Categorizing Quality Costs for Business Improvement

Understanding Quality Costs: A Detailed Classification

Quality costs are expenditures incurred to ensure that products or services meet quality standards, or those that arise when they fail to do so. Understanding and categorizing these costs is crucial for effective quality management and overall business improvement. This classification breaks down quality costs into three primary categories: External Failure Costs, Appraisal Costs, and Prevention Costs.

External Failure Costs

These costs arise when products or services fail to meet quality standards and are detected after delivery to the customer. They directly impact customer satisfaction and brand reputation, often leading to significant financial losses.

Costs Related to Claims Processing and Consequences

• Staff Salary: The cost of personnel dedicated to analyzing customer claims for a specific period.
• On-Site Visits: The cost of travel and time for staff to visit clients, if necessary, for claim resolution.
• Refunds and Cancellations: Costs associated with customer invoice refunds or cancellations due to quality issues.
• Product Returns: The costs incurred from products being returned by customers due to defects.

Guarantees

These are the costs associated with providing free products or services to customers under warranty. This includes:

• Personnel: Staff involved in fulfilling warranty claims.
• Premises: Costs related to facilities used for warranty services.
• Travel Costs: Expenses for staff travel to fulfill warranty obligations.

Discounts

Discounts exceptionally offered to compensate for defects in a faulty delivery.

Campaigns for Replacement of Defective Products

The cost of personnel, advertising campaigns, and necessary pieces to report the defect and facilitate product replacement.

Allowances

Payments for damages to third parties due to a poor quality product or service.

Loss of Customers

The loss of sales caused by quality defects, leading to a decline in prestige and brand image.

Appraisal Costs (Detection Costs)

These costs are incurred to determine the degree of conformance to quality requirements. They are associated with measuring and monitoring activities, ensuring that products and services meet specified standards before reaching the customer.

Control at Reception

The cost of personnel and equipment dedicated to controlling raw and auxiliary materials upon reception.

In-Process Control

The cost of personnel dedicated to controlling the product during its manufacture or the service during its delivery.

Finished Product Control

The cost of individuals and teams dedicated to controlling the finished product or service.

Subcontractor Controls

The cost of tests conducted by external laboratories responsible for subcontractor quality.

Maintenance and Calibration of Control Equipment

The cost of maintaining and calibrating laboratory equipment, scales, process control machines, and other measurement tools.

Materials for Testing

The cost of materials consumed during quality trials and tests.

Customer Satisfaction Surveys

The cost of studies conducted to measure and understand customer satisfaction levels.

Prevention Costs

These costs are incurred to prevent defects from occurring in the first place. Investing in prevention can significantly reduce appraisal and failure costs, leading to long-term savings and improved quality performance.

Quality Department

The costs of the quality department that are not directly linked to control activities, focusing instead on proactive quality initiatives.

Quality System Implementation

The costs associated with implementing a quality system within the company, including the production of a quality manual.

Design Review

The cost of utilizing quality assurance methodologies during the design phase to prevent future errors in product or service creation.

Training and Awareness

The cost of training and awareness activities for personnel to prevent the appearance of defects in the product or service.

Preventive Maintenance

The cost of personnel and equipment dedicated to preventing breakdowns and downtime through scheduled maintenance.

Vendor Evaluation

The cost of facilities and resources used to assess and rank vendors, aiming to select those that offer superior quality.

Systems Improvement

The cost of time and resources dedicated to launching improvement actions within the company.

Customer Expectation Surveys

The cost of studies conducted to understand the expectations of customers, informing product and service development.