International Journal of Quality & Reliability Management

Emerald Article: A review of research on cost of quality models and best

practices
Andrea Schiffauerova, Vince Thomson

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A review of
A review of research on cost of research on CoQ
quality models and best practices models
Andrea Schiffauerova and Vince Thomson
Department of Mechanical Engineering, McGill University, Montreal, Canada 647
Received November 2003
Abstract Revised April 2005
Purpose – This paper aims to present 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.
Design/methodology/approach – The paper’s approach is a literature review and discussion of
the issues surrounding quality costing approaches.
Findings – Even though the literature review shows an interest by the academic community, a CoQ
approach is not utilized in most quality management programs. The evidence presented shows that
companies that do adopt CoQ methods 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 model; however, other quality cost models are used with success as well.
Originality/value – The paper shows that 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 Quality, Quality costs, Best practice
Paper type General review

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 International Journal of Quality &
failures, and all other necessary costs and non-value added activities required to Reliability Management
Vol. 23 No. 6, 2006
achieve a quality product or service. pp. 647-669
CoQ analysis links improvement actions with associated costs and customer q Emerald Group Publishing Limited
0265-671X
expectations, and this is seen as the coupling of reduced costs and increased benefits DOI 10.1108/02656710610672470
IJQRM for quality improvement. Therefore, a realistic estimate of CoQ and improvement
23,6 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
648 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 CoQ concepts 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 (ABC) 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 A review of
discussed at all. research on CoQ
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 models
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 649
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 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 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.
Most COQ models are based on the P-A-F classification (Plunkett and Dale, 1987;
Machowski and Dale, 1998; Sandoval-Chávez and Beruvides, 1998). 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). Juran (1951) initiated the
concept of quality costing, the economics of quality and the graphical form of the CoQ
model. 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 (1962) later highlighted the traditional tradeoff that contrasts prevention plus
appraisal costs with failure costs. 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 CoQ. 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 it 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 CoQ exists at the level at which the cost of securing higher
quality would exceed the benefits of the improved quality (BS4778, 1987). This concept
is, however, often challenged, and it is argued that there is no economic level of quality,
that spending on prevention can always be justified and that the optimum quality level
in fact equals zero defects (Fox, 1989; Plunkett and Dale, 1988a; Price, 1984;
Schneiderman, 1986). These and other references (Porter and Rayner, 1992; Cole, 1992;
 23,6

650

Table I.
IJQRM

cost categories
Generic CoQ models and
Examples of publications describing, analyzing or
Generic model Cost/activity categories developing the model

P-A-F models Prevention þ appraisal þ failure Feigenbaum (1956), Purgslove and Dale (1995),
Merino (1988), Chang et al. (1996), Sorqvist (1997b),
Plunkett and Dale (1988b), Tatikonda and Tatikonda
(1996), Bottorff (1997), Israeli and Fisher (1991),
Gupta and Campbell (1995), Burgess (1996), Dawes
(1989), Sumanth and Arora (1992), Morse (1983), etc.
Crosby’s model Conformance þ non-conformance Suminsky (1994) and Denton and Kowalski (1988)
Opportunity or intangible cost models Prevention þ appraisal þ failure þ opportunity Sandoval-Chavez and Beruvides (1998) and
Modarres and Ansari (1987)
Conformance þ non-conformance þ opportunity Carr (1992) and Malchi and McGurk (2001)
Tangibles þ intangibles Juran et al. (1975)
P-A-F (failure cost includes opportunity cost) Heagy (1991)
Process cost models Conformance þ non-conformance Ross (1977), Marsh (1989), Goulden and Rawlins
(1995) and Crossfield and Dale (1990)
ABC models Value-added þ non-value-added Cooper (1988), Cooper and Kaplan (1988), Tsai (1998),
Jorgenson and Enkerlin (1992), Dawes and Siff (1993)
and Hester (1993)
Shank and Govindarajan, 1994) discuss the two conflicting views of the economic level A review of
of quality costs that are shown in Figure 1. The results of the quality cost simulation research on CoQ
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 models
under an infinite time horizon the modern view prevails. Similarly, Fine (1986), Dawes
(1989), Marcellus and Dada (1991) suggest that the traditional trade-off model may be
an accurate, static representation of quality cost economics, but that in dynamic, 651
multi-period 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 (1979) model are similar to the P-A-F scheme.
Crosby (1979) sees quality as “conformance to requirements” and therefore, defines the
CoQ as the sum of price of conformance and price of non-conformance. 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 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.
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. Modarres 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

