Economics of Quality: Choosing among Prevention Alternatives Available to Purchase

Recent surveys on the use of quality‐related costs in manufacturing industries indicated that, while quality cost data are valuable for deciding on prevention activities, most companies do not understand the fundamental economics of quality. In addition, the published literature fails to discuss this issue adequately. The literature does indicate that cost accounting systems are inadequate in providing quality cost data and that executives often underestimate the impact of quality on the company′s profitability. To help overcome these problems a cost/ benefit classification is proposed and technical limits are equated to the Cost of Quality for capital‐intensive prevention projects. The manufacture of ethanol is used as an example to demonstrate the concepts and methodology of using technical limit analysis and its conversion to an economic “incentive” using engineering economics. This economic incentive could be used in Cost of Quality reporting and for the management of this technology.