CMA Final · Strategic Cost Management

Quality Cost Management: formula sheet

Full chapter guide

Key formulas

Quality of design vs conformance: Quality of design = how well the specification meets customer needs; Quality of conformance = how closely actual output matches the specification; A product can conform perfectly to a poor design. Keep both ideas separate in answers.
Quality control vs quality assurance: QC = product-oriented, detects defects after or during production; QA = process-oriented, prevents defects; Use these two words in every comparison answer.
PDCA cycle: Plan → Do → Check → Act; The standard engine of continuous improvement.
Dimensions of quality (Garvin): Performance, Features, Reliability, Conformance, Durability, Serviceability, Aesthetics, Perceived quality; Eight dimensions. Link each to the product in the case.
Cost of conformance: Cost of conformance = Prevention costs + Appraisal costs; Voluntary spending to achieve quality.
Cost of non-conformance: Cost of non-conformance = Internal failure costs + External failure costs; Loss caused by failing to meet specification.
Total cost of quality: COQ = Prevention + Appraisal + Internal failure + External failure; Equals conformance plus non-conformance costs.
COQ as a percentage of sales: COQ % = (Total COQ ÷ Sales) × 100; Used to compare periods or units. Cost of each category can be shown the same way.
Classification test: Stop defect = Prevention; Find defect = Appraisal; Defect found before delivery = Internal failure; Defect found after delivery = External failure; Use this to tag every item.
Total cost of quality: Total COQ = Prevention + Appraisal + Internal failure + External failure; Conformance = prevention + appraisal. Non-conformance = internal + external failure.
COQ as percentage of sales: COQ % = (Category cost ÷ Sales) × 100; Use the same base (sales or total COQ) for every line in the report. State which base you use.
Optimum quality level (traditional view): Optimum = level where Total COQ is minimum, i.e. where marginal conformance cost = marginal failure cost saved; Beyond this point extra prevention and appraisal spend exceeds the failure cost it removes.
Zero-defect view: Optimum = zero defects (or continuous movement towards it); Argued on the basis that failure costs, including hidden ones, are underestimated and prevention gets cheaper.
Taguchi loss function: L(x) = k (x − T)²; x = actual value, T = target, k = constant = cost of loss at specification limit ÷ (limit deviation)². Loss is zero only at target.
Defects per million opportunities (DPMO): DPMO = (Number of defects ÷ (Units × Opportunities per unit)) × 10,00,000; Use total opportunities for defects, not just units inspected.
Cumulative percentage (Pareto): Cumulative % = Running total of causes ÷ Grand total × 100; Sort causes in descending order before cumulating.
Six Sigma project method: DMAIC = Define → Measure → Analyse → Improve → Control; Used to improve an existing process.
PDCA cycle: Plan → Do → Check → Act (then repeat); Continuous loop, not a one-off.
Six Sigma benchmark: 3.4 defects per million opportunities; Conventional figure, which allows for a 1.5 sigma long-term shift.

Quick revision

Quality cost = cost of conformance plus cost of non-conformance.
Prevention costs are incurred to stop defects from happening, such as training and process design.
Appraisal costs are incurred to detect defects, such as inspection and testing.
Internal failure costs arise when defects are found before delivery, such as scrap and rework.
External failure costs arise after delivery, such as warranty claims, returns and lost goodwill.
Prevention and appraisal are the cost of conformance; the two failure types are the cost of non-conformance.
TQM is a continuous, organisation-wide effort to meet customer needs and reduce defects.
Higher spending on prevention usually reduces failure costs, but the effect has limits.
The optimum level is where total quality cost is lowest; some views argue for continuous improvement towards zero defects.
Always end a quality cost report answer with a clear comment and recommendation.
Match each tool to its purpose before the exam, as Section A may test recognition.

Common mistakes

Equating quality with high price or luxury features Fix: Define quality as meeting customer requirements and fitness for use. A low-cost product can be high quality.
Treating QC and QA as the same thing Fix: State that QC detects defects in output, while QA prevents them through process design. Give one example each.
Treating inspection of incoming material as prevention. Fix: Inspection and testing find defects, so they are appraisal. Prevention is action taken before or in design of the process.
Putting rework in appraisal or external failure. Fix: Rework of defects found before dispatch is internal failure. Only defects found after delivery are external failure.
Classifying inspection of finished goods or testing of incoming material as prevention. Fix: Anything that detects defects is appraisal. Prevention stops defects from arising, such as training, supplier selection, design review and preventive maintenance.
Putting rework and scrap in external failure. Fix: Rework, scrap and re-inspection before despatch are internal failure. Warranty, returns, complaint handling and recalls are external failure.
Treating Kaizen and Six Sigma as the same thing. Fix: Kaizen is small, continuous, everyone-involved change. Six Sigma is a specialist-led, data-driven project to cut variation, using DMAIC.
Not sorting causes in descending order before a Pareto cumulation. Fix: Always rank from largest to smallest first, then compute cumulative percentages.

Exam tips

Section A MCQs often test matching: a scenario to a TQM principle, or a statement to QC versus QA. Learn the keywords for each.
In written answers, always apply principles to the case facts. A bare list earns few marks.
For 'discuss' questions, include both the benefit and a practical difficulty, such as the time and training needed for TQM.
Use the exact terms: quality of design, quality of conformance, prevention, Kaizen, PDCA.
Mention the cost link in one line. It connects this topic to cost of quality, which is examined with numbers.
In MCQs, decide the category by timing: before delivery is internal failure, after delivery is external failure.
In numericals, show each category total separately before the grand total. Marks are given for the classification.
Always add a one-line comment, such as the need to increase prevention spend when failure costs dominate.