A Review of Research on Cost of Quality Models and Best Practices

Andrea Schiffauerova *, Vince Thomson **

* École Polytechnique de Montréal, Department of Mathematics and Industrial Engineering, Montreal
** Department of Mechanical Engineering, McGill University, Montreal, Canada

Article Reference:
Schiffauerova, A. and Thomson, V., “A review of research on cost of quality models and best
practices”, International Journal of Quality and Reliability Management, Vol.23, No.4, 2006

Abstract:
This article presents a survey of published literature about various quality costing approaches
and reports of their success in order to provide a better understanding of cost of quality (CoQ)
methods. Even though the literature review shows an interest by the academic community, a
CoQ approach is not utilized in most quality management programs. Nevertheless, evidence is
presented which shows that companies that do adopt a CoQ concept are successful in reducing
quality costs and improving quality for their customers. The survey shows that the method most
commonly implemented is the classical prevention-appraisal-failure (P-A-F) model; however,
other quality cost models are used with success as well. The selected CoQ model must suit the
situation, the environment, the purpose and the needs of the company in order to have a chance
to become a successful systematic tool in a quality management program.

Keywords: Cost of quality, CoQ models, best practices

Introduction
Many companies promote quality as the central customer value and consider it to be a critical
success factor for achieving competitiveness. Any serious attempt to improve quality must take
into account the costs associated with achieving quality since the objective of continuous
improvement programs is not only to meet customer requirements, but also to do it at the lowest
cost. This can only happen by reducing the costs needed to achieve quality, and the reduction of
these costs is only possible if they are identified and measured. Therefore, measuring and
reporting the cost of quality (CoQ) should be considered an important issue for managers.
There is no general agreement on a single broad definition of quality costs (Machowski
and Dale, 1998). However, CoQ is usually understood as the sum of conformance plus non-
conformance costs, where cost of conformance is the price paid for prevention of poor quality
(for example, inspection and quality appraisal) and cost of non-conformance is the cost of poor
quality caused by product and service failure (for example, rework and returns). According to
Dale and Plunkett (1995), it is now widely accepted that quality costs are: the costs incurred in
the design, implementation, operation and maintenance of a quality management system, the cost
of resources committed to continuous improvement, the costs of system, product and service
failures, and all other necessary costs and non-value added activities required to achieve a quality
product or service.

CoQ analysis links improvement actions with associated costs and customer
expectations, and this is seen as the coupling of reduced costs and increased benefits for quality

1
improvement. Therefore, a realistic estimate of CoQ and improvement benefits, which is the
tradeoff between the level of conformance and non-conformance costs, should be considered an
essential element of any quality initiative, and thus, a crucial issue for any manager. A number of
organizations are now seeking both information on the theoretical background of quality related
costs as well as practical evidence about the implementation of quality costing systems. The
literature that provides advice on this topic is usually centered on one of the existing CoQ
approaches, and only a limited number of articles review all the quality costing methods and
present data from industry on their success. The objective of this paper is to give a survey of
research articles on the topic of CoQ, focusing specifically on the references describing,
analyzing or developing various CoQ models and on the papers providing evidence of the
successful use of these methods by companies.

A few reviews of quality cost literature have been conducted. Plunkett and Dale (1987)
have carried out a literature survey, which provides guidance on the most authoritative reading
on the subject. They have summarized published information on the measurement, collection and
uses of quality related costs. Plunkett and Dale suggest that there is a surprising lack of
references on quality costing in both papers and books. Particularly interesting is the shortage of
such references from Japanese sources, given the Japanese reputation in quality management.
Moreover, Plunkett and Dale argue that only a few of the references are required to encapsulate
almost everything worth saying on the subject. Williams et al. (1999) survey the literature
regarding the historical development of quality costing, the different opinions on CoQ
definitions, the collection and use of CoQ data, and the view of the CoQ concept in accounting
literature. Moreover, published quality-cost data from corporations, industries and industry
groups as well as CoQ experience from individual companies are presented including several
references reporting on the case studies with successful CoQ experience. This work represents a
good starting point for anybody surveying best practices in the quality costing literature. Shah
and FitzRoy (1998) present the surveys of quality costs conducted in various countries. The
authors conclude that the concept of reporting quality cost data is not widely accepted by firms in
any part of the world. They focus on the collection and measurement of CoQ experiences and
also point out the shortage of quality cost surveys.

Some papers surveying CoQ models have already been published. For example, Tsai
(1998) in his article on CoQ under activity-based costing carries out a review of the known CoQ
models and the literature related to them. The main focus is however put on the prevention-
appraisal-failure (P-A-F) scheme. Porter and Rayner (1992) make a more comprehensive survey
of the published literature and present a detailed review of quality cost models, focusing again
mainly on the P-A-F category and its limitations. Nevertheless, attention is drawn to other
approaches such as Juran’s scheme or process cost models, and the use of the models that would
integrate both the costs and benefits of quality improvement. Plunkett and Dale (1988a) propose
categorization of all P-A-F models found in the literature into five groups, discuss them in the
light of their research experience, and conclude that many of the published models are inaccurate
and misleading. Burgess (1996) later examined this classification and reduced the five types of
CoQ models into three categories. In the latter two references, a survey was made of various
models that follow the P-A-F approach emphasizing the many differences between these models
in terms of the relationships between major quality cost categories; however, other quality cost
models were not discussed at all.

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 Otherwise, no other literature reviews surveying CoQ models have been found.
Moreover, so far no work has been published, which would attempt to present, analyze and
summarize a greater number of the case studies discussing the published evidence of successful
best practices in the CoQ field. This paper intends to fill this gap. It opens by presenting a
literature review focused on existing CoQ models; then, it briefly discusses the choice of CoQ
parameters and the metrics used for measuring CoQ effort. Finally, there is a summary and an
analysis of the published cases of CoQ best practices.

