What are Appraisal Costs?
Definition: Appraisal costs are the expenses that companies pay to ensure that their products are free of material defects. In other words, these are quality control costs that the company incurs to make sure customers are getting high-quality goods that are made properly and don’t have anything wrong with them off the assembly line.
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.
What Does Appraisal Cost Mean?
An appraisal is the process of having an expert value on one of your belongings. You can have all kinds of things appraised: your car, house, boat, jewelry, etc. The purpose of an appraisal is to find out what your belonging is worth. Sometimes appraisals are done for insurance purposes and sometimes appraisal are done to authenticate an antique or piece of history. There are all kinds of reasons to have a personal belonging appraised.
In the area of accounting, appraisals usually refer to the valuation of products or a company’s output. Unlike a personal appraisal, an accounting appraisal is a cost accounting term for evaluating the quality of products. It is basically the cost of quality control.
Appraisal costs are a component of the cost of quality, and include those costs associated with maintaining the quality of a product or evaluating an organization’s ability to maintain a desired level of quality in its products. Such costs generally include inspection and testing, but may also extend to costs of quality audits and even costs associated with quality certifications such as ISO 9000.
In the past, it was often believed that a company needs to increase its appraisal costs in order to improve quality. However, if appraisal includes only testing and inspection, then quality of the product reaching the customer may improve, but only because defective products are caught before they are shipped out. Today, it is generally realized that improvements in quality depend upon increased prevention of defects, and that appraisal costs can generally remain the same, or even decrease as the number of defects decreases due to prevention efforts.
Appraisal costs are associated with measuring and monitoring activities related to quality. These costs are associated with the suppliers’ and customers’ evaluation of purchased materials, processes, products, and services to ensure that they conform to specifications. They could include:
- Verification: Checking of incoming material, process setup, and products against agreed specifications
- Quality audits: Confirmation that the quality system is functioning correctly
- Supplier rating: Assessment and approval of suppliers of products and services
Take Apple for instance. Apple pays people just to review, analyze, and test its products coming off the assembly lines to make sure they meet the designated specifications. These employees aren’t actually appraising the products for value. They are appraising them for quality. These quality control costs are considered appraisal costs.
Appraisal costs are a necessary expense for most manufacturers. Shipping products that don’t meet proper standard can upset customers and turn into long-term demand problems. Look at what happened to Ford Motor Company in the 1990’s. Ford consistently produced low quality cars with many defects. As a consequence, Honda and Toyota sales increased making the Civic and Camry the most popular cars in America. Quality control is a vital part of any manufacturing company.
Examples of appraisal costs are:
- The inspection of materials delivered from suppliers
- The inspection of work-in-process materials
- The inspection of 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 test equipment
Advantages of Appraisal Costs
The various different advantages related to the appraisal costs are as follows:
- This is the key expense that the company incurs to ensure the higher level of the customer as well as regulatory satisfaction i.e., it ensures that the high-quality products are getting delivered to the customers of the company thereby making them satisfied.
- Appraisal costs help the organizations to keep their products and services defect-free so that their goodwill can be maintained in the market. This is necessary because in case there are any defects in the products of the company then it can impact the goodwill of the company negatively thereby reducing its sales in the market.
- For the long term survival of the business and ensuring its growth, they are the mandatory thing that is required to be incurred so that the quality of the products and services can be maintained.
- It may help the business organization to reduce the threat of bad customer reviews on the social media platform as the product quality is checked very well in advance.
Disadvantages of Appraisal Costs
The various disadvantages related to the appraisal costs are as follows:
- The company has to make use of the appraisal cost in the early process of manufacturing. in case the company finds the defect after the completion of the production by incurring the appraisal cost, then there is no use of such extra cost and the same will result in the entire production loss of the company. So it is required that such cost in order to find the defect should be incurred before the introduction of the additional labor or material and if the same is incurred afterward then it will not solve any problem.
- Expenditure incurred on the appraisal cost can be very high as it requires the supervisor’s salary and the purchase of expensive testing and equipment machine. So sometimes for the small industries that are working on a low budget cannot employ the personnel for the inspection and testing and are also unable to buy such testing and equipment machines. Therefore, they have to sell their products without proper quality and control checks.
- If not done in the right manner, the appraisal cost can lead to the creation of a negative impact on the total production facility of the company.
- Appraisal costs are incurred in order to find out is any material defect exists in the products of the company but this process is a time-consuming process and requires the efforts of the different persons.
Important Points of Appraisal Costs
The different important points related to the appraisal costs are as follows:
- Appraisal costs are necessary because in case there are any defects in the products of the company then it can impact the goodwill of the company negatively thereby reducing its sales in the market. The expenditure on appraisal costs shows that the organization is concerned about their reputation or goodwill in the market.
- It is considered that the appraisal cost is much lesser than the cost of losing customers who are dissatisfied with the receipt of poor quality or defective products.
- These are required to minimize the threat of bad reviews as in the today’s scenario where the social media provides opportunities to the customers to write their opinion on the products on various platforms, customers review matters a lot in the growth of the business and negative reviews can hinder the growth of the business.
- The different areas where the appraisal cost is useful includes the cost incurred for incoming inspection and incoming test, in-process inspection, the evaluation conducted for ensuring that the requirements are met and the final inspection, etc.
- Appraisal costs are the costs that a company incurs to detect defective inventory before it is shipped to customers. These costs must be incurred in order to keep defective goods from being sold to customers.
- 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.
- The best alternative to incurring appraisal costs is to work on increasing the quality of the production processes of all suppliers and the company itself, so that the entire process is inherently incapable of producing defective parts.