Breaking News
The employees of Swisscom can buy more holidays

Calculate the value-added of income for your business

An essential item in the budget calculation of an asset is the added value. The added value is the gross profit in the income statement, one that indicates how much income the operations of a business, an activity, a study or a shop produces. In essence, the value added is the net gain, which will then be deducted from their taxes, which is obtained from the production and sale of a good or service. With a practical example it will be much easier to explain the concept of added value so we are going to use one in this guide fro you to see how to calculate the added value of the income statement. Follow the three steps below and you can calculate the value of your business.

Added value

Added value

The first step, which is essential in order to perform a precise calculation and as thoroughly as possible, concerns the collection of all the cost items that add up to the production of a good or for the provision of a service. It will be good, therefore, to arm yourself with a good dose of patience and start collecting invoices and bills of any kind and identify what are the costs incurred for the construction of the product that you are going to offer your buyers. Do not underestimate this step! Indeed, it is important to know exactly how much you spend to accomplish what you have to sell.

Now is the time to sit down at your desk and take all the material you need: a notebook for notes and a pencil, supplier invoices, utility bills, an updated report on sales, inventory report and a reliable calculator. To start we need to calculate the value of production, in the products of work in progress, semi-finished and finished products. This item is the sum of: revenues from sales and services, changes in inventories of work in progress, semi-finished and finished goods, change in work in progress, increases in fixed assets for internal work and other revenues related to operations. To give  you a concrete example: a pharmacy that sells drugs for 200 and provides services to 50 can calculate a value of production (Vp) of 250.

Added value

Added value

Now let’s see how to actually calculate the value added (VA). This item is the result of the difference between the value of production and costs of production. Among the items included in the cost of production we are going to write down: the cost of materials consumed, the costs of external services, changes in inventories, measured as the opening inventory + purchases of stock – final inventory, and other costs of operations. Again taking the example of a pharmacy production costs (Cp) will be: costs for drugs of 150, 20 and rents for change in inventories of drugs for 10; Cp = 150 + 20 + 10 = 180. Added value of the pharmacy will be taken into consideration: Va = Vp – Cp = 250-180 = 70

By +Nikos Kontorigas

Leave A Reply