International Journal of Applied Engineering Research

ISSN 0973-4562 Volume 4 Number 6 (2009) pp. 945954

Research India Publications
http://www.ripublication.com/ijaer.htm

Quality Costs in a Manufacturing Industry:
A Gateway for Improvement

Santosh B. Jaju
1
and Ramesh R. Lakhe
2


1
Department of Mechanical Engineering,
G. H. Raisoni College of Engineering,
CRPF Gate No.3, Digdoh Hills, Hingna Road, Nagpur 440016 (India).
Telephone: 91-7104-235220 Fax: 91-7104-232560
[email protected]
2
Director, Shreyas Quality Management System, Nagpur. (India)

Abstract

Quality improvement decisions are viewed as the catalyst for substantial
technological developments being made in the manufacturing sector. Quality
cost is used as an indicator of economic health of an organisation. In order to
improve quality investment decisions, this paper thoroughly reviews the
quality cost literature and researches carried out by various researchers. It
discusses different methods for obtaining quality cost data, their problems and
remedies. A simplified methodology is proposed for collection of quality cost
data in a manufacturing industry. An activity chart along with flow diagram is
prepared demonstrating the procedure for implementation of quality cost
system. This paper presents a complete understanding of quality cost
illustrated by a case study in a manufacturing industry.

Keywords: concept of quality cost, PAF model, manufacturing industry, data
collection, reporting and analysis.

Introduction to Quality Cost Concept
Many companies in the world are gradually promoting quality as the central customer
value and regard it as a key concept of company strategy in order to achieve the
competitive edge. Quality Costs are a measure of the costs specifically associated
with the achievement or non-achievement of product or service quality including all
product or service requirements established by the company and its contract with
customers and society. Measuring and reporting the quality cost is the first step in a
quality management program. Quality costs allow us to identify the soft targets to
946 Santosh B. Jaju and Ramesh R. Lakhe
which improvement efforts can be applied. Quality related costs arise from a range of
activities and involve a number of departments in an organization, all of which
impinge on the quality of the product or service. Quality cost information can be used
to indicate major opportunities for corrective action and to provide incentives for
quality improvement. Manufacturing industry has primarily used quality costing, but
today there is growing interest from commerce, the public sectors and service related
organizations.

Quality Cost Defined
According to Crosby(1983), quality costs are, first a tool for focusing management
attention on quality, and second a measure of the success of a quality improvement
programme.
According to Dale et al(1991), The cost of quality is the cost of producing,
finding, correcting and preventing defects.
According to Campanella(1999), Quality Costs are the total of the cost incurred
by investing in the prevention of non-conformances to requirements, appraising a
product or service for conformance to requirements and failing to meet requirement.
According to Campanella(1999), Quality Costs represent the difference between
the actual cost of a product or service and what the reduced cost would be if there
were no possibilities of substandard service, failure of products, or defects in their
manufacture.
BS 6143-Part 2 (1990), quality related costs are defined as cost in ensuring and
assuring quality as well as loss incurred when quality is not achieved.
According to ASQC(1974), Quality are a measure of the costs specifically
associated with achievement of product or service quality- including all product or
service requirements established by the company and its contract with customers and
society.

Quality Cost Categories
Feigenbaum (1961) categorised quality costs into Prevention-Appraisal-Failure
costs(PAF).The failure costs can be further classified into subcategories: internal and
external failure costs. Oakland(1993) describes these costs as follows :
Prevention Costs: These costs are associated with the design, implementation
and maintenance of the total quality management system. Prevention costs are
planned and are incurred before actual operation.
Appraisal Costs: These costs are associated with the suppliers and customers
evaluation of purchased materials, processes, intermediates, products and
services to assure conformance with the specified requirements.
Internal Failure Costs: These costs occur when the results of work fail to reach
designed quality standards and are detected before transfer to customer takes
place.
Quality Costs in a Manufacturing Industry 947
External Failure Costs: These costs occur when the products or services fail to
reach designed quality standards but are not detected until after transfer to the
customers.

