Chapter: 1 1. Background 1. 1 Background: Many companies that embark on a quality-improvement process have no idea of the potential for savings until they begin to accurately analyze the costs of (non)quality. They may estimate quality costs at about 5 percent of sales, scoff at those who remark that they may be as high as 10 percent, and are astounded when they find the costs at a level of 20 percent (or more) of sales. This number is not as uncommon as it may seem.
The main aim of this term paper is to find out what cost of quality is its calcification estimation of optimum – level of product’s quality and finally how to prepare a quality cost report.
1. 2 Purpose: The purpose of our report is to understand what cost of quality is how we classify and report cost and how we can achieve the economic conformance level and finally find out about what Total Quality Management is and how we can achieve that. 1. 3 Objective of the study: The objectives of this study are-
• To fulfill the partial requirement of the course under the guidance of the coordinator.
Find out the importance and benefits of cost of quality
• What are the types of cost of quality?
• To find out how to improve in cost of quality.
• To find out how to distribute cost of quality.
• How to prepare cost of quality report?
• Uses and limitation of quality cost information
• Finally how to minimize cost of quality. 1. 4 Methodology of the study: We are five members in our group.
Information used to prepare this paper has been collected from the Secondary source. The secondary sources of information were collected from the internets and the course related books. . 5 Limitation of the study: We encountered some problems in the process of gathering information and data for this study. Like-
• Lack of information about cost of quality
• Limitation of time was another factor Chapter: 2 2. Introduction 2. 1 Introduction: The word “quality” is used more and more often in companies, whether in the food, industrial or services sectors, and the IT sector. In this report, the term “company” independently refers to any company, organization or association in the public or private sector.
In the same way, the term “client” must be taken generally to mean “beneficiary” and the term “product” the provision of a material or immaterial (service) deliverable. Many concepts hide behind the term “quality”. This report aims to define the main terms and understand the goals and types of implementing a quality cost. 2. 2 Cost of Quality The concept of quality costs is a means to quantify the total cost of quality-related efforts and deficiencies The total costs incurred on quality activities and issues and often split into prevention costs, appraisal costs, internal failure costs and external failure costs. . 3 Importance of Cost of Quality In these difficult times, many businesses have cut production and workforce to control costs. But what about quality? Customers still demand a quality product at a reasonable price. In this sense we can say that in our real life quality cost minimization and in which way quality cost can be improve that is the importance of quality cost. Cost of Quality (“COQ”) can be used to identify the global optimum for a process, and monitor that process’ progress towards its global optimum.
Global optimum is defined as the best possible outcome from all physically possible operating modes. 2. 4 Uses and benefits of Quality cost information: The benefits, which result from the quality management can be divided on three areas: Benefits for worker
• The definite standard of working,
• Interchangeable assigned the responsibilities and authorization,
• Making clear for workers their place in the whole work of organization,
• The clear qualification of indispensable supplies to the realization of work as well as the bright defining of the expected effects.
Benefits for management
• The support for planning of expenses (the possibility of foreseeing), the organizational changes, restructurization,
• The easiness in implementation and the confirmation of definite standard of offered services,
• The growth of credibility of firm for investor, customer,
• The improvement of the information circulation in a firm,
• The establishment of the uniform principles of functioning inside the firm.
Benefits for surroundings
• The reliable proof of born expenses, growth of credibility for the local community and owner (of the founder’s organ),
• The possibility of co-operation and exchange of experiences in the range of the efficient management with similar units – the benchmarking,
• The strengthener of building the image of the professional firm and friendly for the customer,
• Raising the attractiveness for potential investors.
