According to the American Society for Quality, the total costs associated with a poor-quality product or service are referred to as the cost of quality. Calculating the cost of quality involves measuring different types of quality costs, including prevention costs, appraisal costs and failure costs. To come up with a dollar amount, you must gather information related to quality resources and waste, then tie that waste back to general ledger expense accounts.
Measure Resources and Waste
To calculate the cost of quality, you must identify how many labor hours and what kinds of activities are used to prevent poor-quality products or services. Preventative activities can include quality reviews and process capability evaluations. Similarly, you have to determine the resources needed to appraise your systems or products and services. This can include activities such as inspections and evaluations. Internal and external failure costs are waste that can be measured by reviewing defect and scrap rates.
Tie Resources and Waste to Expense Accounts
Your accounting personnel can help you come up with a figure for the cost of quality by using financial and managerial accounting techniques. They can estimate the dollar amount associated with labor hours, scrap and sales returns, among other items associated with poor-quality products or services. Since accountants maintain expense accounts and budgets, they’re able to see the impact that product or service failures and expended resources have on bottom-line profit. By calculating the cost of quality, you can redesign your company's operations to save money and enhance the quality of your products or services.
Joseph DeBenedetti is a financial writer with corporate accounting and quality assurance experience. He writes extensively online with an emphasis on current trends in finance. As a Quality Assurance Analyst, he honed his technical writing skills creating standard operating instructions for a consumer finance organization.