Value added cost definition

What is Value Added Cost?

A value added cost is incurred when an asset is consumed in order to increase the value of goods or services to the consumer. Stated differently, a value added cost is a cost for which a customer is willing to pay, since it adds to the value of the product or service received.

Examples of Value Added Costs

Examples of value added costs are as follows:

  • Direct labor cost. The cost of the personnel directly employed in the manufacture of goods or the provision of services represents a value added cost, since customers will not otherwise receive any goods or services.

  • Direct materials cost. The cost of the materials used to construct a product represents a value added cost, since the product would not exist without it.

  • Installation costs. The cost incurred to install a product and ensure that it is operating properly is an essential value-added cost. For example, a homeowner who wants to install a home gym will need to have it installed - otherwise, having boxes of unassembled gym equipment on site is useless.

These costs are typically a minority of the total costs incurred by a business, which leaves a significant opportunity to strip out non-value-added costs, thereby increasing profits or allowing for the reduction of product prices.