Analysis of costs for product quality. For higher education

STATE COMMITTEE OF THE RUSSIAN FEDERATION

IN HIGHER EDUCATION

KALININGRAD STATE UNIVERSITY

Department of Economics and

farm management

Product quality cost analysis

(in the discipline “Quality Management”)

4th year student

Faculty of Economics

Group ILukyanova K. L.

INTRODUCTION........................................................ ........................................................ ........................... 3

1. Stages of formation and types of costs for product quality........ 4

2. Information base for cost analysis of product quality. 9

3. Methods for analyzing quality costs.................................................... .................. 14

3.1. Functional cost analysis method.................................................................... ...... 14

3.2. Methods of technical standardization................................................................... ................... 19

3.3. Some other methods of quality cost analysis.................................................... 21

4. Analysis of defects and losses from defects.................................................... ........................... 25

Conclusion................................................. ........................................................ ........................... 29

List of sources used............................................... .................... thirty

The production of products and services is accompanied by production and service costs. The misconception that high-quality products are driven by significant cost increases has been one of the major obstacles to better quality management systems in the past.

In its general sense, quality costs are costs associated with establishing the level of quality, its achievement in the production process, control, evaluation and information on product compliance with the requirements of quality, reliability and safety, as well as costs associated with identifying failures of products not at the enterprise or under the conditions of its operation by the consumer.

Product quality must guarantee consumer satisfaction, product reliability and cost savings. These properties are formed in the process of all reproductive activities of the enterprise, at all its stages and in all links. Together with it, the cost value of the product is formed, which characterizes these properties from planning product development to its implementation and after-sales service. In Fig. Figure 1 shows the chain of formation of costs and value of goods and services.

Rice. 1. Cost chain and product value creation

It allows you to specify the principle of quality assurance and see When, i.e. at what stage of activity, and Where, in which department it is implemented. Since the manager is responsible for each stage and department, it becomes clear Who is responsible for product quality. What is meant by guarantees are technical, technological, environmental, ergonomic, economic and other quality indicators that ensure satisfaction of consumer demands.

Quality costs are associated not only directly with the production of products, but also with the management of this production.

The aggregated costs associated with product quality can be divided into scientific, technical, management and production. Scientific, technical and management prepare, provide and control the conditions for the production of quality products, i.e. as if they predetermine the presence and magnitude of production costs.

If the development and design of new products is carried out by external organizations, then the costs ensuring quality at a given enterprise will include only implementation costs. In some cases, especially in the production of new products, control over their preparation and development is carried out by design departments.

In general, management costs associated with product quality assurance include:

· transport – external and internal transportation of raw materials, components and finished products;

· supply – purchase of raw materials and components planned by type, quantity and quality;

· costs for departments that control production;

· costs associated with the work of economic services, on whose activities the quality of products depends: planning department, financial department, accounting, etc.;

· costs for the activities of other services of the enterprise management apparatus, which are to varying degrees related to and influence the provision of product quality, especially personnel management, the functions of which include recruiting personnel, improving their qualifications and checking compliance with the required level and conditions.

Production costs, in turn, can be divided into material, technical and labor. Moreover, all of them are directly related to the cost of production. And if the amount of management costs in quality costs can be determined only conditionally, indirectly, then the amount of material production costs can be directly counted. It is much easier than management costs to calculate the amount of technical production costs - through depreciation deductions, and labor costs - through wages (payment of standard hours).

In order to manage costs associated with ensuring product quality, it is necessary to distinguish between basic costs that are formed in the process of development, mastery and production of new products and are their carrier until they are discontinued, and additional costs associated with its improvement and restoration lost (less than planned) level of quality.

The main part of the base costs reflects the value of production factors, as well as general and general production expenses attributed to the manufacture of a specific product through a cost estimate.

Incremental costs include assessment costs and prevention costs. The first includes the costs incurred by the enterprise in order to determine whether the product meets the planned technical, environmental, ergonomic and other conditions. The second includes the costs of refining and improving products that do not meet the standards, the best world standards, the requirements of the buyer, inspection, repair, improvement of tools, equipment, equipment and technology, and in some cases, stopping production.

There is another group of costs that, when they arise, should be classified as either basic or additional, depending on the novelty of the product. These are the costs of marriage and its correction. Their value can fluctuate significantly and consist of both the costs of producing subsequently rejected products if there is an irreparable defect or, in addition, the costs of correcting it if the defect is not final, and may also include payment for moral and/or physical damage caused to the consumer by low-quality products .

According to A. Feigenbaum’s classification, quality costs are divided into:

1. Expenses for carrying out preventive measures

A) quality planning(organizational quality assurance, product design, reliability research, etc.);

b) process control(study and analysis of technological processes, control over the production process, etc.);

V) design of equipment used to obtain quality information(design of equipment used to determine the quality of products and technological processes, data collection, processing, etc.);

G) training in quality assurance methods and working with personnel(development of training programs aimed at the correct application of quality management methods by employees);

d) product design verification(pre-production assessment of products);

Product quality cost analysis

Introduction

1. Stages of formation and types of costs for product quality

2. Information base for cost analysis of product quality

3. Methods for analyzing quality costs

1 Functional cost analysis method

2 Methods of technical regulation

3 Some other methods of quality cost analysis

Analysis of marriage and losses from marriage

Conclusion

List of sources used

Introduction

No organization's market goals can be achieved if its products are not in demand. Therefore, issues related to quality assurance cannot be considered in isolation from the economic activities of the enterprise. Consequently, with the development of competition among manufacturers, there is an urgent need to closely link quality costs with the final results of production activities, the level of product quality, sales volume, and profit, which makes it possible to more effectively manage the enterprise and achieve higher profits.

Due to the conditions that have developed within the framework of the centralized system of planning and management of the national economy, the problem of assessing and accounting for quality costs has not been given due attention at domestic enterprises. Since with the transition to market relations, information on quality costs is intended to play one of the key roles not only in making decisions in the field of quality management, but also in developing the entire strategy of enterprise behavior, its accounting and analysis becomes especially important.

1. Stages of formation and types of costs for product quality

In a general sense, quality costs are the costs associated with establishing the level of quality, its achievement in the production process, control, evaluation and information about product compliance with quality, reliability and safety requirements, as well as costs associated with identifying failures of products not in the enterprise or in conditions of its use by the consumer.

Fig.1. Cost chain and product value creation

It allows you to specify the principle of quality assurance and see when, i.e. at what stage of activity, and where, in what department, is it implemented. Since the manager is responsible for each stage and department, it becomes clear who is responsible for product quality. What is meant by guarantees are technical, technological, environmental, ergonomic, economic and other quality indicators that ensure satisfaction of consumer demands.

Quality costs are associated not only directly with the production of products, but also with the management of this production.

Integrated costs associated with product quality can be divided into scientific, technical, managerial and production. Scientific, technical and management prepare, provide and control the conditions for the production of quality products, i.e. as if they predetermine the presence and magnitude of production costs.

In general, management costs associated with product quality assurance include:

transport - external and internal transportation of raw materials, components and finished products;

supply - purchase of raw materials and components planned by type, quantity and quality;

costs for departments that control production;

costs associated with the work of economic services, on whose activities the quality of products depends: planning department, financial department, accounting, etc.;

costs for the activities of other services of the enterprise management apparatus, which are to varying degrees related to and influence the provision of product quality, especially personnel management, the functions of which include recruiting personnel, improving their qualifications and checking compliance with the required level and conditions.

According to A. Feigenbaum’s classification, quality costs are divided into:

Expenses for carrying out preventive measures

a) quality planning (organizational quality assurance, product design, reliability research, etc.);

b) technological process control (study and analysis of technological processes, control over the production process, etc.);

c) design of equipment used to obtain information about quality (design of equipment used to determine the quality of products and technological processes, data collection, processing, etc.);

d) training in quality assurance methods and work with personnel (development of personnel training programs aimed at the correct use of quality management methods by employees);

e) product design verification (pre-production assessment of products);

f) development of management systems (development and management of integrated quality systems, their improvement);

g) other costs associated with carrying out preventive measures.

