Appraisal Costs: Definition, How They Work, and Examples

What are appraisal costs?

Appraisal costs are expenses a company incurs to detect defects and ensure products or services meet customer expectations and regulatory requirements. They are a category of quality-control costs focused on inspection, testing, and verification before products reach customers.

Why appraisal costs matter

• Prevents defective goods from reaching customers, protecting brand reputation and reducing returns, complaints, and loss of future sales.
• Typically less costly than the cumulative losses from warranties, recalls, lost customers, and negative publicity—especially in the age of social media.
• Signals a company’s commitment to quality; sustained poor quality can permanently damage customer trust.

Typical appraisal cost items

Appraisal costs can vary by industry and product lifecycle stage, but common items include:
* Inspection of incoming materials from suppliers
* Inspection of work-in-process (WIP) and finished goods
* Supplies and consumables used during inspections and tests
* Destruction of inventory used in destructive testing
* Supervision and wages for inspection staff (including secret shoppers or field testers)
* Depreciation and maintenance of testing equipment and software
* Costs to repackage or repair goods discovered during inspection

Examples

• A music retailer inspects a new shipment of guitars to verify tuners work, then repackages approved items before sale.
• A manufacturer runs destructive tests on sample parts; the scrapped samples are recorded as part of appraisal costs.
• A retail chain hires secret shoppers to evaluate in-store service and product quality.

Managing and reducing appraisal costs

While appraisal activity is necessary, companies can reduce total quality-related costs by:
* Improving supplier and vendor quality through audits, standards, and collaboration
* Strengthening in-process quality controls so fewer defects reach the inspection stage
* Investing in better training, automation, and preventive maintenance to reduce reliance on manual inspection
* Using data and root-cause analysis to address recurring defects and prevent repetition

Key takeaways

• Appraisal costs are investments in detecting defects before delivery and are part of overall quality-control spending.
• Properly balanced appraisal and prevention activities protect reputation and generally cost less than the fallout from selling defective products.
• Effective supplier management and process improvement can reduce long-term appraisal and failure costs.