The problem of specifying an allowance for defects in a production lot is that of balancing the cost of producing too many items against the risk of not having enough to meet requirements. A model of these costs is here proposed. Sufficient conditions are developed on the probability distribution of defectives for total cost to have a single minimum with respect to the allowance. A sequential algorithm is investigated and shown to produce an optimum allowance if certain further conditions on the probability are met. Next, it is shown for a special class of probability distributions that the above conditions are satisfied. This class is that for which the probability of an item being defective is independent of previous defects in the lot, and includes the binomial distribution. Finally some computational aspects of this algorithm are discussed, and an easily computable starting value is given.