Value added

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In business, the difference between the sale price and the production cost of a product is the unit profit. In economics, the sum of the unit profit, the unit depreciation cost, and the unit labor cost is the unit value added. Summing value added per unit over all units sold is total value added. Total value added is equivalent to revenue less outside purchases (of materials and services). Value added is a higher portion of revenue for integrated companies, e.g., manufacturing companies, and a lower portion of revenue for less integrated companies, e.g., retail companies. Total value added is very closely approximated by total labor expense (including wages, salaries, and benefits) plus "cash" operating profit (defined as operating profit plus depreciation expense, i.e., operating profit before depreciation). The first component (total labor expense) is a return to labor and the second component (operating profit before depreciation) is a return to capital (including capital goods, land, and other property). In national accounts used in macroeconomics, it refers to the contribution of the factors of production, i.e., capital (e.g., land and capital goods) and labor, to raising the value of a product and corresponds to the incomes received by the owners of these factors. The national value added is shared between capital and labor (as the factors of production), and this sharing gives rise to issues of distribution.

Outside of economics, value added refers to "extra" feature(s) of an item of interest (product, service, person etc.) that go beyond the standard expectations and provide something "more", even if the cost is higher to the client or purchasor.[citation needed] Value-added features give competitive edges to companies with otherwise more expensive products.

Value-added methods and measurements are also being utilized in education as part of a national movement towards teacher evaluation and accountability in the United States. This type of measure is known as a value added modeling or measures

Process Improvement

In a process improvement perspective, in order for a step in any process to be considered value added, the activity must meet all three of the following criteria: 1) The customer is willing to pay for this activity, 2) It must be done right the first time, 3) The action must change the product or service in some manner.[1]

Examples of non-value added steps include: inspection by a third party not part of the process, like traditional Quality Assurance, a decision or review board as part of production, or multiple offices or entities performing the same or similar tasks.

Non Value Added tasks need to be further broken down into two categories: Non Value Added Business Required and Non Value Added Pure Waste.

Non Value Added Business Required activities includes things like:

  • Hosting a Health Department Inspection
  • Filling out Tax Forms in Accounting
  • Accommodating a SOX Audit
  • Paying for a Business License
  • Ensuring hiring compliance policies for Federal, State, and Local Government
  • Paying for training for workers that they don't want or need, but are required to receive. (Driver's training for blind employees for example.)

Non Value Added Pure Waste activities include things like:

  • Having an expense form or time sheet printed out, then scanned, then emailed to its destination
  • Having 10 people approve a document electronically when 9 need to read it and 1 approve it
  • Heating up fries for 10 people that only 5 people will order at your restaurant
  • Placing workstations 20 feet apart with parts that need to be carried back and forth instead of next to each other

Two thoughts to keep in mind: 1. Non Value Added Business Required activities need to be kept in tight control, because many times, the people in charge of them will expand the activities because no one questions them. These are necessary, but not desirable activities. They cost everyone money, but provide no value. (According to the definition above of Value Added) 2. Non Value Added Pure Waste activities need to be eliminated...not the people that perform the activities, but the activities themselves. They don't need to be performed for any reason.[2]

National accounts

The factors of production provide "services" which raise the unit price of a product (X) relative to the cost per unit of intermediate goods used up in the production of X.

In national accounts such as the United Nations System of National Accounts (UNSNA) or the United States National Income and Product Accounts (NIPA), gross value added is obtained by deducting intermediate consumption from gross output. Thus gross value added is equal to net output. Net value added is obtained by deducting consumption of fixed capital (or depreciation charges) from gross value added. Net value added therefore equals gross wages, pre-tax profits net of depreciation, and indirect taxes less subsidies.

Differences between Marxist and neoclassical accounting of value added

A difference between Marxist theory and conventional national accounts concerns the interpretation of the distinction between new value created, transfers of value and conserved value, and of the definition of "production".

For example, Rohit Gupta theory regards the "imputed rental value of owner-occupied housing" which is included in GDP as a fictitious entry; if the housing is owner-occupied, this housing cannot also yield real income from its market-based rental value at the same time.

In the 1993 manual of the United Nations System of National Accounts (UNSNA), the concept of "imputed rental value of owner occupied housing" is explained as follows:

"6.89. Heads of household who own the dwellings which the households occupy are formally treated as owners of unincorporated enterprises that produce housing services consumed by those same households. As well-organized markets for rented housing exist in most countries, the output of own-account housing services can be valued using the prices of the same kinds of services sold on the market in line with the general valuation rules adopted for goods or services produced on own account. In other words, the output of the housing services produced by owner-occupiers is valued at the estimated rental that a tenant would pay for the same accommodation, taking into account factors such as location, neighbourhood amenities, etc. as well as the size and quality of the dwelling itself. The same figure is recorded under household final consumption expenditures."

Marxist economists object to this accounting procedure on the ground that the monetary imputation made refers to a flow of income which does not exist, because most home owners do not rent out their homes if they are living in them.

Another important difference concerns the treatment of property rents, land rents and real estate rents. In the Marxian interpretation, many of these rents, insofar as they are paid out of the sales of current output of production, constitute part of the new value created and part of the real cost structure of production. They should therefore be included in the valuation of the net product. This contrasts with the conventional national accounting procedure, where many property rents are excluded from new value-added and net product on the ground that they do not reflect a productive contribution.

Value added tax

Value added tax (VAT) is a tax on sales. It works by being charged on the sale price of new goods and services, whether purchased by intermediate or final consumers. However, intermediate consumers may reclaim VAT paid on their inputs, so that the net VAT is based on the value added by producing this good or service.

See also


  1. Reference 1
  2. Muda (Japanese term)
  • Edgar Z. Palmer, The meaning and measurement of the national income, and of other social accounting aggregates.
  • Paul A. Samuelson and William D. Nordhaus (2004) Economics. "Glossary of Terms," Value added.
  • Anwar Shaikh & Ahmet Ertugrul Tonak, Measuring the Wealth of Nations. CUP.
  • M. Yanovsky, Anatomy of Social Accounting Systems.

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