198s

6.7 As a matter of caution, measurement bases are only as goqd as the

methods for keeping them consistent. Consideration should be given and
adjustments made when bases are affected -by:
a) direct labour replaced by automation;
b) manufacturing cost changes due to the use of alternative mate-
rials, methods or processes;
c) changes in gross margins, selling prices, distribution costs and
market demand;
d) changes in product mix; and
e) time scale of numerator that differs from time scale of deno-
menator.
6.7.1 The above factors should be considered and understood when
comparing quality costs with a measurement base.

7. OPTTMTZTNG qUALTTY COSTS

7.1 It may be of interest to an organization to optimize the operating
quality costs. Although the models described in 3 indicate the optimum
level, it is not very easy to arrive at this in practice.
7.2 One of the technique to determine the optimum quality costs is to
compare it with other similar organizations. This pre-supposes that
quality costs are being maintained and analysed by other similar organi-
zations. Another technique to determine the optrmum level is to analyze
the inter-relationship among the various cost components. Theoretically,
the prevention and appraisal costs should be equal to or greater than the
failure costs. If reverse is the case in any practical situation, it indicates
the need to give greater emphasis on prevention and appraisal costs so
as to approach the optimum quality level. The optimum -level of
operating quality costs could also be arrived by optimizing the different
components. Failure costs and appraisal costs are optimized when there
are no indentifiable sources or profitable projects to reduce them.
7.3 One of the most effective cost analysis tools is the use of pareto
analysis. After identifying the cost component which is significant ( for
example, the cost of failures ), it is further broken down into different
-be either by cause-wise or by the departments to which the cost
elements
can allotted. These are then arranged in descening order of
magnitude. The first few elements which contribute the main
portion of the cost are referred as vital few and the remaining as trivial
many. Once the vital ferv are known, the projects can be developed to
reduce the cost contributed by them. In other words, money is spent to
control the vital few whereas little or no money is spent to control the
trivial many.
l5
IS: 10708 - 1985

B. PERIODIC REVIEW Or QUALITY COSTS

8"1. T.he quality costs shall be evaluated and analyzed periodically. A
periodic study of quality costs have the following advantages:
a) to inform the management of the amount of money involved,
and to reduce arguments for making efforts for improvements, in
other words, to invest money in prevention;
b) to isolate the most promising direct action points and to forrnulate
plans for the successive elimination of excessive costs;
c) to measure the effectiveness of the efforts; and
d) to seek the optimum balance among prevention, appraisal and
failure costs.
8.2 The management will be stimulated by all this to consider and to
take following steps:
a) the task of top management with respect to quality control;
b) the formulation of an oprimal quality poiicy;
c) the review of the functional organization;
d) th9 involvement of all levels of the company ( vertically ) and
all sectors ( horizontally );
e) coordination;
f ) education and training; and
g) the quality of design, quality specifications, etc.

r6
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l9
IS: 10708. 1985

( Continued from page 2 )

Mcmbers Representing
Dlnrclon Indian Agricultural Statistics Research Institute
( IAsRr )' New Delhi
Drr K. G. A*s,ra ( Arternatc)
Dn M. N. Gorer.elr Indian Institute of Technology, Bombay
Srar A. Lenrnr Indian Jute Industries A-esearch Association
( IIIRA ). Calcutta
Dn S. P. Muxnrnrnp CalcLtia Uniiersity, Calcutta
Ssnr K. S. Re*rauuarr Reo Bajaj Auto Ltd, Pune
Sunr N. C. AonE w e.t ( Altetnate )
Srrar Raunsg SEANx'ETi Directorate Geneial of Inspection, Ministry of
Defence, New Delhi
Srrnr N. S. Srxoen, ( Alternate )
Dn D. Rev Delence Research and Development Organization,
Ministry of Defence, New Delhi
Rmpl,nspwrafrvE National Thermal Power Corporation Ltd, New
Delhi
Snnr M. N. S*rnr Indian Statistical Institute, Calcutta
Ssnr D. R. Snr DCN{ Ltd, New Delhi
Snnr S. Suenerru Steel Authority of India I.td, New Delhi
Ssnr S. S. Gur.r,r \ Alternate )

20