This work shows an analysis of the specialized literature and other sources, with a view to specifying the main conceptual aspects involved in the research that takes costs as the object of study. Costs are defined from the old point of view, given by the classics and from the current vision, as well as the approaches given by different authors in the accounting context of companies, as important elements for business excellence and quality.
1.1 Cost accounting
Cost accounting is part of the accounting system and provides information both for financial accounting (preparation of income statements), and for administrative accounting (calculation of balance points, contribution margins, budgets, among others).
Cost accounting is the subsystem that identifies, measures, processes and communicates objective information about the cost of producing a good or providing a service.
Some of the objectives of cost accounting are:
- Determine the cost of producing a good or providing a service Establish administrative control Provide information for planning and decision-making.
There is no single cost, but for any action or productive result, different costs can be defined depending on the objective pursued and they can all be correct, but they will be different from each other.
Cost accounting serves to contribute to the control of operations and facilitates decision making.
The characteristics of cost accounting are as follows:
- It is analytical, since it is planned on segments of a company, and not on its total. It predicts the future, while recording the events that have occurred. The movements of the main accounts are in units. It only records internal operations. It reflects the union of a series of elements: raw material, direct labor and manufacturing loads. Determines the cost of materials used by the different sectors, the cost of merchandise sold and the cost of inventories. Their periods are monthly and not annual as the of general ledger. Its underlying idea is to minimize costs.
Cost accounting is a branch of management accounting that is fundamentally related to the accumulation and analysis of cost information for internal use by managers, in the valuation of inventories, planning, control and taking decision-making (Figure 1). It is also the one that synthesizes and records the costs of the manufacturing, service and commercial centers of a company, in order that the results of each of them can be measured, controlled and interpreted, through the obtaining of unit costs and totals in progressive degrees of analysis and correlation.
Interrelation between financial accounting, management accounting, and cost accounting
Figure 1: Interrelation between financial accounting, management accounting, and cost accounting. Source: Own elaboration.
In Cost Accounting, Horngren defines by cost “… the means in conventional accounting form, in monetary units, that must be paid to acquire goods and services”.
The cost is defined by Polimeni as: "The value sacrificed to obtain goods
It is appropriate to clarify that: “All sacrifice, to be cost, must increase the value of the good to which it is applied; any sacrifice that does not meet this condition should be considered wasteful ”.
Old cost definitions:
One of the most important aspects in cost accounting is the differentiation between cost and expense concepts that are still in current use. This definition of costs was reflected in the context of manufacturing companies (producers) where the main objective of the company was to manufacture products.
Each of these concepts will be defined below:
Cost: is the consumption of resources (raw materials, labor, etc.) to carry out activities directly related to the production of the good or the provision of the service. The benefit obtained from the sacrifice of these resources will be obtained once the final product is sold. Example: the materials used to manufacture the product, the salary of the workers.
Expenditure: is the consumption of resources required to carry out activities that support the production of the good or the provision of the service. The sacrifice of these resources must be charged to the income statement of the period in which they were consumed, therefore, they are not related to the sale of the products. Example. The salary of the administrative staff.
Loss: it is the consumption of resources in which no benefit is obtained: For example, when resources are consumed to manufacture a product but a mistake is made and the product is defective and cannot be sold.
Investment: it is the consumption of resources in which the benefit will be obtained over several periods. Example. The purchase of machinery.
Current definition of costs:
It corresponds to the sum of expenditures and resources consumed necessary for the manufacture of a good or service, from the moment it is designed, until the product is sold to the customer, including after-sales service. This includes the entire value chain of the company.
The cost is nothing more than the monetary expression of the resources used in the production process, it includes expenses for raw materials, materials, fuel, energy, amortization, wages and others that intervene in the production process, it is an economic category inherent to all the social economic formations where there is commercial production, is the part of the value in charge of compensating the production costs of the products, the cost guarantees simple reproduction. There is a relationship between the value category and the cost of production and the selling price does not necessarily coincide with the value.
