Nghia Qui Nguyen (nguyenn11) ITEC3200-SP13-DE

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ITEC 3200: Chapter 12: Questions 2 (define all 4 types of quality costs), 4, 6, 7, 18

Chapter 12: due April 4th by 11:00 AM

*Question 2

The four types of quality costs are defined below.

1. Quality Cost of Prevention: are those costs that occur when a company is performing

activities designed to facilitate the production of products or services that meet customer

expectations. Examples:

Quality planning

New product reviews

Quality audits

Supplier quality evaluations, development

Training

Preventative maintenance

2. Quality Costs of Appraisal: are the costs incurred in the evaluation of products and

services to determine if they meet customer expectations. Examples:

Receiving inspection of purchases products

In-process inspection

Gaging and test equipment

Maintaining accuracy of gages and test equipment

3. Failure Costs occur when the completed product or service does not conform to customer

requirements. This type of cost includes:

Internal failure costs: cost that associated with defects that are found prior to

transfer of product to the customer. Examples: Scrap, rework, failure analysis,

100% sorting and inspection, overtime work to replace defective products,

raw materials/tooling to replace defective products.

External failure costs are costs associated with defects that are found after the

product reaches the customer. They might include almost any internal failure

cost, warranty costs, returned material, prices allowances, corrective actions

or liability costs.

4. Intangible quality costs are cost that do not show up as a line item in the accounting

records or do not show up in the accounting records specifically attributable to poor

quality. Examples:

Customer dissatisfaction

Loss of sales

Nghia Qui Nguyen (nguyenn11) ITEC3200-SP13-DE

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Loss of customer goodwill

Overtime

Raw material/tooling

*Question 4: The two types of failure costs were described in question 2. I can recognize the

internal failure costs as costs that are found before the products “shipped” to the customers. On

the other hand, external failure costs the costs found after the product “shipped” to the customer.

Example: In our previous assignment, bushing, the customer reported that they have been

receiving numbers of defective parts. There must be more defective parts being produced yet

shipped to the customer and the company must do something with them before send them to their

customer. In this case, the costs this company has to spend on product recall from the customer

would be listed in the “external failure costs” whereas the cost this company has to spend to fix

all the defective parts in their warehouse would be listed in the “internal failure costs”

*Question 6: In the chain of production, every phase has its own significant to the whole

process. This concept also applies to the quality costs. We know that prevention costs, appraisal

costs, and failure costs has related to each other. If a company spends more budget on prevention

costs such as providing good employee training program for new hired, the result are foreseen.

Well trained employees will be ready for the job and will make less mistakes which contribute to

the success of the products or services that company provides. Using the same strategy, after the

product being completed, testing or inspection will help to ensure the products are satisfied

before they are shipped to the customer. It is also important that each business has to take care of

its customer when something when wrong. Product recall or warranty services are some of the

examples from the failure costs. As we now see this relationship is vital all starting with

prevention costs. I personal recommend that business should focus on prevention costs.

Unfortunately, as stated in the textbook, “many organizations focus on corrective actions, fixing

problems, reporting saving.”

*Question 7: By looking at the given data, I can see a clearly trend in the costs changing from

the example company. As we can see, the percentage of prevention cost is increasing each year

from 1.2% of the cost of lamp to 3.0%. All other costs have been decreasing. Most importantly,

internal failure costs and external failure costs have been reducing faster than the increasing of

prevention costs. In facts, the prevention costs increased 75% (from 1.2% to 3.0%) within five

years while external costs decreased 90% (from 5.7% to 0.9%). I think this is a worthy trade off.

As you can see from figure 1, each type of costs indicated in different color. It clearly shows the

trend I have stated from the beginning of this session.

Nghia Qui Nguyen (nguyenn11) ITEC3200-SP13-DE

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Figure 1: Changing in the amount of costs in the five years period

*Question 18

For each of the following activities, identify whether the costs incurred should be allocated to the

prevention, appraisal, failure (internal, external), or intangible costs category:

a. Customer inquiries about incorrect billing statement. External Failure Cost

b. Maintenance technician is unable to gain access to customer’s premises during a service call

because the service is not being performed when scheduled and no one notified the customer.

Internal Failure Cost

c. Workers check/test their work before allowing it to leave their work area. Appraisal Cost

d. Management carries out a quality systems audit. Prevention Cost

e. The accounts department is having difficulty obtaining monthly figures from the production

department. This one is hard. I will say intangible costs

f. A customer’s purchase breaks because of inadequate training in the use of the item and must

be replaced. External Failure Costs

1.2

1.6

2.2

2.5

3

3.6 3.5

3.8

2.7

2

4.7

4.3

4

3.5

2.8

5.7

4.6

3.8

2.2

0.9

0

1

2

3

4

5

6

1 2 3 4 5

Prevention

Appraisal

Internal failure

External Failure

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g. Management must deal with written complaints from a customer about continuous poor

service. Intangible costs

h. A technician keeps an appointment after driving across town to pick up equipment from an

outside supplier upon finding it out of stock in his own warehouse. Internal Failure Cost

i. An instruction manual and set of procedures are de-veloped for maintaining a new piece of

equipment. Prevention Cost

j. The company conducts a survey of customer requirements. Prevention Cost