What Are Appraisal Costs?

Appraisal costs are a specific category of quality control costs. Companies pay appraisal costs as part of the quality control process to ensure that their products and services meet customer expectations and regulatory requirements. These costs could include expenses for field tests and inspections.

Understanding Appraisal Costs

Appraisal costs can be a key expense for companies seeking to maintain high levels of customer and regulatory satisfaction. Payments for secret shopper salaries, factory floor inspectors, and technical screening equipment all fall into this category. Companies that spend large amounts of money on appraisal costs show that they are concerned with their reputations.

To prevent defective inventory or products from reaching their customers, companies get creative while incurring appraisal costs to spot suspect products. In the end, it is less expensive to incur appraisal costs than to lose customers who are frustrated by the receipt of low-quality goods.

The Internet and social media now give consumers unprecedented opportunities to voice their dissatisfaction with any companies or products that fail to meet their standards. The threat of unpleasant reviews or viral PR mishaps keeps companies on their toes and investing in appraisals of their products.

Appraisal costs can simply be looked at as part of the cost of doing business as well as the cost of creating a product or service. A company’s reputation is one of the most important assets that it has. Once a company’s reputation slips into the negative after the release of faulty products and bad publicity, it is almost always impossible or extremely difficult to shift consumer opinion.

It is for this reason that management needs to pay strict attention to quality control to ensure the lasting success of their company; appraisal costs are a part of that process.

Examples of Appraisal Costs

There are many examples of appraisal costs and every industry has different types of appraisals and therefore the costs associated with them. Appraisal costs can even be driven by where the industry is in a market cycle.

A classic appraisal cost would be what is spent to inspect materials delivered from suppliers. For example, let’s say a music retailer gets a shipment of guitars from a major manufacturer. Last year, the guitar manufacturer’s first round of guitars had faulty tuners, causing customers to return opened products, file complaints with the guitar store’s corporate parent, and in some cases, switch their loyalty to a different music retailer.

So this year, when the new shipment of guitars comes in, the music retailer opens the boxes, inspects each guitar to make sure the tuners are in good shape, and then repackages them before making them available to customers. This process costs money and time, which is accounted for on the balance sheet as an appraisal cost.

Other examples of appraisal costs include:

• Inspecting work-in-process materials
• Inspecting 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 any test equipment

The next best thing to incurring appraisal costs includes working on increasing the quality of the production processes of all suppliers and the company itself. The idea of vendor and supply chain management seeks to improve the entire process so that it’s inherently incapable of producing defective parts. Like a final product, suppliers need to ensure that their raw materials are in good condition, or else they risk losing supply contracts with the final producer of a good.

What Is an Anti-Dumping Duty?

An anti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value. Dumping is a process wherein a company exports a product at a price that is significantly lower than the price it normally charges in its home (or its domestic) market.

In order to protect their respective economy, many countries impose duties on products they believe are being dumped in their national market because these products have the potential to undercut local businesses and the local economy.

Understanding Anti-Dumping Duties

In the U.S., the International Trade Commission (ITC)–an independent government agency–is tasked with imposing anti-dumping duties. Their actions are based on recommendations they receive from the U.S. Department of Commerce and investigations by the ITC and/or the Department of Commerce. 

In many cases, the duties imposed on these goods exceeds the value of the goods. Anti-dumping duties are typically levied when a foreign company is selling an item significantly below the price at which it is being produced.

While the intention of anti-dumping duties is to save domestic jobs, these tariffs can also lead to higher prices for domestic consumers. And, in the long-term, anti-dumping duties can reduce the international competition of domestic companies producing similar goods.

The World Trade Organization (WTO) is an international organization that deals with the rules of trade between nations. The WTO also operates a set of international trade rules, including the international regulation of anti-dumping measures. The WTO does not intervene in the activities of companies engaged in dumping. Instead, it focuses on how governments can—or cannot—react to the practice of dumping. In general, the WTO agreement permits governments to act against dumping “if it causes or threatens material injury to an established industry in the territory of a contracting party or materially retards the establishment of a domestic industry.”

This intervention must be justified in order to uphold the WTO’s commitment to free-market principles. Anti-dumping duties have the potential to distort the market. In a free market, governments cannot normally determine what constitutes a fair market price for any good or service.

Example of an Anti-Dumping Duty

In June 2015, American steel companies United States Steel Corp., Nucor Corp., Steel Dynamics Inc., ArcelorMittal USA, AK Steel Corp., and California Steel Industries, Inc. filed a complaint with the U.S. Department of Commerce and the ITC. Their complaint alleged that several countries, including China, were dumping steel into the U.S. market and keeping prices unfairly low.

After conducting a review, one year later the U.S. announced that it would be imposing a total of 522% combined anti-dumping and countervailing import duties on certain steel imported from China. In 2018, China filed a complaint with the WTO challenging the tariffs imposed by the Trump administration. Since then, the Trump administration has continued to use the WTO to challenge what it claims are unfair trading practices by the Chinese government and other trading partners.

