Quality Cost 20 Okt 2021

Quality Cost
Definition
• Cost of quality (COQ) is defined as a methodology that allows
an organization to determine the extent to which its resources
are used for activities that prevent poor quality, that appraise
the quality of the organization’s products or services, and that
result from internal and external failures.
Having such information allows an organization to determine
the potential savings to be gained by implementing process
improvements.
Quality Cost
1. Preventive cost
2. Appraisal cost
3. Internal failure cost
4. External failure cost
Some examples of unsatisfactory quality
Example of unsatisfactory product quality
TOCQ
TOCQ
• COPQ = Cost of Non-conformance
• COGQ = Cost of Conformance
Preventive Cost
Prevention costs are incurred to prevent or avoid quality problems.
These costs are associated with the design, implementation, and
maintenance of the quality management system.
• Product or service requirements: Establishment of specifications
for incoming materials, processes, finished products, and services
• Quality planning: Creation of plans for quality, reliability,
operations, production, and inspection
• Quality assurance: Creation and maintenance of the quality
system
• Training: Development, preparation, and maintenance of
programs
Appraisal Cost
Appraisal costs are associated with measuring and
monitoring activities related to quality. These costs are
associated with the suppliers’ and customers’ evaluation of
purchased materials, processes, products, and services to
ensure that they conform to specifications.
• Verification: Checking of incoming material, process setup,
and products against agreed specifications
• Quality audits: Confirmation that the quality system is
functioning correctly
• Supplier rating: Assessment and approval of suppliers of
products and services
Internal Failure Cost
Internal failure costs are incurred to remedy defects discovered before
the product or service is delivered to the customer. These costs occur
when the results of work fail to reach design quality standards and are
detected before they are transferred to the customer.
• Waste: Performance of unnecessary work or holding of stock as a

result of errors, poor organization, or communication
• Scrap: Defective product or material that cannot be repaired, used,
or sold
• Rework or rectification: Correction of defective material or errors
• Failure analysis: Activity required to establish the causes of internal
product or service failure
External Failure Cost
External failure costs are incurred to remedy defects discovered by
customers. These costs occur when products or services that fail to
reach design quality standards are not detected until after transfer to
the customer.
• Repairs and servicing: Of both returned products and those in the field
• Warranty claims: Failed products that are replaced or services that are
re-performed under a guarantee
• Complaints: All work and costs associated with handling and servicing
customers’ complaints
• Returns: Handling and investigation of rejected or recalled products,
including transport costs
Hidden Cost
• Hidden cost associated to the poor/non-
conforming product/service to customer:
- lost sales
- customer dissatisfaction
- company’s image
- lost customer loyalty
Why COQ is important for the organization?
• Many organizations will have true quality-related costs as high

as 15-20% of sales revenue, some going as high as 40% of
total operations. A general rule of thumb is that costs of poor
quality in a thriving company will be about 10-15% of
operations.
• COQ is also an important communication tool → according to
Phillip Crosby COQ is a powerful tool to raise awareness of the
importance of quality, ‘price of non-conformance’ as the
measure tool.
The 1/10/100 Rule
TCOQ
• TCOQ = PC + AC + IFC + EFC
• COGQ = PC + AC
• COPQ = IFC + EFC
TCOQ = Total Cost of Quality

COGQ= Cost of Good Quality
COPQ = Cost of Poor Quality
Example
Let us take the example of a business that generates $1,000,000
in sales. It incurs $10,200 in quality checks and inspection. It pays
$30,000 for appraising the purchased raw materials. Additionally,
it pays $15,000 for repairs on finished items. It maintains a
provision of $5,000 for warranty costs and product returns. Help
the management determine the cost of quality as the
percentage of sales.

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Quality Cost

• Waste: Performance of unnecessary work or holding of stock as a

• Many organizations will have true quality-related costs as high

TCOQ = Total Cost of Quality

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