In traditional financial reporting, the costs of poor quality are not reported or highlighted separately, rues Tapan K. Bose in ‘ Total Quality of Management ’ (www.pearsoned.co.in). These costs – which arise due to wastes, sporadic fire-fighting, correcting mistakes or policing them – get absorbed or remain hidden within the overall cost of operations, he explains.
While these costs can be huge, the company may not track the same with precision; the accounting systems may not provide full coverage partly due to ignorance, and partly because the company has been passing such hidden costs comfortably to the customers, Bose reasons.
He differentiates the costs of poor quality from the investments for building quality into products, as for example, the cost of design, and the investments on processes, facilities, manpower, measuring instruments and so forth to attain the target quality that will sell. “Over time, such expenses take the form of ‘investment’, are easily identifiable, and can be accounted for by the traditional accounting system.”
An alarming estimate cited in the book is that the price of non-conformance (in the form of costs of correcting the product or service, and payments for warranty claims) can represent 20 per cent or more of sales in manufacturing companies and 35 per cent of operating costs in service companies; in contrast, the price of conformance (comprising most of the professional quality functions, all prevention efforts, and quality education) may represent about 3 to 4 per cent of sales in a well-run company.
Recommended study for the quality-conscious.
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