Posted in Operations and Supply Chain Terms, Total Reads: 625
Definition: Value Added
Value Added refers to the increase in value of an item after any stage of processing. This value addition to the item can be due to labour, machine, creativity, technology etc. Hence, it is nothing but the enhancement of the value after each stage of the process.
Mathematically, it is defined as the difference between the total revenue and the total cost of materials, components and services. The value added at each stage is the difference between the cost of the input and the value of the output obtained from the stage. The sum of value added after each stage is the total value added by the industry to the GDP of the economy.
This value added forms the basis for taxation of VAT.
For example, wheat is turned into flour from which bread is prepared
If cost of wheat is 5/kg, cost of flour is 16/kg and cost of bread is 50/pound.
Then assuming that 1 kg of wheat produces 0.5 kg of flour and 0.5 kg of flour produces 0.2 pound of bread, the calculation of value added would be
COST OF FINAL PRODUCT= SUM OF VALUE ADDED = 5+3+2=10
Hence, the sum of value of value added is the cost of final product.