January 26, 2022

SB-Accounting

Accounting + Finance Blog

Meaning of Value Added Cost and Key Explanations

Meaning of Value Added Cost and Key Explanations
Shares

The cost of a product or service isn’t all about the cost of buying materials and all expenses made to make the product or service be in the hands of consumers. There is also the need to consider value-added costs. Why? It increases revenue and of course the bottom line (profit after tax).

Definition of Value Added Cost

According to ATSWA, value-added “is the increase in the market value of a product as a result of changing the form, location, etc. of that product.” Value added cost the increase in the price of a product or service above other competitors as a result of an enhancement that influences customers’ perception of the product or service. The formula for value-added cost is “the total market value of the product less the cost of buying materials and services.”

Key Explanations

Value-added cost increases the market price of the product or service. This cost is an additional cost to put a product into a usable form. If the additional cost is not expended, the product or service will still be useful. However, spending more on the product changes the way consumers see the product and encourage them to pay an extra amount for the product. For example, Infinix smartphones have similar features to Samsung smartphones. But consumers are willing to pay more for Samsung smartphones than the Infinix counterpart. The reason is because of consumers’ perception of the two brands.

READ ON  Conversion Cost Meaning and Key Explanations

Value-added cost is a result of changes in the form of the product. It is also a result of changing the location of the product or services. And the power of promotions of the product or services. For a change in form, the business may add extra features to differentiate the product from competitors. It could be a good customer support system. Free training on how to use the product or service. Or a new feature that cannot be found in a similar product or service.

Promoting the product adds value to such a product. Goods and services that are promoted regularly through advertising and other forms of promotion add more impression to consumers and thereby enhance buyers’ perception. The location of a product also adds value to it and increases market price. The same product can be sold at different prices in different locations. For example, the product may be sold at a lower price at Badagry and at a higher market price in Victoria Island in Lagos. The value-added cost is the increase in the market price in Victoria Island, even if the production costs are the same.

Importance of Value-Added Cost

Increase in revenue: It increases the revenue of the business. At higher prices, consumers are willing to buy the goods or services. This will increase the revenue of the entity.

READ ON  Future Costs meaning and Key Explanations

Increase in profit: Increase revenue with the same production costs increases the bottom line.

Management Decision: Recognising costs that add value to a product and non-value added costs will aid management decision-making. Managers will seek ways to reduce spending on non-value added costs and increase expenditure on value-added ones.

Conclusion

Value-added cost is the one that influences consumers’ perception of a product and pushes them to buy more at exorbitant prices. This increases revenue and the bottom line. It also helps managers to increase expenditure that adds value and reduces non-value added expense.

Shares