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Value Added

Value added is the amount by which a business's sales revenue exceeds the cost of the materials and outside services it buys to produce its goods or services.

What Is Value Added?

Value added is the increase in worth a company creates when it takes materials and services from other businesses and turns them into something more valuable. In accounting, it is usually measured as sales revenue minus the cost of the purchased inputs used to make the product. Economists apply the same idea across whole economies, where it is the building block of gross domestic product (GDP).

Value Added = Sales Revenue − Cost of Purchased Inputs

The subtracted inputs are often called intermediate goods: raw materials, parts, energy, and outside services that are used up in production. Labor and capital costs are not subtracted, so value added is the amount left over to pay employees, lenders, owners, and the government, and to fund future investment.

How It Is Used

Value added is less common in everyday stock analysis than net income or gross margin, but it shows how much the business itself contributes to output. Because purchased inputs are removed, it can help compare companies that buy very different amounts of outside materials. Statistical agencies calculate value added for each industry and add the results together to estimate total economic output. Gross value added includes depreciation, the wear on equipment and buildings. Net value added subtracts it.

Example

Consider a hypothetical furniture maker that sells tables for 1,000 in a year. It spends 400 on wood, fabric, and hardware from suppliers. Its value added is 600. That 600 pays wages, rent, interest, and taxes, and whatever remains is profit.

Limitations

  • Value added depends on how a company classifies its costs, so figures may not be fully comparable across firms.
  • It does not measure cash flow or show whether a business earns more than its cost of capital. Economic Value Added (EVA) is a separate measure that addresses the latter.
  • Official industry figures are published with a delay, so they describe past periods.

Updated November 2, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country's borders over a given period, used as a broad measure of economic output.

Intermediate Good

An intermediate good is a product or service used as an input to produce another good or service, rather than being sold directly to final consumers.

Net Income (NI)

Net income is the profit a company keeps after subtracting all its expenses, including operating costs, interest, and taxes, from its total revenue for a reporting period.

Gross Margin

Gross margin is the percentage of a company's revenue that remains after subtracting the direct costs of producing the goods or services it sells, showing how much each sales dollar contributes.

Depreciation

Depreciation is the accounting method of spreading the cost of a tangible, long-lived asset over the years it is expected to be used, recording a portion as an expense each year.

Economic Value Added (EVA)

Economic Value Added (EVA) is a measure of a company's profit remaining after deducting the full cost of the capital used to generate it, including the return shareholders expect.

Income Statement

An income statement is a financial report that summarizes a company's revenues, expenses, and resulting profit or loss over a specific period, such as a quarter or year.