Appraisal Cost: Simplified Like Never Before

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 costs 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 materials and supplies 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, and vendor arrangements re-negotiated, all entail 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.

Appraisal Costs

Inspection on Receipt

Inspection of Finished Goods

This is the most critical checkpoint for ensuring the true effectiveness of the quality control process. Therefore, all finished goods must be scrutinized and sorted for defectives or un-standardized outliers. This process may be as simple or complicated depending on the nature of the goods under inspection. For example, in the case of consumables such as soap or toothpaste, samples may have to be checked extensively in labs. On the other hand, a mere physical inspection may be sufficient in an assembly line of chairs.

Cost of Destruction or Rework 

Upon appraisal, the defective goods either must go to the trash or be 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 their 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 customers 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.

Also Read: Types of Costing

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 the appraisal cost. Moreover, depreciation to plant & machinery as well as maintenance costs is also included here. Appraisal cost also includes the 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 demonstrate its image as a quality conscious & customer-caring organization.
  • Appraisal expenses can work as proof of 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 costs come in handy in the 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 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.

Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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