Review of CoQ Models

Plunkett and Dale (1987) suggest that the most striking feature of their literature review is the
preoccupation with the prevention-appraisal-failure (P-A-F) model. Indeed, most of the literature
reviewed in the current paper report on the classical P-A-F model. However, as Table I suggests,
the P-A-F concept is not the only one, since other models were found to be developed, discussed
and used as well. This work classifies CoQ models into four groups of generic models. These
are: P-A-F or Crosby’s model, opportunity cost models, process cost models and ABC (activity
based costing) models. Obviously, models within one group are not identical; as a matter of fact,
they can differ quite substantially and the suggested categorization only denotes the common
underlying principles.

Table I: Generic CoQ models and cost categories

Generic Cost/activity Examples of publications describing, analyzing or

model categories developing the model
prevention Feigenbaum, 1956; Purgslove and Dale, 1995; Merino,
P-A-F
+ appraisal 1988; Chang et al., 1996; Sorquist, 1997b; Plunkett and
models
+ failure Dale, 1988b; Tatikonda and Tatikonda, 1996, Bottorff,
1997; Israeli and Fisher, 1991, Gupta and Campbell,
1995; Burgess, 1994; Dawes, 1989; Sumanth and Arora,
1992; Morse, 1983; etc.
Crosby’s conformance
Suminsky, 1994; Denton and Kowalski, 1988
model + non-conformance
prevention
+ appraisal Sandoval-Chavez and Beruvides, 1998; Modarres and
+ failure Ansari, 1987
+ opportunity
Opportunity conformance
or intangible + non-conformance Carr, 1992; Malchi and McGurk, 2001
cost models + opportunity
tangibles
Juran et al., 1975
+ intangibles
P-A-F
Heagy, 1991
(failure cost includes
opportunity cost)
Process cost conformance Ross, 1977; Marsh, 1989; Goulden and Rawlins, 1995;
models + non-conformance Crossfield and Dale, 1990
value-added Cooper, 1988; Cooper and Kaplan, 1988; Tsai, 1998;
ABC models
+ non-value-added Jorgenson and Enkerlin, 1992; Dawes and Siff, 1993;
Hester, 1993

3
 Most CoQ models are based on the P-A-F classification (Plunkett and Dale, 1987;
Machowski and Dale, 1998; Sandoval-Chávez and Beruvides, 1997). It was Armand
Feigenbaum, who in 1943 first devised a quality costing analysis when he and his team
developed a dollar-based reporting system (Harrington, 2002). Joseph Juran (1951) initiated the
concept of quality costing, the economics of quality and the graphical form of the CoQ model.
and Armand Feigenbaum (1956) later proposed the now widely accepted quality cost
categorization of prevention, appraisal and failure (internal and external) costs. Prevention costs
are associated with actions taken to ensure that a process provides quality products and services,
appraisal costs are associated with measuring the level of quality attained by the process, and
failure costs are incurred to correct quality in products and services before (internal) or after
(external) delivery to the customer. Juran later highlighted the traditional tradeoff that contrasts
prevention plus appraisal costs with failure costs (Juran, 1962). The basic suppositions of the P-
A-F model are that investment in prevention and appraisal activities will reduce failure costs, and
that further investment in prevention activities will reduce appraisal costs (Porter and Rayner,
1992; Plunkett and Dale, 1987). The objective of a CoQ system is to find the level of quality that
minimizes total cost of quality. Feigenbaum’s and Juran’s P-A-F scheme has been adopted by
the American Society for Quality Control (ASQC, 1970), and the British Standard Institute
(BS6143, 1990), and is employed by most of the companies which use quality costing (Porter
and Rayner, 1992).

The above-mentioned classical view of quality cost behavior in the P-A-F model holds
that an optimum economic quality exists at the level at which the cost of securing higher quality
would exceed the benefits of the improved quality (BS 4778, 1987). This concept is, however,
often challenged, and it is argued that there is no economic level of quality, that the spending on
prevention could be always justified and that optimum quality level in fact equals zero defects
(for example, Fox 1989; Plunkett and Dale 1988a; Price, 1984; Schneiderman 1986). These and
other numerous references (for example, Porter and Rayner, 1992; Cole, 1992, Shank and
Govindarajan, 1994) discuss the two conflicting views of the economic level of quality costs that
are shown in Figure 1. The results of the quality cost simulation study of Burgess (1996) suggest
that both views can be reconciled within one model. Burgess supports the classical view in
certain time constrained conditions, whereas under an infinite time horizon the modern view
prevails. Similarly, Fine (1986), Dawes (1989), Marcellus and Dada (1991) and Love (1995)
suggest that the traditional trade-off model may be an accurate, static representation of quality
cost economics, but that in dynamic, multiperiod settings, failure costs can continue to decline
over time with no corresponding increase in prevention and appraisal costs. Ittner (1996)
provides empirical evidence to support this behavior. Despite the continuing discussion on
economic quality levels, the basic principles of the P-A-F categorization are still generally
recognized and accepted.

The cost categories of Crosby’s model (Crosby, 1979) are similar to the P-A-F scheme.
Crosby sees quality as “conformance to requirements”, and therefore, defines the cost of quality
as the sum of price of conformance and price of non-conformance (Crosby, 1979). The price of
conformance is the cost involved in making certain that things are done right the first time,
which includes actual prevention and appraisal costs, and the price of non-conformance is the
money wasted when work fails to conform to customer requirements, usually calculated by
quantifying the cost of correcting, reworking or scrapping, which corresponds to actual failure

4
costs. The model is used in companies that measure quality costs; however, most of the time it is
only a different terminology describing a P-A-F model (Goulden and Rawlins, 1995), and the
two costing structures are used interchangeably.