Chapter: 3 3. Types of Quality cost 3. 1 Types of Quality cost: Quality costs can be broken down into two broad groups. These two groups are known as- 1. Maintenance of quality 2. Non-Maintenance of quality These two groups also can be broken into two more groups like-
• Maintenance of quality 1. prevention costs 2. appraisal costs
• Non-Maintenance of quality 1. internal failure costs 2. External Failure Cost Cost area |Description |Examples | |Costs of control (Costs of |Prevention costs |Costs associated with personnel engaged in |Quality planning | |Maintenance) | |designing, implementing and maintaining the |Statistical process control | | | |quality system. The latter includes auditing the |Investment in quality-related | | | |system. information systems | | | | |Quality training and workforce | | | | |development | | | | |Product-design verification | | | | |Systems development and management | | |Appraisal costs |Costs associated with measuring, evaluating or |Test and inspection of purchased | | | |auditing products, components and purchased |materials | | | |materials to assure |Acceptance testing | | | |conformance with quality standards and performance|Inspection | | | |requirements |Testing | | | | |Checking abor | | | | |Setup for test or inspection | | | | |Test and inspection equipment | | | | |Quality audits | | | | |Field testing | |Costs of failure of control |Internal failure |Costs associated with defective |Scrap | |(Costs of Non- Maintenance) |costs |products, components and materials that fail to |Rework | | | |meet quality |Material procurement costs | | | |requirements and cause manufacturing losses | | | |External failure |Costs generated by defective |Complaints in warranty | | |costs |products being shipped to customers. Complaints out of warranty | | | | |Product service | | | | |Product liability | | | | |Product recall | | | | |Loss of reputation | Chapter: 4 4. Quality of conformance 4. 1 Quality of conformance: Quality of conformance is the degree to which the design specifications are followed during manufacturing. Again, the greater the degree of conformance, the higher the level of quality of conformance. The quality cost conformance odel provides an example of a constrained optimization approach. In this model the economic conformance level (ECL) is obtained where prevention and appraisal costs are equal to external and internal failure costs. Prevention and appraisal costs increase as the level of conformance quality increases. Therefore, the total costs associated with conformance quality will be U-shaped as indicated in the exhibit below. [pic] 4. 2 How to Distribute Quality Costs: A company’s total quality cost is likely to be very high unless management gives this area special attention. Experts say that these costs should be more in 2% to 4% range. How a company does reduce its total quality cost?
The answer lies in how the quality costs are distributed A high quality of conformance means that a product is free of defects and a low quality of conformance means that a product has defects. When the quality of conformance is low, total quality cost is high and most of this cost consists of cost of internal and external failure. A low quality of conformance means that a high percentage of units are defective and hence the company must incur high failure costs. However, as a company spends more and more on prevention and appraisal activities, the percentage of defective unit’s drops. This results in lower costs of internal and external failure costs. Thus, a company can reduce its total quality cost by
• Focusing its efforts on prevention and appraisal.
The cost savings from reduced defects usually swamp the costs of the additional prevention and appraisal efforts. Chapter: 5 5. Quality cost report 5. 1 Quality cost report A quality cost report details the prevention costs, appraisal costs, and internal failure cost and external failure cost that arise from company’s current level of defective products or services. Companies often construct a quality cost report that provides an estimate of the financial consequences of the company’s current level of defects. A simple quality cost report is shown in the following example: Example of Quality Cost Report Ventura Company Quality Cost Report For the Year1 & 2 | Year 2 | Year 1 | |Prevention Cost | | | |Appraisal Costs | | | |Internal Failure Costs | | | |External Failure Costs | | | |Total Quality Cost | | | | |Amount |Percent |Amount |Percent | | |1,000,000 |2. 00% |650,000 |1. 0% | | |1,500,000 |3. 00% |1,200,000 |2. 40% | | |3,000,000 |6. 00% |2,000,000 |4. 00% | | |2,000,000 |4. 00% |5,150,000 |10. 30% | | |———– |——— |———- |——— | | |7,500,000 |15. 00% |9,000,000 |18. 0% | | |====== |===== |====== |===== | Prevention cost increased by (1,000,000 – 650,000) = 350,000 Appraisal cost increased by (1,500,000 – 1,200,000) = 300,000 Internal Failure cost (3,000,000 – 2,000,000) = 1,000,000 Total Increase = 1,650,000 External failure cost decreased by = 3,150,000 Net Quality Cost Benefit = 3,150,000 – 1,650,000 = 1,500,000 Several things should be noted from the data in the quality cost report. First, note that the quality costs are poorly distributed in both years, with most of costs being traceable to either internal or external failure. The external failure costs are particularly high in year 1 in comparison to other costs.
