Cost of Quality: Formula, Categories and a Food Example

The cost of quality is everything a business spends making sure its product is right, plus everything it loses when the product isn't. It comes in four categories: prevention, the work that stops problems happening; appraisal, the checks that find them; internal failure, the scrap and rework caught before anything ships; and external failure, the returns, credits and complaints after it has. Add the four together and you have the formula. For a small food maker, the point of adding them up isn't the total. It's the split, because a dollar of prevention can stop several dollars of failure, and that only shows when the four are side by side. In the example below, a quarter of taro chips carries $3,053.82 of quality costs, about 10 cents a bag, and more than half of it is failure. Below is the formula, the four categories, the example, and where the money is best spent.

The short version

• Cost of quality = prevention + appraisal + internal failure + external failure.
• Prevention and appraisal are the cost of good quality; the two failures are the cost of poor quality.
• Internal failure: scrap and rework found before shipping. External: returns, credits, complaints.
• Measure it over a quarter, as dollars and as a share of sales.
• The split matters more than the total: failure costs are where the savings are.
• A little more prevention can remove a lot of failure.
• TaroStack records losses by reason, returns by lot, and the checks on every batch. More below.

The formula and the four categories

Cost of quality = Prevention + Appraisal + Internal failure + External failure
Cost of quality, % of sales = Cost of quality ÷ Sales × 100

A quarter of chips, costed

Windward Roots, the made-up taro business I use in these examples, makes about 2,400 bags of taro chips a week, five batches of 480. For July to September, 13 weeks and 65 batches, with time costed at $20 an hour and a bag at $1.95:

By category:

On chip sales of about $106,000 for the quarter, that's 2.9% of sales, or about 10 cents of every one of the 31,200 bags made. How the scrap figure is counted is in scrap rate formula, and the retained samples in retained samples.

Reading the split

Failures are 56% of the total, and prevention is 11%. That's the pattern the cost of quality is meant to show. The scrap came mostly from burnt loads and failed seals; a thermometer check on every load and a new sealer jaw are prevention costs of a few minutes a load and about $150. If they halved the scrap, the quarter would save about $585 in scrap alone.

External failures are the dearest per bag. Each of the 48 bags credited to stores cost a credit at the wholesale price, a replacement, a share of a delivery and someone's time on the phone, about $8.44 a bag against the $1.95 it cost to make, before counting what the store thinks of you. How a returned or held product is dealt with is in nonconforming product form, and the checks that catch problems at the door are in incoming inspection checklist.

How to measure your own

1. Pick a period, a quarter, and a product or the whole kitchen.
2. List the costs in each category, as dollars: hours times a rate, product at its cost, credits at their value.
3. Take scrap and returns from your records, not memory; they're the biggest numbers and the easiest to forget.
4. Work out the share of each category and the total as a share of sales.
5. Change one thing in prevention, and measure again next quarter.

Where this stops working

The cost of quality is only as good as the records behind it. Scrap thrown away without being counted, credits given on the phone and never written down, and complaints handled from memory make the failure categories look small, which is the opposite of the truth, and the quarter's total becomes a guess.

How TaroStack does it

TaroStack keeps the records the cost of quality is made of, as part of the ordinary work.

Failures, recorded with their reason. What each batch made good is recorded with the batch, so scrap shows in its yield and cost. Product damaged, spoiled or lost later comes off stock as an adjustment with its reason, so waste is reported by reason, item and site. Customer returns go back into the lot they left in, so a return is tied to its batch, and a recall report shows which customers got which lots.

Checks, on every batch and delivery. Batch record forms and receipts carry your own fields with limits, like fill weight, oil temperature or "certificate received", so a reading outside its limit is flagged when it's made. Retained samples come off stock as an adjustment with the reason "sample", by lot.

And what it all costs. Recording a batch takes ingredients and packaging off stock at what you paid, so each batch's real cost sits against the recipe's standard cost, and margins are reported by product and by customer.

Batches, true cost, adjustments with reasons, customer returns by lot, recalls and batch records with limits are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.

Questions people also ask

What is the cost of quality formula?

Cost of quality = prevention costs + appraisal costs + internal failure costs + external failure costs. To compare periods, divide it by sales and multiply by 100.

What are the four categories of cost of quality?

Prevention, which stops problems; appraisal, which checks for them; internal failure, problems caught before shipping, like scrap and rework; and external failure, problems found by customers, like returns and complaints.

What is the cost of poor quality?

The two failure categories together: internal failure, such as scrap and rework, and external failure, such as returns, credits, replacements and complaints.

How do you measure the cost of quality in a small business?

Pick a quarter, list the costs in each of the four categories in dollars, take scrap and returns from your records, and work out each category's share and the total as a share of sales.