The National Accounts Method A problem with the previous two methods is that productive effort is being unequally measured. If production results in a sale for the retail value, then the full value added is recorded. Alternatively, production may be for capital goods for the firm's own use, or the goods may be put into stock (recording a lower total value added than if the items were sold), or they may be sold on hire purchase with, again, a delayed effect on sales. The national accounts method adjusts for these differences by treating these alternative transactions as though they were sales. In this example only items that have been put into stock have been treated differently; finished stock and work-in-progress items have increased by £100, and if the profitability remains the same, then the value added will be about £17. Hence, the total value added will be as in Table.. Applications The most suitable method of measuring value added depends upon the circumstances that the statement is attempting to represent. For measuring value added by a productive unit, the national accounts method would seem to represent more fairly the effort involved. Alternatively, if the intention is to show how wealth is distributed, then either the Corporate Report method or the cost of sales method is a better approach, in that they are related to the value added realized in the period. Further innovations may be made to suit the particular purpose of the statement. For example, in a market where sales prices fluctuate, the use of value added to measure productivity by means of value added per £1 of assets, or per 1 hour of labour, may be distorted. An apparent increase in value added due to greater productivity may, in fact, be due solely to a favourable price increase which is unrelated to productive effort. In such a scenario, standard selling price, or even standard value added, may be regarded as a fairer measure. Clearly, we need to consider carefully the purpose of the value-added statement before deciding on its form. Table Value added – the national accounts method. We offer the following broad purposes as candidates for value added statements: a) Value added as measure of social contribution. Corporations may wish, for varying reasons, to remind society of the contribution that they make. In this respect the value-added statement is better than the profit and loss statement, as it shows that employees and government benefit as well as shareholders. If anything, the statement underestimates the contribution, for the wages and salaries will be spent largely within the community, thereby creating further wealth (known in economics as the multiplier effect). In addition, the materials purchased provide further employment and business and also represent value added to the community. Nevertheless, the format of the statement, de-emphasizing profit and highlighting the wider distribution of wealth, does much to remedy the rather limited view of a firm as given by the profit and loss statement. b) Value added as a measure of effort. Value added is a readily understood concept and therefore provides an attractive base for bonus schemes. Schemes may gauge effort, using a productivity ratio such as value added per 1 payroll cost, or value added per employee. Alternatively, they may deem the difference between actual value added and value added from standard cost data to be an increase in productivity which may then be used as a pool for bonuses (for a detailed explanation, see Cox (1979)). More efficient use of materials and capital goods as well as greater effort may well result in increased value added for the firm. However, as we have noted, value added may be affected by non-productivityrelated factors. Changes in the price of input materials and of goods and services sold are not related to production effort but will nevertheless affect value added. In general, where these other factors are likely to be significant, a value-added basis may well be inappropriate. c) Value added as a return on capital employed. A company generates a return for the owners or shareholders through a combination of resources, including materials, wages, bought-in services and even the infrastructure provided by government, as represented by taxes. Value-added statements deduct only one of these resources - bought-in materials. This partial approach can create distortions when using the ratio for investment decisions or for inter-temporal comparisons. For instance, suppose that instead of making a product in the factory, a firm decides to buy in the finished product. The value added will be reduced by virtue of the increase in material costs. Other factors being equal, there will be a reduction in the workforce, as some of their effort is now being bought in. If this action results in a greater profit, with no significant increase in capital, then reducing value added as a return on capital may increase the return to the shareholders (or the providers of capital). d) Value added as a corporate objective. Shareholders, employees and government would all benefit from an increase in value added due to an increase in selling price, greater productivity, lower material costs and greater efficiency. To this extent, it may seem that value added is a preferable goal to the more narrowly defined profit and loss account, as it would appear to unite the differing interests of the parties concerned. Unfor-tunately, this 'unifying effect' is limited. As we have seen above, shareholders may increase their returns by reducing the share of labour in the value added by the firm. Similarly, labour interests may be furthered by favouring products with high labour content irrespective of their profitability. Value added fails to measure goals at a sufficiently detailed level to reveal such conflicts of interest.