Quality costs are those costs. Quality costs are those costs that inevitable quality costs include

the costs of determining the causes of non-compliance with quality requirements.

Mutual concessions:

the costs of admission to the use of those materials that do not meet the technical requirements.

Grade reduction:

costs arising from a reduction in the selling price of products that do not meet the original technical requirements.

Waste and alterations arising from the fault of suppliers:

costs incurred when, upon receipt from the supplier, it was found that the materials supplied were unsuitable.

External losses

Products not accepted by the consumer:

costs of identifying the reasons for the customer’s refusal to accept products;
costs of reworking, repairing, or replacing rejected products.

2. Warranty:

the cost of replacing unsatisfactory products during the warranty period;
expenses for the repair of unsatisfactory products, for the restoration of the required quality, for compensation.

3.Product recall and modernization:

the costs of checking, modifying or replacing products already delivered to the consumer when there is suspicion or confidence that there is an error in the design or manufacture of the product.

4. Complaints:

costs involved in the study of the causes of consumer complaints about product quality;
costs raised to restore customer satisfaction;
costs of legal disputes and compensation.

So, it is impossible to completely eliminate the cost of quality, but they can be brought to an acceptable level. Some types of quality costs are clearly inevitable, while some others can be avoided. The latter are those that can disappear if there is no defect, and which will decrease if the number of defects decreases.

So, you can avoid the cost of:

unused materials;
revision and / or alteration of defects (correction of defects);
delays, excessive production time caused by a defective product;
additional checks and controls to identify the already known percentage of defects;
risks, including warranty obligations;
loss of sales related to customer dissatisfaction.

Inevitable costs - these are those that are necessary as a kind of insurance, even if the level of defectiveness is very low. They are used to maintain the achieved level of quality, ensuring the preservation of a low level of defects. Inevitable costs may include costs for:

functioning and audit of the quality system;
maintenance and calibration of test equipment;
supplier assessment;
quality training;
minimum level of checks and controls.

Determination of cost

First task - determine the list of cost elements that relate to the company’s activities and group them.

Second task - name these elements in such a way that their meaning is clear to the staff of the company.

Third task - Assign code symbols for each element. This may be, for example, a number, a letter, or a combination thereof.

The above was an example of a list of cost elements grouped according to these recommendations. The general purpose of collecting data on quality costs is to provide management with a management tool. It is especially important that cost elements be definable in the form as they are named and distributed for various categories, including:

for the unit;
for any site;
for product type;
for any workplace;
for any type of defect.

Short description

Ensuring product quality is costly. In the “quality” indicator, the highest priority is given to the completeness of meeting the needs and interests of potential buyers, which ensures profit. For profit, many companies go to increase costs, sometimes significant. These costs are necessary for the formation of high-quality internal and external infrastructure of the company. The quality of the product should guarantee the consumer the satisfaction of his needs, its reliability and cost savings. These properties are formed in the process of the entire reproductive activity of the enterprise, at all its stages and in all links.

costs of re-testing and inspection after alterations or repairs.

3. Loss analysis: the costs of determining the causes of non-compliance with quality requirements. 4. Mutual concessions: costs of admission to the use of those materials that do not meet the technical requirements. 5. Variety reduction: 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 alterations arising from the fault of suppliers: costs incurred when, upon receipt from the supplier, it was found that the materials supplied were unsuitable. External losses 1. Products not accepted by the consumer:

costs of identifying the reasons for the customer’s refusal to accept products;

costs of reworking, repairing, or replacing rejected products.

2. Warranty:

the cost of replacing unsatisfactory products during the warranty period;

expenses for the repair of unsatisfactory products, for the restoration of the required quality, for compensation.

3. Product recall and modernization: the cost of checking, modifying or replacing products already delivered to the consumer when there is a suspicion or confidence that there is an error in the design or manufacture. 4. Complaints:

costs involved in the study of the causes of consumer complaints about product quality;

costs raised to restore customer satisfaction;

costs of legal disputes and compensation.

So, it is impossible to completely eliminate the cost of quality, but they can be brought to an acceptable level. Some types of quality costs are clearly inevitable, while some others can be avoided. The latter are those that can disappear if there is no defect, or which will decrease if the number of defects decreases. So it is possible avoid the cost of:

unused materials;

revision and / or alteration of defects (correction of defects);

delays, excessive production time caused by a defective product;

additional checks and controls to identify the already known percentage of defects;

risks, including warranty obligations;

loss of sales related to customer dissatisfaction. Inevitable costs are those that are necessary as a kind of insurance, even if the level of defectiveness is very low. They are used to maintain the achieved level of quality, ensuring the preservation of a low level of defects. Inevitable costs may include costs for:

functioning and audit of the quality system;

maintenance and calibration of test equipment;

supplier assessment;

quality training;

minimum level of checks and controls.

