Describe the methods used to calculate value added. How does value Essay - 2

Describe the methods used to calculate value added. How does value added contribute towards understanding the connections betwe - Essay Example Labor expenses also include all the salaries that are given in the form of cash to each and every employee of the organization2. All the outflows of cash in form of cash, assets, materials and wages are inculcated in labor expenses. The rest of the labor expenses include the extra money that is given by the organization if the employees are working on over time or in the form of extra working hours. This is necessary because each hand every hour that they are spending on the organization is also in turn being proved to be productive for the overall organizational perspective. The second component refers to all the capital generated in the form of cash or other items, this capital is the result of all work force and all the investments that are exhausted in the work machinery for generate the capital for the profit of the company. The result of the sum of both the factors yield something that can give a competitor’s advantage to an organization as value added has an alluring ef fect of giving performance more than expected. Value added includes those results, services or usage of the products that are beyond expectations of a client in the positive sense and this also increase the overall value of the services and goodwill of the company among the customers to increase revenue generation.3 A very important and mostly deployed method to calculate economic value added is as follows Economic value added = Current performance – base performance The current performance is the economic value added figures that will be used from the time period that is most recent or in which we are interested to calculate the value added. The company’s figures for all the years are written in tabular format and then a base line is selected. The base line refers to the standard year or time period from which the economic value added of the most recent time period will be compared. The comparison is mostly done in the form of ration and then it is calculated that wha t the current economic value of the company is. If the current performance is high then automatically then resultant factor will be high and we will say that the company us improving in the terms of value added services. If the resultant factor is zero then it means that there is no progress but there is no loss as well. The company should pay heed to cut the sunk costs in this case because the EVA must rise with every time period in order to gain profit and produce productive results. If the EVA factor is negative then this means that there is a serious problem in value added services of the company and there should be revision in policies to decrease the loss of the values of the products. The other method to calculate value added is to estimate the current overall costs that are being dissipated and squandered in the production of the products. After the careful estimation of costs, different measures must be taken in order to minimize the costs so that they overall production st eps cannot be effected badly for example the administration of a company can cut off the extra charges of transportation or they can reduce the work force from their company by introducing different automated system in their work environment. This will reduce the extra costs from the working environments and these extra costs can be taken into account for the production of