The concepts expressed on the term cost have been diverse, although all agree that cost is the value of material and human resources, consumed or used in the development of a product or in the provision of a service, which constitutes a measure of productive economic efficiency, so its behavior makes it easier for us to evaluate the results.
- Physical component: amount of factor used expressed in certain units of the
same (liters, kilos, kw, man hours, machine hours, etc.).
- Monetary component: value assigned to each factor.
Cz, y: Cost of the productive factor z to obtain the productive result y.
Qz, y: Physical quantity sacrificed of factor z to obtain the productive result y.
Pz: Unit price of the productive factor z.
The objectives and functions of costing are as follows:
- Serve as the basis for setting sales prices and for establishing marketing policies Allow inventory valuation, both of finished products and products in process Control the efficiency of operations / manufacturing efficiency, that is, to control whether costs are really are having, correspond to the costs that would have to be produced working efficiently. Estimate the utility of the different products. Different products have certain selling prices and certain costs (if the cost is not known, the profit cannot be determined); If it is known, of the entire line of products that is handled, the sales prices and the costs of the products, it is possible to estimate which are the most profitable products and which are the least profitable products.Facilitate business decision making Contribute to the planning, control and management of the company.
The cost elements of a product or its integral components are direct materials, direct labor, and indirect manufacturing costs.
This classification provides the administration with the information necessary for measuring income and setting product prices. These elements are defined below:
Materials: They are the main goods that are used in production and that are transformed into finished articles with the addition of direct labor and indirect manufacturing costs. The cost of materials is divided into direct and indirect materials.
- Direct Materials: These are materials that can be identified in the production of a finished article, that can be easily associated with the product and represent the main cost of materials in the production of that article. Indirect Materials: They are all the materials included in the manufacture of a product, different from the indirect materials of manufacture.
Labor: It is the mental physical effort expended in the manufacture of a product. The cost of labor can be divided into direct labor and indirect labor.
- Direct labor: It is all the labor directly involved in the manufacture of a finished product, which can be easily associated with the product and represents the main cost of labor in the manufacture of that product. Indirect labor: It is all the labor involved in the manufacture of a product that is not considered direct labor. Indirect labor is included as part of manufacturing overhead.
Indirect manufacturing costs: These are all the concepts included in the cost pool and that are used to accumulate indirect materials, indirect labor and all other indirect manufacturing costs such as leasing, energy, depreciation of factory equipment. Such items are included in manufacturing overhead because they cannot be identified with the product.
- Cost Systems
The cost system makes it possible to carry out the analyzes at the global level of the factory, but as a logical need for business development arises to concentrate the cost analyzes in the productive areas, which is where the material expense, salaries or other expenses are generated directly, the cost that existed did not allow this evaluation, so the study of cost by area of responsibility was started, it has been a complex process but it allows the control of raw materials and materials from the departure of the warehouse, which is limited by the previous determination of the figures that can be dispatched to the productive areas as well as the recording of expenditure items in the area, guaranteeing better control for the rational use of the resources used in the productive process.
Cost systems are a set of methods, norms and procedures that govern the planning, determination and analysis of the cost, as well as the process of recording the expenses of one or more productive activities in a company, interrelated with the subsystems that guarantee the control of production and material, labor and financial resources.
Cost systems can be classified:
Absorption Costing: All manufacturing costs are included in the cost of the product, as well as all non-manufacturing costs are excluded. The basic characteristic of this system is the distinction that is made between the product and the costs of the period, that is, the costs that are manufacturing and those that are not.
Variable Costing: Manufacturing costs are allocated to manufactured products. The main distinction under this system is the one between fixed and variable costs. Variable costs are the only ones that are incurred directly in the manufacture of a product. Fixed costs represent the ability to produce or sell, and regardless of whether or not the products are manufactured and carried to the period, they would not be inventoried. Total fixed manufacturing costs remain constant at any production volume. Total variable costs increase in direct proportion to changes that occur in production.