Figure 1.
Classical view on the left
and the modern view on
the right
IJQRM defined in three categories: the cost of conformance, the cost of non-conformance and
23,6 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 et al.’s (1975) model 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
652 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 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 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 CoQ 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 ABC model was A review of
developed by Cooper and Kaplan (Cooper, 1988; Cooper and Kaplan, 1988) to solve this research on CoQ
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 models
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 653
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 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 BS6143 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 CoQ 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
IJQRM how the performance of these elements is measured. Some examples of detailed metrics
23,6 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
654 this paper. Tatikonda and Tatikonda (1996) claim that successful companies (for
instance, AT&T) measure RoQ as a basis for accepting quality improvement projects.
RoQ 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 widely used concept (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 Crosby (1983) 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 CoQ figured out right or used
properly.”

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
Percent of repeat sales
Table II. Time between service calls
Examples of detailed Number of non-conforming calls
metrics for CoQ Number of complaints received

Metric

RoQ ¼ increase in profit/cost of quality improvement program

Quality rate ¼ (input 2 (quality defects þ startup defects þ rework))/input
Table III. Process quality ¼ (available time 2 rework time)/available time
Global metrics for CoQ First time quality ( percent product with no rework)
Companies rarely have a realistic idea of how much profit they are losing through poor A review of
quality. Smaller firms most often do not even have any quality budget and do not research on CoQ
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 models
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 655
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).
Measuring RoQ 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.

Evidence of success
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 CoQ. 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 (1956) costing structure. Some
examples of the case studies based on the use of the P-A-F model follow.
The success of multinational corporation, ITT, that implemented a CoQ system is
often cited in the literature. Groocock (1980) presents how ITT Europe headquartered
in Belgium coped with quality cost control and saved over $150 million during five
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 percent. Specific accomplishments as well as
elements of the CoQ 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.
 23,6

656
IJQRM

Table IV.

models and methods

Documented cases of
successful use of CoQ
Base for CoQ
Company Industry CoQ calculation percent calculation Reported gains Reference

P-A-F model
United Technologies/ Telecommuni-cations CoQ ¼ P þ A þ F Percentage of total CoQ reduced from 23.3 Fruin (1986)
Essex Group, USA manufacturing cost to 17.2 percent in five
Percentage of cost of years
goods produced Gain in productivity of
26 percent
AT&T Bell Telecommuni-cations CoQ ¼ P þ A þ IF þ EF Percentage of Thompson and
Laboratories project budget Nakamura (1987)
Hydro Coatings, UK Industrial coatings CoQ ¼ P þ A þ IF þ EF Percentage of CoQ reduced from 4.1 Purgslove and Dale
manufacturing annual sales to 2.5 percent in four (1995) and Purgslove
turnover years and Dale (1996)
Percentage of raw Investment in quality
material usage paid back in the first
year
Philips Power Electronics CoQ ¼ P þ A þ CONC Percentage of CoQ reduced from 35.8 Payne (1992)
Semiconductor factory turnover to 18.1 percent in four
Business Group, UK years
Workforce reduced by
25 percent in 18 months
Output increased by 25
percent in 18 months
York International, UK Air conditioning and CoQ ¼ P þ A þ IF þ EF Percentage to cost of CoQ reduced from 13.5 Knock (1992)
refrigeration sales to 3.7 percent in eight
years
The cost of factory
failures reduced by 96
percent
British Aerospace Aerospace CoQ ¼ P þ A þ F Percentage of total Objective to reduce Hesford and Dale (1991)
Dynamics, UK manufacturing cost CoQ by one third in one
year
(continued)
 Base for CoQ
Company Industry CoQ calculation percent calculation Reported gains Reference