What Is an Air Waybill (AWB)?

An air waybill (AWB) is a document that accompanies goods shipped by an international air courier to provide detailed information about the shipment and allow it to be tracked. The bill has multiple copies so that each party involved in the shipment can document it. An air waybill (AWB), also known as an air consignment note, is a type of bill of lading. However, an AWB serves a similar function to ocean bills of lading, but an AWB is issued in non-negotiable form, meaning there’s less protection with an AWB versus bills of lading.

Understanding an Air Waybill (AWB)

An air waybill (AWB) serves as a receipt of goods by an airline (the carrier), as well as a contract of carriage between the shipper and the carrier. It’s a legal agreement that’s enforceable by law. The AWB becomes an enforceable contract when the shipper (or shipper’s agent) and carrier (or carrier’s agent) both sign the document. 

The airway bill will also contain the shipper’s name and address, consignee’s name and address, three-letter origin airport code, three letter destination airport code, declared shipment value for customs, number of pieces, gross weight, a description of the goods, and any special instructions (e.g., “perishable”).

An AWB also contains the conditions of the contract that describe the carrier’s terms and conditions, such as its liability limits and claims procedures, a description of the goods, and applicable charges.

Air Waybill (AWB) vs. Bill of Landing

AWBs are unlike other bills of lading, in that they are non-negotiable instruments, meaning that it does not specify on which flight the shipment will be sent, or when it will reach its destination. Bills of lading are legal documents between the shipper of goods and the carrier, detailing the type, quantity, and destination of the goods being carried.

Bills of lading also act as a receipt of shipment when the goods are delivered at a predetermined destination. This document accompanies the goods and is signed by authorized representatives of the shipper, the carrier, and the recipient. However, unlike a bill of landing, an air waybill (AWB) is non-negotiable. Being non-negotiable, the AWB is a contract just for transportation and does not cover the merchandise value.

Requirements for an Air Waybill

The International Air Transport Association (IATA) designs and distributes air waybills. There are two types of AWBs—an airline-specific one and a neutral one. Each airline AWB must include the carrier’s name, head office address, logo, and air waybill number. Neutral air waybills have the same layout and format as airline AWBs; they just aren’t prepopulated.

An air waybill has 11 numbers and came with eight copies of varying colors. With the Multilateral Electronic Air Waybill Resolution 672, paper air waybills are no longer required. Dubbed the e-AWB, it’s been in use since 2010 and became the default contract for all air cargo shipments on enabled trade lines as of 2019.

What Is Austerity?

The term austerity refers to a set of economic policies that a government implements in order to control public sector debt. Governments put austerity measures in place when their public debt is so large that the risk of default or the inability to service the required payments on its obligations becomes a real possibility.

In short, austerity helps bring financial health back to governments. Default risk can spiral out of control quickly and, as an individual, company, or country slips further into debt, lenders will charge a higher rate of return for future loans, making it more difficult for the borrower to raise capital.

How Austerity Works

Governments experience financial instability when their debt outweighs the amount of revenue they receive, resulting in large budget deficits. Debt levels generally increase when government spending increases. As mentioned above, this means that there is a greater chance that federal governments can default on their debts. Creditors, in turn, demand higher interest to avoid the risk of default on these debts. In order to satisfy their creditors and control their debt levels, they may have to take certain measures.

Austerity only takes place when this gap—between government receipts and government expenditures—shrinks. This situation occurs when governments spend too much or when they take on too much debt. As such, a government may need to consider austerity measures when it owes more money to its creditors than it receives in revenues. Implementing these measures helps put confidence back into the economy while helping restore some semblance of balance to government budgets.

Austerity measures indicate that governments are willing to take steps to bring some degree of financial health back to their budgets. As a result, creditors may be willing to lower interest rates on debt when austerity measures are in place. But there may be certain conditions on these moves.

For instance, interest rates on Greek debt fell following its first bailout. However, the gains were limited to the government having decreased interest rate expenses. Although the private sector was unable to benefit, the major beneficiaries of lower rates are large corporations. Consumers benefited only marginally from lower rates, but the lack of sustainable economic growth kept borrowing at depressed levels despite the lower rates.

Special Considerations

A reduction in government spending doesn’t simply equate to austerity. In fact, governments may need to implement these measures during certain cycles of the economy.

For example, the global economic downturn that began in 2008 left many governments with reduced tax revenues and exposed what some believed were unsustainable spending levels. Several European countries, including the United Kingdom, Greece, and Spain, turned to austerity as a way to alleviate budget concerns.

Austerity became almost imperative during the global recession in Europe, where eurozone members didn’t have the ability to address mounting debts by printing their own currency. Thus, as their default risk increased, creditors put pressure on certain European countries to aggressively tackle spending.

