Value Added Analysis - Definition & Meaning
What is Value Added Analysis?
It is a process in which the essential benefits and attributes of a product or service are realized. Those attributes or benefits which are more customer-appealing are retained and improved, while the others are eliminated or reduced. The main goal of value added analysis is to obtain a value for end product which is higher than its production cost. The production cost includes all the resources which are required to produce the product or service, like labor, raw material, transportation, storage and overhead costs.
For value added analysis of a particular process, all the activities involved in that process, need to be examined carefully. The value added by any activity to the whole process should be positive and is calculated as:
Value Added= (Product’s vale after the activity) - (Product’s value before the activity)
While examining an activity, based on the value-added assessment, we can classify it as one of the following:
• RVA activity: It stands for real-value-add activity. It is that activity that contributes directly to improving customer’s perception and satisfying their expectations regarding a product or service. Examples of RVA activities are: shipping, receiving materials, taking orders from customers, assembling material components.
• BVA activity: It stands for business-value-add activity. It is that activity that contributes to satisfying business requirements, but do not add any value from point-of-view of a customer. Examples of BVA activities are: HR record maintenance, financial report preparation, ordering business supplies.
• NVA activity: It stands for non-value-add activity. It is that activity that neither contributes to business requirements nor to customer’s perceptions or expectations. They can be removed from the process without affecting the end-product and are also known as waste activities. Examples of NVA activities are: inspection, approval, storage and transportation.
The value-added analysis is used to improve the effectiveness and efficiency of processes. Cost and Time utilization can be used as indicators of efficiency while, various indicators of effectiveness should be employed.
In value added analysis, it is a common practice to reduce BVA activities and to eliminate waste activities. Sometimes, attempts to improve the efficiencies of NVA activities is made, rather than eliminating them altogether.
Hence, this concludes the definition of Value Added Analysis along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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