Total CoQ Total CoQ

COST PER GOOD UNIT

Failure Costs Failure Costs

COST PER GOOD UNIT

OF PRODUCT

OF PRODUCT
Cost of Prevention Cost of Prevention
Plus Appraisal Plus Appraisal

0% QUALITY LEVEL 100 % 0% QUALITY LEVEL 100 %

(100 % defective) (0 % good) (100 % defective) (0 % good)

Figure 1: Classical view on the left and the modern view on the right

The importance of opportunity and intangible costs has been recently emphasized.
Intangible costs are costs that can be only estimated such as profits not earned because of lost
customers and reduction in revenue owing to non-conformance. Sandoval-Chavez and Beruvides
(1998) incorporate opportunity losses into traditional P-A-F quality expenses. According to
them, opportunity losses may be broken down into three components: underutilization of
installed capacity, inadequate material handling and poor delivery of service. They express total
CoQ as revenue lost and profit not earned. Modarress and Ansari (1987) also advocate that the P-
A-F model be expanded to accommodate extra dimensions that are identified as the cost of
inefficient resource utilization and quality design cost. Carr (1992) includes opportunity cost and
reports evidence of its successful use in a quality program. Quality costs are defined in three
categories: the cost of conformance, the cost of non-conformance and the cost of lost
opportunity. Other authors address the cost of lost costumers derived from product failures that
reach the market (Tatikonda and Tatikonda, 1996; Heagy, 1991). Juran’s model (Juran et al.,
1951) also recognizes the importance of intangibles. His CoQ scheme includes two measurable
cost categories: tangible factory costs and tangible sales costs, and he suggests the inclusion of
intangible internal benefits. Albright and Roth (1992) have proposed Taguchi’s quality loss
function as a means of estimating quality costs that are hidden by accounting systems. Kim and
Liao (1994) have extended the usefulness of this concept by developing various forms of quality
loss functions and have showed how different loss functions can be used for measuring hidden
quality costs for any variation of the actual value from the target value of designated
characteristics of a product.

The process cost model developed by Ross (1977) and first used for quality costing by
Marsh (1989) represents quality cost systems that focus on process rather than products or
services. Process cost is the total cost of conformance and non-conformance for a particular
process. The cost of conformance is the actual process cost of producing products or services
first time to the required standards by a given specified process, whereas cost of non-
conformance is the failure cost associated with the process not being executed to the required

5
standard. These costs can be measured at any step of the process. Accordingly, it can be
determined whether high non-conformance costs show the requirement for further expenditure
on failure prevention activities or whether excessive conformance costs indicate the need for a
process redesign (Porter and Rayner, 1992).

The process modeling method called IDEF (the computer-aided manufacturing integrated
program definition methodology) developed by Ross (1977) is useful for experts in system
modeling; nevertheless, for common use by managers or staff it is too complex. Simpler methods
were developed to overcome this limitation. Crossfield and Dale (1990) suggest a method for the
mapping of quality assurance procedures, information flows and quality-related responsibilities.
Goulden and Rawlins (1995) utilize a hybrid model for process quality costing where flowcharts
are used to represent the main processes.

The use of a process cost model is suggested as a preferred method for quality costing
within total quality management (TQM) as it recognizes the importance of process cost
measurement and ownership, and presents a more integrated approach to quality than a P-A-F
model (Porter and Rayner, 1992). Goulden and Rawlins (1995) also suggest that analysts place
emphasis on the cost of each process rather than on an arbitrarily defined cost of quality under a
P-A-F model. Moreover, the quality cost categorization is simpler and some researchers (Porter
and Rayner, 1992) argue that it is also more relevant than the P-A-F scheme. The process model
has wider application in that it facilitates the collection and analysis of quality costs for both
direct and indirect functions. However, the process cost model is not in widespread use (Goulden
and Rawlins, 1995).

Existing accounting systems are usually considered as poorly fitted for generating reports
on quality measurements (Tatikonda and Tatikonda, 1996; Sorqvist, 1997a, Mandel, 1972). They
do not provide appropriate quality related data, and benefits resulting from improved quality are
not measured (Merino, 1988). Although most CoQ measurement methods are activity/process
oriented, traditional cost accounting establishes cost accounts by the categories of expenses
instead of activities. Thus, many CoQ elements need to be estimated or collected by other
methods. There is no consensus method on how to allocate overheads to CoQ elements and no
adequate method to trace quality costs to their sources (Tsai, 1998). An activity-based costing
(ABC) model was developed by Cooper and Kaplan (Cooper, 1988; Cooper and Kaplan, 1988)
to solve this problem. Under ABC, accurate costs for various cost objects are achieved by tracing
resource costs to their respective activities and the cost of activities to cost objects. The ABC
approach is actually not a CoQ model. It is an alternative approach that can be used to identify,
quantify and allocate quality costs among products, and therefore, helps to manage quality costs
more effectively. Tsai (1998) proposes an integrated CoQ-ABC framework, in which ABC and
CoQ systems are merged and share a common database in order to supply various cost and non-
financial information for related management techniques. The long-term goal of ABC systems is
to eliminate non-value added activities and to continuously improve processes, activities and
quality so that no defects are produced.

