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.
What Does Appraisal Cost Mean?
I’m sure you know what an appraisal is. 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.
Let’s take a look at an example.
Example
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.
