A quality cost report has several uses. First, quality cost information helps managers see the financial significance of defects. Managers usually are not aware of the magnitude of their quality costs because these costs cut across departmental lines and are not normally tracked and accumulated by the cost system. Thus, when first presented with a quality cost report, managers often are surprised by the amount of cost attributable to poor quality.
Second, quality cost information helps managers identify the relative importance of the quality problems faced by their companies. For example, the quality cost report may show that scrap is a major quality problem or that the company is incurring huge warranty costs. With this information, managers have a better idea of where to focus their efforts.
Third, quality cost information helps managers see whether their quality costs are poorly distributed. In general, quality costs should be distributed more toward prevention and appraisal activities and less toward failures.
Counterbalancing these uses, three limitations of quality cost information should be recognized. First, simply measuring and reporting quality costs does not solve quality problems. Problems can be solved only by taking action. Second, results usually lag behind quality improvement programs. Initially, total quality cost may even increase as quality control systems are designed and installed. Decreases in quality costs may not begin to occur until the quality program has been in effect for some time. And third, the most important quality cost, lost sales arising from customer ill will, is usually omitted from the quality cost report because it is difficult to estimate.
Typically, during the initial years of a quality improvement program, the benefits of compiling a quality cost report outweigh the costs and limitations of the reports. As managers gain experience in balancing prevention and appraisal activities, the need for quality cost reports often diminishes.