Costs for quality assessment

a) testing and acceptance control of materials (assessment of the quality of purchased material, travel expenses of inspectors);

b) laboratory acceptance tests (conducting all types of tests in a laboratory or testing center to assess the quality of the purchased material);

c) laboratory measurements (measurements, checking instrumentation, their repair, etc.);

d) technical control (assessment of product quality by employees of the technical control service);

e) product testing (assessment of product performance characteristics);

f) self-control (checking the quality of products by the workers themselves);

g) certification of product quality by third parties;

h) maintenance and inspection of equipment used to obtain quality information (inspection and maintenance of this equipment);

i) technical verification of products and permission to ship (analysis of data obtained as a result of testing and technical control, issuance of permission to ship products);

j) testing under operating conditions.

Costs due to failures caused by internal causes

a) production waste (losses incurred in the process of achieving the required level of quality);

b) rework (additional costs to achieve the required level of quality);

c) costs for logistics (costs in the process of dealing with defects and as a result of considering complaints about purchased material).

Costs due to failures caused by external causes

c) technical maintenance (correction of defects or shortcomings of products that are not the subject of operational complaints);

d) legal liability (financial losses caused by the production of low-quality products);

d) return of products.

There are several other classifications of quality costs, but it should be noted that any single one, i.e. There is no generally accepted classification of quality costs even in developed Western countries. That is why in section 6 of the ISO 9004 international standards, types of costs are presented in only two groups: production and non-production quality costs, with the caveat that such a grouping is of a very general nature.

Be that as it may, the costs of creating and maintaining the production of high-quality products and, consequently, the image of the enterprise itself are formed both within the enterprise and outside it, therefore, their in-depth qualitative and quantitative analysis is necessary.

To analyze the cost of funds spent on maintaining product quality, various information is used. But before we move on to collecting it, we must determine what the purpose of the information is.

The purpose of collecting data during a cost-quality analysis process may be to:

identifying the competitiveness of products in existing markets;

determining the size of the required capital investments;

identifying the relationship between the costs of product quality and the results of the enterprise’s economic activities;

reducing costs per unit of production while maintaining the same quality;

reducing costs for products while improving their properties;

determining the amount of costs by type to change their structure;

increasing production volume without reducing the quality of products from the previous volume of resources by reducing and eliminating waste;

analysis of deviations from established requirements;

product control;

setting prices for products, etc.

It can be seen from this that part of the quality data relating to the technical features of the product and its production is located at the manufacturer, and the other is at a competing enterprise or in the sales area, i.e. in the external environment.

Data for analyzing quality costs can be primary, as a rule, these are technical and other parameters of products contained in technical specifications, GOSTs, certificates and other documents confirming product quality, and secondary, resulting from processing the primary ones.

The data needs processing. Reducing the time spent on data processing is the development of types of media that make preliminary conclusions possible immediately after data collection. To do this, it is necessary to register the source of information (the date when it was collected, the worker who performed the operation, the machine on which the processing was carried out, the batch of materials used, etc.). Information should be recorded in tables that facilitate and speed up the calculation of statistical indicators used in making operational management decisions and for further deeper statistical and mathematical analysis of relationships and trends.

There are a huge number of accounting registers, varying at different enterprises depending on the type of activity, type of product, etc. (time sheets, expense reports, purchase orders, product rework reports, etc.). An example is the registration of defects by a quality control inspector of a stamped plastic part. This form allows you to see the reasons for the defect and quickly determine the damage caused and its culprit.

Fig.2. Defects checklist

In addition, further technical examination of defective parts, if necessary, and comparison of its results with the preliminary conclusion of the quality control inspector will confirm the latter’s qualification level. cost quality cost

As mentioned above, different enterprises may use similar and other accounting forms. Such forms of recording data on the deviation of product quality parameters from the planned ones are appropriate for collecting internal primary technical characteristics of manufactured products, which are then used in factor analysis of product quality costs.

One of the internal sources of information that makes it possible to determine the cost structure of a product and has a great advantage over others due to the mandatory compilation, continuity of the indicators included in it, reliability and visibility, is the production cost estimate. It is convenient for finding ways to reduce them and minimize the price of the product. In addition, you can use data on production costs by type, collected in accounting accounts.

It is more difficult, time-consuming and expensive to obtain external information. Some of it is contained in advertising brochures, price lists, periodicals and specialized literature. These data are more reliable than those obtained in the sales sphere by conducting special sample surveys to study consumer opinions about the price and quality of products. However, the information obtained from sample surveys is difficult to replace with anything if the enterprise wants to take into account the desire of customers to increase sales by improving product properties. For this purpose, you can use a survey of product sellers and buyers or conduct a survey of the population, which in the process of data processing must be divided into groups (classes). This will allow us to know the opinions of various social, age and other groups of the population about the company’s products using a typical sample to obtain information.

When collecting such data for a limited number of consumers, especially with a small sample, it is convenient to construct scatter diagrams that allow you to study the relationship between pairs of variables, for example, price and external design, product packaging. These variables could be:

a) quality characteristic or factor influencing it;

b) two different quality characteristics;

c) two factors influencing one quality characteristic.

It is advisable to take at least one of the variables an indicator expressing the costs of quality, creation or maintenance of any product property or the price of it, i.e. cost value.

The scatter diagram is constructed in several stages. At the first stage, the collected data is recorded in a table, the relationship between which is studied.

On the second, a scale of indicator values is constructed by dividing the difference between their maximum and minimum values by the desired (approximately equal) number of parts. The values of the factor characteristic are plotted on the x-axis, and the values of the resultant characteristic are plotted on the y-axis.

The third step is to construct a scatterplot by plotting the points obtained from the observations on a graph.

At the fourth and final stage, address information is entered: the name of the diagram, the time of observation, the name of the performer and other necessary information.

These scatterplots allow us to draw preliminary conclusions about the relationship between the variables under study (for example, consumer preferences regarding the quality of packaging that ensures the safety of the product and the price of the product).

The following example can be given. Let's assume that an enterprise is finding out how the quality of watch packaging affects the demand for this product. For the consumer, packaging is a quality sign in relation to both the external design and the safety of the product. For the manufacturer, this is also a quantitative indicator, expressed by a certain amount of costs. For ease of data collection, let’s designate each type of packaging by number:

Sale without original packaging (wrapped in paper in the store);

Soft package;

Branded soft package;

Simple cardboard box;

Plastic case;

Branded gift box.

Each type of packaging corresponds to a certain price of the product (the price of the packaging is not communicated to the buyer and is perceived by him as the difference between the subsequent and previous prices of the product, depending on the design). It ranges from 4 to 9 monetary units with an interval of 0.5 monetary units. The results of a survey of 30 buyers, which was actually conducted, are shown in Table 1:

Table 1

Data from a survey of Podarki store customers about the packaging and price of Elektronika watches

It should be noted that the price of the gift box was not named and the maximum price was actually 8 monetary units.

Using the data obtained, you can construct a scatter diagram (the squares highlight those points whose value occurred twice).

Fig.3. Scatter diagram for packaging type and price of Electronics watches

The scatterplot data allows us to draw preliminary conclusions about the relationship between the variables under study; in our example - about the buyer’s preferences regarding the quality of packaging that ensures the safety of the product, its aesthetic appearance, and the price of the product. Preferences are given to reliable packaging at a moderate price, the upper level of which is not mentioned in the answers, which should attract the attention of the manufacturer as a signal that the price is too high in the eyes of the buyer. We can also make a preliminary conclusion that, since the points are located from the lower left corner on this diagram to the upper right, the relationship between these two indicators is direct.

Thus, despite the versatility of information characterizing the costs of product quality and the factors influencing it and similar costs, it is necessary and quite possible, already at the stage of data generation, to use visual forms of their presentation in combination with primary analysis techniques: grouping, graphical analysis etc. This significantly speeds up the analysis process and facilitates its further use for statistical and mathematical methods.

3. Methods for analyzing quality costs

Depending on the goals and objectives of the analysis of quality costs and the possibilities of obtaining the data necessary for its implementation, analytical methods differ significantly. This difference is influenced by the passage of the product through a certain stage of the enterprise’s activity, and its place in the cost chain at a particular moment.

1 Functional cost analysis method

At the stages of design, technological planning, preparation and development of production, it is advisable to use functional cost analysis (FCA). This is a method of systematic study of the functions of an individual product or technological, production, economic process, structure, aimed at increasing the efficiency of resource use by optimizing the relationship between the consumer properties of an object and the costs of its development, production and operation.

