Value Added Statement

Value Added
Statement_v1
Dr. Harald Fien 2
Value Added Statement
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 then
sold 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 customers
are prepared to pay
Value added represents the additional wealth created by the firms own efforts
through the application of its labour force and resources
Value Added
Statement_v1
Dr. Harald Fien 3
Value Added Statement
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 the
dividends
Value Added
Statement_v1
Dr. Harald Fien 4
Value Added Statement
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
Value Added
Statement_v1
Dr. Harald Fien 5
Value Added Statement
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
Value Added
Statement_v1
Dr. Harald Fien 6
Value Added Statement
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 the
value
Value Added
Statement_v1
Dr. Harald Fien 7
Value Added Statement
How does is it different from a P&L Account
A value added statement is really a rearrangement for a profit and loss
account
The items are the same but are arranged in a different way and with a
different 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 how
it is shared out between stakeholders
Value Added
Statement_v1
Dr. Harald Fien 8
Value Added Statement
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
Value Added
Statement_v1
Dr. Harald Fien 9
Value Added Statement
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
Value Added
Statement_v1
Dr. Harald Fien 10
Value Added Statement
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?