Use of Quality Costs

An excerpt from The Handbook for Quality Management (2013, McGraw-Hill) by Paul Keller and Thomas Pyzdek

Analyzing quality costs requires a suitable base, so that the quality cost is analyzed as a percent of an appropriate base: Generally, a suitable base is related to quality costs in a meaningful way, well known to the managers who will review the quality cost reports, and a measure of business volume in the area where quality cost measurements are to be applied.

Several bases are often necessary to get a complete picture of the relative magnitude of quality costs. Some commonly used bases are (Campanella, 1990, p. 26):

A labor base (such as total labor, direct labor, or applied labor)
A cost base (such as shop cost, operating cost, or total material and labor)
A sales base (such as net sales billed, or sales value of finished goods)
A unit base (such as the number of units produced, or the volume of output)

While actual dollars spent is usually the best indicator for determining where quality improvement projects will have the greatest impact on profits and where corrective action should be taken, unless the production rate is relatively constant, it will not provide a clear indication of quality cost improvement trends. Since the goal of the cost of quality program is improvement over time, it is necessary to adjust the data for other time-related changes such as production rate, inflation, etc. Total quality cost compared to an applicable base results in an index that may be plotted and analyzed using statistical control charts.

For long-range analyses and planning, net sales is the base most often used for presentations to top management (Campanella, 1990, p. 24). If sales are relatively constant over time, the quality cost analysis can be performed for relatively short spans of time. In other industries this figure must be computed over a longer time interval to smooth out large swings in the sales base. For example, in industries such as shipbuilding or satellite manufacturing, some periods may have no deliveries, while others have large dollar amounts. It is important that the quality costs incurred be related to the sales for the same period. Consider the sales as the “opportunity” for the quality costs to happen.

Some examples of cost of quality bases are (Campanella, 1990):

Internal failure costs as a percent of total production costs
External failure costs as an average percent of net sales
Procurement appraisal costs as a percent of total purchased material cost
Operations appraisal costs as a percent of total productions costs
Total quality costs as a percent of production costs

See also: Cost of Quality Overview for related links.

Learn more about the Quality Management tools for process excellence in The Handbook for Quality Management (2013, McGraw-Hill) by Paul Keller and Thomas Pyzdek or their online Quality Management Study Guide.