The main principles of application of the FSA are:

functional approach to the object of research;

a systematic approach to the analysis of an object and the functions it performs;

study of the functions of an object and their material carriers at all stages of the product life cycle;

compliance of the quality and usefulness of product functions with their costs;

collective creativity.

The functions performed by the product and its components can be grouped according to a number of characteristics. Based on the area of manifestation, functions are divided into external and internal. External are the functions performed by an object during its interaction with the external environment. Internal - functions that are any elements of an object and their connections within the boundaries of the object.

Based on their role in satisfying needs, external functions are distinguished between primary and secondary. The main function reflects the main purpose of creating an object, and the secondary function reflects the secondary purpose.

Based on their role in the work process, internal functions can be divided into main and auxiliary. The main function is subordinate to the main one and determines the operability of the object. With the help of auxiliary functions, the main, secondary and main functions are implemented.

According to the nature of their manifestation, all of the listed functions are divided into nominal, potential and actual. Nominal values are specified during the formation and creation of an object and are mandatory for execution. Potential reflect the ability of an object to perform any functions when its operating conditions change. Real ones are the functions that the object actually performs.

All functions of an object can be useful and useless, and the latter neutral and harmful.

The goal of functional cost analysis is to develop the useful functions of an object with an optimal ratio between their significance for the consumer and the costs of their implementation, i.e. in choosing the most favorable option for the consumer and manufacturer, if we are talking about the production of products, for solving the problem of product quality and its cost. Mathematically, the goal of the FSA can be written as follows:

where PS is the use value of the analyzed object, expressed by the totality of its use properties, and Z is the costs of achieving the necessary use properties.

Functional cost analysis is carried out in several stages.

At the first, preparatory, stage, the object of analysis - the cost carrier - is specified. This is especially important when the manufacturer's resources are limited. For example, selecting and developing or improving a mass-produced product can bring significantly more benefits to an enterprise than a more expensive, small-scale product. This stage is completed if an option is found with a low cost compared to others and high quality.

At the second, informational stage, data is collected about the object under study (purpose, technical and economic characteristics) and its constituent blocks and parts (functions, materials, cost). They go in several streams according to the principle of an open information network. Information on improving the quality of a product and reducing the costs of its production comes to the network from the design and economic departments of the enterprise and from the consumer to the heads of the relevant services. Consumer ratings and wishes are accumulated in the marketing department. In the process of work, the initial data is processed, converted into appropriate indicators of quality and costs, passing through all interested departments, and goes to the project manager.

A - main, basic, useful;

B - secondary, auxiliary, useful;

S - secondary, auxiliary, useless.

At the same time, previous costs are cut off. Using a tabular form of distribution of functions facilitates this analysis:

table 2

Distribution of service functions of product X according to the ABC principle

Data on the number of minor, auxiliary, useless functions by detail are entered into the final columns, which allows us to make a preliminary conclusion about their necessity.

Next, you can build a table of the cost of parts according to the estimate or its most important items and evaluate the weight of the functions of each part in relation to the costs of providing them. This will allow us to identify possible areas for reducing costs by making changes to the product design, production technology, replacing part of our own production of parts and assemblies with obtained components, replacing one type of materials with another that is cheaper or more economical in processing, changing the supplier of materials, the size of their supplies, etc. d.

Grouping the costs of functions by production factors will allow us to identify the priority areas for reducing the cost of the product. It is advisable to detail such areas, ranking them according to the degree of importance determined by experts, and comparing them with costs, to choose ways to reduce the cost of products. To do this, you can create a table:

Table 3

Comparison of function significance coefficients and their costs

By comparing the share of costs for a function in total costs and the importance of the corresponding function, you can calculate the cost coefficient for each function. Kz/f 1 is considered optimal. Kz/f< 1 желательнее, чем Кз/ф >1. If this coefficient significantly exceeds one, it is necessary to look for ways to reduce the cost of this function (in our example, this is the second function).

The result of the FSA is solution options in which it is necessary to compare the total costs of products, which are the sum of element-by-element costs, with some base. This base can, for example, be the minimum possible cost of a product. The theory of FSA proposes to calculate the economic efficiency of FSA, which shows what share the cost reduction is in their minimum possible value:

where KFSA is the economic efficiency of FSA (current cost reduction coefficient); Ср - actually existing total costs; Sf.n. - minimum possible costs corresponding to the designed product.

At the fourth, research stage, the proposed options for the developed product are evaluated.

Table 4

Decision table for options for selecting products for production

Taking into account the importance of the function of the product, its components, parts and the level of costs through pricing, based on knowledge of the demand for the product, the level of its profitability is determined. All this together serves the purpose of making a decision on the choice of a specific product or direction for production and the scale of its improvement.

2 Methods of technical regulation

Technical standardization methods can provide significant assistance in determining and analyzing the costs of product quality. They are based on the calculation of detailed norms and standards of material resources (raw materials, purchased components and other types of materials), calculation of labor intensity and other costs included in the cost of products in accordance with the design dimensions, the specific technology of its production, storage and transportation, as well as costs for warranty and service maintenance. To calculate them, methods of microelement rationing and normative and reference materials are used. Technical standardization methods make it possible to fairly accurately determine the costs of both a new product by its components and product improvement.

If an enterprise switches to the production of new products that previously had an analogue in consumer purpose and properties, then quality costs (Zk) can be determined by the difference between the costs of old (Zst) and new (Zn) products:

Zk = Zst - Zn, (3)

If an enterprise improves the quality parameters of a previously produced product, then the costs of quality can be determined by direct calculation according to the relevant standards and directions.

The degree of relationship between any quality characteristics that have a quantitative expression and the costs of it or the price of the product as a whole as a form of its value, in which costs occupy the main share, allows us to determine the correlation coefficient. It can be calculated using the formula:

where n is the number of data pairs; S(xy) is called covariance; x and y are two indicators being studied.

The correlation coefficient can take values from -1 to +1. When r is close to ¦1¦, we can talk about a high degree of close connection between the variables under study and, on the contrary: when r is close to 0, the correlation between them is weakly expressed. If r = ¦1¦, all points on the scatter diagram will lie on the same straight line. If r = 0, there is no correlation between factor and performance indicators. The “+” or “-” sign indicates the direction of communication - forward or reverse. According to formulas (4) - (7) and the data in table. 1 you can find the correlation coefficient. Additional necessary calculations are given in table. 5. Then, substituting the obtained values, we will have:

From here

The r value equal to +0.758 indicates the presence of a high positive correlation between the packaging of a product, which is one of the indicators of its quality, and its price, which embodies the costs of the product, which confirms the preliminary conclusion drawn from the scatter diagram.

Table 5

Indicators for calculating the correlation coefficient

3 Some other methods of quality cost analysis

One of the methods that allows you to analyze changes in costs associated with changes in product quality is the index method. The complexity of its application to this subject of research lies in the fact that both characteristics must be expressed quantitatively. Quality does not always have a quantitative meaning and cannot always be described verbally, for example, products that are suitable and have not passed certification, that comply and do not comply with technical specifications, etc.

If the quality indicator has numerical characteristics, then when constructing indices they can be used as cost weights. Otherwise, the number of structural elements of the product, the number of parts, assemblies, and products can serve as scales.

There are at least three reasons that prevent the achievement of high economic results through the creation and certification of a quality system.

First reason- these are not always the correct goals of enterprise managers. When making management decisions on carrying out quality assurance activities, they do not pursue the goal of creating an effectively functioning QMS that will actually guarantee product quality in accordance with the needs and expectations of consumers, namely obtaining a certificate. The presence of such a document gives the company a serious competitive advantage. The foreign market for domestic enterprises that do not have a QMS based on ISO 9000 series standards is practically closed. Therefore, enterprise administrations are primarily interested in the timing of obtaining an international quality certificate. And issues related to the volume of labor, material, technical and financial resources necessary for the implementation and certification of the QMS and, most importantly, to ensure its cost-effective operation, fade into the background

Second reason One of the obstacles to achieving high economic results is that most enterprises implementing the ISO 9000 series do not keep track of quality costs. Maintaining such a report requires the creation of new forms of accounting reporting, since existing forms allow us to isolate only one element of quality costs - losses from defects. The introduction of new management accounting for quality costs is labor-intensive and requires material costs. Therefore, for many enterprises, achieving compliance of documents with the mandatory requirements of ISO standards comes to the fore, and the problem of accounting for quality costs is ignored. As a result, as studies have shown, even senior employees of bureaus and quality departments of enterprises preparing QMS for certification cannot give at least an approximate estimate of the share of costs for ensuring product quality in the total costs of the enterprise, and have little idea of the organization of work on collection, accounting and analysis data on the costs of creating and certifying a QMS.

