The Determination of Value Added - Essay Example

Value Added The determination of value added involves various methods of calculation, which are compatible with the different definitions that attend to the concept. Although the concept remains the same, certain accounting approaches tend to exclude more items in the calculation than others, which often lead to different results. The challenge lies in the fact that there is no universal standards of determining value added (Hansen, Mowen, & Guan, 2009). Value added is usually obtained by adding the unit profit, unit labor cost, and the unit depreciation cost (Hansen, Mowen, & Guan, 2009). The unit profit is arrived at by calculating the difference between the production cost and the sale price. In order to determine the total value added is obtained by adding all the value added figures of all the units. Essentially, the difference between revenue and outside purchases is equivalent to total value added. In terms of analysis, the figure obtained of value added offers a range of interpretations. For instance, integrated companies usually regard value added as a higher portion of revenue whereas companies that are less integrated consider it as a lower portion of revenue. Another method of approximating total value added is by combining total labor expense, operating profit, and depreciation expense in that order (Mowen, Hansen, & Heitger, 2012). According to standard procedure, the operating profit must come before depreciation expense. Labor expense includes such items as benefits, wages, and salaries. The figure of total labor expense is usually considered as a return to labor while the value of operating profit is generally considered as a return to capital. Capital comprises of items such as land, properties, and capital goods. Normally, it is considered important to follow the standard procedure when arriving at the different figures. Factors of production are usually considered in terms of value added when determining the figure of value added in macroeconomic calculations. Calculating value added in national accounts usually involves capital and labor (Mowen, Hansen, & Heitger, 2012). Alternative definitions usually consider value added as the extra features, which extend over standard expectations of a given product or a service. Such items do not involve the cost of the product. According to some theoretical approaches, value added is considered as the difference in the prices incurred by a company over a product and the price paid by a customer for the same customer. As such, arriving at the figure of value added is through the determination of the difference in the prices. The figure is obtained by subtracting the company’s cost from the customer’s cost and then adding the figure of services to the results. Theoretically, value added could be understood in terms of the different enhancements that a business puts on a particular product with the objective of increasing the value of the product (Mowen, Hansen, & Heitger, 2012). In this manner, value added is considered as a determination of the different qualities that are created on a given product or service. Value added can increase the price of a give product or its value. Generally, value added is considered as one of the ways in which a firm enhances the competitive advantage of its products or services. Other perspectives on value added describe it as an increase in the value of goods or services as they transit from one stage of production to another. This description derives from the assumption that goods and services will normally change in value as they pass through the different production stages. The figure of value added, according to this definition, is determined by calculating the difference between the value of inputs and the selling price of the product or service. On this note, inputs relate to purchased services and raw materials. Alternatively, the figure is obtained by determining the difference between sales and the payments made to the suppliers. The three major components that describe value added include employees emoluments, returns on capital, and taxation. Returns on capitals are usually considered in terms of interests and dividends. In the conventional sense, value added is used for determining taxation. Value added tax is usually attached on items with regard to the level of difference between the selling price and the costs incurred in the production of a particular good or service. At this level, it becomes appropriate to consider some of the concepts that attend to the items considered for subtraction from the selling price. The cost of producing a particular service usually relates to the different kinds of items that combine to form the overheads of a given product or service. Value added is also used in the determination of the size and growth of national economies (Mowen, Hansen, & Heitger, 2012). Combining the total of value added of different systems of production within an economy gives the figure of Gross Domestic Product (GDP). Besides determining the size of the national economies, value added is usually used to determine the size of any given company. Valuation of the strengths and weaknesses or strengths of a given company involves the determination of the value added. However, investors attach lesser interests to value added because it does not offer appropriate determinations of valuation measures. The value of profits and turnover are preferred to assess the size and performance of a company because they can be determined within the concept of vertical integration. Usually, the process of preparing the value added statement involves the inclusion of sales and the amounts of money paid to suppliers (Hennig-Thurau, 2000). The statement also includes the distribution of value added. Generally, many countries embrace the concept of value added as one of the ways of determining the trends of performance of a company or business with regard to the nature of products or services. Companies use the figure of value added to determine the value of shares. On this note, value added is considered as an important feature in the disclosures to shareholders although it bears lesser relevance to other accounting indicators. On this score, it becomes important to consider the fact that the determination of value added must go alongside other accounting calculations for the purposes of determining the most appropriate position of a business in terms of size and performance. The determination of value added must be informed by sufficient justifications based on the details of the processes that a service or a product undergoes before it is obtained by the customer (Hennig-Thurau, 2000). It is upon the customer to scrutinize the product and service in order to determine whether the figure of value added is commensurate to the real value of the product. Market forces and competitions are some of the factors that determine the trend of value added. The bargaining power of suppliers, the cost of raw materials and factors such as market preferences and the bargaining power of the customers contribute to the determination of value added. It is important to consider the fact that some of the issues that contribute to the value of value added as fluid and subject to accessional changes over time. Business and product markets are usually subject to the processes of production, competition, and other internal and external forces. Global and local forces, regulatory mechanisms, and other macroeconomic forces tend to affect the constituent features of value added in ways that either increase or lower value added (Hennig-Thurau, 2000). Changes that occur within the production cycle and the supply chain are important in determining the trends of value added. The product markets weigh their stability with regard value added. The linkages and processes from the manufacturing point to the markets are largely regarded as a manifestation of the nature of value added. For instance, value added can be lower in cases where the manufacturer manages to negotiate a lower cost from the suppliers. Value added influences the strength of a product on the markets (Trischler, 1996). Market strategies involving the manipulation of value added often involve the lowering of profit margins for competitive advantage. In some ways, the quality of a product contributes significantly towards enhancing the level of value added. Goods and services considered to be of a superior quality fetch a higher level of value added than those considered to be of a relatively lower quality. As such, it becomes important to consider the fact that market forces, trends, and nature of products are fundamental considerations used in the determination of value added. Some factors considered within the aspect of value added have to be considered in light of the dominant market forces relating to a particular product on the market. References Hansen, D. R., Mowen, M. M., & Guan, L. (2009). Cost management: Accounting and control. Mason, Ohio: South-Western. Hennig-Thurau, T. (2000). Relationship marketing: Gaining competitive advantage through customer satisfaction and customer retention : with 24 tables. Berlin: Springer. Mowen, M. M., Hansen, D. R., & Heitger, D. L. (2012). Cornerstones of managerial accounting. Mason, OH: South-Western Cengage Learning. Trischler, W. E. (1996). Understanding and applying value-added assessment: Eliminating business process waste. Milwaukee, Wisconsin: ASQC Quality Press. Read More