The Cost of Quality
Definition of Cost of Quality (COQ)
Modern organizations should have detailed control systems of management that exhibit both non-financial and financial indicators plus their interdependencies. Cost of quality (COQ) is among the diverse traditional tools for management control that have extensively been developing to date. Cost of Quality (COQ) is the cost associated with conducting an organization’s quality assignment (Fons 2012). In this case, it relates the costs a company incurs in satisfying the customers’ quality needs. Although there are various definitions for COQ, the majority of scholars are in consent that the concept comprises of three types of costs including appraisal costs, prevention costs and failure costs. According to Fons 2012 (339), appraisal costs are costs incurred in detecting failures, prevention costs are those that are incurred in avoiding failures while failure costs are those spent when failure occurs.
Literature Search
Armand Feigenbaum developed a model for quality cost in 1943 (Bangert 2012;Feigenbaum 1956). The COQ model focused on failure, prevention and appraisal. The concept of ‘prevention-appraisal-failure’ emerged in 1956 through his article within Harvard Business Review. Further, Armand Feigenbaum identified the four categories of quality in 1956 in a business review called ‘Total Quality Control’(Dale et al 1988; Feigenbaum1961; Feigenbaum1991). However, COQ analysis was originally discussed by Joseph Juran in 1951in his first book edition titled ‘Quality Control Handbook’ (Pyzdek & Keller 2013). The committee of quality cost was instituted in 1961 by the then ‘American Society for Quality Control’ (ASQC). Before the introduction of the quality cost concept, the general perception held that higher quality needs higher costs either through purchasing better machines or materials or by hiring additional labor. Moreover, while the development of cost accounting had categorized financial transactions to include expenses, revenues and shareholder equity changes, it had failed in categorizing quality related costs. Yet, quality costs are particularly essential considering that the majority of people engaged in manufacturing never engage directly on a product (Avakumovic et al 2009).
Through categorizing quality-based entries from an organization’s general ledger, quality and management experts can assess quality investments on the basis of profit improvement and cost improvement (Olson n.d; Harrington & Harrington1995). The core principle in quality improvement holds that bigger investments on prevention facilitate even bigger savings in appraisal efforts and quality-based failures. The way Feigenbaum categorized quality costs allowed organizations to individually verify their quality improvement. Once faced by multiple numbers of defects, companies essentially responded through engaging many more people in inspection tasks. However, inspection was never entirely efficient (Shah et al1998). Therefore, appraisal costs remained high on condition that failure costs also remained high. After being categorized, quality costs have served as a means of analyzing, measuring, forecasting and budgeting.
In the 1980s, many western-based organizations came to know the significance of strategic TQM in sustaining the welfare of their businesses (Jafar et al 2010). The organizations discovered that TQM helped them to act within local and international markets competitively. Following this finding, the continuous quality improvement process started (Rayner & Porter1992; Suminsky1994). TQM as a whole is an organizational goal while the process of quality improvement is the channel though which quality improvement is attained. Additionally, quality costing is considered among the instruments or tools for quality improvement of services and goods (Jafar et al 2010). During this discovery, it was determined that aside from considering the quality of services and goods, it was essential to act in a competitive manner in relation to cost price as well as materials and products transportation. Organizations discovered that knowing the quality costs helped in preventing the occurrence of possible losses in future (Clark et al 2012). For this reason, quality costing was started by organizations acting as their internal performance index for quality. In fact, such knowledge was vital because it enabled managers to justify their investments in quality control and evaluate the efficiency of actions taken (Wan & Dale 2002).
Overtime, control methodologies including quality cost have been undergoing significant changes that have been reducing various restrictions thereby making the designing of a detailed system of management control possible. Quality programs originally were executed exclusively in manufacturing companies (Qu & Oliver 1999). The activities of such firms were entirely linked to detection of failures, product appraisal and rejection or acceptance decisions (quality control). Years later, other than the control activities, organizations started taking actions in resolving real sources of failures, thus stabilizing the productive process or quality assurance (McGurk & Malchi 2001). During the last half of the 20th century, the quality arena was expanded to incorporate the whole organization by including objectives linked to consumer satisfaction, employee training, process efficiency and thereby the TQM concept emerged. Presently, systems of quality management (QMS) have developed to be the principle under which organizations are managed in an inclusive manner, despite their size or industry. The major demands of QMS are highlighted and detailed within the international standard (ISO 9001:2008) that details the QMS’s requirements. Fons (2012, p.341) observed that this quality theory development has facilitated various innovations within the quality cost method of measurement.