ITT Europe, Belgium Information CoQ ¼ P þ A þ F Percentage of sales Savings from CoQ Groocock (1980)
technology improvement program
totaled over $ 150
million in five years
Allis-Chalmers Machinery CoQ ¼ P þ A þ IF þ EF Percentage of CoQ reduced from 4.5 Kohl (1976)
Corporation, USA manufacturing product sales to 1.5 percent in three
years
Herbert Machine Tools, Machine-tool CoQ ¼ P þ A þ IF þ EF Percentage of sales CoQ reduced from 7.5 Burns (1976)
UK industry to 5.9 percent in four
years
Raytheon’s Electronic Software CoQ ¼ P þ A þ Rework Percentage of total CoQ reduced from 65 to Campanella (1999)
Systems Cost project costs 15 percent in eight
years
Rework cost reduced
from 40 to 6 percent
The overall payoff was
7.5 times
A 170 percent increase
in software
productivity
Major electrical firm Electrical CoQ ¼ P þ A þ IF þ EF Percentage of sales CoQ reduced from 5.4 Campanella (1999)
to 4.6 percent in first
year
Ferranti Defense Electronics, CoQ ¼ P þ A þ F Percentage of total Whitehall (1986)
Systems, UK electro-mechanical costs
equipment
National Cash Register Precision mechanics CoQ ¼ P þ A þ F Percentage of total CoQ reduced from 6.4 Krzikowski (1963)
Company, Germany manufacturing cost to 4.4 percent in six
years
(continued)
research on CoQ
models

657

Table IV.
A review of
 23,6

658
IJQRM

Table IV.
Base for CoQ
Company Industry CoQ calculation percent calculation Reported gains Reference

North American Consumer electronics CoQ ¼ P þ A þ IF þ EF Percentage of Morse et al. (1987)

Philips Consumer standard product
Electronics cost
Percentage of direct
labor
ITT Corp. New York, Information CoQ ¼ P þ A þ F Percentage of sales CoQ reduced from 12 to Hagan (1973) and
USA technology 5.5 percent Morse et al. (1987)
By reducing CoQ the
company has saved
hundreds of millions of
dollars in first five
years
Travenol Laboratories, Medical devices, CoQ ¼ P þ A þ F Tsiakals (1983)
USA pharmaceutical
Hermes Electronics Military electronics CoQ ¼ P þ A þ IF þ EF Percentage of sales Scrap and rework Breeze (1981)
reduced by 30 percent
during one year
Banc One Corporation, Financial services CoQ ¼ P þ A þ IF þ EF Percentage of Net income enhanced Atkinson et al. (1991)
USA operating expense by $20 million annually and Campanella (1999)
Substantial
improvements in
service levels and
operating costs
Cascade Engineering, Automotive supplies CoQ ¼ P þ A þ IF þ EF Percentage of sales Atkinson et al. (1991)
USA
Electronic Electronics CoQ ¼ P þ A þ IF þ EF Percentage of sales Denzer (1978)
manufacturer
Crosby’s model
Solid State Circuits CoQ ¼ COC þ CONC Percentage of the CoQ reduced from 37 to Denton and Kowalski
revenue 17 percent (1988)
(continued)
 Base for CoQ
Company Industry CoQ calculation percent calculation Reported gains Reference

BDM International Software CoQ ¼ COC þ CONC In $ per line of code CoQ reduced by 50 Slaughter et al. (1998)
percent in eight years
Opportunity and alternative cost models
US Marketing Group of Service business CoQ ¼ P þ A Percentage of sales CoQ reduced by $54 Carr (1992)
Xerox, USA þ IF þ EF þ ExR þ OC revenue million in first year
Rank Xerox, UK Office equipment CoQ ¼ P þ A Percentage of total CoQ reduced from 6 to Huckett (1985)
þ IF þ EF þ ExR þ OC manufacturing cost 1 percent in five years
Defect rate reduced by
over 75 percent
Reprographic Office equipment CoQ ¼ P þ A Percentage of the CoQ reduced by 50 Morse et al. (1987)
Manufacturing þ IF þ EF þ ExR þ OC standard cost of percent
Operations Unit of production
Xerox, USA
Pharmaceutical Pharmaceutical CoQ ¼ Operating CoQ reduced by 11 Malchi and McGurk
company Cost þ CONC þ Alternative percent (2001)
Cost
(continued)
research on CoQ
models