Quality costs can be minimized, but the hope that they can be nullified is a fallacy. Only one component of the costs can be reduced to zero - the costs of non-compliance, or internal and external losses. Expenses on the quality General expenses on the quality The sum of all quality costs is the total cost of quality. The relationship between all costs of quality, total costs of quality and the level of quality achieved is shown in Fig. 5.2.4.1. The total cost of quality consists of the cost of preventive measures, the cost of control and loss (external and internal). With a change in the achieved quality level, the values \u200b\u200bof the cost components and, accordingly, their sum, the total cost of quality, change. Declinecommoncost From fig. 5.2.4.1 it is seen that the achieved level of quality varies in the interval “many defects - no defects” (perfection). Looking at the left side of the graph (“a lot of defects”), we see that the total cost of quality is high mainly because the cost of eliminating defects and control is high. The cost of preventative measures is very small. If you move to the right according to the schedule, then the achieved level of quality will increase (decrease in defects). This is due to an increase in the volume of preventive measures; their costs are rising. Losses (costs of defects) are reduced as a result of preventive actions. As shown in the graph, at this stage the costs of losses fall faster than the costs of preventive measures increase. As a result, overall quality costs are reduced. At the same time, fig. 5.2.4.1 demonstrates some idealized dynamics of costs and results. In practice, it should be borne in mind that the economic equilibrium (see. Fig.) Is variable over time and depends on the type of cost factors (new developments, etc.). Accordingly, it is difficult (and incorrect) to believe that the pursuit of a “no defect” situation (perfection) may prove to be economically inexpedient. The studies performed by the authors at Moscow construction sites (civil engineering) and oil and gas construction facilities allowed us to determine the quality price range in relation to domestic conditions: for 50% of responding organizations, 10-24% of turnover; for 7% - up to 10% of the turnover; for 18% - 25-35% of the turnover. On this basis, the Quality Program is implemented, which gives, according to foreign sources, the effect shown in Fig. 5.2.4.2. Along with the general reduction in costs, their structure is changing - the share of preventive costs is increasing, and all others are decreasing.

A typical cost structure for quality in mechanical engineering is shown in Fig. 5.2.4.3. Suppose that the indicated quality costs account for 10% of the turnover, which, due to an increase in the volume of preventive measures, and therefore, an increase in preventive costs, was able to reduce the total quality costs by 6% of the turnover. As a result, the total cost of quality amounted to 60% of their initial value:

Loss costs (external and internal)	=	50% of the new total cost of quality
Control costs	=	25% of the new total cost of quality
Prevention costs	=	25% of the new total cost of quality

Accordingly, in relation to the initial total cost of quality, their new distribution is as follows:

According to the Institute of Quality Assurance in the UK. Thus, the most important object of analysis in any company should be percentage of total quality costs and total sales.How to identify quality costs?First task - determine the list of cost elements that relate to the company’s activities and group them. Second task - name these elements in such a way that their meaning is clear to the staff of the company. Third task - Assign code symbols for each element. This may be, for example, a number, a letter, or a combination thereof. The above was an example of a list of cost elements grouped according to these recommendations. The general purpose of collecting data on quality costs is provide management tool management. It is especially important that cost elements be definable in the form as they are named and distributed for various categories, including:

for the unit;

for any site;

for product type;

for any workplace;

for any type of defect.

Requirements must be established by the organization for its own (internal) use. However, one should not forget that the information collected should be sufficient for other types of analysis. The system of accounting and analysis of costs for quality, which 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? After the system of classification and coding of various elements of the costs of quality has been established, it is necessary to identify the sources of data on costs. Some of the information may already exist; a certain part can be obtained quite easily. Other data will be much more difficult to determine, and some may not yet be available. The main amount of control costs is the remuneration of personnel engaged in control and testing. This may account for more than 90% of all control costs. In addition, these costs can be determined very 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 we can easily get an accurate picture of the costs of control. Determining the elements of internal loss costs is a bit more complicated. This is first of all:

remuneration of labor related to the return of goods;

the cost of materials (vain work);

overhead;

salary related to corrections;

cost of materials (errors in operation);

overhead;

remuneration related to repeated tests and control;

cost of materials;

overhead;

overtime pay for catching up 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 sufficient degree of accuracy. It will be more difficult to identify the amount of wages and overhead associated with:

analysis of the causes of defects;

work on the returned product;

preparing production for corrections. This activity is related to:

production control staff;

supply chain staff;

staff of supervisors;

quality assurance staff.

Since each employee involved is unlikely to solve problems related only to internal losses during the whole working day, losses should be estimated 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 sufficient degree of accuracy. Part of the external losses is due to the fact that the product was returned by the consumer either immediately or during the warranty period. If the product has been returned, the costs associated with irreparable defect or alterations and repairs are determined in the same way as with internal losses. However, there are other costs that are not so easy to determine. Among them are the following: salary, overhead costs and other costs associated with the study of consumer complaints;

labor remuneration, overhead costs and other costs caused by servicing an unsatisfied consumer;

additional transportation costs;

costs arising from litigation (including litigation) and possibly subsequent payment of compensation.

The listed costs may be due to errors in the personnel of various departments: project; technological; economic; sales; Maintenance; transport; legal; quality assurance.

The viability of an enterprise engaged in both production and service depends on its ability to achieve customer satisfaction. Very often, many managers consider the price and delivery time to be the main thing for sale, while not paying enough attention to the value of the product. It is necessary to consider increasing value as one of the most important factors in determining competitiveness. Many consumers see an increase in value as something more important than a decrease in price. A skilled seller can receive an order to perform work in a competitive environment of other companies, however, only the quality of a product or service determines to a greater extent whether the consumer will repeat his order with that seller again.

Some managers believe that meeting customer expectations for quality leads to an increase in the costs of the supplier (producer), which in turn reduces profit or increases the price. This position is based on two assumptions:
· Improving the product delivered to the consumer implies conducting more intensive inspections and sorting by their results into products subject to shipment, alteration or release;
· Improving product quality means improving the variety.
If at least one of these assumptions were true, then the costs certainly increased. Fortunately, both of these concepts are false, and costs do not increase with quality improvement. The Quality Improvement program, if designed correctly, will likely lead to lower than higher costs.

