CMA Final · Entrepreneurship and Startup

Value Addition: formula sheet

Full chapter guide

Key formulas

Value added (business view): Value added = Sales value of output − Cost of bought-in materials and services; Bought-in means purchased from outside. Wages, depreciation and profit are not deducted.
Split of value added: Value added = Wages and salaries + Rent + Interest + Depreciation + Taxes + Profit; Shows who shares the value the firm creates. Useful for the 'why it matters' part of an answer.
Value added per unit: Value added per unit = Selling price per unit − Bought-in input cost per unit; Use for unit-level comparisons between products or processes.
Value added percentage: Value added % = (Value added ÷ Sales value) × 100; Shows how much of each rupee of sales is created by the firm itself.
Margin in the value chain: Margin = Total value (price customers pay) − Total cost of all value activities; Advantage comes from raising value or lowering cost at one or more activities.
Primary activities (Porter): Inbound logistics → Operations → Outbound logistics → Marketing and sales → Service; Remember them in flow order. These deal directly with the physical product and the customer.
Support activities (Porter): Firm infrastructure + Human resource management + Technology development + Procurement; These support all primary activities. Procurement is about purchasing inputs, not inbound logistics (handling and storing them).
Sources of advantage: Cost leadership (lower cost per activity) or Differentiation (higher value per activity); Link every recommendation to one of these two.
Customer value: Customer value = Total benefits perceived − Total cost to the customer; Total cost includes price, time, effort and risk, not price alone. Benefits are as the customer perceives them.
Value Proposition Canvas fit: Fit = Pain relievers and gain creators matched to the customer's key pains and gains; Customer profile: jobs, pains, gains. Value map: products and services, pain relievers, gain creators.
Value proposition statement: For [target customer] who [need], our [product] provides [key benefit], unlike [alternative], because [proof]; A handy template for writing a short, testable statement.
Satisfaction gap: Satisfaction = Perceived performance compared with expectation; Performance equal to or above expectation gives satisfaction; below it gives dissatisfaction.
Value added: Value added = Value of output (sales value) − Cost of bought-in inputs; A basic measure of value created by the business at its own stage. Use it to show that innovation raises output value or cuts input cost.
Customer value: Customer value = Perceived benefits − Perceived costs; Costs include price, effort and risk. A strategy adds value if it raises benefits or lowers costs as the customer sees them.
Types of innovation: Product | Process | Service (| Business model); Use these as headings when classifying an example. Check what the question asks you to include.
Value addition levers: Innovation + Differentiation + Branding + Technology; A checklist for answers. Not every lever suits every startup, so choose those that fit the case.
Value added: Value added = Sales value (output) − Cost of bought-in materials and services; Wages, interest, rent paid to owners of factors and profit are not deducted. They are shares of value added.
Gross value added (GVA): GVA = Output − Bought-in inputs; Before depreciation.
Net value added (NVA): NVA = GVA − Depreciation; Depreciation is the capital consumed in production.
Distribution of value added: NVA = Wages + Interest + Taxes + Dividends + Retained profit; Use it to cross-check. Add depreciation to reach GVA.
NOPAT: NOPAT = Operating profit (EBIT) × (1 − Tax rate); Profit from operations after tax, before financing cost.
Capital charge: Capital charge = Capital employed × WACC; WACC is the weighted average cost of debt and equity.
Economic Value Added: EVA = NOPAT − (Capital employed × WACC); Positive EVA creates value. Negative EVA destroys it.
Benefit-cost ratio: BCR = Total benefits ÷ Total costs; Above 1 means benefits exceed costs. Use present values if benefits arise over several years.

Quick revision

Value addition is the worth created over and above the cost of inputs.
Value added in accounting terms is output value less the cost of bought-in inputs.
The value chain splits a business into primary and support activities.
Primary activities cover inbound logistics, operations, outbound logistics, marketing and sales, and service.
Support activities cover procurement, technology, human resources and firm infrastructure.
A value proposition states what the customer gets, for whom, and why it is better than alternatives.
Customer value is the benefit received less the total cost paid by the customer.
Innovation adds value through new products, better processes, new business models or better service.
EVA = NOPAT − (capital employed × cost of capital).
Positive EVA means value created for providers of capital; negative EVA means value destroyed.
In a case question, name the activity or strategy, then state the effect on value, then recommend.

Common mistakes

Treating value added as profit. Fix: Remember that value added is before paying wages, rent, interest and tax. Profit is only what is left after all of them.
Deducting wages and depreciation while computing value added. Fix: Deduct only bought-in materials and services. Wages and depreciation form part of value added.
Placing procurement among primary activities. Fix: Procurement is a support activity because it serves every activity. Receiving and storing materials is inbound logistics, which is primary.
Treating value chain and supply chain as the same. Fix: Value chain is internal to a firm and focuses on value and margin. Supply chain spans several firms and focuses on flow of goods, information and money.
Listing product features instead of customer benefits. Fix: Convert each feature into 'so that the customer can...' and write the benefit.
Treating customer value and customer satisfaction as the same. Fix: Remember timing: value is the judgement of benefits against cost; satisfaction is the judgement of experience against expectation after use.
Mixing up product and process innovation. Fix: Ask whether the customer receives a changed item (product) or whether only the method of making or delivering changed (process).
Treating branding as only a logo or advertising. Fix: Describe branding as trust, quality promise and recognition that lets the startup earn loyalty or a price premium.
Deducting wages and interest while computing value added Fix: Deduct only bought-in inputs. Wages, interest and profit are shares of value added.
Confusing GVA with NVA Fix: GVA is before depreciation. NVA is after. Check the question's word.

Exam tips

Always give a rupee example. It turns a general definition into marks for application.
Write the formula and show the bought-in inputs separately before subtracting.
In distinction questions, use a short two-column comparison written as bullet pairs: meaning, basis, who benefits.
For MCQs, check whether the option deducts wages or profit. Value added does not.
In case scenarios, name the specific action the startup took (process, design, service, technology) and tie it to customer benefit.
Draw or list the five primary and four support activities first; it earns marks and keeps your answer organised.
In case questions, tie each activity to a fact from the case. Generic answers lose marks.
End with a clear recommendation and name whether it gives cost advantage or differentiation.