Summary by Nicole Sackedis
Master of Accountancy Program
University of South Florida, Fall 2000
Purpose: To discuss the historical significance of product quality in U.S. manufacturing and speculate on the treatment of quality costs in the future. This article includes a discussion and comparison of the four quality cost categories, the historical eras when these cost concepts were developed and some predictions about future developments in the area of quality control.
Four categories of costs:
Internal failure costs
External failure costs
Eras of cost emphasis:
Failure cost era
Appraisal cost era
Prevention cost era
The future: Era of "superprevention"
Quality cost expenditures in the future will emphasize highly developed R&D expenditures. Superior products and production designs that attempt to eliminate the possibility of producing defects. Production equipment that requires minimal human intervention, thus reducing the possibility of defects caused by humor error. The objective of emphasizing prevention costs was to eliminate internal and external failure costs and to reduce appraisal costs. These objectives emphasize superprevention costs, but also increasing the benefit received per dollar of prevention-oriented expenditure. Superprevention expenditures will have to be geared toward making design standards to the expectations of consumers. Future superiority in the global market for manufactured goods will depend on the speed of entrance in the superprevention era.
The four quality cost categories defined and related to the eras of emphasis outlined above:
Internal Failure Costs - Failure costs that are discovered before the product is delivered to customers.
Examples include rework, scrap, and disposition costs.
External Failure Costs - Failure costs discovered after the product is delivered to the customers.
Examples include processing costs, warranty claims, return processing costs and the cost of lost sales.
Characteristics and Emphasis of the Era - Mass production methods became successful. Originated by the growing needs of the economy that provided opportunities where product quality was of little concern. Resulted in quality control programs being limited or nonexistent. The trade-off for increased production, manufacturers were willing to accept high levels of defective outputs.
Appraisal Costs - As monitoring or inspection costs of products in terms of specified standard before the products are released to customers.
Examples include measurement equipment, inspection and tests, product quality audits, process control monitoring, test equipment expense.
Characteristics and Emphasis of the Era - WWII caused the need for manufactured equipment and supplies to grow rapidly. However, experienced workers were decreasing. This resulted in the use of statistical methods for detecting defective products in identifying production problems. Impact was reduced external failure costs. After WWII, innovative quality control techniques continued to be developed by Deming and Juran. The techniques were better received in Japan than in America. U.S. companies concentrated on appraisal expenditures. Japan emphasized prevention costs. Exception to appraisal cost due to P. Crosby, who developed the concept of zero defects. But by 1975 its popularity declined due to the extensive record keeping it entailed.
Prevention Costs - Investments in machinery, technology, and education programs designed to reduce the number of defective products in the production process.
Examples include customer surveys, research of customer needs, field trails, supplier reviews, quality circles, quality education and training programs, investment in improved production equipment, quality engineering.
Characteristics and Emphasis of the Era - Lost the upper hand in quality cost innovations and Japanese and European manufacturers gained market share. Emphasis on prevention control began. Japan emphasized R&D costs, employee education and training costs, use of quality circles and spending money on technology to improve efficiency. Reduced the need for appraisal activities to detect defects. As fewer defective products are produced, failure costs tend to be eliminated.
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