Quality costs are the costs associated with preventing, detecting, and remediating product issues related to quality. Quality costs do not involve simply upgrading the perceived value of a product to a higher standard. Instead, quality involves creating and delivering a product that meets the expectations of a customer. Thus, if a customer spends very little for an automobile, he will not expect leather seats and air conditioning - but he will expect the vehicle to run properly. In this case, quality is considered to be a vehicle that functions, rather than a luxury experience.
Quality costs fall into four categories, which are:
- Prevention costs. You incur a prevention cost in order to keep a quality problem from occurring. It is the least expensive type of quality cost, and so is highly recommended. Prevention costs can include proper employee training in assembling products and statistical process control (for spotting processes that are beginning to generate defective goods), as well as a robust product design and supplier certification. A focus on prevention tends to reduce preventable scrap costs, because the scrap never occurs.
- Appraisal costs. As was the case with a prevention cost, you incur an appraisal cost in order to keep a quality problem from occurring. This is done through a variety of inspections. The least expensive is having production workers inspect both incoming and outgoing parts to and from their workstations, which catches problems faster than other types of inspection. Other appraisal costs include the destruction of goods as part of the testing process, the depreciation of test equipment, and supervision of the testing staff.
- Internal failure costs. An internal failure cost is incurred when a defective product is produced. This appears in the form of scrapped or reworked goods. The cost of reworking goods is part of this cost.
- External failure costs. You also incur an external failure cost when a defective product was produced, but now the cost is much more extensive, because it includes the cost of product recalls, warranty claims, field service, and potentially even the legal costs associated with customer lawsuits. It also includes a relatively unquantifiable cost, which is the cost of losing customers.
Quality costs can arise anywhere in a company. There may be product design issues that begin in the engineering department, as well as manufacturing problems that can create product flaws. Further, the procurement department may acquire substandard components that result in product flaws. In addition, the order entry department may have incorrectly entered a customer order, so that the customer receives the wrong product. These issues all result in quality costs.
Quality costs can comprise a major portion of the total expenses of a business, though they are hidden within its normal cost recording system, which is oriented more toward recording by responsibility center than by quality issue. The mitigation of quality issues can greatly increase the profitability of a business, as well as enhance the level of customer retention.