Third and, in our opinion, the most serious reason preventing the achievement of an economic effect is the lack of a reliable method for quantifying the economic efficiency of the creation, certification and operation of a QMS in enterprises. Its existence is due to the presence of the first two. On the one hand, without knowing the real volumes of expenditure of all types of resources on the implementation and operation of the QMS, it is impossible to give an accurate assessment of its effectiveness. On the other hand, the difficulty lies in the fact that it is difficult, and in some cases almost impossible, to highlight in monetary form that part of the profit that is obtained through the functioning of a certified QMS, and not other quality measures.

With the introduction of a QMS based on ISO 9001 at the enterprise, the functions of the economic and accounting services have remained virtually unchanged: the QMS operates on its own, the accounting department solves its problems. In the current production cost accounting system, a significant part of the costs of ensuring product quality is dispersed and impersonal, which does not allow analyzing their distribution and dynamics, or finding ways to improve work. This makes it difficult to implement one of the main principles of ISO 9001 - the principle of continuous improvement, the goal of which is to reduce losses, save costs and improve product quality.

To establish cost management for quality assurance, it is advisable to supplement the Quality Manual with the section “Managing Quality Costs”, which will formulate the tasks of cost accounting and analysis that are solved at each stage of production, as well as the principles of assessment, planning and management. It is also necessary to develop an enterprise standard that regulates the procedure for collecting financial information on all types of quality costs, procedures for its processing and analysis, as well as defining responsible executors, forms for recording data and submitting reports to senior management. The chief accountant (financial director, etc.) should be responsible for organizing the accounting of costs for quality assurance, and the quality director should be responsible for their analysis, evaluation and taking the necessary measures.

The best known classification of quality costs in accordance with BS 6143, part 2:

preventive costs - costs of investigating, preventing and reducing the risk of non-conformity or defect;
assessment costs - the cost of assessing the achievement of the required quality, including, for example, the cost of control performed at any stage of the product life cycle;
costs due to internal failures - costs due to inconsistencies or defects discovered within the organization at any stage of the product life cycle, such as the costs of disposal, rework, retesting, re-inspection and re-design work;
costs due to external failures - costs due to non-conformities or defects discovered after delivery to the consumer, which may include costs due to complaints, replacement costs and associated losses.

The sum of all these costs gives the Total Cost of Quality (Fig. 1).

Total Quality Costs (Fig. 1).

The components of each of the four main categories of quality costs have been defined many years ago. The categorization of these elements is largely arbitrary and minor differences in detail occur across organizations. This is not significant, since the collection, classification and analysis of quality costs is a purely internal activity of the company. What is really important is that within the company there is unambiguous mutual understanding and agreement on details. Cost categories should be constant, they should not duplicate each other; If a cost appears under one heading, it should not appear under another, and in all subsequent cases, that cost should appear under the same original heading.

Let's consider several basic approaches to assessing and analyzing quality costs. The choice of one or another approach depends on the goals facing the management of the enterprise: it is necessary to clearly understand what information should be obtained as a result of the analysis, and evaluate the possibility of obtaining it when applying the chosen approach.

When analyzing and assessing quality costs, the main goals are:

identification and assessment of the size of necessary investments in ensuring (guaranteeing) and improving quality;
ensuring the required quality of products while minimizing the overall costs of their production and operation;
identifying the relationship between quality costs and the results of the enterprise’s economic activities;
identification of critical areas of production activity that require measures to improve production organization.

Quality costs can be analyzed in five areas.

Table 1 shows in which cases one or another type of quality cost analysis is used.

Item no.	Type of analysis	Goals of the analysis
1	Analysis of losses due to unsatisfied product quality	Identification, analysis and assessment of losses due to unsatisfactory quality at various stages of the product life cycle
2	Analysis of potential sources of losses	Determination, analysis and assessment of losses due to unsatisfactory quality at various stages of the product life cycle, selection of priority areas of work to improve product quality and improve quality management
3	Analysis by type of quality costs in accordance with classification A. Feigenbaum	Continuous identification, determination, analysis and evaluation of quality assurance costs; reduction and optimization of quality costs; monitoring changes in various types of quality costs
4	Analysis of quality costs by type of activity	Monitoring and continuous assessment of quality costs; reduction and optimization of quality costs; identification of ineffective activities in the quality management system; prompt resolution of problems in the field of quality management; analysis and evaluation of investments in improving product quality and improving the quality management system
5	Analysis of quality costs associated with processes	Monitoring and continuous assessment of quality costs; identification of ineffective activities in the quality management system; prompt resolution of quality problems

Let's take the third method as an example. It is used when continuous identification and control of quality-related costs is necessary. Information about costs when using this method can be obtained from accounting data or specially organized accounting of quality costs based on auxiliary subaccounts.

When conducting an analysis of quality costs based on A. Feigenbaum’s classification, the following must be taken into account:

demand for products depends not only on the quality of the product, but also on a number of external factors, often beyond control;
at the early stage of QMS implementation and when carrying out measures to improve quality, capital investments are inevitable, which means that individual cost groups can change abruptly, regardless of changes in product quality;
at the early stage of QMS implementation, internal losses due to defects and inconsistencies will inevitably increase, not because product quality decreases, but because control efficiency increases.

According to A. Feigenbaum’s classification, which coincides with the BS 6143 classification, quality costs are divided into:

1. Costs of carrying out preventive measures

a) quality planning (organizational quality assurance, product design, reliability research, etc.);
b) technological process control (study and analysis of technological processes, control of the production process, etc.);
c) design of equipment used to obtain information about quality (design of equipment used to determine the quality of products and technological processes, data collection, processing, etc.);
d) training in quality assurance methods and work with personnel (development of personnel training programs aimed at the correct use of quality management methods by employees);
e) product design verification (pre-production assessment of products);
f) development of management systems (development and management of complex QMS, their improvement);
g) process control (costs of establishing process controls, costs of studying process capabilities, costs of providing technical support to production personnel in applying and maintaining quality procedures and plans);
h) ensuring the quality of supplies (costs of assessing potential suppliers and materials before concluding supply contracts, costs associated with technical preparation of inspections and tests of purchased materials, costs of technical support to suppliers aimed at helping them achieve the expected quality);
i) audit of the QMS (costs of internal audit, costs of audit of the QMS by the consumer, his agent or other authorized body);
j) other costs associated with carrying out preventive measures.

2. Costs of quality assessment

a) testing and acceptance control of materials (assessment of the quality of purchased material, travel expenses of inspectors);
b) laboratory acceptance tests (conducting all types of tests in a laboratory or testing center to assess the quality of the purchased material);
c) laboratory measurements: measurements, checking instrumentation, their repair, etc. (Under no circumstances will this category include costs associated with the cost of manufacture or depreciation of this equipment.);
d) technical control (assessment of product quality by employees of the technical control service);
e) product testing (assessment of product performance characteristics);
f) self-control (checking the quality of products by the workers themselves);
g) certification of product quality by third parties;
h) maintenance and inspection of equipment used to obtain quality information (inspection and maintenance of this equipment);
i) technical verification of products and permission to ship (analysis of data obtained as a result of testing and technical control, issuance of permission to ship products);
j) testing under operating conditions;
k) materials for testing and inspections: the cost of consumables used in inspection and testing, the cost of materials, samples, etc., subjected to destructive testing (the cost of testing equipment is not included).

3. Costs due to failures caused by internal reasons

4. Costs due to failures caused by external causes

Quality costs taken on their own in absolute (value) terms can be misleading. As a result, incorrect conclusions will be drawn. We must relate quality costs to some other activity characteristic that is sensitive to changes in production. This characteristic is called the measurement base. When determining the relationship of quality costs to any suitable measurement base, it is important to be sure that the period for which all these characteristics were determined was the same.

For many organizations, it is satisfactory to relate quality costs to the volume of products sold. Moreover, sold here means those products that have already been paid for.

