The value of quality should be based on its ability to contribute to profits. The goal of most of the organizations is to make money. Therefore, decisions are made based on evaluating alternatives and the effect each alternative will have on the expense and income of the entity.
The efficiency of a business is measured in terms of dollars. The cost of poor quality can add to the other costs used in decision making, such as maintenance, production, design, inspection, sales and other activities. This cost is no different than other costs. It can be programmed, budgeted, measured and analyzed to help in attaining the objectives for better quality and customer satisfaction at less cost. A reduction in quality costs leads to increased profit.
Quality costs cross department lines by involving all activities of the organization– marketing, purchasing, design, manufacturing and service to name a few. Some costs, such as inspector salaries and rework, are readily identifiable. Other costs, such as prevention costs associated with marketing, design and purchasing, are more difficult to identify and allocate. There are failure costs associated with lost sales and customer goodwill which may be impossible to measure and should be estimated.
Quality costs are defined as those costs associated with the no achievement of product or service quality as defined by the requirements established by the organization and its contracts with customers and society. Simply stated, quality cost is the cost of poor products or services.