Cost of Quality (COQ) is a measure that quantifies the cost of control/conformance and the cost of failure of control/non-conformance. In other words, it sums up the costs related to prevention and detection of defects and the costs due to occurrences of defects.
Definition by ISTQB
Cost of quality: The total costs incurred on quality activities and issues and often split into prevention costs, appraisal costs, internal failure costs and external failure costs.
Definition by QAI
Money spent beyond expected production costs (labor, materials, equipment) to ensure that the product the customer receives is a quality (defect free) product. The Cost of Quality includes prevention, appraisal, and correction or repair costs.
Quality costs are categorized into four main types. Theses are:
- Prevention costs
- Appraisal costs
- Internal failure costs and
- External failure costs.
These four types of quality costs are briefly explained below:
(i) 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.
(ii) 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.
(iii) 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.
(iv) 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.
FORMULA / CALCULATION
Cost of Quality (COQ) = Cost of Control + Cost of Failure of Control
Cost of Control = Prevention Cost + Appraisal Cost
Cost of Failure of Control = Internal Failure Cost + External Failure Cost
- In its simplest form, COQ can be calculated in terms of effort (hours/days).
- A better approach will be to calculate COQ in terms of money (converting the effort into money and adding any other tangible costs like test environment setup).
- The best approach will be to calculate COQ as a percentage of total cost. This allows for comparison of COQ across projects or companies.
- To ensure impartiality, it is advised that the Cost of Quality of a project/product be calculated and reported by a person external to the core project/product team (Say, someone from the Accounts Department).
- It is desirable to keep the Cost of Quality as low as possible. However, this requires a fine balancing of costs between Cost of Control and Cost of Failure of Control. In general, a higher Cost of Control results in a lower Cost of Failure of Control. But, the law of diminishing returns holds true here as well.