The amount and presentation of profits varies under the two methods. If the variable costing method is used, variable costs must be deducted from sales, since they are costs that would not normally be incurred if the items were not produced.
Costing by orders: It is used when it is manufactured according to special customer orders.
Process costing: It is used when the production is repetitive and diversified, although the items are quite uniform among themselves.
Historical or resulting costing : First it is consumed and then the cost is determined by virtue of the actual inputs. It can be used for both order costs and process costs.
Default cost : Costs are calculated according to consumption
Dear. Within these predetermined costs we can identify 2 systems:
Estimated cost or budget: These are costs that are set according to previous experiences. Its basic objective is the fixing of sales prices.
Standard Costing: Standard costs can be scientifically based (if you want to measure operational efficiency) or empirical (if your goal is to fix sales prices). In both cases, the variations are considered inefficiencies and are settled by gains and losses.
The design of a cost accumulation system must be compatible with the nature and type of operations carried out by a manufacturing company. When products are mass-produced in the continuous process, the cost per process system is appropriate.
The difference between the cost per orders and the cost per process in relation to its nature also requires various techniques for applying the cost applied to the product. However, costing techniques for control are no different.
In process costing, all department costs are applied to the product distributing it over the department's output through the use of general averages. The use of this method is possible because all finished units receive equal attention and effort.
The cost per process is applicable in those industries whose finished products generally require long processes, going from one department to another and correspond to uniform or more or less similar products. The main emphasis is on the time function and then on the product itself to determine the unit cost, dividing the cost of production for the period by the number of units processed. Depending on the type of products to be manufactured, the costs pass through the different centers or departments permanently.
Under normal working conditions, in all or almost all departments, there will be inventories of products in process during the period and the same situation may occur at the end of any period, unless it had been planned in another way. The system of processes of several products that are made independently of each other, either from the beginning of production or from a point called the point of separation, is called parallel processes, which are generally sequential in relation to the same product. In other words, the production of one department continues in the next and so on until its completion.
In the system of continuous processes there is a sequence and the costs are obtained by departments. In this way, the second, third and fourth departments receive the cost of the semi-finished units from the previous department and add their own costs to it, before transferring to the next and so on until the product is completely finished.
Depending on the type of product and the manufacturing techniques, the materials can enter in all the processes or only in some, generally the first and the last, while the cost of conversion is part of the cost of each and every one of the processes or departments. Therefore, they are important; the identification of the production center, the number of units produced in each one of them, the total accumulated cost of each center, the computation of the unit cost per department and the total cost per unit.
Possibly the most important aspect within a cost per process system in the determination of unit production costs, both in the process stage and finished at a given time. This aspect is important from the point of view of the need for good information for the control and taking of
decisions. Therefore, it should not be thought that the determination of the cost is the final objective of cost accounting, but is only an instrumental means for planning and control.
- Quality management system
On the threshold of this new millennium, a scenario is presented where the digital age and globalization present the consumer population with alternatives where competitive prices and high quality make the difference in business. Given this fact, organizations must be prepared. Quality should not be perceived as an abstract and immeasurable concept but rather as a fundamental ally that, developed according to the characteristics of the business, can yield the achievements and efficiency objectives that are set. Therefore, organizations must know well not only their products and processes, but also those of their competitors, clearly defining their cost structures, the deviations that occurred during their production operations of goods and services,as well as the costs necessary to improve and avoid the repetition of said deviant events.
Quality is like art, everyone praises it, everyone recognizes it when they see it, but everyone has their own definition of what it is (Sehambenger, 1986).
The main ideologues that address this issue on a global scale have contributed different approaches, as shown below:
In his approach to quality, Harrington argues that as the 1990s entered, customers were not looking for good quality but were looking for perfection. For this author:
Quality is doing the job well every time.
Perfection is doing the right job every time.
Harrington places a lot of emphasis on prevention "Prevention is not preventing problems from recurring, it is preventing them from ever happening." It focuses its quality approach on the process, defining it as any activity or group of activities that use inputs, add value to it, and supply a product to an external or internal customer.