Quality costing approach
Quality costing is the conventional approach of categorizing quality costs as
prevention, appraisal, internal failure and external failure costs. Prevention and
appraisal (costs of conformance) are considered investments, while failure costs (costs
of non-conformance) are considered as losses.
Applying this approach normally involves investing in a relatively modest
increase in the cost of prevention to realize a more significant reduction in the cost of
failure, and ultimately a reduction in cost of appraisal as well, there by substantially
reducing the total of cost of quality. In this approach, those costs are excluded which
is part of the normal operation of the plant or service.

Quality Cost Reporting and Analysis
Quality costs may be summarized by division, by facility, by department, or by shop.
The decision is based on the purpose and the individual needs of the company. In the
analysis, total quality cost may be compared to an applicable base results in an index
which may be plotted and periodically analyzed in relation to past indices. The base
used should be representative of, and sensitive to, fluctuations in business activity
such as net sales, cost input, or direct labor. This comparison will relate the cost of
quality to the amount of work performed.
There are almost as many as ways to report quality costs as there are companies
reporting them: how they are reported depends to a large extent on whom they are
being reported to and what the report is trying to say. The amount of detail included in
the quality cost report generally depends upon the level of management. To top
management, the report may be a scoreboard, presented in the form of trend charts.
The report might also identify savings afforded over the report period and point out
opportunities for future savings. To middle management, the report provides quality
cost trends by department or shop to enable these managers to identify areas for
improvement. Reports to line management might provide detailed cost information.
This will help in identifying specific areas where corrective action would result in
greatest improvement. If shop wise scrap and rework costs in the form of charts were
included in the reports to line management would be more effective.

Trend Analysis to project future quality costs
Trend analysis compares present cost levels to past cost levels. It is suggested that
costs should be collected for a reasonable period before attempting to draw
conclusions or plan action programs. The data from this minimum period should be
plotted in several ways. Costs associated with each quality cost category (prevention,
appraisal, internal failure and external failure) should be plotted periodically as a
948 Santosh B. Jaju and Ramesh R. Lakhe
fraction of one or more measurement bases appropriate for future use as indicators of
business activity. Elements contributing a high proportion of the costs within a quality
cost category should be plotted and analyzed separately.

Implementation of quality cost system in a manufacturing industry
The case study has been carried out in Belt and Hoses manufacturing industry with
following objectives:
(a) To study the various elements of quality cost as applicable to concerned
industry.
(b) Collection of data for various elemental cost associated with prevention,
appraisal and failure categories.
(c) To develop a quality cost system and use it for highlighting the improvement
areas.
(d) To carry out the quality cost trend analysis and give the suggestions for
reduction in quality cost.

Methodology for data collection
In order to know the awareness of concept of quality cost, questionnaire technique
was used. It was found that very few knew about quality cost. There were wide
differences over the definitions and categorization of quality cost. PAF categorization
was better understood than price of conformance/ price of non-conformance. There
was confusion over the responsibilities for the creation of quality cost.
Interviews and discussions were carried out with the various staff of engineering,
quality control department, marketing heads, etc to find out which element of quality
cost occurred within each department.
The difficulty in apportionment of staffs time makes it difficult to costs activities
accurately. Hence departmental study was done to examine in detail some of the cost
elements for ex. Time spent in carrying the troubleshooting, etc. Timesheets and slips
were used to time the various activities.
Quality cost checklist consisting of list of cost elements detailed IS: 10708 1985
but appropriate modifications to suit the industry under study was used to collect the
data for various elements of quality cost categories. The collected data is given in
Tables I, II, III and IV. The summary sheet for quality cost categories is given in
Table V

Analysis
The analysis started with identifying ways to reduce the total quality cost. Investment
in prevention activities was seen as the key to reducing the appraisal and failure costs.
The trend analysis for quality cost over a quarter is plotted as shown in Figure 1 and is
used for giving valuable suggestions for improvements in order to reduce the overall
quality cost. It is suggested that appraisal cost is to be brought down by some
Quality Costs in a Manufacturing Industry 949
preventive measures during production so that the system becomes foolproof. Further
internal failure cost is another area for improvement.