QUALITY COSTS

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 the successful leadership of the company.
At most enterprises engaged in production and services, the costs of satisfying consumer expectations in the field of quality are significant amounts that do not really reduce the amount of profit, so it seems logical that the quality costs should be identified, processed and presented to management like other costs. Unfortunately, many managers are not able to get 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, well-established procedure. Once defined, they provide leadership with an additional powerful management tool.

The main costs of quality
Suppose that the top management of the company has already determined its market, i.e. the sets of requirements for a product or service of various grades (grades) for consumers of various levels: requiring luxury, the middle class and thrifty, were established and reflected with sufficient convincingness.
We must now concentrate on the costs associated with ensuring that the "quality" of the product or service really meets the expectations of the consumer, i.e. at the cost of meeting these expectations.
The following basic questions related to “quality costs” should be asked:
· What are quality costs and how do they arise?
· Are quality costs inevitable?
· What is the relationship between the cost of quality and achieving quality?
· Do quality costs represent a significant part of the company's turnover?
· What benefits can be derived from a cost analysis of quality?

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

The components of each of the four main categories of quality costs were identified many years ago. The categorization of these elements is mostly conditional and minor differences in details are found in various organizations. This is not significant, since the collection, classification and analysis of quality costs is a purely internal company activity. That’s what really matters, is that within the company, mutual understanding and agreement on the details would be unambiguous. Cost categories should be constant, they should not duplicate each other; if any cost appears under one heading, then it should not appear under another, and further, in all subsequent cases, this cost should appear under the same original heading.

An approximate list of the constituent elements of quality costs

Prevention costs
1. Quality management
· Costs of planning a quality system.
· Costs of converting consumer expectations on quality in the technical characteristics of the material, process, product.
2. Process control
· Costs of establishing process controls.
· The costs of studying the capabilities of the process.
· Costs of providing technical support to production personnel in the application (implementation) and maintenance of quality procedures and plans.
3. Quality planning by other departments
· Costs associated with quality planning activities carried out by personnel who are not subordinate to the Quality Manager.
4. Monitoring and measuring equipment
· Costs associated with the development and improvement of all control and measuring equipment (instruments).
· Costs associated with the maintenance and calibration of all equipment (devices).
· 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. Quality assurance of supplies
· The cost of evaluating potential suppliers and materials before entering into supply contracts.
· Costs associated with the technical preparation of inspections and tests of purchased materials.
· Costs of technical support to suppliers to help them achieve the expected quality.
6. Audit of the quality system
· Costs of an internal quality audit.
· The costs of the audit of the quality system by the consumer, his agent or other authorized body.
7. Quality Improvement Program
· Costs associated with the implementation of improvement programs, monitoring and reporting, including the costs of collecting and analyzing data, compiling a report on quality costs.
8. Quality training
· The costs of implementing, developing and operating a training program for staff 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 test personnel during scheduled inspections of production operations.
· Re-checks of rejected elements, their testing, sorting, etc. does not turn on.
2. Inspections and tests of supplied materials
· Payment for the work of inspectors and test personnel related to materials purchased from suppliers, including inspectors and employees at various levels.
· Costs of laboratory tests performed to assess the quality of the materials supplied.
· Costs associated with the work of inspectors and test personnel evaluating materials at the supplier’s premises.
3. Materials for testing and verification
· Cost of consumables used in inspection and testing.
· Cost of materials, samples, etc. subjected to destructive testing.
· The cost of test equipment is not included.
4. Process control
· Remuneration of staff who are not subordinate to the quality manager, performing control and testing on production lines.
5. Acceptance of customer products
· The 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's site before delivery.
6. Checking raw materials and spare parts
· Costs of control and testing of raw materials, spare parts, etc., associated with changes in the technical requirements of the project, excessive storage time or uncertainty caused by other problems.
7. Product audit
· The costs of conducting an audit of the quality of technological operations either in the production process or in the final product.
· Costs of all reliability tests conducted on manufactured products.
· The costs of verifying product quality by external bodies such as insurance companies, government agents, etc.

Defect internal costs

1. Waste
· The cost of materials that do not meet quality requirements and the costs of their disposal and removal.
· The residual value of production waste is not included.
The cost of waste caused by overproduction, obsolescence of products or design changes at the request of the customer is not taken into account.
2. Alterations and repairs.
· Costs incurred in the restoration of products (materials) to meet quality requirements by either reworking or repairing, or both.
· Costs of re-testing and inspection after alterations or repairs.
3. Loss analysis
· The costs of determining the causes of non-compliance with quality requirements.
4. Mutual concessions
· The costs of admission to the use of those materials that do not meet the technical requirements.
5. Grade reduction
· Costs arising from a reduction in the selling price of products that do not meet the original technical requirements.
6. Waste and alterations caused by suppliers
· Costs incurred when, upon receipt from the supplier, it was found that the materials supplied were unsuitable.

External defect costs
1. Products not accepted by the consumer
· The costs of identifying the reasons for the customer's refusal to accept products.
· Costs of remodeling, repairing or replacing rejected products.
2. Warranty
· Costs for replacing unsatisfactory products during the warranty period.
· Costs involved in after-sales services to correct products and restore customer satisfaction.
3. Recall and modernization of products
· The costs of checking, modifying or replacing products already delivered to the consumer when there is a suspicion or confidence in the existence of a design or manufacturing error.
4. Complaints
· Costs involved in research into the causes of consumer complaints about product quality.
· Costs raised to restore customer satisfaction.
· Costs of legal disputes and compensation.

