costs such as using a higher grade leather to make a wallet or using 14K gold instead of gold plating in jewelry. Instead the term quality cost refers to all of the costs that are incurred to prevent defects or that result from defects in products.
the policies, procedures, techniques, and mechanisms that help ensure that management's response to reduce risks identified during the risk assessment process is carried out. In other words, control activities are actions taken to minimize risk.
Preventive activities are designed to deter the occurrence of an undesirable event. The development of these controls involves predicting potential problems before they occur and implementing procedures to avoid them.
Detective activities are designed to identify undesirable events that do occur and alert management about what has happened. This enables management to take corrective action promptly.
Policies Procedures Sequences or combinations of procedures Assignments of duties, responsibilities, and authorities Physical arrangements or processes Combinations of the above.
of activities performed because contaminants and waste have been produced but not discharge into the environment.
To ensure that the contaminants and waste produced are not released to the environment
To ensure that the level of the contaminants released to an amount that complies with environmental standards
the cost of activities performed after discharging contaminants and waste into the environment.
Realized external failure cost are those incurred and paid for by the firm.
Unrealized external failure cost, or societal costs, are caused by the firm but are incurred and paid for by parties outside the firm. A compliance cost is expenditure of time or money in conforming with government requirements such as legislation or regulation. For example, people or organizations registered for value added taxhave the extra burden of having to keep detailed records of all input tax and output tax to facilitate the completion of VAT returns. This may necessitate them having to employ someone skilled in this field, which would be regarded a compliance cost.
Meeting Obligations Imposed by Regulation A Working Definition Some Costs Are Less tangible Some Are Non-Quantifiable Compliance Cost versus Administrative and Economic Costs
regulations that facilitate the collection of taxation
regulations that require businesses to record information
regulations that impose obligations on business for the benefit of third parties
Because the cascading effects of ongoing noncompliance can geometrically accelerate the costs of and number of people affected by a given case, prevention or, failing that, early recognition and intervention are vital. The overall costs of government action have to be set against the expected benefits. A fundamental requirement of sound policy analysis is that the expected benefits to society as a whole from government action will exceed the overall costs.
Net Benefit = Benefits less Costs (administration/compliance/direct/economic)
Prevention costs support activities whose purpose is to reduce the number of defects. Companies employ many techniques to prevent defects for example statistical process control, quality engineering, training, and a variety of tools from total quality management (TQM). Appraisal costs, which are sometimes called inspection costs, are incurred to identify defective products before the products are shipped to customers.
External failure costs include warranty, repairs and replacements, product recalls, liability arising from legal actions against a company, and lost sales arising from a reputation for poor quality. Such costs can decimate profits.
Internal failure costs result from identification of defects before they are shipped to customers. These costs include scrap, rejected products, reworking of defective units, and downtime caused by quality problem.
A quality cost report details the prevention costs, appraisal costs, and internal failure costand 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.
Time to correct (in hours) Plus out-of-pocket cost (including material & services) = Event cost to fix Then Event Cost to fix Times Frequency of occurrence Equals Cost of Quality
If sales of 100,000 pcs. Of item A requires production of 110,000 units( an 11% reject rate), and each replacement piece contains $10 labor and $5 material, then the cost of quality equals $150,000. If sales of $10,000 of item B requires 11,000 to be made (also an 11% reject ion), and each replacement contains $20 labor and $30 material, its cost of quality equals to $50,000
*Loss of Money *Loss of Time
Two other types of loss: *Loss of Control *Loss of Reputation
To benchmark current operations To identify opportunities for improvement To set relative priorities To monitor progress and validate improvement actions Use of Cost of Quality measurement does not account for variation in process or product quality in a single capture. Capture of Cost of quality measures can be seen as threatening to many workers Cost of Quality can be skewed by poor measurement tools, subjective data and bad reporting. Accurate global data are generally better than inaccurate tactical data.