Table I: Prevention cost (in Rupees).

Element Definition Quantified formula & methodology
Quality control
and process
control
engineering
It represents those costs
associated with
implementing and
maintaining quality by
plans and procedures
Quality engineering:-
Meeting expenses = 12000/-
1 Quality engineer pay 12000/-
4 Quality auditors pay 5000/-
Cost = 12000 + 12000 +4*5000 =
44000/-
Test and
inspection
(maintenance and
calibration)
These are the cost
related to maintenance
and calibration of test
and inspection
equipment
M/C maintenance and calibration cost
= 900/-
20% of senior mans time = 1.5 Hrs
Cost = 1.5*90*26 = 3500/-
Cost = 3500+900 = 4400/-
Training Cost of preparing and
conducting quality
related training
programmes.
Hourly rate of senior man = 58/-
20% of 8 Hrs. shift = 1.5 Hrs.
Cost = 1.5*58*26 = 2262/- = 2500/-
Administration,
audit,
improvement
These costs include cost
such as travel,
telephones, post,
printing, etc., and
auditing and
improvement.
Administration charges :-
Travel, phone, post, printing cost =
25,000/-
Audit and improvement :-
15% of senior man Time = 1 Hrs. 12
min.
Cost = 25000+1.12*58*26 = 26,700/-
Supplier
assurance
These costs include the
cost related to assure the
supplier for his quality
supply.
8% time of senior man = 35 min.
Cost = 35/60*58*26 = 879/- = 900/-
TOTAL = 78,500/-











950 Santosh B. Jaju and Ramesh R. Lakhe
Table II: Appraisal cost (in Rupees).

Element Definition Quantified formula & methodology
Lab acceptance
test
These are the cost of
test to evaluate the
quality of purchased
material

One Employee pay 15000/-
Reagent cost =2500/-
M/C used 8 hrs/shift for 26 days
M/C Hr Rate = 23/-
M/C cost = 8*26*23 = 4784/-
M/C maintenance cost = 900/-
Cost = 15000+4784+900+2500 =
23,184/-
Inspection and
testing
These are the cost
related to the
inspection activity
from within the quality
control department.
4 Supervisors pay - 4000/-
14 Jr. supervisors pay 3500/-
3 process auditors pay 5000/-
Cost = 4*4000+14*3500+3*5000 =
80,000/-
In process
inspection
These are the cost of
in-process evaluation
of conformance to
requirements.

4 Supervisors pay 4000/-
3 process auditors pay 5000/-
3 lab assistants pay 5000/-
6 workers pay 2500/-
Cost = 4*4000+3*5000+3*5000+6*250 =
61000/-
Data
processing
The cost incurred in
accumulating &
processing test &
inspecting data.

Quality manager pay 12000/-
Hrs. Rate = 58/-
20% time of manager = 1.5 Hrs.
Cost = 1.5*58*26 = 2200/- (approx)
Evaluation of
material and
spare
The cost of evaluation
testing or inspection of
site material.

3 labours and 2 computer operators pay-
19000/-
Paper, Ink, Floppy, CD, and Computers
charges = 5000/-
Cost = 26200/-
Product
Quality audit
These are the cost
incurred for auditing
the product quality.
Total cost = 2000/-
Total cost = 650/-
TOTAL = 1,93,034/-








Quality Costs in a Manufacturing Industry 951
Table III: Internal failure cost (in Rupees).

Element Definition Quantified formula & methodology
Scrap These are the costs related
to labour, material,
overhead on defective
products that can not
economically be repaired.
No quantified formula for this as the
value are taken directly from accounts
department which is 12,545/-
Rework &
Repair

These are the costs related
to correcting defectives to
make them confirm to
specifications.
Rework cost is taken directly from
accounts department. Repairs:- 3
persons pay 2000/- Month therefore
3 * 2000 = 6000/- Month 2 persons
are helpers but not actually employed.
Therefore O.T. = 15*4*30 = 1800/-
Cost = 6000 + 1800 = 7800/- Month
Trouble
shooting
These are the costs related
to analyse non-confirming
product to determine
causes.

