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Preventive Costs – Meaning, Examples, Types and More

Preventive costs, as the name suggests are the costs that a company incurs to prevent defects from occurring in a product or service. For example, a company investing in training employees to continuously monitor products for faults or defects. There are four categories of cost of quality.

Prevention costs are one of them. Preventive costs cover a broad range of activities, such as product reviews, evaluating processes, and planning for improving quality. Or, we can say, a company can incur these costs at every level, be it production, design, or storage.

We can group prevention costs into four categories:

  • Training and development programs
  • Developing and using a quality system
  • Establishing standards for product or service
  • Developing a plan for quality and production

One biggest benefit of the preventive costs is that they far outweigh their cost in the long-term. Or, we can say, they are less expensive to the company than spending on correcting or replacing the defective products. Meaning their benefits are direct as well as indirect ones. On the one hand, it saves the cost directly and on the other hand, it saves a lot of time, effort, and product or company image issues.

Examples of Preventive Costs

Following are the examples of preventive costs:

New-products Review

These include the costs that a company incurs on coming up with full analysis when launching a new design or new product. For example, reliability engineering, review of design, FMEA, and more.

Process Planning

It includes the cost of studying process capabilities and planning inspection. It also includes similar costs for other activities that relate to production stages.

Process Control

This is the cost for in-process inspection. Or, the cost to determine the accuracy of the process. For instance, SPC, Anova Studies, and more.

Preventive Costs

Quality Audits

It is the cost of determining the quality of audits itself. Also, it involves evaluating the full quality plan.

Evaluating Supplier Quality

This includes the cost to evaluate the supplier before finalizing the deal with it so that the input material does not create any quality issue.

Training

It includes the cost to conduct training on all quality procedures, such as inspection. Also, it includes all costs of developing, updating, and maintaining training content.  

Other Types of Cost of Quality

Apart from preventive costs, there are three more types of cost of quality:

Appraisal Costs

We also call these inspection costs. These costs relate to inspecting the product before delivery to the customer. For example, the salary of inspectors, purchase of testing equipment, and more.

Internal Failure Costs

It includes the costs that a firm spends to correct or replace the defect in the goods or services before delivery to the end-user. The cost of reworking, scrape, replacement, etc are examples of internal failure costs.

External Failure Costs

It includes costs that arise after a company delivers the goods or services to the end-user. For example, replacement cost, warranty cost, loss of sales, and more.

Final Words

Usually, when a company implements the cost of quality, they focus more on the internal and external failure costs. However, it is the prevention cost that they should really focus on. This is because if a company spends on prevention costs and implements it well, then it could easily minimize both internal and external failure costs. In the present business scenario, companies that strive for excellence invest more in prevention cost to boost their offering.

References 

References
https://www.quality-assurance-solutions.com/Prevention-Costs.html https://www.accountingformanagement.org/costs-of-quality-or-quality-costs/ https://ceopedia.org/index.php/Prevention_cost https://qualitytrainingportal.com/resources/cost-quality/coq-prevention-costs/ https://bizfluent.com/info-8561048-prevention-appraisal-costs.html https://www.accountingtools.com/articles/2018/1/27/preventive-costs
Last updated on : November 3rd, 2020
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