Costs of quality or quality costs

Costs of quality or quality costs does not mean the use of  expensive or very highly quality materials to manufacture a product. The term refers to the costs that are incurred to prevent, detect and remove defects from products. Quality costs are categorized into four main types. Theses are:

  1. Prevention costs
  2. Appraisal costs
  3. Internal failure costs and
  4. External failure costs.

These four types of quality costs are briefly explained below:

Prevention costs:

It is much better to prevent defects rather than finding and removing them from products. The costs incurred to avoid or minimize the number of defects at first place are known as prevention costs. Some examples of prevention costs are improvement of manufacturing processes, workers training, quality engineering, statistical process control etc.

Appraisal costs:

Appraisal costs (also known as inspection costs) are those cost that are incurred to identify defective products before they are shipped to customers. All costs associated with the activities that are performed during manufacturing processes to ensure required quality standards are also included in this category. Identification of defective products involve the maintaining a team of inspectors. It may be very costly for some organizations.

Internal failure costs:

Internal failure costs are those costs that are incurred to remove defects from the products before shipping them to customers. Examples of internal failure costs include cost of rework, rejected products, scrap etc.

External failure costs:

If defective products have been shipped to customers, external failure costs arise. External failure costs include warranties, replacements, lost sales because of bad reputation, payment for damages arising from the use of defective products etc. The shipment of defective products can dissatisfy customers, damage goodwill and reduce sales and profits.

More examples of quality costs

Examples of prevention cost

  • System development
  • Quality engineering
  • Quality training
  • Quality circles
  • Statistical process control
  • Supervision of prevention
  • Quality improvement projects
  • Technical support to suppliers
  • Quality data gathering, analysis and reporting
  • Audit of the quality system

Examples of appraisal cost

  • Test and inspection of incoming materials
  • Final product testing and inspection
  • Supplies used in testing and inspection
  • Supervision of testing and inspecting activities
  • Depreciation of test equipment
  • Maintenance of test equipment
  • Plant utilities in inspection area
  • Field testing and appraisal at customer site

Examples of internal failure cost

  • Net cost of scrap
  • Net cost of spoilage
  • Rework labor and overhead
  • Reinspection of reworked products
  • Disposal of defective products
  • Down time caused by quality problems
  • Analysis of the cause of defects in the production
  • Retesting of reworked products
  • Re-entering data because of keying
  • Debugging software errors

Examples of external failure cost

  • Cost of field servicing and handling complaints
  • Warranty repairs and replacement costs
  • Liability arising from defective products
  • Lost sales arising from a reputation of poor quality
  • Returns and allowances arising from quality problems
  • Product recalls
  • Repairs and replacements beyond the warranty period
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14 Thoughts on Costs of quality or quality costs

  1. Lawrencia Tshuma

    Thank you for your Enlightening information. Well done.

  2. Debraj Sen

    Very informative and supportive

  3. julius

    Thank you for your info,
    It has really been helpful as I am preparing for my Advanced management accounting exam.

  4. Alex

    Who’s role in the organization is to implement and report costs of quality?

  5. fatima

    Are Defective Products classified under Internal or External Failure?

  6. Accounting For Management

    @Fatima
    If defective products have been shipped to customers they give rise to external failure cost but if they are still in hand and are being corrected then internal failure cost.

  7. Jhuan vellah

    Thank you for the information,, but may you please clarify on how these types of quality costs interact??

  8. Tefo segomelo

    i need to understand the difference between appraisal cost and prevention cost….because i pick a point where you say all cost accuered during manufacturing process are in the two cost

  9. ssesanga Richard Anderson

    What are the roles of a management accountant

  10. Hayes Nanduba

    This information it was helpful to me.

  11. Phue Thunzar Aye

    Thanks a lot. I clearly understand differences between them

  12. saba

    informative material…

  13. Fatou Khan

    I understand the explanation vividly.

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