Are quality costs inevitable?
The simplest answer is “Yes!”.
In reality, it is not possible to completely eliminate the cost of quality, but they can be brought to an acceptable level. Some types of quality costs are clearly inevitable, while some can be avoided.
The latter are those that can disappear if there is no defect, or which will decrease if the number of defects decreases.
The costs of:
· Unused materials;
· Revision and / or alteration of defects (correction of defects);
· Delays, excessive production time caused by a defective product;
· Additional checks and controls to identify the already known percentage of defects;
· Risks, including warranty obligations;
· Loss of sales associated with customer dissatisfaction.
Inevitable costs are those that are still needed, like insurance, even if the level of defectiveness is very low. They are used to maintain the achieved level of quality, to ensure that the low level of defects is maintained.
· Inevitable costs may include costs for: the functioning and audit of the quality system;
· Maintenance and calibration of test equipment;
· Assessment of suppliers;
· Quality training;
· Minimum level of checks and controls.
Quality costs can be minimized, but any idea that they can be reduced to zero is a fallacy.

QUALITY COSTS AND LEVEL OF ACHIEVED QUALITY

Total Quality Costs
The sum of all quality costs is the Total Cost of Quality.
The relationship between all costs of quality, total costs of quality and the level of quality achieved is usually presented as shown in Fig. 2.
The total costs of quality are the sum of the costs of preventive measures, the costs of control and losses (external and internal). With a change in the achieved level of quality, the values \u200b\u200bof the cost components change, and accordingly, their sum is the total cost of quality.

ECONOMIC EQUILIBRIUM

Assumptions
The first assumption is that preventive activities aimed at preventing the occurrence of defects comply with the Pareto rule: i.e. We are primarily working on those problems, the solution of which 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 a fallacy and ignoring two essentially important factors:
· Firstly, we conduct real preventive (preventive) activities, which in reality are not just damage to paper, and which allows us to be sure that the second time the error does not happen again. Often, such activities are expensive, but they always pay off and make a profit.
· Secondly, new design developments and new processes may give rise to new problems, the solution of which will require additional precautionary costs.

The danger of misinterpretation
It was found that most managers are confident that they work at the level of quality (level of performance) that corresponds to the economic equilibrium. (Very often, they do not have strong evidence to support this assumption).
The published schedule is idealized and shows the level of performance (quality level) in terms of “good” and “bad” and never correlates with the percentage of defects.
A manager who is sure that he works at the 5% defectiveness level is inclined to believe that this is the economic balance, while a manager who thinks that he works at the 1% defectiveness level believes that the economic balance is at this level.
The above schedule inspires these managers with the belief that improving the quality of execution in their companies will be accompanied only by an increase in costs. As a result of this, no additional preventative activities are carried out.

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

SHARE COSTS OF QUALITY IN TURNOVER

Is this share really significant? The simplest answer: "Yes, of course!" Where quality costs are duly taken into account, they can be from 2% to 20% or more of sales (turnover). Information published in recent years in publications from bodies such as the Institute of Quality Assurance in the United Kingdom, the American Society for Quality Control and the European Organization for Quality actually show that this ratio exists in a wide range of enterprises in all parts of the Western world.
One of the most respected world leaders in the field of quality, professor Juranpresented the process of saving quality costs as: "The Gold in the Mine" ("Gold - in the mine!"). Without effort, it is impossible to get gold from the mine. Likewise, effortlessly, cost savings on quality are unattainable.
The most important object for reflection in any company should be the percentage of total costs for quality and total sales.
Quality costs can only be part of the profit.
Any reduction in quality costs increases profit.

DETERMINATION OF THE SIZES OF COSTS

How to identify quality costs
The first task is to determine the 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 the company's staff.
The third is to assign code symbols for each element. This may be, for example, a number, a letter, or a combination thereof.
Above was an example of a list of cost elements grouped and numbered according to these recommendations.
The general purpose of collecting data on quality costs is to provide management with a management tool.
It is especially important that the cost elements are definable in the form as they are named and distributed for various categories, including:
· For the unit;
· For any site;
· 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, one should not forget that the collected information should be sufficient for subsequent analysis.
The system of accounting and analysis of costs for quality, which 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
After the system of classification and coding of various elements of quality costs has already been established, it will be necessary to identify the sources of cost data.
Some information may already exist. Some can be obtained quite 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 bulk of the costs is the remuneration of personnel engaged in control and testing. In fact, this may account for more than 90% of all control costs. In addition, these costs can be determined very accurately.
The remaining costs are mainly related to the cost of materials used, procurement and the cost of maintenance. They can be defined directly.
So, we see that we can easily get an accurate picture of the costs of control.

Defect internal costs
Defining the cost elements of this group is a little more complicated, but you will no doubt define most of the following:
· Payments related to return
· Cost of materials (vain work)
· Overhead
· Remuneration related labor
· Cost of materials (errors in operation)
· Overhead
· Remuneration related labor
· Cost of materials tested and controlled
· Overhead
· Paying overtime to catch up on 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 sufficient degree of accuracy.
It will be more difficult to identify the amount of wages and overhead associated with:
· Analysis of the causes of defects;
· Work on the returned product;
· Preparing production for corrections.
This activity is related to:
· Staff production control;
· Staff of the supply department; staff of supervisors;
· The staff of the quality assurance department.
Since each employee involved is unlikely to solve problems related only to internal losses during the whole working day, losses should be estimated 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 sufficient degree of accuracy.
The costs to be estimated are only a very small part of the total.

