What do you understand by Quality & Cost economics, mention categories of Quality Cost as identified by American Society for Quality Control (ASQC)

Quality & Cost economics 

The cost of quality; it is a widely used term and widely misunderstood.

The cost of quality is not the price of creating a quality product or service. It is the cost of NOT creating a a quality product or service.

Every time work is redone, the cost of quality increases. Obvious examples included:

• The reworking of a manufactured item
• The retesting of an assembly
• The rebuilding of a tool
• The correction of a blank statement
• The reworking of a service, such as the reprocessing of s lean operation or the replacement of a food order on a restaurant

In short, any cost that would not have been expended if quality were perfect contributes to the cost of quality.

The quality cost represents an important component of sales turnover. According to a brochure prepared by the ‘British Department of Trade and Industry’, the quality cost account for between 5 and 25% of turnover. Nevertheless, one can state that these costs provide an economic means through which company management and those practicing quality control can communicate in business terms effectively.

The history of quality cost concept can be traced back to the early fifties when works entitled “The Economics of Quality” and “The Economic Choice of Sampling System in Acceptance Sampling” was published by Juran and Sittig respectively.  Another major milestone in the ‘American Society for Quality Control (ASQC)’ established the “Quality Cost Technical Committee”. Two years later in 1963, the United States Department of Defence issued MIL- Q- 9858A entitled “Quality Problem Requirements”. This document is considered to have played on important role in the development of the quality cost concept as it made “Cost Related to Quality” a Requirement on concerned military contractors and subcontractors.

Ever since then several other developments have taken place and a large number of publication relating to quality costs have appeared.

Categories of Quality costs- 

There are four categories of quality costs identified by “American Society of Quality Control” (ASQC) 

1) Prevention costs- the cost of activities specifically designed to prevent poor quality on products or service. Example include the costs of new product review., quality planning, supplier capability surveys, process capability evaluations, quality improvement team meetings, quality improvement projects, quality education, and training. 

Prevention costs could be misinterpreted on two ways- First, application of the definition of prevention costs could be unclear. Extra appraisal and failure costs may be incurred to prevent more expensive failure costs (for example, added inspections and rework to prevent newly found defects from reaching the customer). These clearly are not prevention costs. But, in the same sense, costs incurred to solve problems (corrective action or failure analysis costs) can be viewed as part of either the problem cost (failure cost) or the cost incurred to prevent the problem on the future (prevention cost). In this case, it does not really matter in which categories the costs are accumulated, as long as there is consistency. The detailed descriptions will attempt to identify elements that might be viewed this way. 

The second way in which prevention costs could be misunderstood occurs whenever individual is engaged in prevention activities as an integral but small part of a regular job assignment. On many cases, this may be a highly significant activity, such as control charting by the production operator, and part of the operator’s cost could be considered prevention in the quality cost report. However, some consider this type of prevention activity as a desirable, built-in, self discipline cost that is part of normal operating expenses. This may also include allocations for automated mechanisms, such as a self-checking machine tool, automatic process control equipment, or as inspection edit built into the software for service processing by computer. 

On the other hand, individuals, such as engineers or analysis, may work full-time for short periods in activities (such as quality improvements projects) specifically to prevent in the process. this type of activity is clearly intended to be a part of prevention costs. 

2) Appraisal Costs- the cost associated with measuring, evaluating, or auditing products or servicer to assure conformance to quality standards and performance requirements. These include the costs of incoming and source inspection / test of purchased material; validation, verification and checking activities; in-process and final inspection / test; product, process, or service audits; calibration of measuring and test; and the cost of associated supplies and material. 

3) Failure Costs- the costing from products or services not confirming to requirements or customer / user needs – that is, the cost resulting from poor quality. Failure costs are divided into internal and external failure cost categories. 

i) Internal Failure Costs occur prior to delivery or shipment of the product, or the furnishing of a service, to the customer. Examples include costs of scrap, rework, reinsertion, retesting, material review, and downgrading. 

ii) External Failure costs occur after delivering or shipment of the product, or during oe after furnishing of a service, to the customer. Examples include the costs of processing customer complaints including necessary field service, customer returns, warranty claims, and products recalls.