Other methods for collecting quality costs and establishing a quality costing system have
been proposed in the literature. For instance, a less formal method based on collecting quality
costs by department is described by Dale and Plunkett (1999), and a method based on a team

6
approach, in which the aim is to identify the costs associated with things which have gone wrong
in a process is outlined by Robison (1997).

CoQ Parameters
There are many possible parameters that can be used in CoQ models and BS 6143 lists the cost
elements to be included in the P-A-F model. Also Johnson (1995) or Atkinson et al. (1991)
suggest exhaustive lists of example CoQ elements. However, any recommended list can serve
only as a guideline and for provoking thoughts. A suggested list is particularly useful if it is
industry-related because each particular industrial sector has its unique quality cost elements
(Plunkett and Dale, 1986). For example, Abed and Dale (1987) have outlined a list of typical
quality cost elements relevant to textile manufacturing organizations. Since there is no set
structure and no accounting standard for quality costing, the decision on the cost structure of the
CoQ model is left to the judgment of quality managers or even quality data collectors. Therefore,
the elements included in CoQ models of various companies differ substantially. The same
elements are often placed into different cost categories or they are even defined in a different
way in order to fit the particular needs of a company (Sorqvist, 1997a; Johnson, 1995). In order
to identify cost of quality elements, some organizations benchmark or borrow elements from
other companies, which have established CoQ programs (Bemowski, 1991). Nevertheless, most
quality experts say that CoQ programs should be tailor-made for each organization such that they
are integrated into a company’s organizational structure and accounting system rather than just
being borrowed (Campanella, 1990; Johnson, 1995; Salm, 1991; Purgslove and Dale 1996).
Campanella (1990) emphasizes that decisions regarding which cost elements should be part of
CoQ and to which cost category they should belong are not as important as consistency.
According to him companies should have a consistent set of comparisons that are made from
period to period as the CoQ program evolves; quality cost elements should be developed,
deleted, modified, or combined as seems reasonable.

CoQ Metrics
CoQ measurement systems should contain good feedback metrics as well as a mixture of global
and detailed metrics. The latter actually represent the elements of CoQ and how the performance
of these elements is measured. Some examples of detailed metrics are given in Table II. Global
quality metrics measure global performance. Some examples are given in Table III. Return on
quality (RoQ), defined as the increase in profit divided by the cost of the quality improvement
program, is the most frequently mentioned global metric in the context of CoQ (Tatikonda and
Tatikonda, 1996; Slaughter et al., 1998). The other metrics in Table III are suggested by the
authors of this paper. Tatikonda and Tatikonda (1996) claim that successful companies (for
instance, AT&T) measure RoQ as a basis for accepting quality improvement projects. Return on
quality also serves as a tool to select a better alternative among competing improvement
programs. Slaughter et al. (1998) modify RoQ for use in the software environment and introduce
three new quality metrics: return on software quality, cost of software quality, and software
quality probability index. Otherwise, very little has been published on metrics for CoQ.

Use of CoQ Models in Practice

No matter how great the interest of the academic community in CoQ models is, and how much
theoretical information and practical advice can be found, the situation in the real world is
different. The results of numerous industry surveys or research studies confirm that CoQ is not a

7
widely used concept (for example, Shah and FitzRoy, 1998; Plunkett and Dale, 1987; Morse,
1991, Wheldon and Ross, 1998; Duncalf and Dale, 1985; Plunkett and Dale, 1986). Quality cost
calculations are not common even among the recipients of the Malcolm Baldridge National
Quality Award (Baatz, 1992). Quality guru Philip Crosby states that nothing in his 30 years of
work as a quality professional has disappointed him as much as the way the concept of CoQ is
not used. He adds that he “has never seen a company that had its cost of quality figured out right
or used properly” (Crosby, 1983).
Table II: Examples of detailed metrics for CoQ
Detailed Metrics
cost of assets and materials
cost of preventive labor
cost of appraisal labor
cost of defects per 100 pieces
cost of late deliveries
% of repeat sales
time between service calls
# of non-conforming calls
# of complaints received

Table III: Global metrics for CoQ

Metric
RoQ = increase in profit
cost of quality improvement program
Quality rate =
input – (quality defects + startup defects + rework)
input
Process quality = available time – rework time
available time
First time quality (% product with no rework)

Companies rarely have a realistic idea of how much profit they are losing through poor
quality. Smaller firms most often do not even have any quality budget and do not attempt to
monitor quality costs (Porter and Rayner, 1992; Plunkett and Dale, 1983). Large companies
usually claim to assess quality costs (Schmahl et al., 1997; Allen and Oakland, 1988; Chen,
1992); however, according to Tatikonda and Tatikonda (1996) and Morse (1991), even though
most managers claim that quality is their top priority, only a small number of them really
measure the results of quality improvement programs. Even in companies that do measure
results, quality costs are grossly understated (Porter and Rayner, 1992; Schmahl et al., 1997;
Tatikonda and Tatikonda, 1996). Few of the companies claiming that they monitor quality costs
have an established framework for the collection across the full range of quality cost categories
(Duncalf and Dale, 1985). Moreover, companies measure visible and quantifiable costs such as
scrap and warranty, but ignore significant costs such as lost sales due to customer defection
(Porter and Rayner, 1992; Schmahl et al., 1997; Tatikonda and Tatikonda, 1996). A high
proportion of the costs have proven difficult to measure and have therefore remained hidden
(Sorqvist, 1997b).

8
 Measuring return on quality is not a common practice (Tatikonda and Tatikonda, 1996).
Spending money on quality improvement programs without ever estimating expected benefits
leads to investment with little or no impact on the bottom line. Even though quality is now
widely acknowledged as a key competitive weapon, it seems that there is a lack of quality vision
and commitment among top management.

