Title: Appraisal Costs — what they are, why they matter, and how to evaluate them
Definition
– Appraisal costs are the expenses a company incurs to check that its products or services meet quality standards. They are a subset of the “cost of quality,” focused on inspection, testing, and other verification steps that detect defects before customers see them.
Why appraisal costs exist
– Appraisal activities are intended to catch problems early: inspecting supplier deliveries, testing work‑in‑progress (WIP), sampling finished goods, and maintaining/testing test equipment. Firms accept these costs because the alternative—higher returns, repairs, lost sales, and damaged reputation—often costs more.
Common examples
– Incoming material inspections (checking supplier parts or raw material batches).
– Final inspections and functional tests of finished goods.
– In‑store or field checks (mystery shoppers or sample purchases).
– Calibration and maintenance of test and measurement equipment.
– Consumables and labor used solely for quality checks (e.g., test fixtures, inspection stations).
How appraisal costs fit with other quality spending
– Cost of quality is usually split into prevention costs (actions to stop defects) and appraisal costs (finding defects), plus internal and external failure costs (fixing defects found before or after delivery). Investing in appraisal reduces failure exposure; investing in prevention reduces the need for appraisal over time.
Practical checklist for managers (quick)
1. Identify inspection points: incoming, WIP, final, and field.
2. Measure current defect rates at each point.
3. Estimate direct appraisal costs (labor, supplies, equipment depreciation).
4. Estimate failure costs avoided (returns, rework, warranty claims, lost sales).
5. Choose sampling plan: 100% inspection vs statistical sampling.
6. Track metrics monthly: appraisal cost per unit, defects per 1,000 units, failure cost.
7. Review supplier quality and consider prevention investments if recurring supplier defects exist.
8. Rebalance spending between prevention and appraisal based on ROI.
Worked numeric example
Assumptions:
– A retailer receives 1,000 units of a product.
– Inspection labor takes 5 minutes per unit. Inspector wage = $18/hour.
– Inspection consumables/packaging = $0.50 per unit.
– Test equipment cost amortized to $0.10 per unit.
Step 1 — compute inspection cost per unit:
– Labor per unit = (5/60) hours × $18 = $1.50
– Total per unit = $1.50 + $0.50 + $0.10 = $2.10
Step 2 — total appraisal cost for the shipment:
– 1,000 units × $2.10 = $2,100
Step 3 — compare with estimated failure cost if not inspected:
– Suppose the defect rate from the supplier is 2% (20 defective units).
– Estimated cost per defect (returns, handling, customer dissatisfaction) = $120.
– Total failure cost = 20 × $120 = $2,400
Conclusion from example:
– Paying $2,100 to inspect the whole shipment is cheaper than the expected $2,400 cost of defects reaching customers. The math supports full inspection in this scenario. Change the numbers (defect rate, per‑defect cost, inspection time) and recompute to guide decisions.
When appraisal spending might be too high
– If inspection cost per unit substantially exceeds the expected failure cost per unit, consider:
– Moving to statistical sampling instead of 100% inspection.
– Investing more in supplier development and prevention measures.
– Implementing automated inline testing to lower per‑unit inspection labor.
Notes and assumptions
– The example uses simplifying assumptions (fixed wages, fixed defect cost). Real decisions should use company‑specific data and include indirect reputational impacts where measurable.
– Appraisal costs reduce but do not eliminate risk. They should be part of a broader quality strategy that includes prevention and supplier management.
References (for further reading)
– Investopedia — Appraisal Costs: https://www.investopedia.com/terms/a/appraisal-costs.asp
– American Society for Quality (ASQ) — Cost of Quality: https://asq.org/quality-resources/cost-of-quality
– ISO — Quality management systems (ISO 9001): https://www.iso.org/iso-9001-quality-management.html
– AccountingTools — The Cost of Quality: https://www.accountingtools.com/articles/the-cost-of-quality.html
Educational disclaimer
This explainer is for educational purposes only and does not constitute personalized financial, legal, or operational advice. Use your own data and professional judgment when applying these concepts.