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Quality Cost Audit

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When you want to talk with senior people in the organization you probably already know that they tend to think of everything in terms of money, which means if you want to be taken seriously, you have to talk money too. Doing a Quality Cost Audit is also a good idea if change is in the wind. Anything that is not tied to products and sales can be a walking target so knowing your financial worth can be very useful!

A further benefit is that when you can see how much activities cost, you can change the overall quality process to increase quality and reduce costs, for example by putting more effort into prevention.

The audit process

When conducting an audit, the first activity is to define and agree the process not only by which it will be carried out but also what follow-up and post-assurance will be undertaken. This can cause significant disagreement and negotiation as costs are challenged and people get defensive. As with any serious investigation, it may need the active support of senior management.

Two key parts of the definition is detailing what will be measured and how it will be measured (including conversion into monetary value). For fixed costs, this can be straightforward. A simple way of containing this is in the table below.  Be precise and test this with the people who will be doing it. You may also want to add columns for such as date, person measuring, etc. 


What is measured

How it is measured (process)

£ Value











The audit should then be resourced and scheduled and a plan published. The audits should then be carried out as planned, with accompanying appraisal to ensure this works as intended.

Audits should output both a financial report, detailing costs as assessed, and an action plan that should result in a reduction of overall quality costs.

In summary, the overall audit and follow-up process is:

  1. Define and agree audit process

  2. Plan schedule and allocate resources

  3. Conduct audit, including ‘auditing the audit’

  4. Analyse findings to fully allocate costs

  5. Write report, including costs and recommended actions

  6. Plan for improvements, including timescale and resources

  7. Implement changes

  8. Assess for actual improvements gained

Prevention costs

Prevention seeks to prevent defects and waste, and is always the best approach of course and a good system here will save significant costs in other areas.

Prevention activities include:

  • Quality planning.

  • Standards maintenance.

  • Designed-in quality in product/service.

  • Managing quality-focused operational systems (from Kanban onwards).

  • Technology used for prevention, including for statistical control.

  • Preventive maintenance.

  • Training and development for all on quality principles and practices.

  • Quality professional salaries.

  • Preventive quality improvement projects.

  • Technical support to suppliers and customers.

Appraisal costs

Appraisal costs are those which are undertaken to find defects and waste which have not been prevented. Any discovery here should be fed back into the prevention system to seek better ways of reducing appraisal costs.

While prevention is always preferred, there can be a practical balance between prevention and appraisal costs when preventive activities are too costly or take too long.

Appraisal activities include:

  • Inbound inspection and test of items from suppliers, including the time and cost in re-supply.

  • Outbound inspection and test of completed items to customers

  • Inspection and tests within operational processes that seek to detect problems at source.

  • Setup and training for appraisal activities.

  • Equipment costs for testing, recording and so on, including depreciation of equipment.

  • Operational audits, including of the quality system itself.

Internal failure costs

When there are defects and waste as a result of the operational process, then these should be recorded as a part of the audit. This information will also be important for sustainability purposes.

Internal failure costs include:

  • Reworking or otherwise fixing items that have failed quality appraisal tests, including the cost of time, materials and other overheads.

  • Waste material that is not used in the operational process and hence scrapped.

  • the production of the part.

  • Down-time caused by failures.

  • Additional activities that are undertaken as a result of internal failure, such as overtime needed.

Internal failure may also include an assessment of the cost of poor management practices, such as inadequate training of staff, poor operational scheduling and so on.

External failure costs

These are often the hardest costs to quantify, yet are the most important as any external quality failure damages the brand and can lead to defection of customers, lawsuits and so on. If you have serious problems here, this could cost far more than all other quality costs combined.

External failure costs include:

  • Warranty and post-warranty costs, including handling, fixing and replacing products that have failed.

  • Customer recovery activities to apologise and restore confidence.

  • Cost of running helpdesk and other quality-related customer service activities.

  • Costs associated with liability including court cases and compensation.

  • Product recall costs.

Reputational costs should be assessed separately as these are less certain. Nevertheless an estimate should be made of future sales lost and brand damage.


Next time: MoT Analysis


This article first appeared in Quality World, the journal of the Chartered Quality Institute


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