There is a reasonable amount of detailed advice available on CoQ, but there are only a
few published, practical examples that give specifics about the costs that are included or
excluded in quality costing, and how the costs are collected. Nevertheless, most examples
confirm that quality improvement and cost measurement processes bring about a huge reduction
in a company’s cost of quality. A brief description of the documented cases of successful use of
CoQ models and methods is given in Table IV.

Table IV shows that the majority of companies implement their CoQ programs in
accordance with the universally accepted Feigenbaum’s costing structure (Feigenbaum, 1956).
Some examples of the case studies based on the use of the P-A-F model follow.

The successes of multinational corporation, ITT, that implemented a CoQ system are
often cited in the literature. Groocock (1980) presents how ITT Europe headquartered in
Belgium coped with the quality cost control and saved over $150 million during 5 years, and
both Hagan (1973) and Morse et al. (1987) describe the efforts of ITT New York towards
reducing CoQ and report huge savings for the company. Another two examples of success
stories come from the telecommunication industry. United Technologies Corporation, Essex
Telecommunication Products Division, established CoQ measurement based on a P-A-F model,
and five years of implementation have yielded a productivity improvement of 26%. Specific
accomplishments as well as elements of the cost of quality calculation and their relationship to
financial performance are examined in detail by Fruin (1986). Thompson and Nakamura (1987)
also follow P-A-F quality costing structure and propose a plan, which is currently being used to
collect and report CoQ data from several development projects at AT&T Bell Laboratories,
Transmission Systems Division. They suggest that managing CoQ in the R&D process is an
effective way to improve product development. The works of Purgslove and Dale (1995, 1996)
discuss the development and operation of a system of quality costing at a manufacturer of
coatings for industrial applications. They report that the investment made in quality improvement
and in the CoQ measurement system was paid back within the first year. Denzer (1978) presents
a description of a P-A-F cost of quality system used in an electronics manufacturing facility and
indicates significant quality cost reduction. Moreover, he shows that the collection and use of
quality costs are an aid to management and are accompanied by improvement of quality.

Table IV presents a lot of other successful cases of CoQ model implementation, where
the classical P-A-F model was used. Many authors offer only a brief analysis of the studied case;
however, some of the references provide an excellent source of information containing hands-on
industrial experience. For example, Whitehall (1986) investigates many possible problems that
could arise during the development and implementation of a quality costing system based on his
experience at Ferranti Defence Systems. He discusses the crucial issues and suggests some
alternative strategies. Purgslove and Dale (1996) give specific details on the development and
setting up of a quality costing system, including the collection, reporting and analyzing of the
quality cost data. The major difficulties that were encountered are discussed in detail. Hesford

9
 Table IV: Documented cases of successful use of CoQ models and methods

Company Industry CoQ calculation Base for CoQ Reported gains Reference
calculation
P-A-F model
United CoQ = P+A+F % of total • CoQ reduced from 23.3% to 17.2% in Fruin, 1986
Technologies/ telecommuni- manufacturing cost 5 years.
Essex Group, cations % of cost of goods • gain in productivity of 26%
USA produced
AT&T telecommuni- % of project Thompson
Bell cations CoQ = P+A+IF+EF budget and
Laboratories Nakamura,
1987
industrial CoQ = P+A+IF+EF % of annual sales • CoQ reduced from 4.1% to 2.5% in 4 Purgslove and
Hydro Coatings, coatings turnover years. Dale, 1995;
UK manufacturing % of raw material • investment in quality paid back in the Purgslove and
usage first year. Dale, 1996
Philips Power electronics CoQ = P + A + % of factory • CoQ reduced from 35.8% to 18.1% in Payne, 1992
Semiconductor CONC turnover 4 years
Business Group, • workforce reduced by 25% in 18
UK months
• output increased by 25% in 18 months
York air conditioning CoQ = P+A+IF+EF % to cost of sales • CoQ reduced from 13.5% to 3.7% in 8 Knock, 1992
International, and years
UK refrigeration • the cost of factory failures reduced by
96%
British aerospace CoQ = P+A+F % of total • objective to reduce CoQ by one third in Hesford and
Aerospace manufacturing cost one year Dale, 1991
Dynamics, UK
ITT Europe, information CoQ = P+A+F % of sales • Savings from CoQ improvement Groocock,
Belgium technology program totaled over $ 150 million in 5 1980
years
Allis-Chalmers machinery CoQ = P+A+IF+EF % of product sales • CoQ reduced from 4.5% to 1.5% in 3 Kohl, 1976
Corporation, US manufacturing years

10
 Company Industry CoQ calculation Base for CoQ Reported gains Reference
calculation
Herbert machine-tool CoQ = P+A+IF+EF % of sales • CoQ reduced from 7.5% to 5.9% in 4 Burns, 1976
Machine Tools, industry years
UK
Raytheon’s software CoQ = P + A + % of total project • CoQ reduced from 65% to 15% in 8 Campanella,
Electronic Rework Cost costs years 1999
Systems • Rework Cost reduced from 40% to 6%
• the overall payoff was 7.5 times
• a 170% increase in software
productivity
major electrical electrical CoQ = P+A+IF+EF % of sales • CoQ reduced from 5.4% to 4.6% in Campanella,
firm first year 1999
Ferranti Defense electronics, CoQ = P+A+F % of total costs Whitehall,
Systems, UK electro- 1986
mechanical
equipment
National Cash precision CoQ = P+A+F probably % of • CoQ reduced from 6,4% to 4,4% in 6 Krzikowski,
Register mechanics total years 1963
Company, manufacturing cost
Germany
North American consumer CoQ = P+A+IF+EF % of standard Morse et al.
Philips electronics product cost 1987
Consumer % of direct labor
Electronics
ITT Corp. New information CoQ = P+A+F % of sales • CoQ reduced from 12% to 5,5% Hagan, 1973
York, USA technology • by reducing CoQ the company has Morse et al.
saved hundreds of millions of dollars 1987
in first 5 years
Travenol medical CoQ = P+A+F Tsiakals, 1983
Laboratories, devices,
USA pharmaceutical
Hermes military CoQ = P+A+IF+EF % of sales • scrap and rework reduced by 30% Breeze, 1981
Electronics electronics during one year

