Quality Costs Quality is the total features and characteristics of a product/service made/performed according to specifications to satisfy customers at the

time of purchase and during use. Costs of quality are costs incurred to prevent or the cost arising as a result of, producing a low quality product. Such costs are categorised into prevention costs, quality appraisal (detection) costs, internal failure costs and external failure costs. Prevention Costs Prevention costs are incurred to prevent defects and other quality problems/to preclude the production of goods that do into conform to specifications. Quality Appraisal (Detection) Costs Quality appraisal costs are incurred to detect which individual unit of a product does not conform to specifications. Internal Failure Costs These costs are incurred as a result of the appraisal activities. These are incurred on a defective product before it is despatched to customers. External Failure Costs External failure costs are costs of making things right when a quality problem has occurred after the product has been delivered to the customer. Quality Costs Illustrated Step 1: Identify the Chosen Product. Step 2: Select Cost-Allocation Base for Allocating Indirect Costs of Quality. Step 3: Identify Indirect Costs Associated With Each Cost-Allocation Base. Step 4: Compute the Rate Per Unit of Each Cost Allocation Base Used to Allocate Indirect Costs of Quality to Product. Step 5: Compute the Indirect Costs of Quality Allocated to the Product. Step 6: Compute the Total Costs of Quality by Adding All Costs of Quality Assigned to the Product. This is shown in Column 5 of Exhibit 1. Non-Financial Measures of Quality and Customer Satisfaction Financial measures of quality focus on the short-run. Non-financial measures indicate the future needs and preferences of customers as well as the specific areas that need improvement.

The non-financial measures of customer satisfaction, inter-alia, include the following: Market research information on customer preferences/satisfaction with specific product features. Number of defective units delivered to customers as percentage of total units delivered. Number of customer complaints. Percentage of products that fail soon/often. Delivery delays in terms of differences between the scheduled delivery date and the date requested by the customers. On-time delivery rate (i.e. percentage of delivery made on/before the scheduled delivery date). Surveys to measure customer satisfaction. Target Costing Target costing is an integrated approach to determine product features, product price, product cost and product design that helps ensure a company will earn reasonable profit on new products. Target cost is the cost of resources that should be consumed to create a product that can be sold at a target price. Target Costing Process A target price is the estimated price for a product/service that potential customers will pay. Target Cost = Target price Profit margin. Target Price Target price is the estimated price for a product/service that potential customers will pay. Target Operating Income Per Unit Target operating income per unit is the operating income that a company aims to earn per unit of a product/service sold. Target Cost Per Unit Target cost per unit is the estimated long-run cost per unit of a product/service that enables the company to achieves its target operating income per unit when selling at the target price. Four components of target costing process (1) Planning and market analysis

(2) Development (3) Production design (4) Production and continuous improvement.