Most fundamental changes have been witnessed in the principles of quality cost over the last few years. In the past, cost of quality (COQ) just considered appraisal and preventive measures linked to short-term production (Michalska 2006). However, as the theory of quality continued evolving over the years, the theory started to consider long-term actions influencing the whole organization. In previous years, indirect costs were not prioritized when quality was exclusively related to individual processes of manufacturing. Indirect costs are profits not generated because of effects linked to past failures on perception of customers. Nonetheless, quality assurance began gaining importance soon after the emergence of TQM (Schiffauerova & Thomson 2006). The concept of ‘zero defect’ was similarly a vital factor in the evolution of COQ. People that were in support of this newly developed concept or idea started criticizing the COQ classical perspective considering that it merely pursued the reduction of cost. In this case, it failed to promote constant improvement. During the initial years following TQM emergence, quality programs almost focused exclusively on consumer satisfaction and effectiveness. Nevertheless, overtime both resource optimization and efficiency started acquiring relevance thus making even the financial indicators for quantifying them vital (Fons 2012).
The above described changes and innovations have changed the definition accorded to quality costs in present day. Quality costs therefore represent the total amount an organization loses through spending or failing to obtain because of inefficiency or ineffectiveness when developing their activities. In this case, quality costs are presently classified into four cost classifications including prevention costs, appraisal costs, failure costs and indirect quality costs. According to Fons (2012, p. 342), prevention costs are costs of activities performed to reduce the gap existing between intended objectives and attained outcomes within each organizational process. Such include costs incurred in QMS execution activities, preventive maintenance tasks, plans of supplier capability improvements, research activities on markets and programs of employee trainings. Appraisal costs relates to action costs incurred in detecting variances between actual outcomes and requirements for process outputs. The costs comprise of implementation of different audit and control activities across an organization. Examples of such costs include incoming inspection or test, test equipment or calibration of inspection and final test or inspection. All such examples comprise of planned activities within organizations. Failure costs include the amount spent to cater for deviations from specifications and objectives due to rejection of operations that generate outputs or discarded outputs (Thomson & Schiffauerova 2006).
The costs may also refer to additional activities performed in repairing defective services and products. The costs are further divided into internal and external failure costs. Internal failure costs relates to deviations detected through internal controls while external failure costs are failures discovered by consumers (Clark et al 2012). Examples of internal failures include scrap or re-work, retesting or re-inspection and material review board. On the other hand, examples of external failures in an organization include returned goods, field repairs, customer complaints processing, costs of recall, warranty costs, costs of processing returned materials, penalties, loss of reputation and customer incurred costs. The costs are usually reactive and non-value added. Lastly, indirect quality cost comprises of possible profits, which have not been acquired due to defects discovered by customers, otherwise referred as opportunity costs. Such costs comprise of net incomes that an organization would have generated if it had achieved sales transactions that were thwarted by previous external failures (Sower & Quarles 2007).
Critical Review
COQ serves as a financial measure for an organization’s quality performance. Essentially, it measures the lack of quality or can be termed as the cost linked to bad quality. COQ has always been relevant in the past just as it is today. The traditional approach evaluated products’ quality based on the physical features and characteristics including their reliability and solidarity (Jafar et al 2010). Overtime, the quality concept has been reconsidered by many companies at an advanced stage. Organizations have discovered that the most successful and desirable products cannot be considered perfect without meeting customer expectations and needs. Contrary to the past, the new meaning accorded to quality needs new strategies in organizing, implementing and controlling. Indeed, the accounting systems for quality cost are a key component of every modern company’s strategy of quality improvement (Pyzdek& Keller 2013).
In fact, COQ accounting and reporting have been part of most quality standards. COQ systems enable organizational managers to plan for improvement of quality through identifying opportunities that hold the greatest investment returns (Tatikonda & Tatikonda1996). Nevertheless, quality managers should always consider that costs of quality address only 50% of quality equation. The equation stands on the principle of doing the right and not the wrong things, implying that an organization should develop services and products that meet customers’ needs thereby delivering total consumer satisfaction. Doing things rightly means avoiding defects plus other behaviors, which can result in customer dissatisfaction (Kaplan & Cooper 1988). The core principle of COQ involves any cost, which an organization would not have incurred if quality was perfect. Such costs may include rework and scrap plus re-ordering costs in replacing defective material. Service businesses similarly incur quality costs. For instance, a hotel incurs quality costs when room services provide a guest with a missing item.
On the other hand, COQ can be considered a more significant aspect of modern businesses. Indeed, total quality management has always been considered as a modern management paradigm. According to Jafar et al (2010, p.19), this is because quality has become the highest considered matter among suppliers and manufacturers. In this case, understanding this concept plus its execution process of the related costs within organizations has become an increasingly vital and substantial principle in accomplishing organizational goals. COQ has become very crucial in today’s businesses due to the fierce local and international competition plus the rapid changes in technology. Considering the importance of creating a costing system for quality to facilitate an effective total quality system, an organization is able to identify prevention and designing costs, internal and external failure costs as well as appraisal costs.