11
 Company Industry CoQ calculation Base for CoQ Reported gains Reference
calculation
Banc One financial CoQ = P+A+IF+EF % of operating • net income enhanced by $20 million Atkinson et al.
Corporation, services expense annually 1991,
USA • substantial improvements in service Campanella,
levels and operating costs 1999
Cascade automotive CoQ = P+A+IF+EF % of sales Atkinson et al.
Engineering, supplies 1991
USA
electronic electronics CoQ = P+A+IF+EF % of sales Denzer, 1978
manufacturer
Crosby’s model
Solid State CoQ = COC + % of the revenue • CoQ reduced from 37% to 17% Denton and
Circuits CONC Kowalski,
1988
software in $ per line of CoQ reduced by 50% in 8 years Slaughter et
BDM
CoQ = COC + code al.,1998
International
CONC
Opportunity and alternative cost models
US Marketing service • CoQ reduced by $54 million in first Carr, 1992
CoQ = P + A + IF + % of sales revenue
Group of Xerox, business year.
EF + ExR + OC
USA
Rank Xerox, office • CoQ reduced from 6% to 1% in 5 Huckett, 1985
CoQ = P + A + IF + % of total
UK equipment years
EF + ExR + OC manufacturing cost
• defects rate reduced by over 75%
Reprographic office • CoQ reduced by 50% Morse et al.
CoQ = P + A + IF + % of the standard
Manufacturing equipment 1987
EF + ExR + OC cost of production
Operations Unit
of Xerox, USA
pharmaceutical • CoQ reduced by 11% Malchi and
CoQ = Operating
company pharmaceutical McGurk, 2001
Cost + CONC +
Alternative Cost

12
 Company Industry CoQ calculation Base for CoQ Reported gains Reference
calculation
Westinghouse • overall productivity increased by 15% Forys, 1986
CoQ = P+A+F
Semiconductor in 4 years
Division, USA (F includes • scrap reduced by 58% resulting in
opportunity costs) savings of over $2,4 million
• material returned by customer reduced
by 69% resulting in savings of over
$600 000
Lebanon Steel steel casting • objective to reduce failure costs by Moyer and
CoQ = P+A+F % of sales
Foundry, USA 50% Gilmore, 1979
(F includes Quality
Image Loss)
Process model
GEC Alsthom Goulden and
Engineering CoQ = COC + Rawlins, 1995
Systems CONC
ABC model
Networked computer CoQ = Process • CoQ reduced by 25% in 1 year Jorgenson and
Computer systems Quality + Board Enkerlin,
Manufacturing Test + Repair + 1992
Operation of Bench Test + Defect
Hewlett- Analysis
Packard, USA
CoQ cost of quality COC cost of conformance
P prevention cost CONC cost of non-conformance
A appraisal cost OC opportunity cost
F (IF+EF) failure cost (internal and external failures)
ExR exceeding requirements

13
and Dale (1991) describe their experience with the development and use of a quality costing
model at British Aerospace (Dynamics) and give special attention to the analysis of the problems
encountered.

Crosby’s model (Crosby, 1979), in which CoQ is expressed as the sum of cost of
conformance and cost of non-conformance, is documented to have been successfully used for
quality improvement programs at several companies. Solid State Circuits, a manufacturer of
printed circuits boards, has designed new methods of measuring conforming and non-conforming
costs and the use of such methods has led to the identification of causes of error and the devising
of means of correcting them. Denton and Kowalski (1988) describe this quality improvement and
measurement process and report a drop from 37% to 17% in the company’s cost of quality.
Slaughter et al. (1998) have carried out a detailed study on the economics of software quality at
BDM International, a major information technology company. They use marginal analysis of
non-conformance costs to identify the greatest cost impacts of defect reduction during their
quality initiatives and present their successful results. The paper includes a number of important
insights for software managers who are interested in improving their decisions on software
quality expenditures.

Use of opportunity or intangible costs for CoQ improvement programs has already
provided sound results. Xerox was the first company to use opportunity cost in order to
determine the CoQ. Quality cost figures include prevention, appraisal, internal and external
failure costs, exceeding requirements (the costs incurred to provide unnecessary or unimportant
information or service, for which no requirement has been established) and the cost of lost
opportunity (profit not earned owing to lost customers and reduction in revenue because of non-
conformance). Rank Xerox in England used this quality costing scheme and achieved an 83%
reduction in CoQ and higher customer satisfaction. The quality improvement process at Rank
Xerox is reviewed in detail by Huckett (1985). Morse et al. (1987) examine the development of
the CoQ process at Reprographic Manufacturing Operations of Xerox headquartered in New
York, which accepted the same quality costing concept, and reports a 50% reduction in CoQ.
Carr (1992) describes the program based on the same costing categorization adopted by the US
Marketing Group of Xerox. The program consists of a system of quality cost measures and cost
of quality concepts specifically adapted to the service industry. A reduction in CoQ of $54
million is reported in the first year of quality improvement efforts.

