Efficient Cost of Quality Estimate – An Innovative Methodology

In modern conditions of fierce competition, any decision in the field of quality should have an economic justification.

The concept of economic assessment of Cost of Quality, adopted in the ISO 9000 series, can be considered as a tool that allows you to determine the economic consequences of decisions made within the framework of the quality management system, assess losses from the occurrence of defects and inconsistencies, conduct a comprehensive analysis of Cost of Quality, organization of accounting, analysis and evaluation of quality costs is necessary for the management of:

• Investments in quality improvement;
• Ensuring the quality of production and improvement of production technology;
• Development of production;
• Development and release of new products;
• Ensuring the interests of the supplier and the consumer.

Analysis and evaluation of Cost of Quality is an integral part of the company’s financial strategy in the field of quality. However, there is not always an adequate understanding of both the terms “quality cost analysis” and “assessment of Cost of Quality”, and the activities that are meant in this case.

Analysis of COQ

The analysis of Cost of Quality can be considered as a method of studying Cost of Quality or as an activity in the quality management system, in the future, the analysis of quality costs will mean the activity of studying Cost of Quality, recognized to scientifically substantiate the decisions and actions of the organization in the field of quality and to promote the selection of the best options for action.

The Assessment of Cost of Quality should be considered activities related to the determination of the relationship and the impact of costs on quality on the economic performance of the organization.

Assessment of Cost of Quality is a direct continuation of the analysis and is carried out in the organization to obtain economic information when making decisions in the field of quality by senior management, It can be carried out according to various criteria depending on the organization’s goals in the field of quality or on the nature of the information that is necessary for making economically sound decisions in the field of quality.

The experience of domestic and foreign enterprises and organizations in this direction allows us to identify several main approaches to the assessment and analysis of Cost of Quality. The choice of one or another approach depends on the goals facing the management of the enterprise: it is necessary to clearly understand what information should be obtained as a result of the analysis, and to assess the possibility of obtaining it when applying the chosen approach.

When analyzing and evaluating COQ, the main objectives are:

• Identification and assessment of the amount of investment needed in quality assurance and improvement;
• Ensuring the required quality of products while minimizing the total costs of its production and operation;
• Identification of the relationship between Cost of Quality and the results of economic activity of the enterprise;
• Identification of critical areas of production activities requiring the adoption of measures to improve the organization of production.

Cost of Quality can be analyzed in five ways.

The table shows. in which cases a particular type of Cost of Quality analysis is used.

Consider the third and fourth methods as an example. The third method is used when constant identification and control of costs associated with quality is necessary. Information on costs using this method can be obtained from accounting data or specially organized accounting of Cost of Quality on the basis of auxiliary sub-accounts. At the same time, not only specific cost values can be analyzed, but also their percentage ratio and change in time .

Classification

When conducting a cost analysis of quality based on the classification of A. Feigenbaum, it is necessary to take into account the following:

• The demand for products depends not only on the quality of products. But also on a number of external factors, often beyond control.
• At an early stage of the implementation of the quality system. And when carrying out measures to improve the quality, capital investments are inevitable. Which means that individual groups of costs can change abruptly, regardless of changes in product quality.
• At an early stage of the implementation of the quality management system. Internal losses due to defects and non-conformity will inevitably increase, not because of this. That the quality of products decreases, and because the effectiveness of control will increase.

The fourth method is used when it is necessary to identify critical areas of production activity, optimize COQ, identify inefficient activities, and reduce quality costs without compromising quality itself.

The main source of information on Cost of Quality in this case will be the data of special (management) accounting based on the maintenance of sub-accounts.

Ways to analyze of Cost of Quality

Planning and accounting of COQ is carrying out on the basis of the budgets of the company’s divisions. The use of the budget planning method depending on the goals allows you to analyze the cost of quality in several ways at once.

• The first way is to monitor deviations of actual COQ from those plans in accordance with the estimates for each type of activity. This method is use when it is necessary to quickly adjust the expenditure of funds.
• The second is similar to the analysis of quality assurance costs by types of quality costs based on Feigenbaum’s A cost classification and allows us to identify trends in change over time of both COQ as a whole and individual cost groups.
• The third is the analysis of the effectiveness of the use of financial resources.
• The fourth is the analysis of investments in quality improvement.

Each of these methods can be used as an independent type of cost analysis. However, only their combined use will achieve the best result in reducing and optimizing quality costs.

The assessment of quality costs is a direct continuation of the analysis. And can be carrying out according to various criteria.

Assessment

To assess the impact and relationship of quality costs with the economic performance of the organization, general and specific criteria can be use. The general ones include the ratio of the value of quality costs to the volume of sales. The amount of profit, the cost of production and the value of COQ for the previous period. The list of particular criteria is determined by the economic service of the organization.

These may include:

• The ratio of types of quality costs to each other (in accordance with the classification);
• The ratio of the cost of quality improvement to the amount of estimated profit;
• The ratio of losses from non-conformity to the costs of their elimination, etc.

Usually, the criteria for assessing quality costs are measured as a percentage. The result of the assessment can be presented in the form of a diagram.

In conclusion, I would like to emphasize that the analysis and evaluation of quality costs. (in accordance with the requirements of ISO 9000:2000). It should be a means of identifying ineffective or ineffective actions in the organization. Initiate improvement actions and be the basis for the development of financial approaches to innovation. Also, information. obtain by management in the analysis and evaluation of quality costs. It must be use in the analysis of the quality management system.