Appraisal Costs Meaning Examples What Is Appraisal Cost

Appraisal Costs Meaning

Appraisal Costs is the cost incurred by a business unit to ensure that the products and services they supply meet the customer’s expectations, i.e., they are free from defects and fulfill all regulatory requirements. Examples of such costs include the cost incurred on inspection, field tests, internal audits, etc.

Example of Appraisal Costs

Let’s take the example of appraisal costs.

One of the examples of appraisal costs can be a retail shop named kitchen king, which was started by Mr. Eden in America and deals mainly with a wide variety 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 could be minimized and a higher level of customer satisfaction. Suppose the salary of inspection staff is $500 per month and other costs related to testing and inspection of the product are $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.

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Advantages of Appraisal Costs

The various advantages related to the appraisal costs are as follows:

It is the necessary expense that the company incurs to ensure a 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 organizations keep their products and services defect-free so that their goodwill can be maintained in the market. It is necessary because if there are any defects in the company’s products, it can negatively impact the company’s 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.read more, thereby reducing its sales in the market. For the long-term survival and growth of the business, these costs are mandatory to maintain the quality of the products and services.It may help the business organization reduce the threat of bad customer reviews on social media platforms 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 use the appraisal cost in the early manufacturing process. If the company finds the defect after the completion of the production by incurring the appraisal cost, then there is no use for 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 introducing 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 machines. So sometimes, 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 must sell their products without proper quality and control checks.If not done in the right manner, the appraisal cost can create a negative impact on the entire production facility of the company.Appraisal costs are incurred to determine if any material defect exists in the company’s products. Still, this process is time-consuming and requires the efforts of different persons.

Essential Points of Appraisal Costs

The different vital points related to the appraisal costs are as follows:

Appraisal costs are necessary because if there are any defects in the company’s products, it can impact the goodwill of the company negatively, thereby reducing its sales in the market. The expenditure on appraisal shows that the organization is concerned about its 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 receiving 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 include the cost incurred for incoming inspection and incoming test, in-process inspection, the evaluation conducted to ensure that the requirements are met, and the final inspection.

Conclusion

The appraisal costs are the different costs incurred by the companies to ensure that the products they are selling in the market to their customers are free from material defects. These are the necessary 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, suppose the company finds the defect after the completion of the production by incurring the appraisal cost. In that case, there is no use for such extra cost, and the same will result in the complete production loss of the company. So, costs must be incurred to find the defect before additional labor or material introduction. If the cost is incurred afterward, it will not solve any problem.