External defect costs
Part of the external costs of the defect is due to the fact that the product was returned by the consumer either immediately or during the warranty period. If the product has been returned, the costs associated with irreparable damage or alterations and repairs are determined in the same way as in the case of internal losses.
However, there are other costs that are not so easy to determine. Among them are the following:
· Remuneration, overhead and other costs associated with the study of dissatisfaction and consumer complaints.
· Remuneration of labor, overhead costs and other costs caused by servicing an unsatisfied consumer.
· Additional transportation costs.
· Costs caused by litigation (including litigation) and possibly subsequent compensation.
The listed costs can be incurred by personnel of various departments, such as:
· Project management Department;
· Technology department;
· Economic;
· Sales department;
· Maintenance department;
· Transport;
· Legal;
· Quality Assurance Department.
Since the employees of all these departments are unlikely to be occupied with full-time issues of external losses, the determination of the amount of costs, again, must be carried out taking into account the time actually 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 confidence and a predisposition to it. Some organizations set the value of these losses (costs) at the level of 2.5% of the total cost of quality. However, many ignore these costs on the basis that they cannot be ascertained with any degree of accuracy - they are only hypothetical.

Prevention costs
These costs are probably the most difficult to identify, since they are caused by the activity of a large number of departments and most employees devote only part of their working time to this work. Look again at the cost of preventive measures to see 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;
· Training.
In addition to this, most of the costs in this category are related to the work of the personnel of the quality assurance department.
Prevention costs mainly include salaries and overheads. However, the degree of accuracy of their determination to a large extent depends on the accuracy of establishing the time spent by each employee individually.
Some precautionary costs are easy to identify directly. They, in particular, may include payment for the work of third parties for:
· Maintenance, calibration and verification of measuring equipment;
· Consultations;
· Training courses.

Sources
When determining the cost of quality, you must remember that:
· The cost of materials can be obtained from the analysis of invoices, entries in the warehouse documentation, etc .;
· Payments to staff can be taken from statements;
· The cost of deliveries can be determined on the relevant invoices or invoices;
· Volumes of salary payments should be taken taking into account the time actually spent on quality assurance work by each employee involved;
· If only part of the employee’s time is spent on quality assurance activities, the appropriateness of evaluating each of the cost components of his time should not be doubted;
· Classification of costs for quality and their distribution by elements should be part of everyday work within the organization. To this end, 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 a subsequent analysis of the cost of quality can only result in an interpretation of the data.

Responsibility for the collection of information and its analysis
Who will be involved in the collection and analysis of data, compiling a report on the cost of quality? This should not happen from time to time; 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 receiving cost elements. So, it seems logical that economists should be involved in this work. However, they will need help in classifying and analyzing cost elements; this is the work of the Quality Commissioner.

MEASUREMENT BASE

Costs of quality, taken by themselves in absolute (cost) terms, can be misleading. Thus: we must correlate the cost of quality with some other characteristic of the activity that is sensitive to changes in production, so the so-called measurement base has been introduced.
When determining the ratio 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 will be satisfactory to correlate quality costs with the volume of products sold. Moreover, the sold here refers to the products that have already been paid for.
However, if the sales volume depends on seasonal factors, or any other cyclical changes (for example, the sale of Christmas tree decorations), the volume of products sold cannot be a reliable basis, since it will be too variable, while the volume of production and costs for quality may remain relatively constant. In addition, it should be noted here that the volume of products sold differs from the volume of delivered products, since products delivered to consumers may not yet be paid for. In the same way, the volume of production may not coincide with the volume of actually sold or delivered. Of course, the decision about which base of measurements to attribute the cost of quality to: the cost of production; to the number of product units produced; to the volume of products sold; to the cost of the delivered products - must be accepted by the enterprise itself and the management must be sure that the results obtained do reflect a real and objective picture of the cost of quality.

Other measurement bases
Some commonly used measurement databases are discussed below and why they are recommended to be used:
Value added.
Labor input.
Cost price.
Alternative ratios.

Value added - this is the value added by processing to the cost of materials and semi-finished products spent in the manufacturing process. If, for example, you cut an ornament on a wooden blank, then the added value is the difference between the cost of the wooden blank and the price you get for the ornament.
Using value added as a measurement base, the following are automatically taken into account:
· A change in the volume of production, since this base corresponds to the quantity produced;
· Inflationary trends, since if the cost of materials rises, then the price of the final product rises.
In addition, the results do not depend on the unevenness (including seasonal) of product sales.
So, we can use the ratio of total quality costs to value added for analysis.

Labor input can be represented as the amount of remuneration directly spent on production. This is a financial category that is often used in practice, and therefore the data required to use this measurement base should certainly be available. However, the complexity should be used with caution, since it can vary over time due to:
· Process automation;
· Technology improvements;
Thus, the complexity as a measurement base can be used only for short periods of time.
It is important to remember the following:
· The complexity cannot be used as a measuring base in the event that the effect of inflation is not taken into account;
· Always compare values \u200b\u200bin terms of value.
A typical example of the use of this database: the ratio of the internal costs of the defect to the complexity.

Cost price can be defined as the sum of the wages directly spent on production, the cost of materials and components, overhead.
In different periods of time, the following factors can influence the cost price:
· Process automation;
· Introduction of new technologies;
· The use of alternative materials;
· Change of staff.
Nevertheless, since a whole group of costs is involved in this category, the influence of temporary changes is not so significant as if only one cost element was used as a measurement base.
In particular, the complexity is reduced with the introduction of automation in production, however, this is indirectly offset by an increase in overhead costs caused by capital investments and increased energy consumption.
A typical ratio using this measurement base may be the following: defective losses attributable to cost.

