The document discusses the cost of quality (COQ) which includes the costs to avoid poor quality or incurred as a result of poor quality. COQ is classified into four categories: prevention costs, appraisal costs, internal failure costs, and external failure costs. Managing COQ data provides opportunities to identify areas for improvement and profit. COQ information can be used as a management tool to allocate resources, establish goals, and identify quality problems.

1. Chapter 11
The Cost Of Quality
THE MANAGEMENT AND CONTROL OF QUALITY, 5e, © 2002 South-Western/Thomson LearningTM 1

2. The Cost of Quality (COQ)
• COQ – the cost of avoiding poor quality,
or incurred as a result of poor quality
• Translates defects, errors, etc. into the
“language of management” – $$$
• Provides a basis for identifying
improvement opportunities and success
of improvement programs
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3. Quality Cost Classification
• Prevention
• Appraisal
• Internal failure
• External failure
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4. Defects, Scrap, Rework, Inspection, Returns, Warranty,
Quality Assurance
Prevention : Design Review, Zero Appraisal: Vendor surveillance,
Defect Program, Supplier Training, Receiving Inspection, Product
Supplier Evaluation, Specification Acceptance, Process Control,
Review, Quality Audits, Preventative Inspection Labor, Quality
Maintenance, Engineering Changes, Control Labor, Testing
Product Liability, Increased Overhead Equipment Costs
Internal Failure External Failure: Consumer
Downtime, Engineering Changes, Affairs, Purchase Changes,
Excess Inventory, Disposal Costs, Re- Service After Service, Product
inspection Liability, Lost Market Share,
Delivery Delay
Reduced Benefits Improved
Inventory turn, lead Finish Goods, Return on assets, Scale economies,
time, time to market warehouse space, return on investment, scheduling,
turnaround WIP thru put, order vendor relations, productivity
process time Dock- transportation,
to-stock learning curves 4

5. Quality Cost Management Tools
• Cost indexes
• Pareto analysis
• Sampling and work measurement
• Activity-based costing
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6. Managing Data and Information
• Validity – Does the indicator measure
what it says it does?
• Reliability – How well does an
indicator consistently measure the
“true value” of the characteristic?
• Accessibility – Do the right people
have access to the data?
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7. The Use Of Quality Cost Information
• To identify profit opportunities
• To make capital budgeting and decision
• To improve purchasing and supplier-related costs
• To identify west in overhead caused by activities not required
by the customer
• To identify redundant systems
• To determine whether quality costs are properly distributed
• To establish goals for budgets and profit planning
• To identify quality problems
• As a management tool for comparative measures I-O
• As a tool of Pareto analysis
• As a strategic management tool to allocate resources
• As an objective performance appraisal measure
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8. Accounting System and Quality
Management
• Activity based costing
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