What are Warranty Costs?
Warranty costs are the expenditure associated with replacing, refunding, or repairing any defective product. Warranties usually come with a warranty period, and customers can claim during this period. If the claim is verified to be true, companies are bound to have warranty costs.
Significance of Warranty Costs in E-commerce
Warranty costs help companies get a clear overview of their products and also in maintaining their finances. These benefits are elaborated on below:
- Maintaining finances: While accounting for a particular period, warranty costs are calculated even if there is no warranty claim. This is because, if any claim comes up subsequently, the costs that are already incurred will lower the warranty liability account.
- Improving products: If any company has high warranty costs, that is a sign for the company to look into their manufacturing unit to understand how their products go wrong.
Prerequisites for Warranty Costs and How It Works
To calculate warranty costs, the following information is needed:
- The average cost of repairing or replacing any product under warranty
- Number of units of any product sold during a specific accounting period
- Percentage of the sold product that might need repairing or replacement
First, the number of products that need to be repaired or replaced is calculated to calculate warranty costs. The following formula is used to accomplish this:
Total number of units sold x Defective units
Subsequently, the cost to repair or replace the said defective units can be calculated as follows:
Number of units to be replaced or repaired x Cost per unit for replacement or repair
Use Case with Warranty Costs
Suppose a company ABC has sold 36,000 scooters. Each scooter costs AUD100 in production. The scooters have a defect rate of 5%. Therefore, the potential number of scooters that need to be replaced or repaired are:
36,000 x 5% = 180
Hence, the potential cost to repair or replace these defective units would be:
180 x 100 = 18000 AUD