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

The purpose of using all the considered relationsis a comparison of performance in different periods of time. Therefore, it is necessary:
· Be consistent in using the measurement base.
· Use in ratios quantities expressed in monetary units, and not in units of time or quantity of production.
· Ensure that in each ratio both the numerator and denominator correspond to the same time period.

QUALITY COSTS 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; in particular, it is used by company management to measure achieved quality and detect problems, while setting goals for achieving quality.
Presented in financial terms and compiled in simple language, the report on quality costs has significant advantages over other types of reports to management. An analysis of this document has an immediate impact and gives a strong impetus to everyone who receives it.
The content of the report on the costs of quality to a large extent depends on who it is intended for and on what role the organization plays in the organization to whom this particular report is intended.
Top management should receive a report in the form of general forms summarizing the whole plant, department, group, etc. The report should give a general picture of the state of quality in the company and be executed in purely financial terms. It should be accessible and objectively stated.
Medium and linear management should receive more detailed information about the achieved level of quality in the area of \u200b\u200bactivity that it leads. The report should be very detailed and provide data on product types, batch numbers, etc. The basic principle of all types of analysis of the costs of quality is to present to everyone to whom it is intended information on the costs of quality in a form that would be most useful and most convenient for him / her to use.
The reader must receive information that will allow:
· Compare the current level of achievements with the level of the previous period, i.e. identify trends;
· Compare the current level with the goals;
· Identify the most significant areas of costs;
· Select areas for improvement;
· Assess the effectiveness of improvement programs.
The manager expects to receive a report on quality costs, which:
· Will tell him about those things that relate only to his sphere of competence and nothing more;
· It is written in an easy-to-understand style and is not crammed with “special” jargon;
· Clear, expressive, concise, which does not make you "dig" in order to "get" information;
· Prompts about possible areas of activity.

Top Management Report
The report intended for top management can be built in the form of a table and accompanied by a schedule. In addition, critical points can be emphasized. For example, savings resulting from increased preventative activities may be presented. Based on the report, an analysis and decision is made by the head.

SYSTEM IMPLEMENTATION

All of the above probably seems very frighteningly difficult and time-consuming to implement. Probably, in this regard, relatively few organizations have implemented a system for collecting and analyzing quality costs.
Management must be convinced of its usefulness before it begins to build a system for collecting and analyzing the cost of quality in the company. Therefore, you need to convince him. The following are some of the "secrets" to a successful system implementation.
TAKE IT SIMPLE
· Do not immediately try to cover every department (type of activity) and so on in the organization.
· Choose one type of product, one model, department — what you want, and build a system that you think you can fill with actual financial data.
· Start with the quality costs for which data is already known.
· Define other necessary costs in an “expert” way, if necessary for now.
· When working on building a system, you may suddenly find an unexpected obstacle. Do not be afraid of this and do not postpone the work. Having solved the problem once, you will make your life easier in the future.
· Simplify the system to suit your needs.
· Do not worry if you cannot easily identify some costs.
If your costs are determined with an accuracy of + 5%, you have done a good job. Your Director and you yourself now have a more accurate picture of the cost of quality than before you took up this business.
· Start small and build up.
· Create a sample to show how this can be done.
· Confirm with documents the value of cost-benefit analysis.
· Only in this way will you gain understanding and cooperation.

Another, but similar classification of quality costs was proposed. F. Crosby who proposed dividing the cost of quality into two categories:

compliance costs - all costs that must be incurred in order to do everything right the first time;

non-compliance costs - all costs that have to be borne due to the fact that not everything is done right the first time.

Without going into details, we can accept that the first two groups of costs calculated by the Juran – Feigenbaum method, “Costs of preventive measures” and “Costs of control” correspond to the categories “Costs of compliance” calculated by the Crosby method. These costs cannot be reduced to zero, because not to evaluate the quality and not to take preventive measures means to let the quality go by itself.

“External Losses” and “Internal Losses” correspond to “Costs of non-compliance”, since defective products found inside the company or by the consumer are in any case losses for which you have to pay. These costs can and should be made as small as possible (Fig. 5.2.1.1), and ideally, brought to zero.

The categorization of the cost of the quality of four elements or two is mostly conditional; slight differences in details are found in different organizations. This is insignificant, since the collection, classification and analysis of quality costs is a purely internal activity of the company. Really it is important that the cost structure within the company is unambiguous and standard. Cost categories should be constant, should not duplicate each other; if any cost appears under one heading (name), then it should not appear under another.

An approximate list of elements of cost of quality

Prevention costs

1. Quality management:

quality system planning costs;

the cost of converting consumer expectations of quality into the technical characteristics of the material, process, product.

2. Process control:

the costs of establishing process controls;

costs of studying the capabilities of the process;

the costs of providing technical support to production personnel in the application (implementation) and maintenance of quality procedures and plans.

3. Quality planning by other departments:

Costs associated with quality planning activities carried out by personnel who are not subordinate to the Quality Manager / Authorized Person of the senior quality management.

4. Monitoring and measuring equipment:

the costs associated with the development and improvement of all control and measuring equipment (instruments);

costs associated with the maintenance and calibration of all equipment (devices);

the costs associated with the maintenance and calibration of technological equipment, fixtures, patterns and samples that are directly related to product quality.

5. Quality assurance of supplies:

the cost of evaluating potential suppliers and materials before entering into supply contracts;

the costs associated with the technical preparation of inspections and tests of purchased materials;

the cost of technical support to suppliers to help them achieve the required quality.

6. Quality system audit:

costs of internal audit of the quality system;

costs of auditing the quality system by the consumer;

third-party quality system audit costs (certification).

