Cost of Quality: The 4 Categories of Quality Costs

The top priority and the main objective of the cost of quality approach should always be to improve the performance by focusing on continuously reducing the poor quality in every aspect of the business operations. The common issue in cost analysis for quality professionals occurs when hidden, indirect and opportunity costs have been ignored or miscalculated which gives a wrong or inaccurate assessment of the success of the quality initiative.

However, since most companies today recognize that quality management is among the best strategic alternatives for improving customer satisfaction, it is crucial for management to be able to recognize and calculate the costs of quality whether it is related to poor or high quality issues.

Juran was first who originally talked about this concept which he called the cost of poor quality. However it is not only the cost of poor quality but it is about calculating the total costs of all quality investments and lost money – direct or indirect. The poor quality costs include the cost of lost business, dissatisfied customers, poor reputation, product refunds, rework, etc. while the cost of high quality is incurred through the quality management programs such as testing, process control, product improvement, improving customer service, etc. In most cases without changing the total cost and by simply shifting and allocating the costs from one category to another the bootomline can be improved significantly. However once the business is able to identify and manage the total costs, in addition both the overall quality is improved and the quality costs are decreased.

The 4 main categories of quality costs include:

Category 1. Internal Failure Costs

The types of costs include the costs which can be avoided if there were no product or service defects before they were delivered to the customer. This means taking care of internal issues and making sure high quality products are shipped to the customer. Examples of these types of costs include testing, quality control, process control, inspection, materials inspection, etc.

Category 2. External Failure Costs

These are the costs associated with defects or non conformance in the products and services after they were delivered to the customer. Examples of these quality costs include handling customer complaints, increased customer service costs, handling product returns, warranty costs, poor company reputation, lost and dissatisfied customers, repair handling costs, recalls, etc.

Category 3. Appraisal Costs

These are the costs involved in performing various tests, evaluations, assessments, audits, calibration, vendor control and various process analysis with the purpose of managing high quality and minimizing non conformance.

Category 4. Prevention Costs

Prevention costs are linked to the quality initiatives performed for the purpose of avoiding potential defects and malfunction in the future. This includes all proactive and planned activities organized by the organization to improve the overall quality system. Examples include investments in quality training, developing quality teams, better product development and evaluation, process improvements, planning and strategy development, standardization, etc.

Related Resources:

Plan your Quality Scorecard and Dashboard Reporting

Excel Templates for Business Reporting

Frequently Used Quality Tools

Quality, SPC and Six Sigma Software, Charts, Templates and Tools

Quality Function Deployment


Additional Resources:

More on Analytics

Here is How to Easily Track your KPIs in Excel

Financial Ratios, Metrics and KPIs Templates

Quality Management Tools, Charts and Templates