Employee 3 persons pay 5000/-
Month
Time spend 3 Hrs. For failure
analysis. Considering Hrs. Rate = 25/-
Cost = 25*3*26 = 1950 = 2000
(Approx)
Total Cost = 2000*3 = 6000/- Month.
Re-inspection &
Retest
These ate the costs related
to re-test and Re-
inspection of products
that have undergone
rework or other revision
Re-inspection:- 2 employees pay
2000/-
Cost = 2*2000 = 4000/-
Retest:- 3 Employee pay 5000/-
Month
Time spend = 2 Hrs. Labour Hrs. Rate
= 25/-
Cost = 25* 2* 26 = 1300 = 1500
(Approx)
Total cost = 4000 + 1500 = 5500 =
6000/-Month.
TOTAL = 2,16,789/-











952 Santosh B. Jaju and Ramesh R. Lakhe
Table IV: External failure cost (in Rupees).

Element Definition Quantified formula &
methodology
Complaints
administration

Cost incurred in attending
the complaints due to
quality defects
Two Employees for administration
of complaints pay = 3000/-
Total cost = 3000 * 2 = 6000/-
Returned product
handling and
accounting
Cost of handling and
accounting of rejected
products on the customer
end.
These includes traveling, services,
Administration expenses = 10,000/-
Warranty
replacement
Cost of replacing failures
within the warranty period.
Considering 1% chance of failure
outgoing quantity =7000 belts
1% of 7000 = 70 belts
Cost of 1 belt = 35/-
Total replacement cost = 35 * 70 =
2450/-
TOTAL = 18,450/-

Table V: Summary of quality cost categories (in Rupees)

Cost category Sept. Oct. Nov. Dec. Total Projected
Prevention 74,150 76,700 78,500 75,300 3,04,650 9,13,950
Appraisal 1,91,634 1,91,934 1,93,034 1,96,050 7,72,652 23,17,956
Internal failure 2,03,569 2,07,400 2,16,789 1,89,055 8,16,813 24,50,439
External failure 19,750 17,400 18,450 20,800 76,400 2,29,200
Total 59,11,545
Prevention 2.3%
Appraisal 5.8%
Internal failure 6.1%
External failure 0.6%
Total 14.8%

Quality Costs in a Manufacturing Industry 953
TREND ANALYSIS
0
2
4
6
8
10
12
14
16
SEPT OCT NOV DEC
Month
Q
u
a
l
i
t
y

C
o
s
t

a
s

%

o
f

S
a
l
e
sPREVENTION COST
APPRAISAL COST
INTERNAL FAILURE
COST
EXTERNAL FAILURE
COST
TOTAL COQ


Figure 1: Trend analysis of various categories of quality cost and total quality cost.

Conclusion
The main focus of the study was to review the literature and the research carried out
by different authors in the area of quality cost. The quantified standard methodology
is developed for collecting data of various elements of quality cost categories for
manufacturing industry.
A case study is carried out in a manufacturing industry and quality-costing system
has been developed using PAF- model. From summary sheet as shown in Table V,
Internal failure cost is very high and is about 6.1 % of annual sales turnover. It has
been also observed that training is being neglected area. From the trend analysis it is
seen that there are no additional efforts taken towards prevention activities. Training
and quality planning activities need to be encouraged which will definitely increase
the prevention cost but will have reverse effect on appraisal and failure cost. This will
definitely reduce the overall quality cost and the performance of the industry would
improve.

References

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progress, April, pp16-21.
954 Santosh B. Jaju and Ramesh R. Lakhe
[4] Dale, B.G., and Plunkett, J.J., 1991, Quality Costing, Chapman & Hall,
London.
[5] Gilmore, H. L. (1983), Consumer product quality control cost revisited,
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th
World Congress on Total
Quality (WCTQ), Jan, Mumbai.
[7] Jaju, S.B., Shrivastava, R.L., and Lakhe, R.R., 2003, Performance Analysis
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