Appraisal costs refer to the cost of quality control of a product or service or both with an intention to meet quality standards or the requirements of the regulatory framework. It also ensures that the safety standards of the products are met, and they are fit for usage. The common appraisal cost includes inspection costs, tests, internal audits, etc.
Did You Know? Companies incur appraisal costs to check on the quality control of the products.
Meaning of Appraisal Cost
Appraisal costs can be a key expense for a company wanting to maintain a high level of customer and regulatory satisfaction. Payments for inspection, testing of product safety, technical screening of equipment, and product safety badge all fall within the category of appraisal cost. Usually, companies spend a huge sum of appraisal costs to maintain the quality of the products and earn a reputation in the market. It also helps prevent defective products from being produced and delivered, which helps build strong customer loyalty and save the company's resources. It is especially important for companies to earn customer loyalty at this time as customers have strong voices to show their dissatisfaction on social handles. These treats push companies on their own to keep on investing in the appraisal of their products.
A company’s reputation in the marketplace keeps it motivated to innovate and lunch new products. It is rightly understood that appraisal costs can be simply considered the cost of doing business. Once the company slips into negative publicity, it becomes a tough job to change the perception of the customers toward the company.
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Examples of Appraisal Costs
There are many examples of appraisal cost, which sometimes varies between industries. Appraisal cost can be seen as where the industry is in a market cycle. However, here are a few examples of appraisal costs -
Inspection Cost
Companies spend a huge sum of money on maintaining quality in their entire production. From the start of material procurement, the material is inspected for quality and checked on various standards set by company managers. Once the material is checked it is passed on for further processing on it until the final product is produced. Thereafter, the final product is inspected on various quality standards until final delivery is released for the market where customers buy them. Inspection costs are also incurred on various production processes to check the quality of outputs.
Safety Costs
It is hard to imagine that somebody could sell an unsafe product in the market, especially in this information era where every consumer is well informed about his safety. Companies acknowledge this and try to incorporate safety standards into their production process. There are regulatory frameworks also to compel producers to make their products safe for the market. For example - a manufacturer of Stove Cookers installs safety valves in their products to make the cooker safe for consumers and ready for market.
Test Costs
There is a difference between the inspection and the test of a product. A product, in general, tests for various standards to check its impact on the life of consumers. For example - FMCG Products are usually tested for adulteration to check their fitness for human consumption. Due to adulteration issues, brands like Nestle often face huge penalties from regulators.
Assembly cost
During the stage of product assembly, the components of a product are fitted to produce the product. At this stage of production, The products are checked on their fitness and durability of the products produced. For example - At the assembly stage, phones are assembled from various components like battery, camera, etc., and finally tested to check whether they are even working and whether they are strong enough as promised in advertising materials.
Stamping and Labeling
It is quite a practice in companies that products are stamped and labelled as “OK TESTED”. This ensures that the product has passed through various set standards of quality and reliability. This is also a part of the appraisal cost. Also, it helps people in the organisation identify that the products are ready for shipment and match all the safety and required quality control set within the organisation and the regulators, if any, applicable to the company.
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Advantages of Appraisal Costs
There are various advantages of appraisal costs. Some of them are as follows -
- It is quite necessary for companies to earn customer loyalty by providing customers with excellent quality products and services.
- Companies also incur appraisal costs to meet the regulatory standards for quality controls in their products.
- It also helps companies to keep their products safe and fit for the market. It ensures that the company is maintaining a consistent improvement in the safety and quality of the products. This, in turn, creates customer loyalty, and the company can position itself as a market leader with strong values.
- A company with an excellent footprint on quality builds its brand for the long-term growth of the company.
- A company with a good investment in appraisal costs reduces the risk of customer dissatisfaction and creates positive images among the customers.
Disadvantages of Appraisal Costs
Too much emphasis on appraisal costs could put a company at a serious disadvantage. Here are a few of the disadvantages of appraisal costs -
- Appraisal costs are usually incurred in the production processes of a company. This causes production delays as employees may put too much effort into improving quality every step of the way of production. It also may sometimes create idle time in the production processes, which may add up to the production cost.
- Companies that invest a lot in appraisal costs end up increasing the cost of production. This causes their product to be unnecessarily expensive for customers leading to lower sales and revenue. Also, Increasing production costs may lead to lower profitability for the Company.
- A company with a strong quality inspection team may reduce the number of defective products to be delivered to customers. But, without feedback, a company may struggle to dispose of these defective products, which hinders the company.
- If not done in the right manner, the appraisal cost can create a negative impact on the entire production facility of the company.
Rationality Behind Appraisal Costs
Companies are required to set up a team for inspection and quality controls, and they may alternatively outsource this to an outside firm with more expertise in the matter. However, This may add up to a huge cost, which is well worth its price.
Companies that succeed in detecting defectives early in production may save millions in revenue. They could create a feedback mechanism to improve their production process as a result and avoid such defects for coming production ahead. It also helps companies to avoid reaching those defects to customers and save the company’s reputation. For example - Samsung Galaxy Note 7 was eventually discontinued due to its poor quality and safety issues. The phone blasted on its own and caused a huge reputational loss for Samsung. In response to it, Samsung recalled every unit sold and provided a new and improved phone instead and relaunched its phone again.
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Conclusion:
Appraisal costs are something that companies struggle to neglect or avoid. In the modern information era, customers are very sensitive to bad experiences with products, and they have voices that can be found on internet reviews and on their social handles. This compels the companies to invest in appraisal for products and win the trust of the customers. That is why no business could afford to sacrifice on quality and reliability of the products. They avoid all changes of customers getting poor or defective products. While it is quite true that appraisal costs companies too much, the benefits always outweigh the cost involved. On that note hope, you enjoyed reading it so and liked it. We have discussed a lot about appraisal costs, appraisal costs examples, advantages, and disadvantages.
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