Second note that the company increased its spending on prevention and appraisal activities in year 2. As a result, internal failure costs went up in that year (from $2 million in first year to $3 million in year 2), but external failure costs dropped sharply (from $5. 15 million in year 1 to $3 million in year 2). Because of the increase in appraisal activates in year 2, more defects were caught inside the company before they were shipped to the customers. This resulted in more cost for scrap, rework, and so forth, but saved huge amounts in warranty repairs, warranty replacements, and external failure costs. Third, note that as a result of greater emphasis on prevention and appraisal, total quality cost decreased in year 2.
As continued emphasis is placed on prevention and appraisal in future years, total quality cost should continue to decrease. That is, future increases in prevention and appraisal costs should be more than offset by decreases in failure costs. Moreover, appraisal costs should also decrease as more effort is placed into prevention. 5. 2 Uses of Quality Cost Information (Report): A quality cost report has several uses.
• First -Quality cost information helps managers see the financial significance of defects. Managers usually are not aware of the magnitude of their quality costs because these costs cut across departmental lines and are not normally tracked and accumulated by the cost system.
Thus, when first presented with a quality cost report, managers often are surprised by the amount of cost attributable to poor quality.
• Second -Quality cost information helps managers identify the relative importance of the quality problems faced by the firm. For example, the quality cost report may show that scrap is a major quality problem or that the company is incurring huge warranty costs. With this information, managers have a better idea of where to focus efforts.
• Third- Quality cost information helps managers see whether their quality costs are poorly distributed. In general, quality costs should be distributed more toward prevention and appraisal activities and less toward failures. 5. 3 Limitations of Quality Cost Information (report):
Three limitations of quality cost information should be recognized.
• Simply measuring and reporting quality costs does not solve quality problems. Problems can be solved by taking actions.
• Results usually lag behind quality improvement programs. Initially quality cost may even increase as quality control systems are designed and installed. Decrease in these costs may not begin to occur until the quality program has been in effect for a year or more.
• The most important quality costs lost sales arising from customers ill will, is usually omitted from the quality cost report because it is difficult to estimate. Chapter: 6 6. Total Quality Management (TQM) 6. 1 Total Quality Management
The concept of Total Quality Management (TQM) refers to the implementation of a business plan that is based on a quality procedure that involves all employees. It means the continuous improvement of product and services which bears the following characteristics-
• It focuses on serving customers
• Systematic problem solving using team approach
• It improves productivity be encouraging the use of science in decision making
• It discourages the counter productive defensive behavior TQM provides tools and techniques for continuous improvement based on facts and analysis and if properly implemented it avoids counterproductive organizational infighting 6. 2 How to minimize Quality cost: One of the basic principles of quality is prevention and continual improvement.
This means that quality is a never-ending project whose goal is to spot dysfunction as quickly as possible after it occurs. Thus, quality can be represented by a cycle of corrective and preventative actions called a “Deming cycle”: [pic] This cycle, represented in the Deming cycle, is called the PDCA model. PDCA refers to the four following steps:
• “Plan: define the goals to be reached and plan how to implement the actions
• “Do: implement the corrective actions
• “Check: verify that the set goals are achieved
• “Act: depending on the results that occurred in the previous step, take preventative measures. By in this way we can minimize quality cost. Chapter: 7 7. Conclusion . 1 Conclusion: After considering every information and analysis we can come to this conclusion that the every renowned company concern about the quality cost. Because this is very crucial factor to work and more concern about how the quality cost can be minimized and continuing improvement. And the world economy says that if we can not provide good quality product here we can’t survive in the present market. For that reason every single matter should be consider to maintain and to provide better quality service by low cost high quality service. Bibliography:
• Managerial Accounting by Garrison/Noreen/Brewer
• www. wikipidia. com
• www. pqa. et/ProdServices/Qtools/COQ. htm
• www. download-free-pdf. com/cost-of-quality-wikipedia. pdf APPENDIX: Deming cycle: PDCA (plan-do-check-act) is an iterative four-step problem-solving process typically used in business process improvement. It is also known as the Deming circle, Shewart cycle, Deming cycle, Deming wheel, or plan-do-study-act. PDCA was made popular by Dr. W. Edwards Deming, who is considered by many to be the father of modern quality control; however it was always referred to by him as the ” Shewart cycle”. Later in Deming’s career, he modified PDCA to “Plan, Do, Study, Act” (PDSA) so as to better describe his recommendations.