7. Quality Improvement Program:

Costs associated with the implementation of improvement programs, their monitoring and reporting, including the costs of collecting and analyzing data, compiling a report on quality costs.

8. Quality training:

The costs of implementing, developing and operating 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 test personnel during scheduled inspections of production operations.

Repeated checks of rejected elements, their testing, sorting, etc. are not included.

2. Checks and tests of the supplied materials:

payment for the work of inspectors and test personnel related to materials purchased from suppliers, including inspectors and employees at various levels;

costs of laboratory tests performed to assess the quality of the supplied materials;

the costs associated with the work of inspectors and test personnel evaluating materials at the supplier’s production.

3. Materials for testing and verification:

the cost of consumables used in inspection and testing;

the cost of materials, samples, etc. subjected to destructive testing.

The cost of test equipment is not included.

4. Process control:

Remuneration of staff who are not subordinate to the quality manager, performing control and testing on production lines.

5. Acceptance of customer products:

the costs of launching and testing finished products in production for delivery to the customer before delivery;

costs of acceptance testing of products from the customer before delivery.

6. Checking raw materials and spare parts:

The costs of control and testing of raw materials, spare parts, etc., associated with changes in the technical requirements of the project, excessive storage time or uncertainty caused by other problems.

7. Product audit:

the costs of conducting an audit of the quality of technological operations either in the production process or in the final product;

the costs of all reliability tests conducted on manufactured products;

costs of confirming the quality of the product by external bodies such as insurance companies, government organizations, etc.

Internal losses

1. Waste:

The cost of materials that do not meet quality requirements, and the costs of their disposal and removal.

The residual value of production waste is not included.

The cost of waste caused by overproduction, obsolescence of products or design changes at the request of the customer is not taken into account.

2. Alterations and repairs:

the costs incurred in the restoration of products (materials) to meet quality requirements through either rework or repair, or both;

costs of re-testing and inspection after alterations or repairs.

3. Loss analysis:

The costs of determining the causes of non-compliance with quality requirements.

4. Mutual concessions:

The cost of admission to the use of those materials that do not meet the technical requirements.

5. Decrease in grade:

Costs arising from a reduction in the selling price of products that do not meet the original technical requirements.

6. Waste and alterations arising from the fault of suppliers:

Costs incurred when, upon receipt from the supplier, it was found that the materials supplied were unsuitable.

External losses

1. Products not accepted by the consumer:

costs of identifying the reasons for the customer’s refusal to accept products;

costs of reworking, repairing, or replacing rejected products.

2. Warranty:

the cost of replacing unsatisfactory products during the warranty period;

expenses for the repair of unsatisfactory products, for the restoration of the required quality, for compensation.

3. Review and modernization of products:

The costs of checking, modifying or replacing products already delivered to the consumer when there is a suspicion or confidence that there is an error in the design or manufacture.

4. Complaints:

costs involved in the study of the causes of consumer complaints about product quality;

costs raised to restore customer satisfaction;

costs of legal disputes and compensation.

So, it is impossible to completely eliminate the cost of quality, but they can be brought to an acceptable level.

Some types of quality costs are clearly inevitable, while some others can be avoided. The latter are those that can disappear if there is no defect, or which will decrease if the number of defects decreases. So it is possible avoid the cost of:

unused materials;

revision and / or alteration of defects (correction of defects);

delays, excessive production time caused by a defective product;

additional checks and controls to identify the already known percentage of defects;

risks, including warranty obligations;

Loss of sales related to customer dissatisfaction. Inevitable costs are those that are necessary as a kind of insurance, even if the level of defectiveness is very low. They are used to maintain the achieved level of quality, ensuring the preservation of a low level of defects. Inevitable costs may include costs for:

functioning and audit of the quality system;

maintenance and calibration of test equipment;

supplier assessment;

quality training;

minimum level of checks and controls.

Quality Costs Total Quality Costs

The sum of all quality costs is the total cost of quality. The relationship between all costs of quality, total costs of quality and the level of quality achieved is shown in Fig. 5.2.4.1.

The total cost of quality consists of the cost of preventive measures, the cost of control and loss (external and internal). With a change in the achieved quality level, the values \u200b\u200bof the cost components and, accordingly, their sum, the total cost of quality, change.

Lower total costs

From fig. 5.2.4.1 it is seen that the achieved level of quality varies in the interval “many defects - no defects” (perfection). Looking at the left side of the graph (“a lot of defects”), we see that the total cost of quality is high mainly because the cost of eliminating defects and control is high. The cost of preventative measures is very small.

If you move to the right according to the schedule, then the achieved level of quality will increase (decrease in defects). This is due to an increase in the volume of preventive measures; their costs are rising. Losses (costs of defects) are reduced as a result of preventive actions. As shown in the graph, at this stage the costs of losses fall faster than the costs of preventive measures increase. As a result, overall quality costs are reduced.

At the same time, fig. 5.2.4.1 demonstrates some idealized dynamics of costs and results. In practice, it should be borne in mind that the economic equilibrium (see. Fig.) Is variable over time and depends on the type of cost factors (new developments, etc.). Accordingly, it is difficult (and incorrect) to believe that the pursuit of a “no defect” situation (perfection) may prove to be economically inexpedient.

The studies performed by the authors at Moscow construction sites (civil engineering) and oil and gas construction facilities allowed us to determine the quality price range in relation to domestic conditions: for 50% of responding organizations, 10-24% of turnover; for 7% - up to 10% of the turnover; for 18% - 25-35% of the turnover.

On this basis, the Quality Program is implemented, which gives, according to foreign sources, the effect shown in Fig. 5.2.4.2. Along with the general reduction in costs, their structure is changing - the share of preventive costs is increasing, and all others are decreasing.

