Cost of Quality (COQ) is "a financial report that identifies and analyzes the implicit (or hidden) costs of quality", which is based on the theory of Total Quality Management and useful for decision-making, comparison and signalling behaviours in a firm's internal quality control. COQ is composed of three kinds of costs; prevention, appraisal and failure costs which happen over the different process points in a firm's value chain. Also, there are two different views that define a firm's approach to controlling the COQ, conventional and contemporary views. The conventional view decides it is more profitable to reduce investment in prevention costs, but instead react through appraisal costs and failure costs. On the other hand, the contemporary view places importance on both prevention and appraisal costs in quality control. This view holds that firms should increase their prevention costs in order to save more on the appraisal and failure costs, with an objective to economize on overall transaction costs.
             Our case entails a firm's production process. The part of process we are analysing includes is the purchase of raw materials, the welding together of some parts, and then inspection of the finished subassembly. Monty, the department manager, noticed that output was decreasing even thought efficiency measures were being met. We have noticed this is due to high wastage through poor quality management. Through the following analysis of these problems we have realised the central problem causing the decreasing output is the conventional view of the firm for controlling the COQ. Why is this a problem, and why is contemporary better?
             Substandard materials have gotten through the purchasing system into the production process, which has resulted in 20% of the subassemblies eventually being reworked or scrapped. These materials had been bought from a new supplier who agreed to supply parts 4% cheaper than the standard purchase p...