Value added – definition and meaning

Value added has several different meanings. In economics it is the difference between all sales within an industry and the total costs of materials, components and services bought from other businesses over a specific period.

Economic value added is one industry’s contribution to a country’s GDP (gross domestic product).

The Bureau of Economic Analysis (BEA), part of the US Government, explains that the value added of an industry, also known as GDP-by-industry, is the contribution of an industry or government sector to overall GDP.

The BEA explains:

“Value added equals the difference between an industry’s gross output (consisting of sales or receipts and other operating income, commodity taxes, and inventory change) and the cost of its intermediate inputs (including energy, raw materials, semi-finished goods, and services that are purchased from all sources).”

Value added describes what happens when a commercial enterprise takes a basic product and increases its value (and also its price) by adding extras in the manufacturing process, or by tacking extra products, offers and/or services. It is classed as a value-added activity when customers are willing to pay extra for the additional output.

In accounting, value added means the same as gross income.

Value added in marketing

In marketing, value added is a competitive advantage that a product or service obtains by combining, packaging, or bundling benefits and features to it. A company may add a few features to a product – which is otherwise basically the same as those of its competitors – to make it stand out and be more attractive to consumers.

An example of a value added feature on a product such as a laptop would be to offer a two-year guarantee that includes free support.

The world of shopping, as far as consumers are concerned, has changed considerably since the advent of the Internet. Consumers can have access to any product they desire and have it delivered directly to their homes or offices in record time.

The struggle among suppliers to find a competitive advantage in today’s digital marketplace has become intense. Businesses are forever challenged to find ways to give their products added value to justify their prices.

Economic Value Added (EVA), otherwise known as economic profit, is the difference between how much profit a business makes from invested capital and how much it paid out to obtain that capital – how much more it created than the required return of its stockholders and debt holders (investors). It is a variation of profit. Profit alone doesn’t tell us what the cost of capital was – EVA does.

What the product does for me

Modern consumers are much more concerned now about what the good or service will do for them than just its list of features.

Knowing what consumers truly value is crucial to how suppliers create, package, market and deliver their goods and services.

Companies can created added value through their brands. German automobile makers such as Mercedes, Audi and BMW sell their products for significantly more than their costs of production because of their reputation for reliability, sturdy mechanics, and unrivaled performance.

Value added in accounting

Rather than purchasing a product or service, customers buy the value and utility that a company puts into its goods or services. The value a company adds to its products is what convinces its customers to purchase them. Value added costs are what it costs a company to produce a customer’s products or provide his or her services.

As explains, cost accounting is a division of managerial accounting that tracks production costs.

As a company’s items move through production, cost accounting identifies which activities do and do not add value to its products. The aim is always to keep non-value-added activities to a minimum.

There are three types of costs that a business incurs: 1. Value-added costs. 2. Business value-added costs. 3. Non-value-added costs. What do they mean?

Non-Value-Added Costs: costs that are added to goods or services without enhancing their value. Examples include fixing or reworking defective goods, product inspections, and quality control.

Storage costs are increased when a supplier produces too much. Anything which leads to machines or workers remaining idle creates non-value-added costs.

Value-added costs: these are the resources consumed – money/time spent – in enhancing the value of a product or service. For manufacturing companies, value-added costs include direct labor, equipment and machinery, raw materials, and other expenses used in creating and making the product more attractive or enticing.

For retailers, value-added costs include the costs of purchasing their merchandise, as well as transporting and storing it. Virtually any activity that makes money for a company forms part of value-added costs.

Business-Value-Added costs: these are the indispensable indirect expenses of creating products, delivering services, or selling merchandise in a shop. However, they do not add value to what is being delivered to the customers.

They are the company’s administrative and selling expenses, such as employee wages and salaries, commissions, and advertising expenditure. Manufacturers also include direct labor as part of business-added-value costs. There is some overlap with the other categories – the degree of overlap usually depends on the company’s accounting style and where the accountant was trained.