1. Cost Of Quality
Neeta Sunil Gaonkar
M. Pharm F.Y Sem-1
Department of Pharmaceutical Quality Assurance
1

2. Why do we need to know CoQ ?
 This tool speaks in the language of management
 It can prioritize quality improvement actions
 Cost of quality data shows how profit is affected by quality
 It helps identify the rebundant activities
2

3. What is Cost?
 Cost denotes the amount of money that a company spends on the
creation or production of goods or services.
 In business, cost is usually a monetary valuation of:
1. Effort
2. Material
3. Resources
4. Time & Utilities consumed
5. Risk incurred
6. Opportunity forgone in production & delivery of Good or
Service
3

4. What is Quality?
Quality has many meanings:
A degree of Excellance
Conformance with requirements
The totality of characteristics of an entity that
bear on its ability to satisfy stated or implied
needs
Fitness for use
Freedom from defects, imperfections
Contamination and delighting customers
4

5. Cost of Quality
Cost of Quality= Cost of Conformance + Cost Of Non-conformance
 Cost of conformance is the cost of providing products or services as per the
required standards. This can be termed as good amount spent. (Prevention &
Appraisal costs)
 Cost Of non-conformance is the failure cost associated with a process not
being operated to the requirements. This can be termed as unnecessary amount
spent. (Internal & External failure costs )
5

6. 6

7. Conformance cost
1. Prevention Cost
Prevention costs are associated with design, implementation,
maintenance and planning prior to actual operations, in order to
avoid defects from happening.
The emphasis is on the prevention of defects in order to reduce
the probability of producing defective products. Prevention
activities lead to reduction of appraisal costs and both type of
failures (internal and external). The motto is “Prevention rather
than appraisal”
7

8. Activities associated with
Prevention costs
 Market research
 Product or service requirements establishment of specifications
for incoming materials, processes, finished products, and services
 Contract review
 Quality Planning : creation of plans for quality, reliability,
operations, production, and inspection
 Quality assurance : creation and maintenance of the quality
system
 Training development, preparation, and maintenance of programs
8

9. Conformance Cost
2. Appraisal Cost
Appraisal costs are associated with measuring & monitoring
activities related to quality. These costs are associated with the
suppliers and customers evaluation of purchased materials,
processes, products and services to ensure that they confirm to
specifications.
9

10. Examples of Appraisal Cost
Verification :
Checking of incoming material, process set up and products against
agreed specifications
Quality Audits:
Confirmation that the quality system is functioning correctly
Supplier Rating:
Assessment and approval of suppliers of products and services
10

11. Non- Conformance cost
 1. Internal Failure Cost
Internal failure costs are incurred to remedy defects
discovered before the product or service is delivered to the customer.
These costs occur when the results of work fail to reach design quality
standards and are detected before they are transferred to the customer.
11

12. Examples of Internal Failure costs
 Waste: Performance of unnecessary work or holding of stock as a
result of errors, poor organization or communication
 Scrap : Defective product or material that cannot be repaired, used
or sold
 Rework or rectification: Correction of defective material or errors
 Failure analysis: Activity required to establish the causes of internal
product or service failure
12

13. Non- Conformance Cost
2. External Failure cost:
External failure costs are incurred to remedy defects
discovered by customers. These costs occur when products or
services that fail to reach design quality standards are not
detected until after transfer to the customer.
13

14. Examples of Non- conformance cost
 Repairs and servicing- Of both returned products and those
in the field
 Warrenty claims- Failed products that are replaced or
services that are reperformed under a guarantee
 Complaints- All work and costs associated with handling and
servicing customers complaints
 Returns- Handling and investigation of rejected or recalled
products, including transport costs
14

15. 15

16. Cost Of Quality and Organizational
objectives
 Cost of quality is also an important communication tool. Philip Crosby
demonstrated what a powerful tool it could be to raise awareness of the
important of quality.
 The costs of doing a quality job, conducting quality improvements and
achieving goals must be carefully managed so that the long-term effect of
quality on the organization is a desirable one.
 These costs must be a true measure of the quality effort, and they are best
determined from an analysis of the costs of quality. Such an analysis
provides a method of assessing the effectiveness of the management of
quality and a means of determining problem areas, opportunities, savings
and action priorities
16

17. Steps in Implementing Quality
Costs
 The following sequence applies to most organizations :
 Review the literature on quality costs or consult others in similar
industries who are using the same tool
 Select one organizational unit of the company to serve as a pilot site
 Discuss the objectives of the study with the key people in the
organization
 Collect whatever cost data are conveniently available from the
accounting system
 Make a proposal to management for a full study
17

18.  Publish a draft of the categories defining the cost of poor quality
 Finalize the definations & secure management approval
 Secure aggrement on responsibility for data
collection & report preparation
 Collect and summarise the data
 Present the cost results to management along with
the results of a demonstration quality improvement
project
18

19. Case study: H&S motors
The H&S motor company produces small motors for use in lawnmowers and
garden equipment. The company instituted a quality improvement program in
1999 and has recorded the following quality cost data and accounting measures for
4 years.
The company want to assess its Quality Assurane program and develop quality
index using sales basis for the 4 year period.
Quality
Costs
Year
1999 2000 2001 2002
Prevention 27,000 28,500 74,600 1,12,300
Appraisal 1,55,000 1,70,300 1,13,400 1,07,000
Internal Failure 3,86,400 4,69,200 3,47,800 2,19,100
External Failure 2,42,000 1,92,000 1,03,500 1,06,000
Total 8,10,400 8,60,000 6,39,300 5,44,400
Sales 43,60,000 4,45,000 50,050,000 51,90,000
19

20. Key points to Study
 Approximately 75% of the H&S’s total quality costs are a result of internal
and external failures.
 In 2000 company spent more money on product monitoring and inspection
that resulted into high appraisal cost.
 With this strategy, H&S was able to identify more defective items, resulting in
an apparent increase in internal failure cost and lower external failure cost.
 In year 2001 & 2002 company spent more money on prevention
activities i.e.training of employees, redesigning the production process
and planning how to build in product quality etc.
 Prevention costs increased by more than 300 % during the 4 year
 Period resulted into decrease in overall quality costs.
20

21. The H&S company also desired to develop index numbers using quality costs as
a proportion of sales.
Quality index no. for 1999 sales is = (810,400/ 43,60,000)*100
= 18.58 and similarly for other years
These index no's alone provide little insight into the effectiveness of the quality
management program; however as a standard to make comparisons over time they
can be useful.
Year Quality Sale Index
1999 18.58
2000 19.32
2001 12.66
2002 10.49
21

22. Benefits of using Quality costs
 Quantify the size of the quality problem
 Identify major opportunities for cost reductions
 It helps in Identification of opportunities for reducing customer
dissatisfaction and associated threats to product salability
 Measures the results of quality improvement
activities align quality goals with
organizational goals
 Set cost reduction targets
22

23. Conclusion
 Increase in the cost of conformance
increases the cost of quality.
 When the cost of Non
Conformance decreases Cost of
Quality increases.
23

24. 24

25. 25