However, if sales volume is subject to seasonal factors, or some other cyclical changes (for example, the sale of Christmas tree decorations), the volume of products sold cannot be a reliable basis because it will be too variable, while production volume and quality costs may remain relatively constant.

Other measurement bases are often used:

added value (the value added by processing to the cost of materials and semi-finished products consumed in the production process);
labor intensity (the amount of remuneration for labor directly spent on production);
cost (the sum of wages directly spent on production, the cost of materials and components, overhead costs);
alternative ratios.

As quality management costs increase, defective costs will decrease. However, this does not mean that the company should increase its quality costs unlimitedly. It is necessary to constantly analyze the costs of quality management, the costs of defects and the overall costs of the enterprise, because with an unreasonable increase in quality costs, an increase in overall costs is possible.

Quality control costs and defective costs can be plotted on the same graph, as shown in Fig. 2.

Figure 2. Cost-effectiveness of quality management.

The point where these two curves intersect is usually the point of minimum cost. But in practice it is not easy to get even a rough estimate because there are many other variables to consider. However, this task is the most important task for management. Many firms do not make such calculations, although calculating quality costs can be a source of enormous savings.

One of the world's most respected leaders in the field of quality, Professor Juran, presented the process of saving costs on quality as: “The Gold in the Mine!” Without effort, it is impossible to extract gold from a mine. Likewise, without effort, cost savings on quality are unattainable.

The most important thing to think about in any company should be the percentage of total quality costs versus total sales.

Quality costs may only be part of the profit.

Any reduction in quality costs increases profits.

TAKE THE SIMPLE

Don't try to immediately cover every department (activity) and so on in the organization.
Pick one product, one model, one department, whatever you want, and build a system that you think you can fill with actual financial data.
Start with those quality costs for which data is already known.
Determine other necessary costs in an “expert” way, if necessary at this time.
As you work to build a system, you may suddenly encounter an unexpected obstacle. Don't be afraid of this and don't put off work. Solving the problem once will make your life easier in the future.
Simplify the system to suit your needs.
Don't worry if you can't easily identify some costs.

If your costs are determined to within ±5%, you've done a good job. Your Director and yourself now have a more accurate picture of quality costs than before you took on this business.

Start small and build up.
Create a sample to show how this can be done.
Document the value of quality cost analysis.
Only in this way will you achieve understanding and cooperation.

It is recommended that resource optimization be approached from a total cost management perspective, using a process approach in accordance with BS 6143 Part 1. From this perspective, the cost model should reflect the total costs in each process, not just quality costs. A cost model can be created for any process.

The cost model is built on the basis of identifying the process and discretizing it into individual types of work. For each type of work, elements of compliance costs and non-conformity costs should be identified and established.

The main goal of analyzing total costs is to identify opportunities to reduce them.

For manufacturers of automotive components, process cost analysis becomes relevant in connection with the requirement of JSC AVTOVAZ for certification according to ISO / TU 16949, which requires:

Clause 5.1.1 Top management should review product life cycle processes and supporting processes to ensure their effectiveness and efficiency.

A typical process cost model (shown in Figure 3) provides answers to the questions posed above.

In general, the costs of any process consist of the following elements:

labor costs;
costs of labor tools (for example, organizational and technological equipment);
materials costs;
costs of creating working conditions.

Figure 3. Process cost model.

When building a model, each element is assigned either to the group of costs for compliance (satisfactory functioning of the process) or to the group of costs due to non-compliance (excess costs due to various types of losses). In this way, the total costs of compliance of a given process and the total costs due to process non-compliance can be calculated separately. Dividing costs into groups makes it easier to analyze cost reports later.

A very important characteristic “Frequency of complaints from consumers of the process” has been introduced into the model. This refers not only to the external consumer of the process, but also to the internal one (for example, another division of a given enterprise). This recorded and easily accessible characteristic allows you to more reasonably choose the direction of process improvement and objectively evaluate the effectiveness of the implemented improvements.

Based on a standard model for a specific process, a working model and cost reporting form are developed. In the working model, if necessary, simplified formulas for calculating costs and data sources for calculation are indicated, as shown in the example on rice. 4. To analyze the process, high accuracy in calculating costs by element is not required; approximate values are sufficient. Taking this into account, one should strive to simplify the formulas as much as possible and minimize the necessary initial data (on rice. 5 An example of filling out a cost reporting form is provided).

Figure 4. Example of a process cost reporting form.

In the future, process cost models can be used for regular reporting of process performance - as part of a measurement and monitoring system. In this regard, it should be noted that the cost model must remain stable in order to be able to make comparisons with previous periods and observe trends in costs.

Figure 5. Example of filling out a process cost reporting form.

The process cost model described above is not the only one.

The total process cost model (widely used in environmental management to describe the complete material balance of processes) in BS 6143.1 is described in a form close to SADT technology. Those. For enterprises that have chosen SADT technology to build a process model, this cost model may be the most acceptable. It easily fits into the already developed description of the activity (examples are shown in the figure below).

When building a cost model, you should take into account not only direct financial costs, but also other types of costs, for example, time spent on performing processes. These data can also be included in the SADT model.

On rice. 6 It is shown that the model can include data on the frequency of process execution, duration (i.e. time costs), and cost of process execution. At the same time, in the blocks of the SADT model, the total cost (equal to the product of cost and frequency) is automatically calculated and displayed. On rice. 7 shows an example of a SADT diagram. For clarity, text has been added to the model (within frames) indicating the frequency, cost and duration of subprocesses.

Figure 6. An example of including data on the frequency of processes, duration, and cost in the SADT model.

Figure 7. Example of a SADT diagram with subprocess data.

Based on the data on the subprocesses in the higher-level diagram, the total cost is automatically calculated (Fig. 8). Data can also be obtained on the total duration of the process (as the sum of the duration of execution of all subprocesses, taking into account frequency).

Figure 8. Example of calculating process data based on entered information about its subprocesses.

In particular, analysis of cost reports can be carried out to determine the direction of process improvement or to monitor the impact of implemented process changes. In the first case, based on a comparison of the total costs of compliance and costs due to process non-compliance and taking into account the frequency of consumer complaints in production and operation, the priority of solving problems can be established: eliminating losses or developing a new improved process design. In the second case, changes in reported data on costs and frequency of consumer complaints can serve as one measure of the effectiveness and efficiency of the improvements made. In this way, continuous improvement processes can be supported by reporting the full costs of processes. It may initially focus on eliminating waste. Once significant waste has been eliminated and the cost contribution due to the total cost discrepancy is no longer significant, the improvement effort may involve redesigning the process. Once a new process is implemented, the cycle repeats.

Material prepared for publication
Sergei Tyumentsev, editor of the "Volga Region Quality Bulletin"

html layout: Andrey Garin

see additionally:

STP QMS template "Quality cost analysis"
Multidimensionality of the cost management process for the quality of industrial enterprises

posted in the section: School of Quality

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To analyze the cost of maintaining product quality, various information is used.

The purpose of collecting data during a cost-quality analysis process may be to:

1. reduction in costs per unit of production while maintaining the same quality;

2. reducing costs for products while improving their properties;

3. increasing unit costs, allowing to achieve a high level of quality, giving advantages over competitors;

4. determining the amount of costs by type to change their structure, but maintaining the same amount of costs for products, which allows maintaining the current price level in order to outstrip competitors in terms of quality;

5. increasing production volume without reducing the quality of products from the previous volume of resources by reducing and eliminating waste;

6. analysis of deviations from established requirements;

7. product control;

8. setting prices for products.

Information should be recorded in tables that facilitate and speed up the calculation of statistical indicators used in making operational management decisions and for further data analysis.

3. Methods for analyzing costs for product quality.

Depending on the goals, objectives of quality analysis and the possibility of obtaining the data necessary for its implementation, analytical methods differ significantly. This difference is also influenced by the passage of a product through a certain stage of the enterprise’s activity, its place in the cost chain at a particular moment.

At the stages of design, technological planning, preparation and development of production, it is advisable to use functional cost analysis (FCA). This is a method of systematic research of the functions of an individual product or technological, production, economic process, structure, focused on increasing the efficiency of resource use by optimizing the relationship between the consumer properties of an object and the costs of its development, production and operation. The main principles of application of the FSA are:

Functional approach to the object of study;

A systematic approach to the analysis of an object and the functions it performs;

Study of the functions of an object and their material carriers in situations of the product life cycle;

Compliance of the quality and usefulness of product functions with their costs;

Collective creativity.

