Value Analysis and Material Classification

Value analysis is one of the newer scientific aids to managerial decision-making. It comprises a group of techniques aimed at the systematic identification of unnecessary costs in a product or service and efficiently eliminating them without impairing its quality and efficiency.

Value analysis involves a creative approach for finding out unnecessary costs. Such costs are those costs which though incurred on a product or service, are unnecessary and do not improve its quality or efficiency, give it a better appearance, prolong its life, nor provide any additional satisfaction to the customer.

By eliminating these costs; the cost of the product or service can be reduced, and the sales and the resulting profit proportionately increased.

Types of Value Analysis

The term, value is used in a broader sense and it has different meanings for different persons. For example, for a designer, value means quality of the product designed and efficiency of the product produced; for a salesman, it would be the price of the product at which it can be sold in the market; and for the management, value would be the return on capital employed.

An industrial product may have the following types of value:

Use Value: There are certain characteristics of a product which make it useful for certain purposes. For example, a book of Cost Accountancy if written for ICWA—Inter students, has a use value provided it serves the purpose of such category of students. It measures the quality of performance of a product. Use value may be primary use value, secondary use value and auxiliary use value.

Primary use value indicates the attributes of a product which are essential for its performance as engine, steering wheel and axle in a motor car without which car cannot run. Secondary use value refers to such devices as bonnet or the mudguard or the windscreen without which motor car can be driven but these are necessary for the protection of engine and other parts.

Auxiliary use value is essential for better control and operation as speed meter, electric horn etc in motor car.

Esteem Value: Certain properties of a product do not increase its utility or performance but they make it esteemable which would induce customers to purchase the product. For example, a watch with gold cover has esteem value. A rich customer may prefer a watch with gold cover although a watch with a steel cover may serve the same purpose of keeping time.

Some products may have both use as well as esteem value and yet both may be important. For example, a fountain pen with a gold plated body will have both use and esteem value as it will not only look better but will also last longer.

Cost Value: This value is measured in terms of cost involved. In case of a manufacturing concern it refers to the cost of production of the product produced and if some part of the product is purchased from outside, it means cost of purchase of that part.

Exchange Value: Certain characteristics of a product facilitate its exchange for something else and what we get is the exchange value of that product. It is equivalent to its sale value. All these values play an important part in our personal lives, but in value analysis, we are mainly concerned with use value and to some extent to the esteem value.

All other valued should be subordinated to use value in varying degrees. Value of a product manufactured for sale is the least amount spent in manufacturing it to create appropriate use and esteem values. Thus, value analysis seeks to provide the different values required in a product or service at the least cost without impairing its quality, efficiency and attractiveness.

Classification as per Value Analysis

• Serviceable, Unserviceable and Obsolete Items: Here, items that temporarily go out of service are regarded as serviceable items, which after repairs and/or replacement, become serviceable again and their durability are extended for a long time. They are therefore only meant for disposal as scraps. When it comes to obsolete items, they become very old in the presence of new innovations in use, design, etc, and thus, cannot earn you profits.
• Finished Items: These goods are manufactured completely and can be then sold in the market. Semi-finished items are referred to those items that have not been manufactured in complete form and need to be further processed before they can be sold into the market.
• Dead Stock Items: Dead stock items are often found in government departments, such as furniture, machinery, equipment with a definite life and cannot be written off, before their expiry. These items are issued temporarily to their users on loan basis.
• Unused Items: The items are defective, damaged or rendered unusable in the production process for some reason.