Quality cost

Quality costs introduction
Quality costs are one of the most important things within a company, speaking in profit terms. These costs
must be at the same time, effective and cheap and as a result, customers will be completely satisfied. This is
the base of every company and business, we desire to earn money as much as possible, offering to customers
guarantees and satisfaction but to achieve these aims a sequence of steps must be followed, defined as cost of
quality where different costs arise such as prevention cost, appraisal cost, and finally, failure costs.
The relationship between quality and cost implies that as quality rise, the cost rises too, and consequently the
price of the product increases.
The customer is only willing to pay more for the product if the quality is proportional. Therefore the main task
of quality control is to reach the level of quality, which maximises profit.
It is compulsory to define quality cost if we want to know what we are pursuing. Quality cost can be defined
as follows:
Quality cost are costs associated with making defective product(Groocock ; The Cost of Quality).
As we mentioned above, prevention, appraisal and failure are the three categories, which embrace quality
costs.
Failure includes scrap, rework as well as warranty costs, appraisal contains inspection and test costs, the
activities related to prevent defectives belong to prevention category. Appraisal also includes those costs,
which do not fall within any of the four categories.
Some advantages and disadvantages could be found categorizing quality costs.
On the one hand, among advantages, the attention should be drawn in the point that quality costs make
accounting process easier. Furthermore, to make easier the classification of failure costs, they are subdivided
in two subcategories; external and internal being external cost, more serious.
Focusing on quality costs reports, their best advantage is problems could be detected easier; consequently
appropriate resources can be applied to its solution; moreover, some clear objectives and targets could be set,
motivating people to reach them.
On the other hand it is undesirable to categorize quality cost as Groocock argues in The cost of quality due to:
1−It is not easy to differentiate which costs belong to each department.
2−If results are not like we expected, to identify the responsible people, could be a difficult task.
3−The quality cost definition is opposite to de idea of categorization.
Background
Quality is not a new term, it began at the same time as traditional jobs, when the customer placed an order to
the artisan, and the artisan's work was according, to the requirements or needs specified by the buyer.
There was a direct communication between buyer and seller, as a result the quality was high but at the same
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time, the cost was high.
Gradually, industrial production burst into market and took the place of artisans, moreover mass production
appeared and consequently the costs dropped drastically due to the fact of manufacturing with standard pieces
and the appearance of production chains. Chains of production were problematic, because when the piece did
not fit the requirements of the buyer, it was destroyed or considered scrap.
Therefore the first definition of quality arose; requirement's fit.
From that time companies needed departments of control of quality, because lack of quality was too
expensive.
In the last few yeas, total quality has spread widely as a management tool within organizations, both public
and private.
Quality could be considered as a philosophy of integration of the different activities and department of the
company.
Quality means efficiency and effectiveness coupled with the reductions of costs and the increase of
profitability. When we speak about total quality a new concept called the intern customer appears. All the
staff is involved in the process of quality, and the product or services must be transferred from any department
to another, without any failure. The supplier helps the customer to express customers' needs and them the
supplier tries to satisfy as much as possible these requirements.
The larger is the chain of production, the less successful is the achievement of quality, it means that the
commitment of all the people within the company is essential. If any link of the chain fails, the quality and
effectiveness decreases.
But the needs of quality arise mainly due to the fact that, as business world is getting smaller, because of
advance technology and cheaper air travel, companies must be aware of the competition increase, and in order
to stay or remain ahead of the competition, their efforts should be greater as time goes by.
Obviously in order to study quality cost, first of all, the definition of quality must be known. Several
definitions can be found, one of the most appropriate is the totality of features and characteristics of a product,
process or service that bear on its ability to satisfy stated or implied needs.
In our case,Stardust Computer Games was founded in 1996,it means in terms of quality that this is a new
company, having some advantages and disadvantages.
Concerning to advantages, it can be claim that the company does not have some bad habits and it is easier to
implement a quality system due to the fact that people are less reluctant to changes within the organisation.
On the other hand some disadvantages arise, related to the wealth of the company and it does not have enough
experience yet to know accurately what customers want.
We have to consider that our product is for children ,but the price is too high ,therefore however parents or
who invest the money must be persuaded as well.
Actual calculations
The actual quality costs for stardust computer games for a year are as follow:
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Two different costs could be found within quality cost:
−Cost of compliance−consist of prevention and appraisal costs
−Cost of non compliance−consist of internal and external failure costs.
The following costs have to be classified in the different categories seen above.
Firstly among the assets of the company, some of them are ignored as they are non costs of quality such as
coffee maker, soldering irons, workbenches, photocopier, carpets&curtains , jigs&fixtures, company car. On
the contrary IC tester, micrometers, multimeters , test bays could be considered as appraisal costs as they
measure however the results either of the quality or of the customers requirements or of the quality of
products .The total amount is £33,800,but we have to take into account the period of depreciation, it means to
share the total cost of each asset among years of live of the asset. As a result the definitive total cost is
£11,133.26 Appraisal costs are related to inspection and testing, either at the arriving of products or
throughout the process or a the final stage.
Both of manufacturing scrap and obsolete and surplus stock belong to internal cost.
As they are considered a typical cost of the month, we have to calculate the total amount of the year, so that
through the monthly amount, the annual amount has to be calculated, multiplying by 12.
Therefore the obtained figures are £13,074 and £693.6 for manufacturing scrap and obsolete and surplus stock
respectively. The costs occurred while the product is still in the company's possession are regarded as internal
costs. Either defective products or correcting defectives could cause these kinds of costs. In the case of
stardust company both manufacturing scrap and obsolete and surplus stock take place while the products
belong to the company, therefore this is the reason why they are considered internal costs.
