Cost of Quality

Cost of quality (COQ) is defined as a methodology that allows an organization to determine the extent to which its resources are used for activities that prevent poor quality, that appraise the quality of the organization’s products or services, and that result from internal and external failures. Having such information allows an organization to determine the potential savings to be gained by implementing process improvements.

In process improvement efforts, quality costs or cost of quality is a means to quantify the total cost of quality-related efforts and deficiencies. It was first described by Armand V. Feigenbaum in a 1956 Harvard Business Review article.

Prior to its introduction, the general perception was that higher quality requires higher costs, either by buying better materials or machines or by hiring more labor. Furthermore, while cost accounting had evolved to categorize financial transactions into revenues, expenses, and changes in shareholder equity, it had not attempted to categorize costs relevant to quality, which is especially important given that most people involved in manufacturing never set hands on the product. By classifying quality-related entries from a company’s general ledger, management and quality practitioners can evaluate investments in quality based on cost improvement and profit enhancement.

Cost of Poor Quality: Internal Failure Costs

Internal failure costs are costs that are caused by products or services not conforming to requirements or customer/user needs and are found before delivery of products and services to external customers. They would have otherwise led to the customer not being satisfied. Deficiencies are caused both by errors in products and inefficiencies in processes. Examples include the costs for:

• Rework
• Delays
• Re-designing
• Shortages
• Failure analysis
• Re-testing
• Downgrading
• Downtime
• Lack of flexibility and adaptability

Cost of Poor Quality: External Failure Costs

External failure costs are costs that are caused by deficiencies found after delivery of products and services to external customers, which lead to customer dissatisfaction. Examples include the costs for:

• Complaints
• Repairing goods and redoing services
• Warranties
• Customers’ bad will
• Losses due to sales reductions
• Environmental costs

Cost of Good Quality: Prevention Costs

Prevention costs are costs of all activities that are designed to prevent poor quality from arising in products or services. Examples include the costs for:

• Quality planning
• Supplier evaluation
• New product review
• Error proofing
• Capability evaluations
• Quality improvement team meetings
• Quality improvement projects
• Quality education and training

Cost of Good Quality: Appraisal Costs

Appraisal costs are costs that occur because of the need to control products and services to ensure a high-quality level in all stages, conformance to quality standards and performance requirements. Examples include the costs for:

• Checking and testing purchased goods and services
• In-process and final inspection/test
• Field testing
• Product, process or service audits
• Calibration of measuring and test equipment