Value Added Costing

Value Added Costing

Value Added Costing

The theory of Value Added Costing differs from the above because it takes the view that value is added to the merchandise at every stage of its production and onward transmission through its various distribution channels. The value added by a manufacturer is the difference between the value of the product to the final consumer and the raw materials and consumable stores involved in its production, plus his purchases of light and power used during the manufacturing process. This is illustrated in the following example:

Cost of Raw Materials �10,000

Cost of Consumable Stores and Fuel �5,000

Total �15,000

Assuming the total sales turnover is �20,000, then

the value which has been added is


Less �15,000

equals �5,000

which is the value added including the profit which has been achieved.

Some of this additional value has been contributed by Sales and Distribution. One of the merits of this method of costing is that the money spent on selling and distributing the product is not regarded, necessarily, as wasted. Those activities which cause the product to be in the right place at the right time give it an added value which may not be less important, from the economic standpoint, than the manufacturing processes by which it has been created.

To discover the added value which Sales and Distribution have contributed it is necessary to take the total figure of sales to the consumer, add to this the sales overheads incurred, and subtract the cost of the goods which have been sold:

Sales to Consumers �20,000

+Sales Overheads �1,000


-Costs of Goods Sold �16,000

Value added by Sales and

Distribution �5,000

Selling and distribution costs vary enormously between one type of product and another. The ONLINE MARKETING Manager must maintain a constant watch upon these costs to ensure that the profitability of his product is not being eroded by wastefulness in these sectors of his ONLINE MARKETING operation.

Waste can be caused by a number of factors of which the following are the most prevalent:

1. Market scatter causes inefficient use of transport facilities.

2. Average order size too small to be economically viable.

3. Non-productive effort involved in combating competition.

There are certain categories of merchandise for which transportation costs are proportionately high. Whether they are uneconomic will depend upon the ratio which exists of the value of the goods to their bulk. Thus a large piece of computing equipment may be expensive to transport across the country, but its high value and the profit margin which it carries can absorb this cost very comfortably. On the other hand, the cost of providing a truck to carry a load of empty barrels from London to Manchester can be completely uneconomic because their considerable bulk will be out of all proportion to their value.

Some commodities have to be transported at a comparatively high cost because they need special consideration. Thus, perishable goods must be moved quickly. Others may require the use of refrigerated vehicles. Certain chemical products have to be transported in tankers or in special glass carboys. There are goods which demand special protection in transit because of their fragility. All these factors will result in a disproportionately high transportation cost.

High distribution costs can be incurred not only because of the type of product, but because of the nature of the market which is to be supplied. Manufacturers of toys, for example, must often create stocks months prior to the commencement of the Christmas trading season, thus incurring capital tie-up both in goods and in storage premises. Certain classes of merchandise demand the provision of expert advice to assist the consumer, as, for example, central heating systems, loft conversion installations, business machines and industrial plant of all kinds. This service must be paid for and represents part of the distribution costs of the product.

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Please Note

The Trade is, of course, a major source of product ideas. All manufacturers examine, with avid interest, the new products of their competitors.