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5.3: Cost of Quality

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    117763
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    Companies who provide excellent quality goods and services are obviously able to excel and differentiate themselves from competitors. They also tend to be more profitable and their losses and extra costs due to poor productivity, rework, inspection, and scrap will be negligible.

    The various costs of quality can be broken down into the following four categories: prevention costs, appraisal costs, and failure costs, which are further classified as internal failure costs and external failure costs.

    Prevention costs

    Prevention costs include all the funds spent to prevent the occurrence of defects. Examples include quality improvement initiatives, employee training, upgrading of equipment, implementing quality procedures and making proactive design changes.

    Appraisal costs

    All money spent in checking and testing of product during the production process would be considered Appraisal costs. Wages of inspectors when defined as part of the process, testing labs and equipment, gauging, and process control, would be included in this category.

    Internal failure costs

    Once a defect has been produced, with any luck the organization will detect the error before it leaves the building and is sent to the customer. Often, defective products can be repaired, but all of the extra time spent on the rework is considered internal failure costs. Product that is unable to be repaired is classified as scrap. This also is Internal Failure costs. This can cause many other problems because customers still expect on-time deliveries. Often other orders may have to be re-manufactured and expedited in order to compensate for products that are scrap. The customer is often not aware of these issues.

    External failure costs

    Once a defective product has been shipped to the customer, the costs then become external failure costs. Replacement product, expedited shipping, potential law suits, product recalls, and of course loss of future business are all external failure costs. It is impossible to predict the actual external failure costs since there is no way of gauging the impact of dissatisfied customers on future business.

    Cost of Quality is Cost of Conformance and Nonconformance. The Cost of Conformance has prevention costs (training the staff, documenting processes, testing equipment, time) and appraisal costs (running tests, destructive testing, inspecting deliverables). This money is spent during the project to avoid failures. The Cost of nonconformance includes internal failure costs (rework, scrap) and external failure costs (liabilities, law suits, recalls, warranty work, lost business and lost credibility). This is money spent during and after the project because of failures.
    Figure \(\PageIndex{1}\): A diagram denoting the costs of conformance (prevention and appraisal costs) versus non-conformance (internal and external failure costs) in quality management; Credit: pmexamsmartnotes.com / Flickr / http://flic.kr/p/dYvQhj / CC BY-NC-ND

    5.3: Cost of Quality is shared under a CC BY-NC 4.0 license and was authored, remixed, and/or curated by LibreTexts.