There is no free lunch in this world. To generate income or to earn money, one has to sell some sort of product. A product is a tangible thing or an intangible service having some utility for the buyer. Hence, the product is a utility or value created over the crude material.
Value added,therefore, is a created utility in the product of the business. Without creating value, one can not sell the product for a profitable price. A firm charges some extra price over the materials and services used for the value creation over the product. For example, if one buys some materials and services at $ 100 and sells them at $ 300 , then the added value is $200.
Therefore, Net value = Revenues - The price paid for materials and services.
Value does not come by itself. It needs some changes over the bought-in materials. Change in the utility of product is brought about by labor, capital, government services etc. Therefore, the added value is to be distributed to the stakeholders of business in the ratio of the service rendered by each of the stakeholders. Added value is paid in the form of wages and salaries to labor, taxes and duties to government, interest and dividends on the capital and residual fund is retained in the business.
Therefore, the value added is the increase in the market value created by a change in the form,location or availability of product or service,excluding the cost of bought-in materials or services used in that product or service.
