Cost of Quality Examples, Metrics & Overview | What is COQ? | Study.com

Learn about cost of quality. Understand what COQ is, identify the types of cost of quality, learn how COQ is determined, and see examples of cost of quality. Updated: 08/30/2022

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What is COQ?

The cost of quality (COQ) is the total cost incurred by a business to produce a product or service of acceptable quality. COQ includes the costs associated with ensuring quality and the costs incurred when products do not meet quality standards.

Two main types of quality costs are associated with conformance costs and non-conformance costs. Conformance costs are incurred to meet quality requirements and include costs such as prevention, inspection, and testing. Non-conformance costs arise when products or services do not meet quality requirements and include costs such as rework, warranty claims, and customer returns.

The cost of conformance is the cost of making products that meet quality standards. Conformance costs include the cost of materials, labor, and overhead. It’s the essential work and materials a company uses to make a product. The ideal way to reduce the cost of quality is to find problems early in the production process and fix them.

The non-conformance costs are the costs incurred because of products that do not meet quality standards. Examples of non-conformance costs include the cost of rework, scrap, and warranty claims.

Why is COQ important to businesses?

The cost of quality is crucial because it measures the financial impact of poor quality on an organization. It also helps to identify and prioritize improvement opportunities. COQ can be used to assess the effectiveness of quality improvement initiatives. Finally, understanding the cost of quality can help organizations make informed decisions about allocating resources to achieve the highest return on investment.

How do businesses use COQ?

By understanding the cost of poor quality, organizations can make informed decisions about where to allocate resources to improve quality and reduce waste. Additionally, COQ can be used as a metric to benchmark quality performance against other organizations.

Cost of Good and Poor Quality

The cost of goods and poor quality is an enormous problem for businesses. Not only does it affect the bottom line, but it can also damage a company’s reputation. Sometimes, it can even lead to legal action.

Several factors contribute to the cost of goods and poor quality. First, there is the cost of the raw materials. If a company is using inferior materials, it will have to pay more for them. Second, there is the cost of labor. If a company uses shoddy methods or employs unqualified workers, it will have to pay more for labor. Finally, there are regulatory costs. A company will face fines or other penalties if it does not comply with regulations.

Businesses can save themselves a lot of money in the long run by taking these steps. For example, documenting customer expectations, then applying those lessons to the production process is a conformance cost. A non-conformance cost would be the cost of product returns because your product is not meeting the customer’s needs. It takes more time and upfront costs to research what customers want before you produce it, but it saves money in the long run.

Types of Quality Costs

There are four main types of quality costs: appraisal costs, prevention costs, internal failure costs, and external failure costs.

• Appraisal costs are the costs associated with assessing the quality of a product or service. This can include inspection costs, testing costs, and review costs.
• Prevention costs are the costs of preventing defects from occurring in the first place. This can include training costs, process improvement costs, and design costs.
• Internal failure costs are the costs associated with repairing or reworking a product or service that does not meet quality standards. This can include repair costs, replacement costs, and rework costs.
• External failure costs are associated with replacing or refunding a defective product or service. This can include warranty costs, liability costs, and lost customer costs.

Materials scrapped during the production process due to defects are internal failure costs.

Cost of Quality Metrics

The cost of quality measures the financial impact of defects or failures in quality. COQ includes the cost of conformance, which is the cost of making sure products meet requirements, and the cost of non-conformance, which is the cost of fixing defects or reworking. There are several ways to measure the cost of quality, but the most common is to use the following metrics:

Cost of conformance (COC): This includes the costs of prevention and appraisal, which are the costs of ensuring products meet requirements. COC sometimes appears on financial reports as a percentage of the total cost of production.

Cost of non-conformance (CONC): This includes the costs of failure, which are the costs of fixing defects or rework. CONC may appear on financial reports as a percentage of the total cost of production.

• Cost of quality (COQ): This is the sum of the cost of conformance and the cost of non-conformance. It is also often listed as a percentage of the total cost of production.
• Quality cost index (QCI): QCI measures the financial impact of defects or failures in quality, expressed as a ratio of the cost of conformance to the cost of non-conformance.

The most important thing to remember when using these metrics is that you shouldn’t compare apples to apples. In other words, only compare the cost of quality for products that are similar in terms of complexity, size, and other factors. Otherwise, you will not be able to accurately gauge the financial impact of defects or failures in quality.

Calculating Cost of Quality

Let’s look at how to calculate the cost of quality for a fictional company called Headphones Inc.

Cost of Quality

Example: Headphones Inc. Cost of Quality Calculation in Microsoft Excel

1. Headphones Inc. compiled financial information for each type of quality: prevention costs, appraisal costs, and failure costs.

2. The analyst listed each of these costs on the Excel spreadsheet under its appropriate category. Next, she divided failure costs into internal and external, depending on where they were discovered.

3. Finally, she added all the costs together to find the total cost of quality.