In the world of real estate, the term Value Added will be a key component of development in this tight economy.
By way of example: If you own a piece of real estate, and you can add value to that real estate by building additional footage of space or other creative approach, the given that you already have the existing piece as equity to draw upon, the odds are you’ll have the best chance in this market to get financing.
Well, we briefly covered the concept in a business valuation course today, and I think I better understand your original line of thought. If we want to look at the value added by a process (ie conversion of raw materials into finished product) then we would take the gross revenue, less direct material costs. This removes the fluctuation in the underlying raw materials from the calculation of value for the process.
So labor is tossed out because it is part of the conversion process that is being assigned value. The value is therefore, not a value added by the labor but by the processing steps from raw materials to finished products.