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Describe the methods used to calculate value added. How does value added contribute towards understanding the connections betwee - Essay Example

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Methods Used to Calculate Value Added and How Value Added Contribute Towards Understanding the Connections between the Business and Its Product Markets   Essay Date 1250 words   Name Institution The fundamental concept of measuring performance and income of an economic unit or body is based on the value added by various economic activities…
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Describe the methods used to calculate value added. How does value added contribute towards understanding the connections betwee
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Download file to see previous pages Value added concept of income measurement has been viewed as the increase in the wealth of an economic body. It is traditionally rooted to the evaluation of national income in macro economics, measured by national economy productive performance.2 This concept is referred to as National or Domestic product and represents a specific period’s national economy. This is a common use of this concept but it has also been applied in many other different areas of business operations and economics as a positive performance and economic gauge. This makes value added a measure and indicator of an economic entity’s performance and has a fairly long period of application in the field of economics.3 Value added represents a calculated value, and for this reason, it is well related to accounting. It is also contrasted from the traditional calculation of income in that, it can be and has been used in all the three accounting systems i.e. managerial accounting, financial accounting and the national accounting system. It is also distinguishable from income computation whereby value added is constantly described internationally as a difference of expenses from revenues. It can be defined in two ways that will be discussed below and this gives value added concept another critical characteristic commonly known as the dichotomy of value added.4 Subtractive method is the first method of calculating the value added and it is defined as: Value Added (VA) = O – I. Where O = Output; I = Input. This means that when being compared to accounting income, it is perceived as the net figure. The value expressed is the value that an economic body, such as a person, an industry or a company adds to the products and services it purchased or received from other entities during its creative or own productive economic activities.5 In the second one, additive method, the value added is represented by the total sum of the distributed parts that constitute the created wealth. This is done with respect to the reality that all the created wealth is well distributed i.e. by being allocated in some way. When considering a company, value added calculation is defined as: VA (Value Added) = RE + RG + RCP + NAP. Where RE = Remuneration of employees; RG = Remuneration of government; RCP = Remuneration of capital providers; NAP = not appropriated income i.e. retained earnings.6 The two formulas above disclose the characteristic content that value added concept has. This concept can be divided into social aspect, represented by the additive method, and performance aspect which is articulated by the subtractive method. This shows that in addition to economic information given by this concept, value added also offers social information through identification of the part of the yield that goes to every contributor of the whole process in a company.7 Value added concept has evolved besides its historical principal function in national accounting to several other uses and applications in the three; financial, national and managerial accounting. The two sided feature of value added i.e. performance and social characteristic, is depicted clearly by the concrete and possible applications. Hence it has been argued as a way to estimate productivity of an economic body through their way of using productive factors.8 This makes the ...Download file to see next pagesRead More
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