Next, customer returns have to be classified, placing them in the external cost category. They are defined, as
external costs due to these costs appear having transferred the product to customer; usually these costs are a
result of warranty charges. The total amount of customer returns is (£1475.9 multiplied by 12) £17,710.8.
The next costs, which have to be taken into account, are salary costs. First of all the number of workers
belonging to each stage of quality costs must be identified.
Respect to prevention activities, several departments can be found such as training, new design and quality
systems. All these departments have in common that they try to ensure, things are right first time. In all we
have 7 workers, earning each one £20,000 per year.
Concerning to appraisal we have 7.5 workers belonging to quality control, provision of equipment, inspection
and finally test operators. This last department has 4 workers, 3 of them working for appraisal and one for
internal.
To find out this the test report must be used, as we can see, 25% of the tests failed so 1 in 4 workers belong to
internal costs and 3 to appraisal costs.
Apart from the internal cost of this worker, we should not forget to take into account quality investigation and
rework departments. In all they have four workers.
Finally external cost needs one department called returns with one worker.
Another cost, which can be founded in the information provided, is the order cancelled .It must be considered
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as a internal cost due to the fact that the products remain in the company's possession .The cost considered is
not £40 each product, because this is just the selling price, actually the estimate cost is about 40% of £40 each.
The total amount reaches £1600(0.4*£40*100).
Respect to the city bank's letter, a new cost has to be faced, our account is overdrawn and there is a cost of
£3,432 which comes from the different between £5,432 and £2,000.It could be considered as internal cost,
because it is a consequence of the nasty planning, of the financial needs by the company.
Finally there is a cost associated with rework due to non conforming materials from suppliers .To calculate the
board's cost we have to multiply 20 pence by 240(number of days in a year) and again multiply by 675(the
number of boards manufactured each day). The cost rises to £32400.
Therefore the total cost is:
Internal cost
−Manufacturing scrap
−Obsolete and surplus stock
−Salaries
−Order cancelled
−Overdrawn
−Rework
External cost
−Customer returns
−Salaries
Appraisal cost
−Assets
−Salaries
£13,074
£693.60
£80,000
£1,600
£3,432
£32,400
£131,200
£17,710.80
£20,000
£37,710.80
£11,133
£150,000
£161,133
Prevention cost
−Salaries
£140,000
TOTAL COST
£470,044
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How to prevent cost of quality
There are three approaches to commit employees with quality:
1−Quality circles: it is an approach, which enables employees to be more involved in the decisions taken in
the company. This managerial philosophy encourages employees to solve their own job related problems in an
organised way.
The key feature of this approach is that, people are more involved, but at the same time they do not have
pressure, in other words this is a voluntary process at all levels of the organisation.
Quality circles consist of a group of people, who meet together regularly, to identify, analyse and solve their
work problems.
Among the advantages of this practice, we could find:
−Improvement and development of enterprise
−Happy working environment.
−Human capabilities and skills more developed.
−Participation by all.
−Creativity
−Quality consciousness.
In our company it means the communication among the 50 employees, and the contribution of ideas, because
almost all of them have contact with children and then, they know what they want.
2−quality of work life: this is based in participation, when it is encouraged the perception of quality by the
worker rises.
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There are different ways to obtain work quality:
• Improved co−operation between departments: The better is the internal communication, the more
encouraged people are to learn about other departments.
• Employee involvement in suggesting improvements: new ideas from employees must be fostered, offering
rewards to involved people.
• Improved security: the feeling of ownership makes people feel appreciated and consequently they are alert
to possible thefts.
• Reduced staff turnover: organizations with good reputation at staff relationships are more appreciated.
3−Conscience and responsibility: For the achievement of quality is essential, the involvement of the every
member of the staff and, the commitment with quality, basic for the quality control.
The commitment must be based in a dynamic quality system and in an organizational framework, which leads
the company to commitment and the administration of quality. The quality commitment is a endless process
with different stages or dimensions. This process is basic for the quality control and the total quality systems.
For Stardust company this point is extremely important, since the company is new and it must reach the
customer's confidence and goodwill.
Conclusion
As time goes by is indispensable to be aware of environment of the company, and it means companies must
adapt their strategies, to new trends and management tools.
The waste of time implies the losing of the company's position and the possible closing down. Quality costs
analysis help the company in different ways such as, planning, development and control. This report shows
the importance of how quality began, the most remarkable events throughout the history, and how they
influenced the quality discipline, the procedures to calculate a particular quality cost, for Stardust and the
main options to avoid quality costs.
In this case we estimate the turnover would be around £2M, since the quality cost amount is about £470k, it
can be ascertained that we will have a great profit. Gradually with the implementation of the quality system,
these costs will decrease and therefore profit will rise.
References and bibliography.
−Standards and quality management; an integrated approach.1995
−Margaret Cardwell.Customer care:strategy for the 90's.Quality management series.
−I.Graham.TQM in service industries.A practitioner's manual.
−R.H Caplen.A practical approach quality control.1972
−J.M Groocock.The Cost of Quality.1974
−Www.rincondelvago.com
− http://www.kaner.com/qualcost.htm
−Www.calidad.org
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−Robson.Quality Circles;a practical guide.
−Quality circles;an executive guide.1992
−Dale B.Quality improvement through standards; 1994
−Bergman; Quality: from customers needs to customers' satisfaction.
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