Appraisal Costs Meaning
Appraisal Costs is the cost incurred by a business unit for ensuring that the products and services supplied by them are meeting the expectations of the customer, i.e., they are free from defects and are fulfilling all regulatory requirements. Examples of such costs include the cost incurred on inspection, field tests, and internal audits, etc.
Example of Appraisal Costs
Let’s take an example of appraisal costs.
One of the examples of appraisal costs can be of a retail business shop named kitchen king, which was started by Mr. Eden in America, which deals mainly with the wide varieties of food processors. When Mr. Eden sold the first lot of food processors containing around 50 food processors, 45 of them were found to be defective and were returned by the customer. Due to this, the goodwill of Mr. Eden’s business was not developing.
So Mr. Eden decided to employ quality control staff who were required to check every food processor before selling it to the customer so that the returns can be minimized and a higher level of customer satisfaction can be achieved. Now suppose the salary of inspection staff is $500 per month and other costs related to testing and inspection of the product is $200 per month. Therefore, the total appraisal cost is $700 per month, i.e., sums of the salary of inspection staff and other costs related to testing and inspection of products.
Advantages of Appraisal Costs
The various advantages related to the appraisal costs are as follows:
- It is the critical 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. It is necessary because in case there are any defects in the products of the company, it can impact the goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price. of the company negatively, thereby reducing its sales in the market.
- For the long term survival and growth of the business, these costs are mandatory 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. If 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 complete production loss of the company. So it is required that such costs 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 entire production facility of the company.
- Appraisal costs are incurred to find out is any material defect exists in the products of the company. Still, this process is time-consuming and requires the efforts of the different persons.
Essential Points of Appraisal Costs
The different vital 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, 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. In today’s scenario, social media provides opportunities for customers to write their opinion on the products on various platforms. Customer 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.
The appraisal costs are the different costs which are incurred by the companies to ensure that the products they are selling in the market to their customers are free from the material defects. These are the critical expenses that the company incurs to ensure a higher level of customer and regulatory satisfaction along with marinating the goodwill of their company in the market.
However, in case the company finds the defect after the completion of the production by incurring the appraisal cost, there is no use of such extra cost, and the same will result in the complete production loss of the company. So such costs need to be incurred, to find the defect, before additional labor or material introduction. If the cost is incurred afterward, then it will not solve any problem.
This article has been a guide to what are appraisal costs and its meaning. Here we discuss an example of appraisal costs along with advantages and disadvantages. You can learn more from the following articles –