What Are Appraisal Costs? Definition, How They Work, and Examples

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.

Key Takeaways

  • 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.
  • Quality control is important to the reputation of a business, which is why appraisal costs are necessary costs to the success of a company.

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 on appraisal costs show that they are concerned with their reputations.

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.

To prevent defective inventory or products 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.

Appraisal costs can simply be looked at as part of the cost of doing business as well as the cost of creating a product or service. A company's reputation is one of the most important assets that it has. Once a company's reputation slips into the negative after the release of faulty products and bad publicity, it is almost always impossible or extremely difficult to shift consumer opinion.

It is for this reason that management needs to pay strict attention to quality control to ensure the lasting success of their company; appraisal costs are a part of that process.

Examples of Appraisal Costs

There are many examples of appraisal costs and every industry has different types of appraisals and therefore the costs associated with them. 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 that it's inherently incapable of producing defective parts. Like a final product, suppliers need to ensure that their raw materials are in good condition, or else they risk losing supply contracts with the final producer of a good.

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