Xerox is not the only company that has achieved success with the use of the opportunity
costs. Malchi and McGurk (2001) discuss the methodology of measuring CoQ, which includes
so-called alternative costs in the total CoQ. Alternative costs are hidden costs, and examples are
lost sales, extra inventory, delays and unidentified scrap. They present a case study of
implementation of this CoQ program in a pharmaceutical manufacturing facility, where
implementing this methodology resulted in an 11% reduction in the cost of quality. Moyer and
Gilmore (1979) make an economic cost analysis at Lebanon Steel Foundry and reveal a potential
for huge quality cost reductions. A classical P-A-F scheme is used; however, it includes an
intangible category, Quality Image Loss, within failure costs, which should reflect the loss of
business due to poor quality. Also Forys (1986) reports a successful case of Westinghouse
Semiconductor Division, where such intangible and opportunity costs as white collar lost time,
interest lost on uncollected receivables or interest lost on invoicing delays are calculated or
estimated in the company’s CoQ model.

14
 A quality costing system using the process approach has been successfully designed and
implemented within the power systems division of GEC Alsthom Engineering Systems. Goulden
and Rawlins (1995) describe this hybrid process model, which uses flowcharts. These were
found to be most effective process modeling tools as they facilitated understanding and better
interdepartmental communication.

Since activity-based costing (ABC) is considered more compatible with quality cost
measurement systems than traditional accounting, its use for a CoQ determination is an
appealing alternative. Jorgenson and Enkerlin (1992) describe how a Hewlett-Packard
manufacturing operation utilized its ABC system to identify, quantify and allocate quality costs
among its products. Having this information allowed product teams to simulate and reduce
quality costs earlier in the product design phase.

Discussion of the Published Case Studies

Based on the documented cases, the model most frequently used at companies is the classical
Feigenbaum’s prevention-appraisal-failure model. Results of the literature review support this
finding as well. If companies use quality costing, they usually employ the P-A-F model (Porter
and Rayner, 1992). Nevertheless, the P-A-F categorization is only a basic concept and the
concrete costing systems still differ considerably from company to company. Every model is
usually adjusted according to the company’s needs; different subcategories and groupings are
used; and the various costs and elements are defined in a different way. The underlying
principles of the P-A-F approach however remain unchanged.

There are only a few slight deviations observable in Table IV in the basic structure of the
P-A-F model. For example, some of the mentioned firms combine both external and internal
failure costs into one failure category. Even though most of the references avoid combining these
two categories, many authors (for example, Hesford and Dale, 1991; Krzikowski, 1963; Fruin
(1986; Payne, 1992; Groocock, 1980; Campanella, 1999; Whitehall, 1986; Hagan, 1973) report
the existence of such costing systems. Hesford and Dale (1991) warn against the dangers in
combining these costs, since some external quality costs may become hidden within the total
failure cost figure, which could consequently result in the lack of appropriate action.

Another slight difference consists in the naming of the categories in the P-A-F models.
Payne (1992) reports on a quality costing model which includes prevention, appraisal and non-
conformance costs. Similarly, prevention, appraisal and rework categories were used for the CoQ
model described by Campanella (1999). In neither case, is it explained why the usual “failure
cost” category was omitted and substituted by other. Moreover, two of the case studies (Denton
and Kowalski, 1988; Slaughter et al.,1998) using Crosby’s conformance and non-conformance
cost classification technically follow the same P-A-F costing concept only with different
terminology.

The results show that some companies are realizing the importance of opportunity and
intangible costs (especially a loss of company’s reputation), since they attempt to include them in
the costing scheme. Several references (Burns, 1976; Dale and Wan, 2002) acknowledge these
costs; however, they usually consider it too difficult to quantify them (Moyer and Gilmore, 1979)
and these costs are at the end excluded from their calculations.

15
 However, Heagy (1991) claims that in order for the CoQ model to be appropriate for
today’s business environment, it has to include certain opportunity costs, as the cost of lost sales.
Heagy suggests that incorporating the cost of lost sales increases optimum quality cost and
ignoring this cost can lead to poor decisions as to how much to spend on the various components
of quality cost. Moreover, the loss of the company’s image could be much more costly than is
usually expected, and it is the intangible perception of the customer which is the main
determinant. Research has shown that companies perceived by customers to have superior
quality are up to three times more profitable than those perceived to have inferior quality (Malchi
and Gurk, 2001). The lost reputation and the perception of the company’s inferiority
consequently make customers leave for another competitor. Reichheld and Sasser (1990) give
evidence of the surprisingly powerful impact of customer defections on the bottom line. They
suggest that companies can boost profits by almost 100% by retaining just 5% more of their
customers. The importance of the intangibles therefore should not be underestimated.

Table IV suggests that there is considerable variation in measured CoQ percentages at

various companies. The inconsistency in quality cost figures should be explained by the fact that
the structure of the CoQ models often differs substantially among companies. The most visible
difference observed in Table IV is the variety of the selected bases for CoQ calculation. The
most frequently used among the studied companies is a calculation of CoQ as a percentage of
total sales or company turnover; however, other bases such as percentage of total manufacturing
cost, percentage of operating cost, percentage of total product cost or percentage of total labor
cost are used as well. Also other CoQ calculation bases, for example quality cost as a percentage
of value-added or quality cost per unit of output is reported as being used in industry (Gilmore,
1983).

