What is Value added? and Value added Meaning

What is Value added?

Value added

Meaning of value added

The value added is the difference between sales revenue and purchase price of the products and series. It is ascertained by deducting cost of purchase form sales revenues. In the processes of conversion of raw materials into finished product, it is required to add value or utility inform of profit. So, sales price of the product is higher that cost. The excess of market value over the cost of material/input is known as value added.

If a manufacturing produces goods for Rs 100 and sell of Rs 150, the difference of Rs 50 is the value added. Similarly, if the same goods are sold to the retailer for Rs180, the value added is Rs30. As such the same goods are sold to the customers for Rs200, the value added is Rs20. Hence, the total value added becomes Rs100 (Rs50+Rs30+Rs20 or Rs200- Rs100). Therefore value added is the wealth or utility in the product of the business that a firm creates by its own effort.

Vale added= sales revenue and other incomes – cost of budget-in-materials and services.

Cost of bought-in-includes to cost of materials purchase for consumption and cost of services includes the cost of services paid for external agencies for using the facilities.

In another side, it considered that it will be calculated by taking the total of employees' costs, interest on loans, dividend, government taxes, depreciation and retained profit. In other words, value added is pre-tax profit employees' costs, interest and depreciation. So that:

Value added= employee's cost + interest on loans and dividends + government taxes + maintenance/ depreciation of assets + depreciation and retained earnings

Value added differs the conventional profit depicted by profit and loss accounts because conventional profit calculations deduct all costs from sales income whereas value added is obtained by deducting the cost of bought-in-materials and services from the sales revenue.

Value added should not be confessed with conversion cost because value added includes employees' costs. Interest, dividends, taxes, depreciation and retired profit where conversion costs is works costs other than to cost of direct materials. Thus,

Conversion cost = all internal cost for adding value.

Value added = profit before tax + all conversion and other costs.

Profit = value added – all conversion and other costs.

Value added concept couldn't be applied in the business sector, when its functions are not or cannot measure in monetary basis. The profit of an organization is improved with proper arrangement of value added. It is the under consideration that all the conversation and other costs are fixed cost.

Value added statement

Value added statement is a useful means to inform the result of the companies to the concerned bodies such as workers, staff and shareholder of the company as well as the government and financial institutions. The statement clearly shows th added value of business and the allocation of such value among the employees, government, shareholder and investors. Based on the suggestion of the accounting standard committees in 1975, some company have started preparing value added statement statements give to employs, providers of finance and the government.

a. Format of value added statement without considering stock adjustment

Meaning of value added tax
There are a number of ways for a government to charge tax to businesses. If tax is charged on the basis of sales. It is called the sales tax. If tax is charged on the basis of value added, it is known as value added tax. Value added tax prevents the fraud in tax through down of the selling price. Since this method is transparent, many countries have followed to value added tax systems. The way of method is transparent many added method have been present below. Supposes, an importer sells the calculating tax under value added method have been presented below. Suppose, an importune sells the goods for Rs.100 to a wholesaler which is sold to a retailer for Rs110 finally, the retailer sells the goods to the consumer for Rs121 i.e. at 10% profit. The value added tax is calculated as under if the tax rate is 10%.

In this way, the customers has to pay Rs150.40 for the purchase for Rs100 where the government is paid tax of Rs17.30. it is not necessary for the  suppliers to pay this way, the value added tax is more effective than sales tax.

8. "Cost control does not necessarily aim at a reduction in cost." Explain briefly.
Cost control refers to a managerial effort, which is implemented in order to obtain certain cost goal within a particular operating enlivenment. It is one of the managerial activities that make sure that actual work is done under the predetermined standards.

On other hand, cost reduction refers to the activities aimed at reducing cost of goods/services in different functions areas. Cost reduction cost is done once and it may last for a longer period of time. But, cost control is not a one-set program. Rather it is a continuous and regular routine activity to be frequently carried out in order to active cost goals. Costs must be controlled to minimize wastes, misappropriation and embezzlement. In this regard, it is clear that cost control covers a wide range of activities aiming to produce high quality product at lower cost of production rather that the more functions of cost reduction.