CONSTRUCTION METHODS AND

MANAGENENT

Assignment-I

Quality Cost

Submitted by: Submitted to:

Kabish Tandukar Khem Nath Dallakoti

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Quality Cost

Definition and Explanation of Quality Cost:

A product that meets or exceeds its design specifications and is free of defects that mar
its appearance or degrade its performance is said to have high quality of
conformance. If an economy car is free of defects, it can have a quality of conformance
that is just as high as defect-free luxury car. The purchasers of economy cars cannot
expect their cars to be as opulently as luxury cars, but they can and do expect to be free
of defects.

Preventing, detecting and dealing with defects cause costs that are called quality costs
or costs of quality. The use of the term "quality cost" is confusing to some people. It
does not refer to 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.

Quality costs can be broken down into four broad groups. These four groups are also
termed as four (4) types of quality costs. Two of these groups are known as prevention
costs and appraisal costs. These are incurred in an effort to keep defective products
from falling into the hands of customers. The other two groups of costs are known
as internal failure costs and external failure costs. Internal and external failure
costs are incurred because defects are produced despite efforts to prevent them
therefore these costs are also known as costs of poor quality.

The quality costs do not just relate to just manufacturing; rather, they relate to all the
activities in a company from initial research and development (R & D) through customer
service. Total quality cost can be quite high unless management gives this area special
attention.

Four types of quality cost are briefly explained below:

Prevention Costs:
Generally the most effective way to manage quality costs is to avoid having defects in
the first place. It is much less costly to prevent a problem from ever happening than it is
to find and correct the problem after it has occurred. 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).

Prevention costs include activities relating to quality circles and statistical process
control. Quality circles consist of small groups of employees that meet on a regular
basis to discuss ways to improve quality. Both management and workers are included in
these circles.

Statistical process control is a technique that is used to detect whether a process is in

or out of control. An out of control process results in defective units and may be caused
by a miscalibrated machine or some other factor. In statistical process control, workers
use charts to monitor the quality of units that pass through their workstations. With

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these charts, workers can quickly spot processes that are out of control and that are
creating defects. Problems can be immediately corrected and further defects prevented
rather than waiting for an inspector to catch the defect later.

Some companies provide technical support to their suppliers as a way of preventing

defects. Particularly in just in time (JIT) systems, such support to suppliers is vital. In a
JIT system, parts are delivered from suppliers just in time and in just the correct
quantity to fill customer orders. There are no stockpiles of parts. If a defective part is
received from a supplier, the part cannot be used and the order for the ultimate
customer cannot be filled in time. Hence every part received from suppliers must be free
from defects. Consequently, companies that use just in time (JIT) often require that their
supplier use sophisticated quality control programs such as statistical process control
and that their suppliers certify that they will deliver parts and materials that are free of
defects.

Appraisal Costs:
Any defective parts and products should be caught as early as possible in the production
process. Appraisal costs, which are sometimes called inspection costs, are incurred to
identify defective products before the products are shipped to customers. Unfortunately
performing appraisal activates doesn't keep defects from happening again and most
managers realize now that maintaining an army of inspectors is a costly and ineffective
approach to quality control.

Employees are increasingly being asked to be responsible for their own quality control.
This approach along with designing products to be easy to manufacture properly, allows
quality to be built into products rather than relying on inspections to get the defects out.

Internal failure Costs:

Failure costs are incurred when a product fails to conform to its design specifications.
Failure costs can be either internal or external. 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. The more effective a company's appraisal activities the greater the chance of
catching defects internally and the greater the level of internal failure costs. This is the
price that is paid to avoid incurring external failure costs, which can be devastating.

External Failure Costs:

When a defective product is delivered to customer, external failure cost is the result.
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.

In the past, some managers have taken the attitude, "Let's go ahead and ship
everything to customers, and we'll take care of any problems under the warranty." This
attitude generally results in high external failure costs, customer ill will, and declining
market share and profits.

External failure costs usually give rise to another intangible cost. These intangible costs
are hidden costs that involve the company's image. They can be three or four times

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greater than tangible costs. Missing a deadline or other quality problems can be
intangible costs of quality.

Internal failure costs, external failure costs and intangible costs that impair the goodwill
of the company occur due to a poor quality so these costs are also known as  costs of
poor quality by some persons.

Prevention Costs Appraisal Costs

Failure Costs Total Quality Costs

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Cost and Values of Quality

Cost and Values of Quality

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Examples of four types of quality cost are given below:

Cost area Description Examples

 Quality planning

 Statistical process control

Arise from efforts to keep defects from  Investment in quality-related information

Prevention costs
occurring at all systems

 Quality training and workforce development

 Product-design verification
Costs of control
 Test and inspection of purchased materials
(Costs of
conformance)
 Acceptance testing

 Inspection

Arise from detecting defects via inspection,

Appraisal costs  Testing
test, audit
 Checking labor

 Quality audits

 Field testing

Costs of failure of Internal failure Arise from defects caught internally and dealt  Scrap
control (Costs of costs with by discarding or repairing the defective

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 Rework
items
 Material procurement costs

 Complaints in warranty
non-conformance)
 Product service
External failure Arise from defects that actually reach
costs customers
 Product recall

 Loss of reputation

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References
1. Wikipedia.org
2. Feigenbaum, Armand V. (1991), Total Quality Control (3 ed.), New York, New
York: McGraw-Hill, p. 109
3. Accounting4management.com
4. Transtutor.com
5. Sineeditor.com

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