Even if the same calculation base is used, there are still wide variations in published
figures, because every quality costing system is usually adjusted according to every company’s
specific needs, and different elements are included or deemed unimportant and left out of the
calculations. This depends mostly on the element’s significance in the total quality cost figure
and on the difficulty of its measurement and collection. The CoQ calculations in reported cases
were often preceded by Pareto analysis of the cost elements, which pointed out the “important
few”, and the calculations were then customized accordingly. Therefore, it is infeasible to get an
exact figure of the CoQ for a company, and the results at various companies will always be
inconsistent.

Another finding of this research is in the area of the industry segments. The results
suggest that quality cost measurements are more frequently made in electronics and other high-
tech industries. The business environment for an industry sector and product line dictates
somewhat the amount of effort that is put into a continuous quality program. It could be
supposed that companies that work in industries that require very high levels of quality would
have quite elaborate quality and productivity improvement systems, that they manage to obtain
satisfying results from these programs, and that they report their successes. Other companies
work within certain determined quality limits that are deemed to be sufficient without even
considering implementation of a CoQ strategy. However, a closer look at Table IV reveals that
companies from other industries implement CoQ programs as well. For instance, the case studies
from the steelmaking industry (Moyer and Gilmore, 1979) or service companies (Carr, 1992;
Atkinson, 1991 or Bohan and Horney, 1991) report evidence of the successful use of the CoQ

16
methodology. The CoQ approach is universal, flexible and could be adapted to any business
setting.

The documented examples of CoQ improvement programs were successful. They

brought about sufficient savings to justify CoQ measurement expenses, and they yielded a good
productivity gain and reduction in quality costs. More importantly, they identified target areas
for cost reduction and quality improvement. But which CoQ system was the best? Even though
some references present a detailed account of the methodology of quality cost collection, some
of the authors give only a brief outline sufficient to explain their results. Without any detailed
knowledge of the company’s concrete methodology and ability to make an analysis of every
mentioned quality costing method, it is difficult to evaluate the results of a company’s effort.
Percentage reductions in cost mentioned in Table IV do suggest the level of the success using the
CoQ methodology; nevertheless, it is impossible to make any conclusion as to which quality
costing program was superior, and it must be concluded that any CoQ method has a chance to
succeed if it suits the purpose and the needs of the company. This conclusion corresponds with
Dale and Wan’s results of the study of an evaluation of four separate quality costing methods in
one company (Dale and Wan, 2002). They suggest that the chosen quality costing method must
suit a company’s situation, be based on the concept of continuous improvement, be applicable to
all departments and employ a team approach. Dale and Plunkett (1995) propose a detailed
checklist of the issues which should be considered by an organization in deciding the approach to
be taken to quality costing.

Concluding Remarks and Future Directions

Many research papers on CoQ propose quality cost models, methods and techniques, and provide
abundant information on the topic. The literature review of the practical use of CoQ suggests that
even though quality is considered to be an important issue, the CoQ approach is not fully
appreciated by organizations and only a minority of them use a formal quality costing method.
Nevertheless, companies usually do have quality systems and continuous improvement
programs, but approach quality improvement and cost containment in many other ways. Thus,
although not using CoQ as a method to drive quality costs down, they achieve the required result
with different techniques.

The published examples of best practices indicate that companies that use CoQ programs
have been quite successful in reducing CoQ and in improving quality for the customer. The
model most commonly implemented in practice is the classical P-A-F approach; however, other
quality cost categorizations are documented as being used with success. Even though the P-A-F
categorization serves as a basic concept, the individual costing systems still differ considerably
from company to company. Every model is usually adjusted according to the company’s needs,
which results in the various CoQ structures. Different subcategories and groupings are used and
the various costs and elements are defined and named in a different way. Also, a variety of
elements is included or deemed unimportant and left out of the calculations. Moreover, the
selected bases for CoQ calculation vary as well, which causes an inconsistency in quality cost
figures and makes it even more difficult to compare the results of the CoQ programs among
companies. The underlying principles of the P-A-F approach however remain generally
unchanged throughout the researched companies.

17
 Further research into how successful companies take decisions with regard to quality
improvement and how they reduce quality costs should be conducted. Specifically, more detailed
surveys on collection and measurement of quality costs in practical settings should yield useful
information about CoQ best practices, encourage companies to report quality cost data, and help
them implement comprehensive quality cost systems.

CoQ measurement should be part of any quality management program. The methodology
is not complex and is well documented. CoQ programs provide a good method for identification
and measurement of quality costs, and thus allow targeted action for reducing CoQ. Further
education on the practical level is needed for managers to understand better the CoQ concept in
order to appreciate fully the benefits of the approach, to increase their ability to implement a
CoQ measurement system and to save money.

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Autobiographical Note

Andrea Schiffauerova
PhD student
For her PhD, Ms. Schiffauerova is studying the structures of innovative networks,
knowledge flows and the performance of the firms within industrial clusters. She has also
participated in projects in cost of quality, technical information transfer, risk management,
quality function deployment and engineering change.

École Polytechnique de Montréal

Department of Mathematics and Industrial Engineering
C.P. 6079, Succ. Centre ville
Montreal, QC, Canada, H3C 3A7
tel: 1-450-462-5778
Email: [email protected]

Vince Thomson
Werner Graupe Professor of Manufacturing Automation
Dr. Thomson has been involved in manufacturing and information technology related
research for the past 25 years at McGill University and the National Research Council (Canada).
His research has ranged from shop floor control and production scheduling to the present interest
in real-time control and process management in manufacturing. His process management
research has focused on new product introduction, concurrent engineering and manufacturing
support in terms of coordination, metrics, and process principles.
McGill University
Department of Mechanical Engineering
817 Sherbrooke Street West
Montreal, QC, Canada, H3A 2K6
tel: 1-514-398-2597, fax: 1-514-398-7365
Email: [email protected]

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