A typical cost structure for quality in mechanical engineering is shown in Fig. 5.2.4.3.

Suppose that the indicated quality costs account for 10% of the turnover, which, due to an increase in the volume of preventive measures and, consequently, an increase in preventive costs, managed to reduce the total quality costs by 6% of the turnover. As a result, the total cost of quality amounted to 60% of their initial value:

Accordingly, in relation to the initial total cost of quality, their new distribution is as follows:

According to the Institute of Quality Assurance in the UK.

Thus, the most important object of analysis in any company should be percentage of total quality costs and total sales.

Another, but similar classification of quality costs was proposed. F. Crosby who proposed dividing the cost of quality into two categories:

Costs of compliance - all costs that must be incurred in order to do everything right the first time;

Non-compliance costs - all costs that have to be borne due to the fact that not everything is done right the first time.

An approximate list of elements of cost of quality

Prevention costs

1. Quality management:

Costs of planning a quality system;

The cost of converting consumer expectations on quality into the technical characteristics of the material, process, product.

2. Process control:

The cost of establishing process controls;

The cost of studying the capabilities of the process;

The cost of providing technical support to production personnel in the application (implementation) and maintenance of quality procedures and plans.

3. Quality planning by other departments:

Costs associated with quality planning activities carried out by personnel who are not subordinate to the Quality Manager / Authorized Person of the senior quality management.

4. Monitoring and measuring equipment:

Costs associated with the development and improvement of all control and measuring equipment (instruments);

Costs associated with the maintenance and calibration of all equipment (devices);

Costs associated with the maintenance and calibration of technological equipment, fixtures, templates and samples that are directly related to product quality.

5. Quality assurance of supplies:

The cost of evaluating potential suppliers and materials before concluding supply contracts;

Costs associated with the technical preparation of inspections and tests of purchased materials;

The cost of technical support to suppliers to help them achieve the required quality.

6. Quality system audit:

Costs of internal audit of the quality system;

The costs of auditing the quality system by the consumer;

Third-party quality system audit costs (certification).

7. Quality Improvement Program:

Costs associated with the implementation of improvement programs, their monitoring and reporting, including the costs of collecting and analyzing data, compiling a report on quality costs.

8. Quality training:

The costs of implementing, developing and operating 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 test personnel during scheduled inspections of production operations.

Repeated checks of rejected elements, their testing, sorting, etc. are not included.

2. Checks and tests of the supplied materials:

Payment for the work of inspectors and test personnel related to materials purchased from suppliers, including inspectors and employees at various levels;

Costs of laboratory tests performed to assess the quality of the materials supplied;

Costs associated with the work of inspectors and testing personnel evaluating materials at the supplier’s premises.

3. Materials for testing and verification:

Cost of consumables used in inspection and testing;

Cost of materials, samples, etc. subjected to destructive testing.

The cost of test equipment is not included.

4. Process control:

Remuneration of staff who are not subordinate to the quality manager, performing control and testing on production lines.

5. Acceptance of customer products:

The cost of launching and testing finished products in production for delivery to the customer before delivery;

Costs of acceptance testing of products at the customer's site before delivery.

6. Checking raw materials and spare parts:

7. Product audit:

The costs of conducting an audit of the quality of technological operations either in the production process or in the final product;

Costs of all reliability tests conducted on manufactured products;

The costs of verifying product quality by external bodies such as insurance companies, government organizations, etc.

Internal losses

1. Waste:

The cost of materials that do not meet quality requirements, and the costs of their disposal and removal.

The residual value of production waste is not included.

The cost of waste caused by overproduction, obsolescence of products or design changes at the request of the customer is not taken into account.

2. Alterations and repairs:

Costs incurred in the restoration of products (materials) to meet quality requirements through either rework or repair, or both;

The cost of re-testing and inspection after alterations or repairs.

3. Loss analysis:

The costs of determining the causes of non-compliance with quality requirements.

4. Mutual concessions:

The cost of admission to the use of those materials that do not meet the technical requirements.

5. Decrease in grade:

Costs arising from a reduction in the selling price of products that do not meet the original technical requirements.

6. Waste and alterations arising from the fault of suppliers:

Costs incurred when, upon receipt from the supplier, it was found that the materials supplied were unsuitable.

External losses

1. Products not accepted by the consumer:

The costs of identifying the reasons for the customer's refusal to accept products;

Costs of remodeling, repairing, or replacing rejected products.

2. Warranty:

Costs for replacing unsatisfactory products during the warranty period;

The cost of repairing unsatisfactory products, the restoration of the required quality, compensation.

3. Review and modernization of products:

The costs of checking, modifying or replacing products already delivered to the consumer when there is a suspicion or confidence that there is an error in the design or manufacture.

4. Complaints:

Costs involved in the study of the causes of consumer complaints about product quality;

Costs raised to restore customer satisfaction;

Costs of legal disputes and compensation.

So, it is impossible to completely eliminate the cost of quality, but they can be brought to an acceptable level.

Unused materials;

Finalization and / or alteration of defects (correction of defects);

Delays, excessive production time caused by a defective product;

Additional checks and controls to identify a known percentage of defects;

Risks, including under warranty;

The functioning and audit of the quality system;

Maintenance and calibration of test equipment;

Supplier Assessment

Quality training;

The minimum level of checks and controls.

Quality Costs Total Quality Costs

The sum of all quality costs is the total cost of quality. The relationship between all costs of quality, total costs of quality and the level of quality achieved is shown in Fig. 5.2.4.1.

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