Value Added

Value Added

In business, the difference between the sale price and the production cost of a product is the unit profit. In economics, the sum of the unit profit, the unit depreciation cost, and the unit labor cost is the unit value added. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases (of materials and services). Value Added is a higher portion of Revenue for integrated companies, e.g., manufacturing companies, and a lower portion of Revenue for less integrated companies, e.g., retail companies. Total value added is very closely approximated by Total Labor Expense (including wages, salaries, and benefits) plus "Cash" Operating Profit (defined as Operating Profit plus Depreciation Expense, i.e., Operating Profit before Depreciation). The first component (Total Labor Expense) is a return to labor and the second component (Operating Profit before Depreciation) is a return to capital (including capital goods, land, and other property). In national accounts used in macroeconomics, it refers to the contribution of the factors of production, i.e., capital (e.g., land and capital goods) and labor, to raising the value of a product and corresponds to the incomes received by the owners of these factors. The national value added is shared between capital and labor (as the factors of production), and this sharing gives rise to issues of distribution.

Outside of economics, value added refers to "extra" feature(s) of an item of interest (product, service, person etc.) that go beyond the standard expectations and provide something "more" while adding little or nothing to its cost. Value-added features give competitive edges to companies with otherwise more expensive products.

Value-added methods and measurements are also being utilized in Education as part of a national movement towards teacher evaluation and accountability in the United States. This type of measure is known as a Value Added Modeling or Measures