Table of Contents
- 1 What is ‘Appraisal Cost’?
- 2 Components of Appraisal Cost
- 2.1 Inspection at Source
- 2.2 Inspection on Receipt
- 2.3 Surveillance / Superficial Costs
- 3 In a Nutshell
What is ‘Appraisal Cost’?
In the common parlance, appraisal cost typically refers to expenses borne by home sellers. A house seller hires a professional appraiser to ascertain the market value of the house. This ensures fetching the right price on the property when it is finally up for sale. As such, ‘appraisal cost’ is nothing but the professional appraiser’s fee.
In accounting, however, appraisal cost is referred to differently. Appraisal cost is a specific subset of quality control costs. Companies incur an appraisal cost to evaluate the quality of goods and services after production and before they are ready for shipping to customers. The primary goal of an appraisal remains to sort out the defective or substandard products and prevent the shipping of such lower-quality produce.
Incurring appraisal cost proves to be much cheaper than losing out on disgruntled customers not happy with the goods. Additionally, appraisal costs also go a long way in maintaining a shiny track record. The ever-maintained quality would speak for itself in events of investigations and checks as per government regulations.
Components of Appraisal Cost
For ease of understanding the types of appraisal costs have been bucketed into three broad categories.
Inspection at Source
Inspection of Incoming Material
This pertains to quality checks on incoming raw material and supply from vendors. Samples of input material must be inspected to ensure they adhere to the prescribed quality and composition standards. If not, the goods are returned, vendor arrangements re-negotiated all of which entails costs.
Inspection at Intermediary Production
This appraisal cost relates to withdrawing samples of products in the work-in-progress stage. Lab testing of samples ensures conformity to expected levels of quality. Any finished product required a standard mix of inputs. Any variance from this mix would require re-work of the entire batch amid-production. This, of course, is an expensive affair. Not to mention the cost of lab technicians inspecting the raw samples.
Inspection on Receipt
Inspection of Finished Goods
This is the most critical checkpoint for ensuring the true effectiveness of the quality control process. All finished goods must, therefore, be scrutinized and sorted for defectives or un-standardized outliers. This process may be as simple or complicated depending upon the nature of goods under inspection. For example, in the case of consumables as soap or toothpaste samples may have to be checked extensively in labs. On the other hand, in an assembly line of chairs, a mere physical inspection may be sufficient.
Cost of Destruction or Rework
Upon appraisal, the defective goods either must go to trash or sent back to production for correction or rework. It is important to destroy the involved defective produce lest it gets mixed up with the outgoing finished goods. Obviously, both these options entail costs.
Salary of Supervision Staff
Salaries are a prevalent expense at every level of production. However, it is significant to distinctively call it out at this stage. Skilled technical staff with specialized experience in quality control must be employed to verify the quality of the final product. Due to the level of expertise, their salaries constitute a sizable portion of the total appraisal costs.
Surveillance / Superficial Costs
Cost of Testing Equipment
This is a rudimentary form of appraisal cost and includes the cost of equipment & material used in the appraisal process. For example, lab equipment, chemicals & materials used, disposable testing subjects, etc.
Customer Site Inspection
Often, companies offer site inspections and quality checks as a part of after-sales services. Businesses visit the site or storage spaces of customer post-sale to ensure the storage conditions are optimum to maintain the quality of goods. Customer specifications may also mandate certain changes. Obviously, such appraisal checks on off-site client locations not only involve additional logistical cost but also expert fees proving to be a costly affair.
Plant Utilities in Inspection Area
This bucket includes overhead expenses incurred as ancillary to the apprising activity. Electricity, power & fuel and other consumables used while carrying out the appraisals are all part of appraisal cost. Moreover, depreciation to plant & machinery as well as maintenance costs is also included here. Appraisal cost also includes rent of special areas allocated for quality control activities.
In a Nutshell
While it is entirely up to the subjective decision of a business, it is in their favor to have a judicious spend for appraisal. Iterated below are a few reasons:
- Incurring appraisal cost is cheaper than the cost of losing out a customer dissatisfied with a sub-par purchase.
- Significant cost written to P&L under appraisal demonstrates good business practices. These fetch good advertisement of the business and demonstrates its image as a quality conscious & customer-caring organization.
- Appraisal expenses can work as a proof to the commitment to quality thus adding to the brand image. Consequently, this goes a long way in cutting off competition and building a loyal customer base.
- Regular expenses on appraisal cost come in handy in events of statutory inspections. When under the governmental radar, it is convenient to pass all tests of quality since an ongoing practice of quality maintenance is strongly demonstrated.
- There may be cases of claims or lawsuits filed against the business for damage or loss due to the consumption or use of alleged sub-standard quality of goods. In such an event lab reports attesting quality, supervisor’s shift report or any other appraisal checks proving standard of production may prove to be a savior.1–3