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Explaining Value Added -- Dickeson

January 2004
It's called Value Added in the Ratio Studies of the Printing Industries of America. Or, you can call it PVA for "Process" Value Added—looking at it from inside the shop. From outside the plant—the customer side—we call it PVA for "Perceived" Value Added.

It's all one and the same. It's the difference between selling price of manufactured products and the cost of the raw materials converted to those products. Strip away selling price, the cost of raw materials, and outside job purchases and what you're left with is Value Added, either as a percentage or as a number.

"Yes, we know all that, Roger. What difference does it make? We look at it once or twice a year—when we get financial statements. You have to buy paper, ink and other stuff for jobs, don't you? Not much you can do about it. Look at those PIA ratios. For more than a dozen years they've been running around 36 percent of selling price for manufactured product—for both top performers and all companies. That means that all printers are paying about the same, doesn't it? Have been for years."

That's mostly true—except for the part about not being able to do much about it. There are things you can, and should, do. Let's think for a moment about it.

First of all, we know that the materials—primarily paper—are about the same for all 800 printers reporting to PIA, don't we? That's the thing we do know about jobs—the dollar cost of materials for the job. It's the breaking point before we shove off into that unknown thicket of "processing" costs that we really can't identify with specific jobs.

Add in Salaries

Those "processing" costs include salaries and wages of the CEO, accounting people, secretaries, estimators, customer service, warehousing, janitorial, sales, supervisors and factory crews. Plus, the "social costs" of those people must be added to their wages and salaries—taxes, insurance, medical, 401(k)s, and the like. That's the bulk of the processing costs. Then we add interest, realty, services, depreciation and taxes. All of these are "processing" costs that can't be added to specific jobs save by assumptions that attribute them all to manufacturing crew labor called job "chargeable" hours.

We find ourselves with two groups of cost: materials and processing of those materials. Material costs we estimate in real dollars by the job. For processing costs we make a set of guesses or assumptions and attribute them to jobs. Those guesses bear only some relationship to the real world. We're adding costs that we know for a job to costs that we predict, and using both of them for estimates.
 

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