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Value Added Statements

Addition of wealth made by the organization with the effort of management and employees using capital is called value addition. Value- added is measured as a difference between the sales and the cost of material and service purchased from outside. It is a key measure of performance and wealth creating ability of the organization. In calculating profit, bought-in-material and services, labour, depreciation, interest, etc., are deducted from sales revenue. In calculating value added only the cost of bought-in-materials and services are deducted. That is value-added equals’ pre-tax profit plus labour, depreciation and interest.

Approaches for computation of Value-Added

(a) Additive Approach: In this approach, all the items that create value such as wages and salaries, interest, depreciation, rent rates and insurance, employee benefits, other overhead expenses and profit before tax are all added up to give the sum of value-added.

(b) Subtractive Approach:In this approach, the following items such as raw materials, bought-in components, sub-contracted processing, consumable stores, loose tools, repairs and maintenance of the plant and equipment and other bought-in-services are deducted from the sales revenue. To this, the increase or decrease in labour and relevant overhead in stocks and work-in-progress are added or deducted as the case may be.

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