Value added can be defined in the context of business and economics. While doing business, there is always the difference between the production cost and the price of sale. This is termed the unit profit. In economics, the unit value added refers to the sum of unit profit, the unit depreciation and the labor cost unit. When the value added is summed over all the units sold, it is referred to as the total value added (Dhungel, 2011). Certain methods have been employed to calculate the value added. These methods are explored in this paper. The contribution of value added in the understanding of the connections between the business and its production markets are also well analyzed.
Methods of Calculating Value Added
Value added is in many instances assessed by the government on the sales of the consumer products. The following methods may be used to calculate the value added:
The Simple Calculation of the Value Added
The simplest method of calculating the value added is through the multiplication of an item by the rate of the value added tax and then adding the total to the price of the item. For example, if one wants to purchase a sweater for 160 pounds in England and the VAT is 18%, the value added tax will be 160×0.18. The total price is therefore 160×0.18 above the normal rate (Schenk & Oldman, 2007, p. 38).
Combination of Price and VAT
This is yet another method of calculating the value added. It involves the calculation of the price of an item by multiplying it by 1 then adding the percentage of the Value added tax. In the above example, this method works by multiplying the price of the item (160 pounds) by one plus the percentage of value added tax (Bickley, 2003, pp. 4-5).
Calculating the VAT from Total Profit
This involves working backwards from the final price to the value added tax. This is very useful in the situation where the value added tax is not broken down in the receipt. It can also be helpful in a case where it was included in the price when it ought to be refunded (Flynn, Koornhof, & Flynn, 2005). It is very important to know the value added tax rate for the country. In this situation, the final cost of the item is taken and divided by 1 plus the value added tax rate, then subtracted from the total cost to obtain the paid Value added tax (Tait, 2000).
Contribution of Value Added towards understanding the connections between the business and its product markets
Value added contributes very fundamentally towards the understanding of the connections that exist between businesses and the product markets. It should be noted that, without the product markets, a business is of little or no consequence (Kogel, Trivedi, & Barker, 2006, p. 62). The sole reason for the existence of a business is to serve the needs of the product markets.
The value added contributes very significantly in the national accounts where the contribution of the factors of production in raising the product’s value and corresponding to the values of these factors i.e. land, labor and capital. As such, it ensures that these factors are distributed fairly across the country (Hennig-Thurau, 2000). It is, therefore, very important to note that the value added plays a very vital role in determining the distribution of resources across the national product markets.
Moreover, the labor creates a new value (value added) that covers its own wages. This is very crucial to the understanding of the connections between the value added and the product markets. The incomes that constitute the value added are also regarded as a reward for the services that are rendered to the product markets (Rao, 2002, p. 318).
It is also apparent that the value added is a useful tool in determining the prices of new goods and services in the product markets. This is very important for the producers, the government and consumers of such products. When the consumers in the product markets are enlightened on how the value added is calculated, they get to know what to expect in such markets (Caldewell, 2008). Consequently, a better understanding of the link between business and the product markets is created.
It is conclusive to note that value added plays a leading role in the price determination and thereby making the business stakeholders aware of the business trends in the product market. Its role in easing the understanding of the ties that exist between the businesses and the product markets cannot at any time be underestimated (Weele, 2009). The consumers of products need to know more about it to avoid the controversies that are likely to arise with regards to the pricing of products in the markets. The simplest method of calculation of the value added should be employed especially when dealing with the ordinary person who may not have adequate understanding of the complex methods.
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