(c) 2013 Cengage Learning

Quality and Environmental

Cost Management

Chapter 14 Objectives
1. Define quality, describe the four
types of quality costs, and
discuss the approaches used for
quality cost measurement.
2. Explain why quality cost
information is needed and how it
is used.

Quality
Improving quality may actually be the key to survival
for many firms.
Improving process quality and the quality of products
and services is a fundamental strategic objective.
If quality is improved, then customer satisfaction
increases.
If customer satisfaction increases, then market
share will increase.
If market share increases, then revenues will
increase.
If quality improves, then operating costs will also
decrease.
4

Costs of Quality
A quality product or service is one that meets or
exceeds customer expectations.
A defective product is one that does not conform to
specifications.
Quality is customer satisfaction.
Quality of conformance is a measure of how a product
meets is specifications.
Zero defects means all products conform to
specifications.
Robustness means exact conformance to target value.
Objective
1
14-5

Costs of Quality
Costs of quality costs that exist because poor
quality may or does exist
Control activities: performed by an
organization to prevent or detect poor quality
Prevention and appraisal activities
Control Costs: costs of performing control
activities
Failure activities: performed by an organization
or its customers in response to poor quality
Failure costs: costs incurred by an organization
because failure activities are performed
Objective 1

14-6

Costs of Quality
Defining Quality Costs:
1) Prevention costs= to prevent poor quality
2) Appraisal costs= whether products
conform to customer needs/requirements
3) Internal failure costs= incurred because
products do not conform to the above
4) External failure costs=after delivery

Objective 1

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Costs of Quality

Objective 1

14-8

Prevention Costs
Prevention costs are incurred to ensure
that companies produce products
according to quality standards
Examples:
Quality engineering
Training employees
Statistical process control
Training and certifying suppliers
2012 Pearson Prentice Hall. All rights
reserved.

Appraisal Costs
Appraisal costs relate to inspecting
products to make sure they meet
both internal and external customers
requirements
Examples:
Inspection of incoming materials
Maintenance of test equipment
Process control monitoring
2012 Pearson Prentice Hall. All rights
reserved.

Internal Failure Costs

An internal failure occurs when the
manufacturing process detects a
defective component or product
before it is shipped to an external
customer
Examples:
Reworking defective components or
products
The cost of downtime in production
2012 Pearson Prentice Hall. All rights
reserved.

External Failure Costs

External failures occur when customers
discover a defect
Examples:
All costs associated with correcting the problem

Repair of the product

Warranty costs
Service calls
Product liability recalls

For many companies, this is the most

critical quality cost to avoid
2012 Pearson Prentice Hall. All rights
reserved.

Cost-of-Quality Report
Information is compiled in a cost-of-quality
(COQ) report, developed for several reasons:
Illustrates the financial magnitude of quality
factors
Helps managers set priorities for the quality
issues and problems they should address
Allows managers to see the big picture of quality
issues
Allows managers to try to find the root causes of
their quality problems
2012 Pearson Prentice Hall. All rights
reserved.

Reporting Quality Costs

Objective 2

Reporting Quality Costs

Strategy to reduce quality costs recommended by the
American Society for Quality Control:
The strategy for reducing quality costs is quite simple:
(1) take direct attack on failure costs in an attempt
to drive them to zero; (2) invest in the right
prevention activities to bring about improvement;
(3) reduce appraisal costs according to results
achieved; and (4) continuously evaluate and redirect
prevention efforts to gain further improvement.
This strategy is based on the premise that:
For each failure, there is a root cause.
Causes are preventable.
Prevention is always cheaper.
Objective 2

14-15

Controlling Quality Costs

The Total Quality Approach
Zero-defect standards reflects a philosophy of total
quality control and calls for products and services
to be produced and delivered that meet the
targeted value.

Objective 4

14-16

Controlling Quality Costs

The Total Quality Approach
Standard referred to as the robust zero-defects standard.
Three types of progress can be measured and reported:
1) Progress with respect to a current-period standard or
goal (an interim standard report)
2) The progress trend since the inception of the qualityimprovement program (a multiple-period trend
report)
3) Progress with respect to the long-range standard or
goal (a long-range report)
Objective 4

14-17

Controlling Quality Costs

Incentives for Quality Improvement
1.Nonmonetary Incentives
Participation helps employees internalize
quality improvement goals as their own
Error Cause Identification is a program in
which employees describe problems that
interfere with their ability to do the job right
the first time
2.Monetary Incentives Gainsharing
Provides cash incentives for a companys
entire workforce that are keyed to quality or
productivity gains
Gainsharing provides an incentive by offering
Objective 4
a bonus to the employees equal to a

14-18

End of Chapter 14