The Increase in the Value of a Specific Product - Essay Example

?Methods to calculate Value Added The increase in the value of a specific product at a specific instance and stages of its production irrespective ofits initial cost or production prices is known as value added. Value added is used to calculate the progress in the overall company’s performance and how it can be used to increase the gross profit of organization more with the passage of time1. There are several ways to calculate value added some of the ways are explained below. Value added= total labor expense + operating profit (in terms of cash) The first component if the cost and expenditures involved in hiring, wages of the workforce and difference allowances for the work force. Labor expenses also include all the salaries that are given in the form of cash to each and every employee of the organization2. All the outflows of cash in form of cash, assets, materials and wages are inculcated in labor expenses. The rest of the labor expenses include the extra money that is given by the organization if the employees are working on over time or in the form of extra working hours. This is necessary because each hand every hour that they are spending on the organization is also in turn being proved to be productive for the overall organizational perspective. The second component refers to all the capital generated in the form of cash or other items, this capital is the result of all work force and all the investments that are exhausted in the work machinery for generate the capital for the profit of the company. The result of the sum of both the factors yield something that can give a competitor’s advantage to an organization as value added has an alluring effect of giving performance more than expected. Value added includes those results, services or usage of the products that are beyond expectations of a client in the positive sense and this also increase the overall value of the services and goodwill of the company among the customers to increase revenue generation.3 A very important and mostly deployed method to calculate economic value added is as follows Economic value added = Current performance – base performance The current performance is the economic value added figures that will be used from the time period that is most recent or in which we are interested to calculate the value added. The company’s figures for all the years are written in tabular format and then a base line is selected. The base line refers to the standard year or time period from which the economic value added of the most recent time period will be compared. The comparison is mostly done in the form of ration and then it is calculated that what the current economic value of the company is. If the current performance is high then automatically then resultant factor will be high and we will say that the company us improving in the terms of value added services. If the resultant factor is zero then it means that there is no progress but there is no loss as well. The company should pay heed to cut the sunk costs in this case because the EVA must rise with every time period in order to gain profit and produce productive results. If the EVA factor is negative then this means that there is a serious problem in value added services of the company and there should be revision in policies to decrease the loss of the values of the products. The other method to calculate value added is to estimate the current overall costs that are being dissipated and squandered in the production of the products. After the careful estimation of costs, different measures must be taken in order to minimize the costs so that they overall production steps cannot be effected badly for example the administration of a company can cut off the extra charges of transportation or they can reduce the work force from their company by introducing different automated system in their work environment. This will reduce the extra costs from the working environments and these extra costs can be taken into account for the production of the different products. By eliminating the wastage of money in unnecessary places, the “sunk cost” can be used productively in order to produce the articles and goods of high quality. We can add the wastage costs and credit it into the account of value added. The “sunk cost” account will be debited and the customer value account will be added by careful estimation and calculations. Another method to calculate the value added is as follows, Value added= (Customer cost –company cost) + services Customer cost can be calculated by the production cost of the company and how the company’s sales force successfully manages to oblige the different customers so that customers become regular. Customer cost also includes some complimentary items, different packages and schemes. The company cost means the production cost and how much extra money was allowed on the production of different items. The services are different opportunities that are given to the client or customers and they are the main and primary factor which tells us that how much value added will be in the result of the company’s worksheets and how much money will be depicted in the final result. The value added calculations are dependent upon the output given by the sale force of the company because there are different and diverse types of competitors that are sitting in the market. The rivalry goes on in the market and if the sales force of the rivals gets success in getting the customer’s attention then there will be no profit for the company. The value added factor is very necessary to gain customer satisfaction and all the calculations are dependent upon the policy making strategies of administration.4 There is another method to calculate value added and that is known as Value added per worker average gross wage. It includes calculating the value added ration and comparisons of a specific worker from a timeline within the company. As value added is always for the estimations for inside the company and there is no scope of value added calculations outside the company. The more this factor, the more is the benefits, the members are getting. There is another technique to calculate value added and that is known as Value Added: Turnover in which different ratios and comparisons are involved. First the statements of all the financial depiction are made and then the turnover ratio is calculated. The lower the ratio, the more is the value added. It shows that how the company is performing well in the fixed economic conditions and the improvement is going with progress with the passage of time. Connections between the business and its product markets Value added helps a lot in understanding the connection between diverse markets of product and how their business can flourish globally. For example there are multiple competitors for the same product in the market but their “value chains” make them different from each other. Value chain is the main concept that tells that how and when the value added approaches will make a difference in the markets. The set of independent activities cannot give a company value added services but if the organization follows some steps and chain in the production of the same product then there will be a massive decrease in the sunk cost and boost in the value added. Value added tells the company that are they performing well or not? and what are the loop holes which can be improved in order to increase the value added factors. The calculations of value added are necessary in order to depict the future of the product markets of a company because it is the comparison of the company’s financial positions. For example in order to calculate the value added factors ,a company will make list of statements and then there will be a simple comparison on the bases of ratios and then there will be depicted results that will tell them that are they following the intended course of direction in the business or not. Value added compares the timelines of the company with different perspective and gives the idea about the overall progress. For example when value added is calculated with the perspective of net assets then this calculation will give the idea to the company that how they are managing assets with perspective of the market situation and whether there are some improvements required or not. Similarly, when there is a calculation for value added in terms of wages then the company will be able to learn that how much workforce should they hire so that their output can be maximized keeping in view the requirements of the industry and product markets. The business is also affected directly ad competitors craft new policies based on the calculations of value added. Value added is necessary step is establishing the connection between technical issues in product development and managerial issues in business development. 5 Bibliography Top of Form Top of Form Bottom of Form Bottom of Form De Medeiros, Otavio. "Empirical evidence on the relationship between EVA and stock returns in brazilian firms." Available at SSRN 701421 (2005). Dopson, Lea R., and David K. Hayes. Managerial Accounting for the Hospitality Industry. Chichester: Wiley, 2008.p221 Productivity.business.gov.sg, Productivity@Work EnterpriseOne How do I calculate productivity?. [online] Available at: http://productivity.business.gov.sg/en/basic_how.aspx [Accessed: 30 Dec 2012].2009 Rust, Roland T., Valarie A. Zeithaml, and Katherine N. Lemon. Driving customer equity: How customer lifetime value is reshaping corporate strategy. Free Press, 2000. Scallan, Peter. Process Planning The Design/Manufacture Interface. Amsterdam: Butterworth-Heinemann, 2003.p3. Read More