659

Table IV.
A review of
 23,6

660
IJQRM

Table IV.
Base for CoQ
Company Industry CoQ calculation percent calculation Reported gains Reference

Westinghouse CoQ ¼ P þ A þ F (F Overall productivity Forys (1986)

Semiconductor includes opportunity costs) increased by 15 percent
Division, USA in four years
Scrap reduced by 58
percent resulting in
savings of over $2,4
million
Material returned by
customer reduced by 69
percent resulting in
savings of over
$600,000
Lebanon Steel Steel casting CoQ ¼ P þ A þ F (F Percentage of sales Objective to reduce Moyer and Gilmore
Foundry, USA includes Quality Image Loss) failure costs by 50 (1979)
percent
Process model
GEC Alsthom CoQ ¼ COC þ CONC Goulden and Rawlins
Engineering Systems (1995)
ABC model
Networked Computer Computer systems CoQ ¼ Process CoQ reduced by 25 Jorgenson and Enkerlin
Manufacturing Quality þ Board percent in one year (1992)
Operation of Test þ Repair þ Bench
Hewlett-Packard, USA Test þ Defect Analysis
Notes: CoQ, cost of quality; COC, cost of conformance; P, prevention cost; CONC, cost of non-conformance; A, appraisal cost; OC, opportunity cost;
F (IF þ EF), failure cost (internal and external failures); ExR, exceeding requirements
The works of Purgslove and Dale (1995, 1996) discuss the development and operation A review of
of a system of quality costing at a manufacturer of coatings for industrial applications. research on CoQ
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 models
description of a P-A-F CoQ 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 661
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 analysis of quality cost
data. The major difficulties that were encountered are discussed in detail. Hesford 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 (1979) model, 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 percent in the company’s CoQ. 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 percent 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 percent
IJQRM reduction in CoQ. Carr (1992) describes the program based on the same costing
23,6 categorization adopted by the US Marketing Group of Xerox. The program consists of
a system of quality cost measures and CoQ 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
662 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 percent reduction in the CoQ. 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.
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, 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 P-A-F 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 (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 A review of
consequently result in the lack of appropriate action. research on CoQ
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, models
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 663
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.
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, such 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, such as 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 McGurk, 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 percent by retaining just 5 percent 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
percentages of total manufacturing cost, operating cost, total product cost or total labor
cost are used as well. Gilmore (1983) reports other bases for CoQ calculations, for example,
quality cost as a percentage of value-added or quality cost per unit of output.
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.
IJQRM Another finding of this research is in the area of the industry segments. The results
23,6 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
664 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 besides high-tech
implement CoQ programs as well. For instance, the case studies from the steelmaking
industry (Moyer and Gilmore, 1979) or service companies (Carr, 1992; Atkinson et al., 1991;
Bohan and Horney, 1991) report evidence of the successful use of the CoQ methodology.
The CoQ approach is universal, flexible and can 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 is 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 (2002) results of the evaluation of four separate
quality-costing methods in one company. 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 in 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 A review of
individual costing systems still differ considerably from company to company. Every research on CoQ
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 models
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 665
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.
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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About the authors

Andrea Schiffauerova, a PhD student, for her PhD, she is studying methods that consider how
risk, cost, scope, technology and other factors impact product development projects. She has also
participated in projects in CoQ, technical information transfer, risk management, quality
function deployment and engineering change. Andrea Schiffauerova is the corresponding author
and can be contacted at: [email protected]
Vince Thomson, Werner Graupe Professor of Manufacturing Automation, 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.

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