Applying Cost of Quality to a Service Business

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The costs of ensuring good quality and recovering from poor quality have often been found to total 25 percent to 30 percent of sales revenue. No wonder cost of quality (COQ) programs are attractive to senior managers. Kaplan defines such a program in a manufacturing context as “a financial, systemwide measure of the costs associated with preventing, testing for, or correcting defective items.”1 A COQ program may address costs associated with training employees to avoid errors, inspecting products, remaking products, wasted materials, and lost business. There is no commonly accepted definition of accounts or an official program structure.

COQ programs are controversial. Some experts have called them “a useful tool” and others “a waste of time and money.”2 Quality gurus Juran and Crosby have popularized the quality cost concept, but Deming sees no value in financial measures related to quality (nor do the Japanese firms that support his philosophy).3 The key question is: Does COQ aid in the quality process? Both practitioners and academics are trying to answer this question.

At this point, there are few solid examples of firms that have successfully implemented and maintained a COQ program as prescribed by such agencies as the American Society for Quality Control (ASQC).4 In particular, there are few examples of sustained COQ programs that have become an integral part of an organization’s total quality plan or overall management process.5 This paper describes a cost of quality management success story. The story is unusual in two respects. First, the organization made COQ an integral part of its operational management system; it used COQ more as a management tool than as an accounting technique. Second, the program was implemented in a sales and marketing division. COQ was originally developed as a manufacturing tool, and it has not been widely used in services.

The object of my research was the U.S. marketing division of Xerox. I was given access to all relevant documents, and I interviewed the division’s key players — the controller, the cost of quality manager, and functional managers — in addition to corporate senior managers. Xerox executives were fully cooperative, asking only that certain financial information be kept confidential.

In this paper I briefly describe the background and context of the COQ program, the definitions that were developed, and implementation.


1. RS. Kaplan, “Limitations of Cost Accounting in Advanced Manufacturing Environments,” in Measures for Manufacturing Excellence, ed. RS. Kaplan (Boston: Harvard Business School Press), p. 37.

2. R.S. Kaplan, “Measuring Manufacturing Performances: A New Challenge for Management Accounting Research,” The Accounting Review 58 (1983): 686–705.

3. J.M. Juran, Quality Control Handbook, 3rd ed. (New York: McGraw-Hill, 1979);

P. Crosby, Quality Is Free (New York: McGraw-Hill, 1979);

W.E. Deming, Quality, Productivity, and Competitive Position (Boston: MIT Press, 1982); and

D.A. Garvin, “Competing on the Eight Dimensions of Quality,” Harvard Business Review, November–December 1987, pp. 101–109.

4. American Society for Quality Control, Accounting for Quality Costs (Milwaukee, Wisconsin: ASQC, 1991).

5. See J.K Shank, “Strategic Cost Management: New Wine, or Just New Bottles?” Journal of Management Accounting Research 1 (1989): 47–65;

J.H. Atkinson, Jr., et al., Current Trends in Cost Quality: Linking Cost of Quality and Continuous Improvement (Montvale, New Jersey: National Association of Accountants, 1991); and

R.L. Hale, D.R. Hoelscher, and R.E. Kowal, Quest for Quality (Minneapolis: Tennant Company, 1987).

6. Xerox, USMG, Cost of Quality Team, Cost of Quality: A Guide to Application (Xerox Corp., 1987).


The author wishes to thank John Kelsch, John Reilly, and Tom Lee of Xerox for their open discussion and helpful comments.

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