Joseph Juran (1995) when referring to the concept of quality, Juran states that quality means the satisfaction of the external and internal customer. The characteristics of the product and the lack of deficiencies are the main determinants of satisfaction; then define customer and product as follows:
Customer is the one whom a product or process impacts. External customers include not only the end user, but also intermediate and commercial processors. Internal customers include both other divisions of a company that are supplied with components for an assembly, and others it affects.
However, the product is the output of a process (goods, software, services). Customer satisfaction is achieved through two components: product characteristics and lack of deficiencies.
One limitation to this concept is that its approach is subjective, it depends on the criteria of the person evaluating.
Edward Deming (1998), his approach to quality is based on daily work controlling variability and reliability at low costs, focusing on customer satisfaction. He believes that quality must be constantly improved due to the ever-changing needs of the market. His vision of quality is very dynamic.
Other approaches:
Due to the guiding role that standards related to quality play in the world, it is necessary to include the approach of the International Organization for Standardization (ISO), this considers quality as the capacity of a set of inherent characteristics of a product, system or process to satisfy the requirements of customers and other interested parties.
A study carried out by Tamini and Sebastianelli (1996) determined that managers of eighty-six firms in the eastern United States of America define quality as:
- Perfection Consistency Elimination of waste Delivery speed Compliance with policies and procedures Providing a good product Doing it right the first time Customer satisfaction Total customer service.
This varied range of interpretations shows that quality encompasses the vast majority of the processes of any organization and that it must be perceived and applied not only in the production stages of a good or service, but also throughout the integral chain supply, from the marketing phase and survey of customer needs to after-sales service. However, despite the importance of quality, many companies are still reluctant to integrate quality into their management efforts.
The concept of quality has been approached by different authors. The author agrees with them since she considers quality as: styles that the organization uses to satisfy the needs and expectations of its internal and external customers.
The mechanisms through which organizations have managed quality have evolved the approaches and stages of quality management. Thus, after the First World War and in the 1920s there was talk of quality inspection where the conformity of the final product with certain previously established specifications had to be verified. After the Second World War and in the 50s there was talk of statistical quality control where these specifications were applied during the manufacturing process. Quality inspection consists of counting and measuring to identify and separate defective products from total production. Quality control, meanwhile,It is the set of techniques and activities of an operational nature used to verify the requirements related to the quality of the product. This approach does not incorporate any prevention and improvement activities, the search for non-conformities to the specifications is carried out during the manufacturing process based on statistical methods, thus improving efficiency regarding inspection. In general, in the quality control approach there is no participation of the personnel, only the quality department is responsible for complying with the established specifications, in no case is customer satisfaction considered and is based on the detection of errors with the aim of correct and fix them.The search for non-conformities to the specifications is carried out during the manufacturing process based on statistical methods, thus improving efficiency with respect to inspection. In general, in the quality control approach there is no participation of the personnel, only the quality department is responsible for complying with the established specifications, in no case is customer satisfaction considered and is based on the detection of errors with the aim of correct and fix them.The search for non-conformities to the specifications is carried out during the manufacturing process based on statistical methods, which improves efficiency with respect to inspection. In general, in the quality control approach there is no participation of the personnel, only the quality department is responsible for complying with the established specifications, in no case is customer satisfaction considered and is based on the detection of errors with the aim of correct and fix them.In no case is customer satisfaction considered and is based on the detection of errors with the aim of correcting and fixing them.In no case is customer satisfaction considered and is based on the detection of errors with the aim of correcting and fixing them.
In the 70s, the term “Quality Assurance” emerged, which is equivalent to translating it as a guarantee or Quality Assurance and that encompasses the “set of planned and systematic activities, necessary to give confidence that a product or service will satisfy the established requirements. ”. The objective is to guarantee the delivery of a product to the customer according to specified requirements and agreed with them. Customers increasingly request the assurance that a quality management system is in place that provides them with product safety. In recent years, the ISO 9000 series quality assurance standards have become very popular and are later referred to as quality management.
