Question

Which of the following is an appraisal cost?

Multiple Choice

• Depreciation of testing equipment

• Customer service costs

• Engineering and design costs

• Costs to repair defective units

Answer 1

Depreciation of testing equipment is an appraisal cost.

Appraisal cost:

Appraisal costs are the costs that a company incurs to detect defective inventory before it is shipped to customers. These costs must be incurred in order to keep defective goods from being sold to customers. It is less expensive to incur appraisal costs than to lose customers who are frustrated by the receipt of low-quality goods from the seller. The cost associated with a lost customer comprises not only the marketing cost to initially attract the customer, but also all subsequent profits over what would have been the term of the relationship with the seller. Examples of appraisal costs are:

• The inspection of materials delivered from suppliers

• The inspection of work-in-process materials

• The inspection of finished goods

• The supplies used to conduct inspections

• The inventory destroyed as part of the testing process

• Supervision of the inspection staff

• Depreciation of test equipment and software

• Maintenance of test equipment