For organizations to survive in today’s markets, they must produce continuously. Nonetheless, if such organizations conceal their defects they might not manage to beat today’s fierce competition. For this reason, total quality management concept has developed to be among the most dominant term in modern businesses (Wiele et al1999). In recent years, organizations have been making constant attempts to improve and boost quality in their businesses. In fact, such efforts have become part of organizational culture as well as strategic principles to fundamentally demonstrate continued organizational improvement. Moreover, being successful in today’s highly competitive markets demands a number of factors among them the most fundamental being continuous quality improvement(Jafar et al 2010). Meanwhile, past scientific researches and studies indicate that raising the quality level in order to satisfy consumer should be linked to cost reduction and cost of manufactured or sold goods. Among the factors that can lead to reduction of such product-based costs involves the reduction of costs associated with quality. Therefore, acknowledging, classifying and improving such costs have consistently been among the key components of quality within organizations (Jafar et al 2010).
Bangert (2012, p. 35) noted that more modern organizations have been adopting information systems including activity-based costing (ABC) and enterprise resource planning (ERP), which facilitates COQ tracking process. The power of such systems is used in tracking quality costs thereby influencing the possibilities for reduction of such costs (Tsai1998). Although the COQ concept has existed for decades, its evolvement has been consistent over the years with some notable differences. Quality has become a priority across organizations while the tack upon quality costs has shifted from considerations on the amount being spent to enhance quality to the organizational readiness in handling events (Bangert 2012).
Presently, the quality focus is not the role of small groups that monitor performances while also eliminating defect products anymore. All organizational files and ranks are considered to be effective quality elements. Quality management (QM) is a philosophical-managerial approach that has increasingly been finding its place within societies and highly values innovations and customer needs together with strategies of availing services and enhancing quality as their work principles. Notably, in recent years, QM improving systems have been experiencing a rapid development in the last 20years (Sedevich 2011). During this period, quality control procedures have replaced simple inspection activities while quality assurance has emerged. In addition, continuous quality improvement or TQM have taken over by presenting theories and patterns linked to systems’ and products’ quality improvement thereby becoming today’s motto among organizations (Suthummanon et al 2004).
Estimate of Quality Cost
DTB Manufacturers Summary of Quality Cost Code:
Date:
Measurement Period-1Year
Category of Quality Cost Amount ($) (%)
Prevention cost 20,000 2
Appraisal cost 250,000 25
Total COC 270,000 27
Internal failure cost 400,000 40
External failure cost 330,000 33
Total COPQ 730,000 73
Total quality cost 1,000,000 100
Conclusion
Based on the above results, it is evident that COQ is extremely vital in ensuring business excellence. Financial measurement within an organization is an appropriate way in evaluating its performance (Sower & Quarles 2007). An organization is able to know its position in business through establishing whether the intended objectives or goals have been accomplished. Indeed, reporting activities of the quality system plus its effectiveness in relation to finances has been illustrated to be an increasingly significant approach in connecting continued organizational improvement that associated with a quality system with the performance improvement of a company. The importance of COQ, therefore, is an important aspect in firms since it might even help organizations to exceed their net profits. Moreover, measuring COQ can greatly help in identifying what areas of quality an organization needs t o improve. Further, the relevance of this concept has been demonstrated in that it offers one measure for comparing projects’ success within organizations. Calculating COQ can also be helpful in providing cost-related data for the purpose of motivating organizations towards the quality aspect. Indeed, the results indicate the importance of showing numbers to the organizational managers since money is their language (Dale & Purgslove1996). Moreover, there is a strong link between profits and quality costing. COQ aims at increasing prevention activities to eradicate external and internal failures while also reducing appraisal activities. The goal of any COQ system should be to allow quality efforts, which will result in cost reduction opportunities through the application of various strategies including failure costs elimination, appraisal costs reduction and investment in prevention programs or activities. The calculation of COQ can help in improving quality within an organization while also enabling the organization to save money and minimize outsourcing activities. Regardless of how the calculations are done, the outcome needs to be lower costs since the key idea is the reduction of the whole production cost (Bangert 2012). Based on this discussion, the knowledge of COQ can help enhance decision-making while also factoring in other organizational initiatives like ISO. For this reason, it is recommendable to conduct a root cause assessment or analysis to establish factors influencing COQ. An organization that spends more on prevention costs will minimize their failure and appraisal costs over time. All these arguments illustrate the great importance accorded to measurement of COQ in an organization since it ensures successful business. This is because effective quality improvement leads to higher quality level, which results in increased productivity followed by increased profitability and increased competitiveness subsequently. In this case, better quality leads to higher productivity and satisfied customers.
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