From the 1990s on, interest in quality grew to unprecedented levels, fueled, in part, by the publicity of the "Malcolm Baldridge" National Quality Award, an award instituted since 1987 by United States Law under the auspices of of the American Productivity and Quality Center, to enhance North American companies committed to quality management, practice and performance and to compete for the Deming award in Japan.
The Malcolm Baldrige model is based on a system of leadership, strategic planning, and customer and market focus (Figure 2). It is an extraordinary tool to follow to evaluate total quality management, with criteria of truly impressive depth. This model consists of seven criteria: leadership, strategic planning, customer and market focus, information and analysis, orientation to human resources, process management and business results.
American Model for Business Excellence Malcolm Baldrige
Figure 2. American Model for Business Excellence Malcolm Baldrige
Source: Malcolm Baldrige (1987)
Total Quality is the most evolved stage within the successive transformations that the term “quality” has undergone over time. At first we talk about Quality Control, the first stage in quality management that is based on inspection techniques applied to production. Subsequently, Quality Assurance is born, a phase that seeks to guarantee a continuous level of quality of the product or service provided.
Finally, what is known today as Total Quality is reached, a business management system closely related to the concept of Continuous Improvement and which includes the two previous phases.
The philosophy of Total Quality provides a global conception that encourages Continuous Improvement in the organization and where all its members are involved, focusing on the satisfaction of both internal and external customers. This philosophy can be defined as follows: Quality Management (the governing body is fully committed) (the customer's requirements are understood and assumed exactly) Total (every member of the organization is involved, including the customer and the supplier, when this is possible).
Total Quality Management (TQM) is a necessity for organizations that want to be competitive and survive. It is approached from the perspective of both internal and external customers, and enables continuous improvement.
The TQM's main objective is business excellence. It is difficult to put Total Quality Management into practice since it is a philosophy, a culture and a new way of thinking in the organization.
The quality system must be based on the definition and management of processes, which implies the breakdown of the organization's activities into well-defined parts, establishing the correct sequence and the appropriate interaction that may exist between them and in the study. and treatment of them in order to give
lead to compliant products.
The measurement and analysis of the results must lead to the establishment of an improvement methodology, not only of the activities that the organization develops, but also of the control methods.
The quality management system is the set of the organizational structure, responsibilities, procedures and resources that are established to carry out quality management. According to this definition, multiple types of quality systems could be established and in fact, it is logical to think that each different organization has a system adapted to its characteristics. However, it is also evident that the discrepancy between the different systems that might exist would introduce great complexity in the commercial and technical relationships between organizations.
The quality function encompasses the entire company, since the quality of a product is the result of the work of all departments throughout the production process. Each one of the specialized departments has, not only the responsibility to carry out its functions, but also has to do its job correctly. In this way, each department has a quality-oriented activity that it must develop simultaneously with its main function.
1.4 Quality costs
The transformation process that the business world has undergone in recent years has brought, as a fundamental result, the internal reorganization of companies and has enhanced their strategic action, which has influenced the search for techniques capable of transmitting information necessary to make new decisions.
The conditions that prevail today force the company to integrate into its competitive strategy, in addition to conventional factors, other factors that constitute more effective indicators of the contribution made by the organization's operations to its competitive strategy.
Quality is the objective and the reference of any activity carried out in the company. It has become a powerful and advanced management instrument, which in the hands of companies, allows them to reach significant market shares and is used as a differentiating competitive strategy.
This is how the need to control the resources used to obtain that quality arises, with costs being a valuable instrument in this regard, in order to keep track of the strategy by providing the management with the necessary information.
An essential element for a total quality control program is the identification, analysis and control of quality costs for the entire business, which allows evaluating these programs and detecting the areas that demand attention.
Quality costs are an integral part of the production cost, being present in the results that are reflected in the Income Statement of an organization, but they are not quantified separately, preventing their adequate control and analysis, which makes it difficult to apply possible corrective measures and the decision-making process.
