What Are Appraisal Costs?
Appraisal costs are a specific category of quality control costs. Companies pay appraisal costs as part of the quality control process to ensure that their products and services meet customer expectations and regulatory requirements. These costs could include expenses for field tests and inspections.
- Appraisal costs are fees a company pays to detect defects in its products ahead of delivering them to customers; they are a form of quality control.
- For most companies, the money that would be lost as a result of selling faulty products or services far outweighs the appraisal costs.
- Appraisals are used in many industries, with costs influenced by how extensive quality control is and what stage in the product cycle the company is at.
Understanding Appraisal Costs
Appraisal costs can be a key expense for companies seeking to maintain high levels of customer and regulatory satisfaction. Payments for secret shopper salaries, factory floor inspectors, and technical screening equipment all fall into this category. Companies that spend large amounts of money for appraisal costs show that they are concerned with their reputations.
To prevent defective inventory or product from reaching their customers, companies get creative while incurring appraisal costs to spot suspect products. In the end, it is less expensive to incur appraisal costs than to lose customers who are frustrated by the receipt of low-quality goods. The Internet and social media now give consumers unprecedented opportunities to voice their dissatisfaction with any companies or products that fail to meet their standards. The threat of unpleasant reviews or viral PR mishaps keeps companies on their toes and investing in appraisals of their products.
Common appraisal costs include inspecting materials delivered from suppliers, materials that are a work-in-process, or finished goods; supplies used for inspections; and maintenance of test equipment.
Examples of Appraisal Costs
There are many examples of appraisal costs, and every industry is different. Appraisal costs can even be driven by where the industry is in a market cycle.
A classic appraisal cost would be what is spent to inspect materials delivered from suppliers. For example, let's say a music retailer gets a shipment of guitars from a major manufacturer. Last year, the guitar manufacturer's first round of guitars had faulty tuners, causing customers to return opened products, file complaints with the guitar store's corporate parent and in some cases, switch their loyalty to a different music retailer. So this year, when the new shipment of guitars comes in, the music retailer opens the boxes, inspects each guitar to make sure the tuners are in good shape and then repackages them before making them available to customers. This process costs money and time, which is accounted for on the balance sheet as an appraisal cost.
Other examples of appraisal costs include:
- Inspecting work-in-process materials
- Inspecting finished goods
- The supplies used to conduct inspections
- The inventory destroyed as part of the testing process
- Supervision of the inspection staff
- Depreciation of test equipment and software
- Maintenance of any test equipment
The next best thing to incurring appraisal costs includes working on increasing the quality of the production processes of all suppliers and the company itself. The idea of vendor and supply chain management seeks to improve the entire process, so it's inherently incapable of producing defective parts.