The functions performed by the product and its components can be grouped according to a number of characteristics. Based on their manifestation, functions are divided into external and internal.

External are functions performed by an object during its interaction with the external environment.

Internal – functions that are performed by any elements of an object and their connections within the object.

Based on their role in satisfying needs, external functions are distinguished between primary and secondary.

The main function reflects the main purpose of creating an object, and the secondary function reflects the secondary purpose.

Based on their role in the work process, internal functions can be divided into main and auxiliary.

The main function is subordinate to the main one and determines the operability of the object. With the help of auxiliary ones, the main, secondary and main functions are realized.

According to the nature of their appearance, all listed functions are divided into nominal, potential and actual.

Nominal values are specified during the formation and creation of an object and are mandatory for execution. Potential reflects the ability of an object to perform any functions when its operating conditions change. Real ones are the functions that the object actually performs.

All functions of an object can be useful and useless, and the latter neutral and harmful.

Interrelation of functions.

Main Nominal Useful

Minor Potential

Basic

Internal Useless

Auxiliary Valid

Neutral Harmful

Mathematically, the goals of the FSA can be written as follows:

where: PS is the consumer value of the analyzed object, expressed by the totality of its consumer properties. PS = n*

Z - costs for achieving consumer properties.

The viability of a business that engages in both production and service depends on its ability to achieve customer satisfaction. Very often, many managers consider the main selling point to be price and delivery time, while not paying enough attention to the value of the product. It is necessary to consider value addition as one of the most important factors in determining competitiveness. Many consumers view increasing value as more important than decreasing price. A skilled seller can receive an order to perform work in a competitive environment from other firms, but only the quality of the product or service determines to a greater extent whether the consumer will repeat his order from this seller again.

Some managers believe that meeting consumer quality expectations leads to increased costs for the supplier (manufacturer), which in turn reduces profits or increases prices. This position is based on two assumptions:
· Improving the product delivered to the consumer involves conducting more intensive testing and sorting the results into products to be shipped, reprocessed or discarded;
· Improving product quality means improving the variety.
If at least one of these assumptions were true, then costs would of course increase. Fortunately, both of these concepts are false, and costs do not increase as quality improves. A "quality improvement" program, if designed correctly, will reduce rather than increase costs.

COSTS OF QUALITY

Management tool
Most of the costs associated with the activities of the enterprise are recorded in reports and provided to management. Knowing and analyzing these costs is of great help in successfully running a company.
In most manufacturing and service businesses, the cost of meeting customer quality expectations is a significant amount that does not actually reduce profit margins, so it seems logical that quality costs should be identified, processed, and presented to management like other costs. Unfortunately, many managers do not have the opportunity to obtain visual information about the level of quality costs simply because the company does not have a system for collecting and analyzing them, although registering and calculating quality costs is not a complicated, already proven procedure. Once defined, they will provide management with an additional powerful management tool.

Basic costs for quality
Let's assume that the company's top management has already identified its market, i.e. sets of requirements for a product or service of various gradations (grades) have been established and reflected with sufficient conviction for consumers of various levels: those requiring luxury, middle class and thrifty.
We must now concentrate on the costs associated with ensuring that the “quality” of a product or service actually meets consumer expectations, i.e. on the costs associated with meeting these expectations.
The following basic questions should be asked related to "cost of quality":
· What are quality costs and how do they arise?
· Are quality costs inevitable?
· What is the relationship between quality costs and quality achievement?
· Do quality costs represent a significant part of the company's turnover?
· How can you benefit from quality cost analysis?

What are quality costs and how do they arise?
Quality costs are generally divided into the following categories:
· costs of preventing the possibility of defects occurring, i.e. costs associated with any activity that reduces or completely prevents the possibility of defects or losses (prevention costs or preventative costs);
· control costs, i.e. costs of determining and confirming the achieved level of quality;
· internal defect costs - costs incurred within the organization when the agreed quality level is not achieved, i.e. before the product was sold (internal losses);
· external defect costs - costs incurred outside the organization when the agreed quality level is not achieved, i.e. after the product has been sold (external losses);
· the sum of all these costs gives the Total Cost of Quality.

Approximate list of constituent elements of quality costs

Prevention costs
1. Quality management
· Costs of quality system planning.
· Costs of transforming consumer expectations for quality into the technical characteristics of a material, process, product.
2. Process control
· Costs of establishing process controls.
· Costs of studying process capabilities.
· Costs of providing technical support to production personnel in applying (implementing) and maintaining quality procedures and plans.
3. Quality planning by other departments
· Costs associated with quality planning activities performed by personnel not reporting to the Quality Manager.
4. Control and measuring equipment
· Costs associated with the development and improvement of all control and measuring equipment (instruments).
· Costs associated with maintenance and calibration of all equipment (instruments).
· Costs associated with the maintenance and calibration of technological equipment, fixtures, templates and samples that are directly related to product quality.
Under no circumstances will this category include costs associated with the cost of manufacture or depreciation of this equipment.
5. Ensuring the quality of supplies
· Costs of evaluating potential suppliers and materials before entering into supply contracts.
· Costs associated with technical preparation of inspections and tests of purchased materials.
· Costs of technical support to suppliers aimed at helping them achieve expected quality.
6. Quality system audit
· Costs of internal quality audit.
· Costs of auditing the quality system by the consumer, his agent or other authorized body.
7. Quality Improvement Program
· Costs associated with implementing, monitoring and reporting improvement programs, including the costs of collecting and analyzing data and reporting quality costs.
8. Quality training
· Costs of implementation, development and operation of a training program for personnel at all levels on quality issues.
9. Costs not accounted for elsewhere, such as:
· Salaries of secretaries and employees, organizational expenses, etc., which are directly related to preventive measures.

Control costs
1. Inspections and tests
· Payment for the work of inspectors and testing personnel during routine inspections of production operations.
· Repeated checks of rejected elements, their testing, sorting, etc. does not turn on.
2. Inspections and tests of supplied materials
· Payment of inspectors and testing personnel associated with materials purchased from suppliers, including inspectors and employees at various levels.
· Costs of laboratory tests performed to assess the quality of supplied materials.
· Costs associated with inspectors and testing personnel evaluating materials at the supplier's facility.
3. Materials for testing and inspection
· Cost of consumables used in inspection and testing.
· Cost of materials, samples, etc., subjected to destructive testing.
· Cost of testing equipment is not included.
4. Process control
· Remuneration for personnel not subordinate to the quality manager who perform inspection and testing on production lines.
5. Reception of products by the customer
· Costs of launching and testing finished products in production for delivery to the customer before delivery.
· Costs of acceptance testing of products at the customer before their delivery.
6. Checking raw materials and spare parts
· Costs of inspecting and testing raw materials, spare parts, etc., due to changes in project specifications, excessive storage time, or uncertainty caused by other problems.
7. Product audit
· Costs of conducting a quality audit of technological operations either during the production process or on the final product.
· Costs of all reliability tests carried out on manufactured products.
· Costs of confirming the quality of the product by external bodies such as insurance companies, government agents, etc.

Internal defect costs

1. Waste
· The cost of materials that do not meet quality requirements and the costs of their disposal and removal.
· The salvage value of production waste is not included.
The cost of waste caused by overproduction, obsolescence of products or changes in design at the request of the customer is not taken into account.
2. Alterations and repairs.
· Costs incurred during the restoration of products (materials) to meet quality requirements by means of either rework, or repair, or both.
· Re-testing and inspection costs after alterations or repairs.
3. Loss analysis
· Costs of determining the causes of non-compliance with quality requirements.
4. Mutual concessions
· Costs of permitting the use of those materials that do not meet technical requirements.
5. Downgrading
· Costs incurred as a result of a reduction in the selling price of products that do not meet the original technical requirements.
6. Waste and rework caused by suppliers
· Costs incurred when, after receipt from the supplier, it is discovered that the materials supplied are not suitable.

