How can value added be determined

What is their value add? Value add here? Pause this video and think about it. Now, one benefit of the value added approach is that real supply chains are quite complex and things might be going from one country to another, they might as we've talked about in another video, the year might end right over here and so, when something is made in China and there's value add in China but then it's shipped to the US and some value add is placed on it and then it's shipped back to China or Mexico, you have to be careful to only count the value add in the country for which you are measuring the GDP.

So, that's one useful way or one useful reason, or one way in which the value added approach might be useful. The key idea though is that you're getting to the same value. You should get to the same value as the market value of the final goods and services produced in a given time period.

Components of GDP. Up Next. These goods had been included in the financial year in which they were produced, and they are not counted as a part of current flow manufactured products and services. However, any brokerage fee or commission paid on any sale or purchase of such products are to be included in this calculation as a productive service.

Self-consumption services, i. These are produced and consumed within a household, and they do not enter the market. Therefore, these are regarded as non-market transactions. However, paid services like maids, drivers, etc. On the other hand, self-consumption goods should be counted in national income calculations because they contribute to the output of a financial year.

However, their value is to be estimated as these products are never sold in the open market. The estimated value of houses owned by individuals should be included. The reason being, owners who live in their own homes are enjoying similar housing services like people who live in rented places. Hence, the value of such services is estimated as per the market rate. This estimation is known as imputed rent. Any changes in the inventory must be included in this calculation. Net increase in inventory stocks is involved in national income calculation as a part of capital formation.

National income and its methods of calculation are a vital chapter of economics. Value added method is one of the three ways which has been discussed here. In this case, Cmpnk becomes the new raw material initial cost VIn1.

While the difference between Cmpk and VI1 persists, the value of Xnik will increase or decrease. Moreover, the coefficients of added value per each process must be recalculated by using Equation 9, where CAik would remain constant and Xnik would change, affecting each of the aggregated values previously calculated.

At the same time, it must be taken into consideration that the difference between the purchasing cost of raw materials and VI1 should be less than the product profit.

On the other hand, regarding the selling price, two possible scenarios could occur; the first corresponds to a fixed price and the second to a variable price. Subsequently, the new net added value XNnik and each operation added value must be recalculated by applying Equations 9 or 10; in this case, Xnik must be replaced by XNnik which could be calculated by using Equations 15 and 16 as follows:. In the second scenario, due to variations in price, if the company wants to constantly obtain the same profit Pv k -Cmpk , the new added value for each operation should be calculated by applying Equation 9 and the new XFnk by using Equations 17 or 18 as follows:.

The procedure was applied at an electromechanical products company located in Santa Clara Cuba , specifically in the medium-voltage fuse process, with the following results:.

In the selected process, two types of fuses are manufactured, which differ from each other depending on the voltage 15 KV and 34 KV. In this paper, the 15 KV and 1 ampere fuse were selected as examples to apply the proposed procedure. In the selected process, some operations are semiautomatic and others are manual. The list of operations and their processing times are shown in Table 1.

The specific weight of each product rk was 2. As seen in Table 1 , operation 7 assembly is the bottleneck of the process. Table 2 shows the list of materials, components and other required resources for the process.

The cost and inventory level for each operation are shown in Table 3. The operation times Tik are the same shown in Table 1. According to a previous analysis, operation 8 was classified as a manual operation and the remaining as mechanical-manual operations.

The data used to calculate the added values at each operation are also shown in Table 3. Also, the bottleneck is the operation with the high-est net added value.

Table 4 shows the obtained added value at each operation. As shown, the final value of the product at any operation is equal to the initial value in the following operation.

For example, 1. Calculation of the required capital for purchase of raw materials. In the case under analysis, a fixed cost scenario was assumed. As this result was coincident with the raw material cost, it was not necessary to recalculate a new added value.

However, for illustrative purposes, in Tables 5 and 6 the results of a sensitivity analysis to evaluate the effect on added value are shown. Table 5 shows the results of increasing one cent in the initial cost; in turn, Table 6 shows the results of decreasing the same amount. According to the data of Table 5 , if the raw material cost is increased, the added value in each operation is decreased.

Otherwise, if the raw material cost decreases, the added value is increased by applying the same procedure. The same analysis should be done regardless the increase or decrease of the initial cost, subject to this amount does not exceed the product profit in case of increase from 0 to 0. The increase or decrease of the initial cost inversely affects the profit and, in the same way, it affects the net added value of each operation.

From another point of view, it is possible to analyze the distribution of this difference based on the relative importance weight of each operation. All of the above is valid in case of fixed price sales, because for sale prices and variable costs, the added value is affected in a direct way. The proposed procedure is shown as a useful tool for both the calculation of added value and the identification of critical operations in a manufacturing process.

From setting the selling price and through a pull approach, the procedure allows to calculate the added value in a production process, independently of the initial raw material cost and product profit. The procedure can be applied to any production system, since the added value calculation is done for each product regardless the operations sequence.

Moreover, the calculated initial value allows comparisons with the purchasing budget, providing additional decision criteria purchasing capacity to the supplier's selection. In the case of an operation or a machine dedicated to various products, the equipment operation cost will be the same for all production runs, varying only in processing times, inventory levels and the costs of the components.

This is enough to get a different weight and added value for each operation and product. In the selected process, it was demonstrated that the bottleneck operation 7, assembly was the operation of higher net added value.

However, the operation of higher added value was the production of upper terminal operation 4. According to the results, the weight of the bottleneck operation was However, it must be established that after some syn-chronization efforts, the bottleneck operation could be changed. In this case, the aggregated values must be recalculated, because a new bottleneck requires adjustments in processing times, inventory levels and costs. The analysis of the new aggregated values must be addressed in two ways.

First, it is necessary to establish if the change of the added value is reflected in savings or economic loss; then, the added value for each operation should be increased in case of savings or reduced in case of loss, proceeding in the same manner as the net income was distributed.

Finally, when simultaneous changes happen increase or decrease in both the initial cost and the selling price, the effect of such change on operations must be identified. After obtaining a single value, the obtained result should be distributed in each operation. Baudin, C. Bayraktar, E. DaSilva, C. Fletcher, T. Ghisi, F. Goldratt, E. Un proceso de mejora continua.