There are three types of costs when quality considerations are made: Appraisal Costs, Prevention Costs, and Failure Costs. These costs are affiliated with the efforts of process improvement and are also known as quality costs or cost of quality.
Appraisal costs are associated with measuring, evaluating or auditing products and services to satisfy quality and performance requirements set by the company. Examples of this cost include inspection and testing of purchases material, final inspections, audits for products and services, and testing equipment.
Prevention costs are associated with all activities designed to prevent and stop poor quality in the products and services provided to the customers. Examples of this cost include new product review, supplier surveys, capability evaluations, improvement projects, education and training.
Failure costs result from products and services that did not meet the quality standards and requirements set by the company. They divided into two categories: Internal Failure Costs and External Failure Costs. Internal failure costs occur before delivery and shipment of product and/or before services are performed to the customer. Examples of this cost include scrap, rework, retesting, re-inspecting, reviewing the material and downgrading. External failure costs occur after delivery and during or after providing the service to the customer. Examples of this cost include reviewing and processing customer complaints, customer returns, claims based on warranty, and recalls.
The total quality costs are the sum of the appraisal, prevention, and failure costs. This will represent the difference between the actual costs of the product and/or service. The trade-offs between the appraisal, prevention, and failure costs are relevant. Some believe when the prevention costs are increased , the appraisal and failure costs will decrease substantially. This means that the total costs will be lower. Others say that if they spend too much on quality, it will reduce the money available for other projects such as upgrades to technology.