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.
Feigenbaum defined the following quality cost areas:
|Costs of control (Costs of conformance)||Prevention costs||Arise from efforts to keep defects from occurring at all||
|Appraisal costs||Arise from detecting defects via inspection, test, audit||
|Costs of failure of control (Costs of non-conformance)||Internal failure costs||Arise from defects caught internally and dealt with by discarding or repairing the defective items||
|External failure costs||Arise from defects that actually reach customers||
The central theme of quality improvement is that larger investments in prevention drive even larger savings in quality-related failures and appraisal efforts. Feigenbaum's categorization allows the organization to verify this for itself. When confronted with mounting numbers of defects, organizations typically react by throwing more and more people into inspection roles. But inspection is never completely effective, so appraisal costs stay high as long as the failure costs stay high. The only way out of the predicament is to establish the "right" amount of prevention.
Once categorized, quality costs can serve as a means to measure, analyze, budget, and predict.
|Tangible costs—factory accounts||
|Tangible costs—sales accounts||
To ensure impartiality, reporting should be performed by the accounting department. Additionally, to make it more understandable to a wider audience, the total cost of quality should be reported as a percent of sales, cost of sales, cost of manufacturing, or for firms in the service industry, cost of operations.
The main objective of quality cost reporting is to provide means for evaluating effectiveness and establishing the basis for internal improvement programmes.
External assurance quality costs are those costs relating to the demonstration and proof required as objective evidence by customers, including particular and additional quality assurance provisions, procedures, data, demonstration tests, and assessments (e.g., the cost of testing for specific safety characteristics by recognized independent testing bodies.