quality costs

Quality Cost

The expenses a company incurs to improve the quality of its products. Quality is the state of being superior to something else. For example, if a company uses a more durable raw material to make its products, the material is usually more expensive, which causes the company to incur a quality cost. However, poor quality can also result in costs. For example, customers may complain about defective products that may be replaced for free, which costs the company lost revenue.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
Quality costsclick for a larger image
Fig. 74 Quality costs.

quality costs

the costs which are incurred by a firm in ensuring that its products meet customers' QUALITY requirements. Quality costs fall into three main categories.

First, prevention costs which are the costs of pre-production activities aimed at preventing defects (these include the determination of quality requirements and specifications, the creation of quality planning procedures and quality assurance systems aimed at achieving the quality objective, the training of operatives, etc).

Second, appraisal costs which are the costs associated with the evaluation of materials, processes, products and services to ensure that they conform to pre-determined specifications.

Third, failure costs which are the costs incurred when defective products are made. Failure costs themselves include both internal failure costs (costs of scrap, re-working and machine downtime) and external failure costs (warranty charges, re-turned goods and allowances).

Figure 74 depicts the relationship between the costs of prevention, appraisal and failure, and the ability of the firm to meet customers' quality requirements. When the ability to provide a quality acceptable to customers is low, quality costs are typically high, largely because of failure costs. As ability is improved by a greater investment in prevention and appraisal, failure costs can be reduced significantly leading to a marked fall in total quality costs.

Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson
References in periodicals archive ?
Quality costs may be summarized by division, by facility, by department, or by shop.
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