Value Added

Published Oct 26, 2023

Definition of Value Added

Value added refers to the increase in value that a company or a production process brings to a product or service. Value added is calculated by subtracting the cost of materials or inputs from the total value of the output. It represents the additional worth that is created through various stages of production, such as manufacturing, distribution, and marketing.

Example

To understand value added, let’s consider a hypothetical example of a furniture company. The company purchases raw materials, such as wood, nails, and paint, for $500. With these materials, the company crafts a wooden table that it sells for $1,000.

By deducting the cost of materials from the sale price, we find that the value added is $500 ($1,000 – $500). This $500 represents the increase in value that the company has generated through its production process. The company has taken raw materials and transformed them into a finished product, thereby creating value.

Why Value Added Matters

Value added is an important concept for businesses because it provides insight into their efficiency and productivity. By calculating value added, companies can assess the effectiveness of their production processes and identify areas for improvement.

Additionally, value added is a key component in measuring a country’s gross domestic product (GDP). It reflects the overall value created within an economy and serves as an indicator of economic growth. Governments and policymakers use GDP and value added to make informed decisions about economic policies and development strategies.