Types of Austerity

Broadly speaking, there are three primary types of austerity measures:

• Generating revenue generation through higher taxes. This method often supports more government spending. The goal is to stimulate growth with spending and capturing benefits through taxation.
• The Angela Merkel model. Named after the German chancellor, this measure focuses on raising taxes while cutting nonessential government functions.
• Lower taxes and lower government spending. This is the preferred method of free-market advocates.

Taxes

There is some disagreement among economists about the effect of tax policy on the government budget. Former Ronald Reagan adviser Arthur Laffer famously argued that strategically cutting taxes would spur economic activity, paradoxically leading to more revenue.

Still, most economists and policy analysts agree that raising taxes will raise revenues. This was the tactic that many European countries took. For example, Greece increased value-added tax (VAT) rates to 23% in 2010. The government raised income tax rates on upper-income scales, along with adding new property taxes.

Reducing Government Spending

The opposite austerity measure is reducing government spending. Most consider this to be a more efficient means of reducing the deficit. New taxes mean new revenue for politicians, who are inclined to spend it on constituents.

Spending takes many forms, including grants, subsidies, wealth redistribution, entitlement programs, paying for government services, providing for the national defense, benefits to government employees, and foreign aid. Any reduction in spending is a de facto austerity measure.

At its simplest, an austerity program that is usually enacted by legislation may include one or more of the following measures:

• A cut or a freeze—without raises—of government salaries and benefits
• A freeze on government hiring and layoffs of government workers
• A reduction or elimination of government services, temporarily or permanently
• Government pension cuts and pension reform
• Interest on newly issued government securities may be cut, making these investments less attractive to investors, but reducing government interest obligations
• Cuts to previously planned government spending programs such as infrastructure construction and repair, health care, and veterans’ benefits
• An increase in taxes, including income, corporate, property, sales, and capital gains taxes
• A reduction or increase in the money supply and interest rates by the Federal Reserve as circumstances dictate to resolve the crisis.
• Rationing of critical commodities, travel restrictions, price freezes, and other economic controls, particularly in times of war

Criticism of Austerity

The effectiveness of austerity remains a matter of sharp debate. While supporters argue that massive deficits can suffocate the broader economy, thereby limiting tax revenue, opponents believe that government programs are the only way to make up for reduced personal consumption during a recession. Cutting government spending, many believe, leads to large-scale unemployment. Robust public sector spending, they suggest, reduces unemployment and therefore increases the number of income-tax payers. 

Economists such as John Maynard Keynes, a British thinker who fathered the school of Keynesian economics, believe that it is the role of governments to increase spending during a recession to replace falling private demand. The logic is that if demand is not propped up and stabilized by the government, unemployment will continue to rise and the economic recession will be prolonged.

But austerity runs contradictory to certain schools of economic thought that have been prominent since the Great Depression. In an economic downturn, falling private income reduces the amount of tax revenue that a government generates. Likewise, government coffers fill up with tax revenue during an economic boom. The irony is that public expenditures, such as unemployment benefits, are needed more during a recession than a boom.

Examples of Austerity

United States

Perhaps the most successful model of austerity, at least in response to a recession, occurred in the United States between 1920 and 1921. The unemployment rate in the U.S. economy jumped from 4% to almost 12%. Real gross national product (GNP) declined almost 20%—greater than any single year during the Great Depression or Great Recession.

President Warren G. Harding responded by cutting the federal budget by almost 50%. Tax rates were reduced for all income groups, and the debt dropped by more than 30%. In a speech in 1920, Harding declared that his administration “will attempt intelligent and courageous deflation, and strike at government borrowing…[and] will attack high cost of government with every energy and facility.”

Greece

In exchange for bailouts, the EU and European Central Bank (ECB) embarked on an austerity program that sought to bring Greece’s finances under control. The program cut public spending and increased taxes often at the expense of Greece’s public workers and was very unpopular. Greece’s deficit has dramatically decreased, but the country’s austerity program has been a disaster in terms of healing the economy.

Mainly, austerity measures have failed to improve the financial situation in Greece because the country is struggling with a lack of aggregate demand. It is inevitable that aggregate demand declines with austerity. Structurally, Greece is a country of small businesses rather than large corporations, so it benefits less from the principles of austerity, such as lower interest rates. These small companies do not benefit from a weakened currency, as they are unable to become exporters.

While most of the world followed the financial crisis in 2008 with years of lackluster growth and rising asset prices, Greece has been mired in its own depression. Greece’s gross domestic product (GDP) in 2010 was $299.36 billion. In 2014, its GDP was $235.57 billion according to the United Nations. This is staggering destruction in the country’s economic fortunes, akin to the Great Depression in the United States in the 1930s.

Greece’s problems began following the Great Recession, as the country was spending too much money relative to tax collection. As the country’s finances spiraled out of control and interest rates on sovereign debt exploded higher, the country was forced to seek bailouts or default on its debt. Default carried the risk of a full-blown financial crisis with a complete collapse of the banking system. It would also be likely to lead to an exit from the euro and the European Union.