External defect costs
1. Products not accepted by the consumer
· Costs of identifying the reasons for the customer’s refusal to accept products.
· Costs of rework, repair or replacement of not accepted products.
2. Warranty
· Costs of replacing unsatisfactory products during the warranty period.
· Costs involved in service departments to correct products and restore customer satisfaction.
3. Product recall and modernization
· The cost of testing, modifying or replacing products already supplied to the customer when a design or manufacturing error is suspected or certain.
4. Complaints
· Costs involved in investigating the causes of consumer complaints about product quality.
· Costs incurred to restore customer satisfaction.
· Costs of legal disputes and compensation payments.

Are quality costs inevitable?
The simplest answer is “Yes!”
In reality, it is not possible to completely eliminate quality costs, but they can be reduced to an acceptable level. Some quality costs are clearly unavoidable, while others are avoidable.
The latter are those that can disappear if there is no defect, or which will decrease if the number of defects decreases.
You can avoid costs for:
· unused materials;
· revision and/or rework of defects (correction of defects);
· delays, excessive production time caused by defective product;
· additional checks and controls to identify an already known percentage of defects;
· risks, including warranty obligations;
· loss of sales associated with consumer dissatisfaction.
Unavoidable costs are those that are still necessary, like insurance, even if the defect rate is very low. They are used to maintain the achieved level of quality, to ensure that the level of defects remains low.
· Unavoidable costs may include costs for: operating and auditing the quality system;
· maintenance and calibration of testing equipment;
· supplier assessment;
· training in quality issues;
· minimum level of inspections and control.
Quality costs can be minimized, but any idea that they can be reduced to zero is a fallacy.

COSTS OF QUALITY AND LEVEL OF QUALITY ACHIEVED

Total quality costs
The sum of all quality costs is Total Quality Costs.
The relationship between all quality costs, total quality costs and the level of quality achieved is usually presented as shown in Fig. 2.
Total quality costs consist of the costs of preventive measures, control costs and losses (external and internal). As the achieved level of quality changes, the values of the cost components also change, and, accordingly, their sum - the total costs of quality.

ECONOMIC EQUILIBRIUM

Assumptions
The first assumption is that preventive activities aimed at preventing the possibility of defects occurring correspond to the Pareto rule: i.e. We primarily work on those problems whose solution gives the greatest result in reducing costs.
The second assumption is that the so-called economic equilibrium does not change over time. In fact, this is misleading and ignores two essential factors:
· Firstly, We carry out real preventative activities, which in reality are not just paper damage, and which allow us to be sure that the mistake will not be repeated a second time. Often, such activities require large expenses, but they always pay off and make a profit.
· Secondly, new design developments and new processes may create new problems, the solution of which will require additional preventive costs.

The danger of misinterpretation
It was found that most managers are confident that they are working at the level of quality (level of performance) that corresponds to economic equilibrium. (Very often they do not have hard evidence to support this assumption).
The published graph is idealized and shows the level of performance (level of quality) in terms of “good” and “bad” and is never related to the percentage of defects.
A manager who believes that he is operating at a 5% defective level tends to believe that this is economic equilibrium, while a manager who thinks that he is operating at a 1% defective level believes that economic equilibrium is at this level.
This graph gives these managers confidence that improving the quality of performance in their companies will only be accompanied by an increase in costs. As a result, no additional preventive activities are carried out.

Fact or fallacy?
If preventive measures are carried out properly and are effective, then it is quite difficult to find evidence that any company has experienced an increase in total quality costs due to increased costs for preventive measures.
On the other hand, if the company is a leader both in its own country and abroad, and has a very low level of defects, for example, one part per million, i.e. 0.001%, then such a highly competitive and successful enterprise has, however, very low overall quality costs.
Both of these facts taken together may lead us to the conclusion that the concept of economic equilibrium is not supported. In reality, the fact is that many managers are confident in the validity of the presented concept, but use it as a basis for not raising the level of quality.

SHARE OF QUALITY COSTS IN TURNOVER

Is this share really significant? The simplest answer is: “Yes, of course!” Where quality costs are properly taken into account, they can range from 2% to 20% or more of sales (turnover). Information published in recent years by bodies such as the Institute of Quality Assurance in the UK, the American Society for Quality Control and the European Organization for Quality actually shows that this relationship exists in a wide range of businesses in all parts of the Western world.
One of the most authoritative world leaders in the field of quality, professor Juran presented the process of saving quality costs as: “The Gold in the Mine!” Without effort, it is impossible to extract gold from a mine. Likewise, without effort, cost savings on quality are unattainable.
The most important thing to think about in any company should be the percentage of total quality costs versus total sales.
Quality costs may only be part of the profit.
Any reduction in quality costs increases profits.

DETERMINATION OF COST VALUES

How to identify quality costs
The first task is to determine a list of cost elements that relate to the company's activities and group them.
The second is to name these elements in such a way that their meaning is clear to company personnel.
The third is to assign code characters for each element. This could be, for example, a number, a letter or a combination of both.
Above was an example of a list of cost elements grouped and numbered according to these recommendations.
The general purpose of collecting quality cost data is to provide guidance to a management tool.
It is especially important that cost elements are defined as they are named and allocated to various categories, including:
· for the department;
· for any area;
· for product type;
· for any workplace;
· for any type of defect.
Requirements must be established by the organization itself, for its own (internal) use. However, we should not forget that the collected information should be sufficient for subsequent analysis.
A system of accounting and analysis of quality costs that is not consistent with the existing features within the organization has too little chance of success. This system should be built into the organization, as if “tailored to measure.” It cannot be “taken off the hanger”, i.e. already ready.

How to identify quality costs
Once a system for classifying and coding the various elements of quality costs has been established, it will be necessary to identify sources of cost data.
Some information may already exist. Some data can be obtained fairly easily, while other data will be much more difficult to determine, and some may not yet be available.

Let us recall once again the elements of control costs (see above), in which the main cost is the payment of labor for personnel involved in control and testing. In fact, it can account for more than 90% of total control costs. Moreover, these costs can be determined quite accurately.
The remaining costs are mainly related to the cost of materials used, procurement and maintenance costs. They can be defined directly.
So, we see that it is possible to obtain an accurate picture of control costs without much difficulty.

Internal defect costs
Determining the cost elements in this group is a little more complex, but you will no doubt identify most of the following:
· Remuneration for labor associated with returns
· Cost of materials (wasted work)
· Overheads
· Remuneration for labor related to corrections
· Cost of materials (work errors)
· Overheads
· Remuneration for labor associated with repeated
· Cost of materials testing and control
· Overheads
· Overtime pay to make up for lost time.
· Lost profits associated with a decrease in the class (grade) of products.
A picture of the above costs can be obtained with a reasonable degree of accuracy.
It will be more difficult to identify the wages and overhead costs associated with:
· analysis of the causes of defects;
· working on the returned product;
· preparing production for corrections.
This activity is related to:
· production control staff;
· supply department staff; staff of controllers;
· staff of the quality assurance department.
Since each involved employee is unlikely to spend the entire working day solving problems associated only with internal losses, the assessment of losses should be made taking into account the time actually spent on this activity and the resulting indicators.
Thus, we again see that the main types of costs in this category can be determined with a reasonable degree of accuracy.
The costs that need to be estimated are only a very small part of the total.

External defect costs
Part of the external cost of a defect is due to the fact that the product is returned by the consumer either immediately or during the warranty period. If the product is returned, the costs associated with irreparable defects or rework and repairs are determined in the same manner as for internal losses.
However, there are other costs that are not so easy to determine. These include the following:
· Labor, overhead and other costs associated with investigating customer grievances and complaints.
· Labor, overhead and other costs incurred by serving an unsatisfied customer.
· Additional transportation costs.
· Costs caused by proceedings (including litigation) and, possibly, subsequent payment of compensation.
The listed costs may be incurred by personnel of various departments such as:
· Project department;
· Technological department;
· Economic;
· Sales department;
· Maintenance department;
· Transport;
· Legal;
· Quality Assurance Department.
Since employees of all these departments are unlikely to be busy full-time with issues of external losses, the determination of the amount of costs, again, must be carried out taking into account the actual time spent.
And yet, one of the elements of external losses is really impossible to obtain - these are losses associated with a decrease in the company’s image, a decrease in consumer trust and predisposition towards it. Some organizations set the amount of these losses (costs) at 2.5% of the total quality costs. However, many people ignore these costs on the basis that they cannot be determined with any degree of accuracy - they are only guesstimated.