The so-called "traditional" cost systems do not have procedures to provide information to management related to quality control.
Referring to this issue, cost accounting has traditionally dealt with reprocessing, which is carried out on those products that move away from design quality to bring them closer to it, developing techniques for the treatment of waste and the so-called defective production.
However, an emphasis on quality can be a support that identifies and eliminates the causes of errors and rework, reducing costs and making more units of product available to meet delivery dates.
According to Philip Crosby, the cost of quality is the cost of not meeting the requirements, it is what we spend for doing things wrong or for not doing them right the first time. The quality cost is made up of two main elements:
- The cost of complying (training, planning and others) The cost of not complying (rework, waste, repeat work, payment of surcharges and others).
Uniting these two concepts will result in the highest expenses that a company has.
Crosby has found through studies that the cost of quality in a typical company is around 20% of total sales. This is what you want to reduce, this is what you are spending for not doing things right.
Some authors include under this term two types of costs; the cost of quality itself, which is derived from the efforts of the organization to manufacture a product or generate a service with the quality offered, and the cost of non-quality, also known as the “price of non-compliance” or the cost of doing things incorrectly. The latter is defined as those expenditures produced by inefficiencies or non-compliance, which are avoidable.
Currently, quality costs are understood as those incurred in the design, implementation, operation and maintenance of the quality systems of an organization, those costs of the organization involved in the processes of continuous quality improvement, the cost to determine whether the production is acceptable, that is, the investment made to verify the level of product quality and the investment made to prevent or correct the occurrence of non-quality, the costs of systems, products and services that have been frustrated or that have failed due to not having in the market the expected success, so far the costs are unavoidable, because they are inherent to the production processes or indirect costs for these to be carried out.But to these are added any other cost incurred by the company and the client because the production did not meet the specifications and expectations of the client and that the company incurs them for producing failures in the product, these are known as costs of poor quality, poor or no quality, these costs are avoidable, as they would not exist if the processes did not produce defects.
Making a synthesis of the above, it can be summarized that the cost of quality is an administrative decision tool that allows to quantify monetarily the expenses of the Quality Management System in the organization.
Costs can be classified into two large groups: controllable costs and resulting costs.
CONTROLLABLE COSTS
They are those over which the company has direct control to ensure that only products / services acceptable to the client are sent to them. They are divided into two categories: prevention and evaluation.
- Prevention costs
They are the expenses incurred to avoid mistakes, defects and failures, thus avoiding the delivery of defective products. It includes the costs of previous activities and during the stages of product development, purchase of materials, planning and execution of operations, manufacturing, support operations and post-dispatch service. If you look at them from the financial point of view, they are not really a cost but an investment for the future, which can be called an investment to avoid costs. Its main classes are:
- Quality planning Review of new products Training Process control Obtaining and analyzing quality data Improvement projects Quality reports Evaluation costs
Also called as valuation, estimation or appreciation costs. These are the result of the evaluation of the finished or in process production and the audit of the process to measure the conformity with the established criteria and procedures. They seek to ensure compliance with quality standards and the level of performance. They include:
- Inspection and testing Maintaining the precision of inspection and testing equipment Stock assessment Consumed materials and equipment Post-sale performance check Quality data processing and reporting Product quality audits Quality personnel training
COSTS RESULTING FROM POOR QUALITY
Also known as failure costs. They are the costs incurred by the company that are a consequence of the errors, they are incurred to evaluate the performance of the product, to correct the discrepancies or to replace the products not in accordance with the requirements of the clients. It is the money that the company invests because not all the activities were done well every time. They are called outcomes because they are directly related to the decisions that are made within the category of controllable costs. These costs would disappear if there were product failures. They could be called losses because they actually represent this for the company. They are divided into costs resulting from internal and external failures.
