Blog: Value-Added or Cost-Added?

The term “value-added” is used in management accounting as well as some country’s tax codes. In management accounting, activity based costing uses the value-added concept. A company identifies all of the activities that incur costs, and then classifies them as either value adding or non-value adding activities. Activities that do not add value for the customer should be reduced or eliminated. Reducing or eliminating non-value added costs leads to higher profits for a company because they can maintain the same selling price for their products, but have lower costs.

Some countries have a Value Added Tax (VAT) on goods and services when they are sold. In my experience with VAT, the amount of value added that is taxed is the difference between what the company pays for the inventory or materials and what they sell the finished good for. Therefore, it seems that a more accurate term would be Cost Added Tax because we are not measuring whether the customer thinks that any value has been added. VAT focuses only on the costs added and assuming that the value of the product is increased the same amount.

As a consumer, we should look very closely at value added and whether or not the seller has added any value for us. If the seller has not added value, then we should try to buy the product or service not from that seller, but from the company that they buy it from.

For example, my company in Russia teaches classes for the Russian language ACCA DipIFR Exam. We have prepared our own materials for this exam based on the syllabus of the exam and we sell these books for self-study. We also provide live-taught classes. Of course, the live-taught classes are more expensive than the books. A potential student needs to make a couple of decisions. First, they need to determine if our books add value to the syllabus that they were prepared from. If our books are largely just a copy of the syllabus, then there is little value added and the person would be better off not buying our books. Since our books are quite detailed, we can assume that the individual determines that our books are value added. Next, they need to determine if the live-taught classes add value to the books. If they determine that our teachers just read the books out loud in class, then the classes do not add value, and they do not need to pay for the classes.

There are many products now that have additional optional features. As consumers, we need to determine if those additional costs provide additional benefits or not. Companies may make a lot of their profit by charging more for something that sounds beneficial, but does not really add any value to the product. Or, the additional cost we pay may be very small compared to the additional value that we receive from this “additional feature.”

For a “closer to home” example, let’s look at our CMA exam preparation products. You can buy just our book, or our book and software, or our books, software and videos, or our books, software, videos and Live with Brian, or you can buy all of those together with the Re-Registration Guarantee. As you add each additional item, the question you need to ask is whether or not that additional study tool provides more value to you than it costs. Of course, we think that all of our products add much more value than they cost, but it is you – the consumer – who gets to make the final decision.

What are some examples where you have experienced a wide gap between the cost added and the value added in products or services that you have purchased?

Brian Hock, CMA, CIA