Prevention costs
These costs are probably the most difficult to identify because they arise from a large number of departments and most employees devote only a portion of their time to this work. Look again at the components of prevention costs to understand what is meant.
These costs may appear at the following stages of activity:
· production;
· sales and marketing;
· design and development;
· engineering support;
· process planning;
· research;
· laboratory tests;
· financial and economic support;
· data processing;
· education.
In addition, most of the costs in this category are associated with quality assurance personnel.
Prevention costs primarily include wages and overhead. However, the degree of accuracy of their determination largely depends on the accuracy of determining the time spent by each employee individually.
Some precautionary costs are easy to identify directly. They may, in particular, include payment for the work of third parties for:
· Maintenance, calibration and verification of measuring equipment;
· Consultations;
· Training courses.

Sources
When determining quality costs, it is necessary to remember that:
· Material costs can be obtained from the analysis of invoices, records in warehouse documentation, etc.;
· Payments to staff can be taken from statements;
· The cost of supplies can be determined from the relevant invoices or invoices;
· The volume of wage payments must be taken taking into account the actual time spent on quality assurance work by each involved employee;
· If only part of an employee’s time is spent on quality assurance activities, then the appropriateness of assessing each component of his time expenditure should not be questioned;
· Classification of quality costs and their allocation to elements should become part of daily work within the organization. To this end, the various cost elements and their corresponding codes should be well known to all personnel.
If all the elements are collected and distributed with sufficient accuracy, then the subsequent analysis of the costs of quality can only result in the interpretation of the data.

Responsibility for collecting information and analyzing it
Who will collect and analyze data and compile a report on quality costs? This should not happen occasionally; a system must be developed. At the same time, you need to be sure that all data is consistent with financial materials, accounts, etc. It is necessary to rely on real accounting data when obtaining cost elements. So, it seems logical that economists should be involved in this work. However, they will need assistance in classifying and analyzing cost elements; This is already the job of the Quality Manager.

MEASUREMENT BASE

Quality costs taken on their own in absolute (value) terms can be misleading. Thus: we must relate quality costs to some other characteristic of the activity that is sensitive to changes in production, which is why the so-called measurement base has been introduced.
When determining the relationship of quality costs to any suitable measurement base, it is important to be sure that the period for which all these characteristics were determined was the same.
For many organizations, it is satisfactory to relate quality costs to the volume of products sold. Moreover, by “sold” we mean those products that have already been paid for.
However, if sales volume is subject to seasonal factors, or some other cyclical changes (for example, the sale of Christmas tree decorations), the volume of products sold cannot be a reliable basis because it will be too variable, while production volume and costs quality can remain relatively constant. In addition, it should be noted here that the volume of products sold differs from the volume of products delivered, since the products delivered to the consumer may not yet be paid for. Likewise, the volume of products produced may not coincide with the volume actually sold or delivered. Of course, the decision is about which measurement base to assign quality costs to: the cost of manufactured products; to the number of units of product produced; to the volume of products sold; to the cost of the delivered products - must be accepted by the enterprise itself, and management must be sure that the results obtained truly reflect a real and objective picture of the costs of quality.

Other measurement bases
Below are some commonly used measurement bases and explain why they are recommended:
Added value.
Labor intensity.
Cost price.
Alternative ratios.

Added value is the value added by processing to the cost of materials and semi-finished products consumed in the production process. If, for example, you carved an ornament on a piece of wood, then the added value is the difference between the cost of the piece of wood and the price you will receive for the ornament.
Using value added as a measurement base, the following are automatically taken into account:
· change in production volume, since this base corresponds to the quantity of products produced;
· inflationary trends, because if the cost of materials increases, then the price of the final product also increases.
In addition, the results do not depend on uneven (including seasonal) product sales.
So, we can use the ratio of total quality costs to value added for analysis.

Labor intensity can be presented as the amount of wages directly spent on production. This is a frequently used financial category in practice, and therefore the data required to use this measurement base must be readily available. However, labor intensity must be used with caution as it may change over time due to:
· process automation;
· technology improvements;
Thus, labor intensity as a measurement basis can only be used for short periods of time.
It is important to remember the following:
· Labor intensity cannot be used as a measurement base if the effect of inflation is not taken into account;
· It is always necessary to compare values in their value terms.
A typical example of using this base: the ratio of internal costs per defect to labor intensity.

Cost price can be defined as the sum of wages directly spent on production, the cost of materials and components, and overhead costs.
At different periods of time, the cost may be influenced by the following factors:
· process automation;
· introduction of new technologies;
· use of alternative materials;
· change of service personnel.
However, since there is a whole group of costs involved in this category, the impact of temporary changes is not as significant as if only one cost element were used as the basis of measurement.
In particular, labor intensity decreases when automation is introduced into production, but this is indirectly offset by increased overhead costs caused by capital investments and increased energy consumption.
A typical ratio using this measurement base could be the following: defective losses allocated to cost.

Alternative ratios
We should not dwell only on those relationships that have already been discussed above. We can use any ratios that will help sort the information we are interested in.

The purpose of using all the considered relationships is to compare the effectiveness of activities over different periods of time. Therefore, it is necessary:
· Be consistent in using the measurement base.
· Use in ratios values expressed in monetary units, and not in units of time or quantity of production.
· Make sure that in each ratio both the numerator and denominator correspond to the same time period.

QUALITY COST REPORT

General provisions
The purpose of the report is to analyze the costs of quality and compile a report in a form that could assist managers at various levels by presenting them with an objective picture of quality.
Quality cost analysis is a powerful management tool and is particularly used by company management to measure achieved quality and identify problems when setting quality goals.
Presented in financial terms and written in simple language, the cost of quality report has significant advantages over other types of management reports. Analyzing this document has an immediate impact and gives a strong boost to everyone who receives it.
The content of a cost of quality report largely depends on who it is intended for and the role within the organization of the person to whom this particular report is intended.
Top management should receive the report in the form of general forms that summarize the plant, department, group, etc. as a whole. The report should give an overall picture of the state of quality in the company and be written in purely financial terms. It must be presented in an accessible and objective manner.
Middle and line management should receive more detailed information about the achieved level of quality in the area of activity they manage. The report should be very detailed and provide data by product types, lot numbers, etc. The basic principle of all types of quality cost analysis is to present to everyone for whom it is intended information on quality costs in the form that would be most useful and most convenient for him/her to use.
The reader of the report should receive information that will allow:
· Compare the current level of achievement with the level of the previous period, i.e. identify trends;
· Compare the current level with the goals set;
· Identify the most significant cost areas;
· Select areas for improvement;
· Evaluate the effectiveness of improvement programs.
The manager expects to receive a quality cost report that:
· will tell him about those things that relate only to his area of competence and nothing more;
· written in an easy-to-understand style and not filled with “special” jargon;
· clear, expressive, concise, which does not force you to “dig” in order to “get” information;
· suggests possible areas of activity.

Report to senior management
A report intended for senior management may be presented in the form of a table and accompanied by a graph. In addition, the most important points can be emphasized. For example, savings resulting from increased preventive activities may be presented. Based on the report, the manager analyzes and makes decisions.

SYSTEM IMPLEMENTATION

All of the above probably seems quite dauntingly complex and time-consuming to implement. This is probably why relatively few organizations have implemented a system for collecting and analyzing quality costs.
Management must be convinced of the utility before it begins to build a system for collecting and analyzing quality costs in the company. So you need to convince him. Below are some of the "secrets" to successful implementation of the system.
TAKE THE SIMPLE
· Do not try to immediately cover every department (activity) and so on in the organization.
· Pick one product, one model, one department - whatever you want, and build a system that you think you can fill with actual financial data.
· Start with those quality costs for which data are already known.
· Determine other necessary costs in an “expert” way, if necessary at this time.
· While working on building a system, you may suddenly encounter an unexpected obstacle. Don't be afraid of this and don't put off work. Solving the problem once will make your life easier in the future.
· Simplify the system to suit your needs.
· Don't worry if you can't easily identify some costs.
If your costs are determined to within +5%, you've done a good job. Your Director and you yourself now have a more accurate picture of quality costs than before you took on this matter.
· Start small and build up.
· Create a sample to show how this can be done.
· Document the value of quality cost analysis.
· Only in this way will you achieve understanding and cooperation.

Exchange rates

Rice. 1. Cost chain and product value creation

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