Value added is the portion of a product's value that has been created in a given organization. This is the difference between the value of products sold and purchased goods and services.
Value added concept
Value added is calculated as the difference between revenue and the cost of goods and services purchased from external organizations. The latter include, in particular, the cost of raw materials and semi-finished products, repair, marketing, maintenance services, electricity costs, etc.
The added value is the value of the product (or service) by which the value of this product increases during processing until the moment it is sold to the consumer. It includes the wage fund, rent, depreciation, rent, interest on the loan, as well as the profit received.
For example, a company sold products worth 100 thousand rubles. For the production of these products, she purchased raw materials for 30 thousand rubles, and also paid for services to external contractors for 10 thousand rubles. The added value in this case will be 60 thousand rubles. (100 - 30 - 10) or 60% of the cost of the final product.
Western economists also share the concept of negative value added, when additional processing not only does not add value to the product, but, on the contrary, reduces it. In a market economy, this phenomenon is absent and is applicable to the planned model.
The company uses added value in the following areas:
- salary payments (wages, bonuses, compensations, contributions to extra-budgetary funds);
- payment of taxes (except for sales taxes and VAT);
- payments of bank interest, dividends and other payments;
- investments in the acquisition of fixed assets, R&D and intangible assets;
- depreciation of fixed assets.
If, after all the expenses incurred, there are funds left, they are called Retained Value Added. The latter can be negative when the added value is insufficient to cover all costs.
Gross value added
Distinguish between the concept of gross value added, which is calculated at the level of economic sectors. It is defined as the difference between the output of goods (services) and intermediate consumption. The summation of the gross value added of all economic sectors forms in the sum of the GDP at the production level.
Intermediate consumption - the total value of consumed goods and services for the production of other goods (services). This, in particular, raw materials and materials, purchased components and semi-finished products, fuel, electricity, etc.
Economic added value
Economic value added (EVA) is one of the methods for assessing economic profit, which is used when analyzing business performance from the perspective of owners. This is the profit of the company from its activities, net of taxes and reduced by investment in capital (at the expense of its own and borrowed funds).
Formula EVA = profit - taxes - capital invested in the company (the amount of the balance sheet liability) * weighted average price of capital.
Thus, economic value added is less than profit (and, accordingly, more losses) by the amount of capital payments.
