Prevention cost

Prevention cost
See also

Prevention cost is all expenses incurred by the company in order to minimize the appearance of a product or service defect. These are both expenses in the sphere of production, design or storage. All this to prevent shortages. An example of such a cost may be investing in a pieces of training for workers from the production sector, so that they know how to properly produce a given product or service. "Prevention costs are all the costs expended to prevent errors from being made or, to say it another way, all the costs involved in helping the employee do the job right every time. If you look at this from financial viewpoint, it is really not a cost. It is an investment in the future, often called a cost - avoidance investment" (Harrington J. H, 1987, p.14)

Types of prevention cost:

  • Product or service standards: establishing records for incoming materials and processes
  • Creation of quality, production and control plans
  • Creating and maintaining a quality system
  • Training and development programs

It is much better, more convenient and cheaper to bear prevention costs than selling damaged goods or servicing. Because it often ends up exchanging the whole product / service and losing customers.

Prevention cost in COQ[edit]

"Cost of quality (COQ) is a method used by organizations to show the financial impact of quality activities. Attaching a dollar amount of quality related activities clarifies where there may be significant opportunities of quality improvement. Once recognized, process improvement efforts can be focused on those with the higher potential pay-off" (Westcott R.T., 2013, chapter 5). It is a way that allows the company to determine to what extent its resources are used for activities that prevent bad products and services, which are the cause of internal and external failures. Thanks to this information, the company knows what its potential savings may be.

Cost of quality is divided into two basic types of costs:

  • Cost of control

There are prevention cost (described above) and appraisal costs (Similar to prevention cost. These are all expenses that are incurred to avoid quality problems. These are quality inspections).

  • Cost of failure of control

The first type of cost of failure of control is internal failure costs (It is when the product produced is defective. The cost of processing such goods is part of the cost). The second type is external failure costs. The costs arose as a result of producing a defective product. These are the costs linked with product recall, guarantees, and service costs. It can also be (unmeasurable) cost of lost customers.

To sum up: "Total quality costs = Prevention costs + Appraisal costs + Internal failure costs + External failure costs" (Chopra A., Garg D., 2011, p.511)

References[edit]

Author: Edyta Krzyczman