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p:\fcs\oc\00tool\material\graphics\a-f\costqua4.doc DATE \l 5/9/95 The Coq Calculation The COQ calculation is a guideline for the engagement team to use in designing a specific COQ formula for the company being evaluated. It is important for the client to have a COQ calculation tailored to the companys quality process, accounting, cost accounting, and other systems to enable it to do the following: - Continue calculating COQ. - Take action to reduce COQ. - Place the appropriate amount of emphasis on prevention, detection and failure costs. Many companies will be calculating COQ for the first time. Therefore, this will be the base COQ they will use to compare COQ calculated in the future. It will become a powerful tool for these companies as they continue to use the formula designed to calculate COQ and track the improvement in the mix of COQ and total COQ. The COQ may be a significant amount and is typically 15 to 25 percent of revenues, or higher. The amount itself is not as important as how management uses the information. The COQ includes some hard facts, straight from the accounting information. It also includes estimated costs that typically are not quantified (e.g., badwill, no repeat customers, etc.). However, it is important to include an estimate for these intangible costs. If you dont measure it, you cant control it. Emphasis should be placed on designing a sound COQ calculation framework that the client can apply regularly to obtain a consistent COQ. Accuracy is important, but consistency makes COQ an even more powerful tool to be used for continuous quality improvement. The base COQ calculation is quite simple: P + D + I + E = TCOQ TCOQ ÷ Total Revenue = TCOQ as a Percent of Revenue P = Prevention Costs D = Detection Costs I = Internal Failure Costs E = External Failure Costs TCOQ = Total Cost of Quality As the cost elements are reviewed, the engagement team and the client should determine what percentage of each cost element is quality-relat