- Costs for internal failures
Costs incurred by the company as a result of errors detected before production is received by the customer. And they are costs like:
- Reworking work Waste: Double test: Downtime Loss of performance Disposal costs Avoidable losses in process 100% inspection Costs for external failures
The producer incurs an external cost because the customer receives an unacceptable product / service. The company incurs it because the evaluation team did not detect all the errors before the product was delivered to the customer. And they are costs of the type of:
- Claims attention Warranty expenses Returned material:
The measurement of quality costs allows planning the activities related to quality and the resources destined to achieve better results, as well as the follow-up of these planned and implemented activities, analyzing the way in which they are carried out.
Generally, the measurement of quality costs is directed towards areas of high impact and identified as potential sources of cost reduction. Those that allow to quantify development and provide an internal basis for comparison between products, services, processes and departments.
On the other hand, the measurement of quality costs makes it possible to continuously evaluate prevention activities and resize them to achieve improvements, taking into account that:
- For every failure there is a cause. The causes of failure are subject to prevention. Prevention is always less expensive.
With greater control over costs related to quality and greater organization of them, the collection and transmission of information on the new variables that in this context are of interest to manage is facilitated, in order to achieve a correct identification of quality costs. that allows them to be measured, improved and controlled.
The calculation of quality costs in addition to being a tool to locate the main areas of deficiency allows us to evaluate the operation of the Quality Management System without which it would not be possible to know the essence of the costs of the organizations.
Quantifying the dimension of the quality problem in monetary terms improves communication between the different levels of management. Any reduction in quality costs will have a direct impact on the company's profits and on increasing its competitiveness.
Some of the benefits that can be achieved are as follows:
- Higher profitability Higher customer retention Fewer customer complaints and warranty claims Reduced costs due to fewer losses, duplication of work Higher employee engagement and satisfaction, lower turnover Increased ability to attract new customers
Measurement of costs relative to quality also reveals deviations and anomalies in terms of cost distribution and standards, which are often not detected in routine analysis work. Last, and perhaps the most important use, quantification is the first step toward control and improvement.
The measurement of quality costs is of great importance for any entity:
- In the first place because these are usually very large. According to the research of a working group of the Office for National Economic Development (ODEN) that studied the quality and standards published in 1985, about 10 to 20% of the total sales of companies is represented by costs related to quality. Second, 95% of costs in quality are generally related to valuation and defects. These expenses add very little to the value of the product or service; the expense of defects, at the very least, can be considered avoidable. Reducing the costs of defects by eliminating the causes of non-compliance can also translate into a substantial reduction in valuation costs. Third, unnecessary and avoidable costs make goods and services more expensive. This in turn affects the competitiveness and, ultimately, wages and standards vida.En Fourth, it is clear that the costs and economics of many quality-related activities, including investments in prevention and evaluation activities, are unknown to companies, although such costs are considerable and that a substantial part of them is avoidable.
The cost of quality is not exclusively an absolute measure of performance, its importance is that it indicates where a corrective action will be more profitable for a company.
The costs of quality are present not only in production operations but also in many others. When selecting a company's activities, quantifying costs for errors can draw attention to the severity of problems and identify specific areas where they occur. Hence, they present certain advantages but also some difficulties for their establishment and analysis.
Advantage:
Provides a manageable entity; provides a unique view of quality; provides a means of measuring changes; provides a priority system for problems; ensures that the quality objectives are together with the aims and objectives; provides the way to correctly distribute the Costs of Quality to obtain maximum benefits; induces the analysis of quality in the Board of Directors; improves efficient use of resources; brings a new approach to getting the job done right; provides a measure of improvements made; reducing the costs of quality makes it possible to increase the profits of an organization.
Difficulties:
Immediate rejection of the analysis because it implied changes in the System in some cases and in others to implement the analysis where it was not analyzed; difficult the job of sensitizing staff in cost analysis; lack of adequate training and preparation of the personnel who carry out data collection and information processing; organize areas to introduce cost analysis; classify costs by work areas; achieve the appropriate interrelation between the quality department and the accounting department for the collection and analysis of data; the complexity of the initially selected areas makes the work more cumbersome; run the statistical analysis of the cost trend.
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