The three main types of costs when quality considerations are made includes: the appraisal costs, prevention costs and the internal and external failure costs. Appraisal costs are those costs that are incurred in order to find detective products before finally distributing the products to consumers (Wood, 2013). It is worth to note that the overarching goal of quality control is to identify defective products as early as possible in the production process. For this reason, a firm has to incur appraisal costs in the process of identifying defective products. These includes the amount a firm has to pay employees just to review, analyze and test products to just ensure the end products meet the required quality. For example, Apple Company employs individuals to just check the quality of products coming out of the assembly line.
Prevention costs are those costs that focus on actions to prevent manufacturing and distribution of defective products to consumers (Wood, 2013). Basically, prevention costs include the costs of actions taken to prevent creation of defective products. Examples include: quality planning, new-products review, process planning and control, quality audits and supplier quality evaluation, and training. Quality planning covers the whole range of activities ranging from production procedures to clear communication between production lines that collectively culminate into a quality product (Oakland, 2016). New-products review includes quality-associated activities such as risk assessment, design of experiments, reliability engineering and design review that are associated with launching of new design.
Process planning encompasses activities such as inspection planning and process capability studies that are associated with manufacturing and service processes (Oakland, 2016). Process control on the other hand includes inspection and test to establish the status of the production process. Quality audits involve evaluating execution of activities in the overall quality plan. Supplier quality evaluation on the other hand involves evaluation of suppliers for quality before selecting them. Lastly, training on firm procedures, specification and inspection activities also culminate into prevention costs.
Failure costs include those costs that are incurred when a product fails to meet the required specifications (Wood, 2013). These costs are of two types: internal and external failure costs. Internal failure costs are those that are incurred to rectify discovered defects before products are distributed to the customers, and they include costs of eliminating scrap and waste as well as costs of undertaking failure analysis (Wood, 2013). External failure costs on the other hand are those costs incurred to rectify defects discovered by customers and they include replacements and warranty repairs, customer complaints services, repairs and servicing, and return of poor quality of products that leads to low sales (Wood, 2013).
Given the three types of costs discussed above, a firm must carefully consider trade-offs within manufacturing a product or producing a service that results into generation of these costs through quality cost minimization. First things first, there is need to estimate the cost function for prevention activities, appraisal activities, and the internal and external failure activities that results into generation of quality costs (Oakland, 2016). The estimated cost functions will enable a firm to establish the level of external failure acceptable. Secondly, there is need to identify optimal combination of prevention and appraisal activities so as ensure that external is within acceptable limits (Oakland, 2016). Lastly, having established the acceptable external failure rate, a firm can cost-effectively combine prevention and appraisal activities such that the overall production process is flawless and thereby eliminating the need to re-work defective products.