Distribution of Quality Costs/Quality Cost Report:
Learning objectives of this article:
How to Distribute
Quality Costs?
A company's total quality cost is likely to be very high
unless management gives this area special attention. Experts say that these
costs should be more in 2% to 4% range. How does a company reduces its total
quality cost? The answer lies in how the quality costs are distributed.
Total
quality cost is a function of quality of conformance. A high
quality of conformance means that a product is free of defects and a low
quality of conformance means that a product has defects. In this sense an
economy car may have a quality of conformance same as a very expensive car
if it has no defects. Like wise an expensive car may have less quality
of conformance if it has defects that effect its use. When the quality of
conformance is low, total quality cost is high and most of this cost
consists of cost of internal and external failure. A low quality of
conformance means that a high percentage of units is defective and hence the
company must incur high failure costs. However, as a company spends more and
more on prevention and appraisal activities, the percentage of defective units drops.
This results in lower costs of internal and external failure costs. Ordinarily
total quality cost drops rapidly as the quality of conformance increases.
Thus, a company can reduce its total
quality cost by focusing its efforts on
prevention and appraisal. The cost savings from reduced defects usually
swamp the costs of the additional prevention and appraisal efforts.
As a company's quality program becomes more refined and as
its failure costs begin to fall, prevention activities usually become more
effective than appraisal activities. Appraisal can only find defects,
whereas prevention can eliminate them. The best way to prevent defects from
happening is to design processes that reduce the likelihood of defects and to
continually monitor processes using statistical process control methods.
Quality Cost Report:
A quality cost report details the
prevention costs,
appraisal costs,
and
internal failure cost and
external failure cost that arise from
company's current level of defective products or services. Companies often
construct a
quality cost report that provides an estimate of the financial
consequences of the company's current level of defects. A simple quality
cost report is shown in the following example:
Example of Quality Cost Report
Ventura Company
Quality Cost Report
For the Year1 & 2
|
Prevention Cost
Appraisal Costs
Internal Failure Costs
External Failure Costs
Total Quality Cost |
Year 2 |
Year 1 |
|
Amount
1,000,000
1,500,000
3,000,000
2,000,000
-----------
7,500,000
====== |
Percent
2.00%
3.00%
6.00%
4.00%
---------
15.00%
===== |
Amount
650,000
1,200,000
2,000,000
5,150,000
----------
9,000,000
====== |
Percent
1.30%
2.40%
4.00%
10.30%
---------
18.00%
===== |
Prevention cost increased by
(1,000,000 – 650,000) = 350,000
Appraisal cost increased by (1,500,000 – 1,200,000) = 300,000
Internal Failure cost (3,000,000 – 2,000,000) = 1,000,000
Total Increase = 1,650,000
External failure cost
decreased by = 3,150,000
Net Quality Cost Benefit =
3,150,000 – 1,650,000
= 1,500,000
Several things should be noted from the data in the quality
cost report. First, note that the quality costs are poorly distributed in
both years, with most of costs being traceable to either internal or
external failure. The external failure costs are particularly high in year 1
in comparison to other costs. Second note that the company increased its
spending on prevention and appraisal activities in year 2. As a result,
internal failure costs went up in that year (from $2 million in first year
to $3 million in year 2), but external failure costs dropped sharply (from
$5.15 million in year 1 to $3 million in year 2). Because of the increase in
appraisal activates in year 2,more defects were caught inside the company
before they were shipped to the customers. This resulted in more cost for
scrap, rework, and so forth, but saved huge amounts in warranty repairs,
warranty replacements, and external failure costs. Third, note that as a
result of greater emphasis on prevention and appraisal, total quality cost
decreased inyear2.As continued emphasis is placed on prevention and
appraisal in future years, total quality cost should continue to decrease.
That is , future increases in prevention and appraisal costs should be more
than offset by decreases in failure costs. Moreover, appraisal costs should
also decrease as more effort is placed into prevention.
Also See
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