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 are the direct materials , direct labor , and installation costs associated with a sale. 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.