Value Added Statement_v1

8/12/2019 Value Added Statement_v1

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Value Added Statement


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Value Added

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Dr. Harald Fien 2


Value added

Business organisations are involved in adding value

Consider a manufacturing firm - it buys in raw materials and components, then

processes and assembles them into finished products. The finished goods are thensold to customers

The manufacturing firm added value to the inputs that it bought in

Value added is the difference between the cost of materials and the price customersare prepared to pay

Value added represents the additional wealth created by the firms own effortsthrough the application of its labour force and resources


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Value Added

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Dr. Harald Fien 3


Example of value added

Selling price per unit: 7

Cost of bought in goods: 3 Value added to the unit: 7- 3 = 4

The 4 is not profit since the manufacturer will have to pay

employees, creditors and others out of the 4

But the 4 value added pays the wages, the overheads and thedividends


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Value Added

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As measure of the organisations size

Value added is a good measure of the size of a business

organisation

As a measure it is a superior to sales revenue since sales revenue

is inflated by the value of raw materials and components bought in

Value added is a measure of the wealth created by the company

through its own activities


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Value Added

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Value added statement

A value added statement shows the value added to the goods and services

acquired by an organisation in order to generate its sales

It also shows how the value added has been distributed:

to employees

to shareholders

to other providers of of finance

to the government in taxation and how much has been retained


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Value Added

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Dr. Harald Fien 6


Isnt this the same as profits?

No

Profit is sales revenue minus all costs

Value added is the difference between the revenue received from

selling the firms products and the cost of the materials and services

bought in to produce these products

In fact, profit is value added minus the internal costs of adding thevalue


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How does is it different from a P&L Account

A value added statement is really a rearrangement for a profit and lossaccount

The items are the same but are arranged in a different way and with adifferent focus

A profit and loss account: sales revenue minus all costs equals profit. What happened to the profits?

A value added statement: sales revenue minus the cost of bought in goods equals value added. How was

the value added distributed?.

The VA statement shows how the value added has been arrived at and howit is shared out between stakeholders


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Value Added

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Dr. Harald Fien 8


An example of a VA Statement (k)

874

379

495

210

150

70

65

495

Sales revenue/turnover

Minus bought in materials and services

Equals value added.

Applied as follows

To employees (wages)

To providers of capital (e.g. shareholders and lenders)

To government (payment of tax)

To provide for the maintenance and expansion of assets (depreciation

and retained profits)

Value added


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Advantages of a value added statement

Simple to calculate and understand

Enables us to compare companies with different activities

It is useful for internal communications and in support of employee incentive

schemes

It measures wealth as value added rather than profit (which is a rather

subjective concept)

It is not as easy to manipulate as profit in a profit and loss account


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Lessons Learned

What is a value added statement? Explain:

Why is it a measure of the organisations size

Definition

Difference to P&L statement

What are advantages of a value added statement?

Value Added Statement_v1

Documents

Transcript of Value Added Statement_v1