UVA method

The UVA method (fr. Méthode des Unités de Valeur Ajoutée - the Value-added Unit Method) is an accounting and decision-making tool, based on calculating the cost of sales. Unlike management accounting, which calculates product margins, the UVA method calculates the result (profit or loss) generated by each sale. The UVA method relies on a very detailed analysis of all costs related to products, customers, orders, and deliveries. It introduces the notion of a single measure unit (the UVA), which applies to all the operations in the company. The method relies on an equivalent-based approach.

Origins of the UVA Method

The UVA method is an upgrade of the GP method, which traces back to the works of Georges Perrin (1891-1958), a French engineer and a graduate of the Ecole Centrale. In 1953, he presented his product costing method, based on the introduction of a measure unit – the GP –, which was distinct from currency, and which allowed one to express the entire production of a company. The GP unit stands for the effort that the company needs to make in order to produce a representative good (a basic item). The validity of the method relies on the principle of the occult constants, postulated by Georges Perrin, according to which the relationships between the production efforts made to produce various goods remain stable over time.

Jean Fiévez and Robert Zaya from the Les Ingénieurs Associés (LIA) consulting office, took it to the next level. In 1995, its name changed into the Value-added Unit Method (UVA). As against the GP method, which focused only on product costing, the UVA method looks into most about every operation in the company.

Basic Concepts of the UVA Method

The UVA method relies on a highly-detailed analysis of all value-producing processes, which involves both product-related processes and customer-related ones.

The whole added-value production of a business is measured with the help of one unit: the UVA. The idea of using a measure unit that would be shared by all the company’s operations is based on the fact that only companies that make a single product know its cost perfectly (namely, the result of total expenses divided by the number of units produced). The introduction of the UVA changes every company into a “mono-product” one.

By analysing all of its processes, the company can envisage “determining its results per sale”. This is the main objective of the UVA method, since a transaction/sale (which translates into an invoice) concentrates all the efforts carried out through the company’s various operations. This is clearly a new approach to management, in which one asks oneself whether a transaction between the company and its customer results in profit or loss. The customer is therefore at the centre of the decision-making mechanism. When the customer buys something for a given sum, has the company earned or lost money? Each sale contributes to the overall result of the company. The result of a sale is the difference between the cashed amount and the cost of the sale. The aggregated results of all sales constitute the company’s EBIT (earnings before interest and taxes).

The question of precision is critical, in costing. It is linked to the presence of indirect costs. By placing the sale at the centre of the analysis, the UVA method does away with direct/indirect costs, because from a sale viewpoint, all costs are direct: sold products, transport, order processing, invoicing, etc. Thanks to that approach, the UVA method provides a result precision that other systems cannot achieve.

The method presents two cost axes: product costs and customer costs. Product costs include design, processing, raw materials, production, control, storage, post-sale service, etc. Everything that the company has had to do to sell its products (or services) falls under the customer costs. Customer costs include market research, order processing, order preparation, shipment, invoicing, etc.

About 90 to 95 percent of resources fall under two categories of costs: products and customers. The rest of the costs have to do with the internal operation of the business: general management, financial accounting, etc.

Product costs have two distinct components: the cost of the value added by the company and the cost of integrated purchases. Integrated purchases (essentially, the raw materials required to produce a good) are called Product-specific Expenses (PSE), according to the UVA method. They can be found in the nomenclatures, so they are easy to calculate.

$Cost\ of\ a\ product=PSE+cost\ of\ the\ added\ value$

Customer costs, too, have two distinct components: the cost of the added value and the Customer-specific Expenses (CSE). The CSE may include the commission to the representative, the customer rebate, or the price paid to the carrier. These are costs that are determined directly.

$Customer\ cost=CSE+cost\ of\ the\ added\ value$

The UVA method focuses on a precise calculation of the added value.

All the added value that the business produces is measured by a single unit: the UVA.

Main Notions

The UVA method introduces a certain number of specific concepts.

UVA Entry

The UVA entry comprises all the material and human resources needed to carry out an operation, which are used in a clearly-defined technical and economic framework. In other words, a UVA entry is by definition a homogenous package of resource uses. UVA entries are present in every company operation.

Attributable expenses

They are expenses that can be attributed to the entries without any key of arbitrary allocation; they represent the use of resources by the entries.

Rate of UVA Entry

The rate of a UVA entry is the sum of the resources that have been used per unit of work. It includes labour, depreciation, floor space used, consumables, maintenance, etc.

Process

The process (or sequence of operations) is a succession of activities that are carried out in association with a UVA entry, within a given timeframe. The concept of sequence of manufacturing operations is a common one, and the UVA method introduces it in all the company’s operations.

UVA – Added Value Unit

The added value unit (1 UVA) represents the use of resources required to carry out a typical process within the company’s activity: generally speaking, it is the manufacturing of an item (in the case of a processing company) and execution of a service (in the case of a service company). The process is called basic process, and its rate will be the basic rate.

Index of a UVA Entry

The index of a UVA entry is the ratio between its rate and the basic rate.

In other words, the index of a UVA entry is given by its use of resources, expressed in added value units.

UVA Equivalent of a Process

The UVA equivalent of a process is given by its use of resources, expressed in added value units.

Cost of a Sale

The cost of a sale is the sum of product costs and customer costs incurred by the company in order to carry out the sale.  

Result of a sale

The result of a sale is the difference between the amount paid and the cost of the sale.

Profitability Curve

The profitability curve of the sales is a curve that represents the aggregated turnover (invoice by invoice) on its abscissa and the result rate (the result as a percentage of the turnover) on its ordinate. The invoices are classified in ascending order of the result rate.

Structure of the UVA Method

The UVA method comprises the following steps:

• Inventory of UVA entries
• Analysis of attributable expenses
• Calculating the rate of the UVA entries
• Choosing the UVA unit
• Calculating the indices of the UVA entries
• Describing the sequence of operations
• Calculating the UVA equivalents of processes

Inventory of UVA entries

To do a precise analysis of a company’s operations, one needs to start by reviewing all of its work entries. A work entry is a complete “package” of materials – either fixed or mobile – upon which wealth is created (the value added by the company), with or without the help of personnel. In a production workshop, a work entry may be a machine, whereas in an administrative service, it may be an assistant working in an IT office. Work entries may be used in different circumstances, with difference resource use levels. For instance, a machine that is used in a workshop may work in an adjustment mode or in a production mode. The resource use will not be the same in the two instances. The adjustment mode will require one or several highly-qualified adjusters, whereas in the production mode, the machine will use more power. According to the UVA method, a work entry may constitute one or several UVA entries, as long as there are different ways of using it. The number of UVA entries depends on the size and structure of the analysed company and may range from a few dozen to several hundred.

Analysis of Attributable Expenses

The expenses that can be attributed to a UVA entry regard the use of resources at that entry.

The main attributable expenses are the following:

•  Direct and indirect labour. This includes salaries, social contributions, cost of personnel service, and fringe benefits (accommodation, car, transportation tickets, etc).
•  Consumables. In an office, they generally include the telephone, the IT equipment, the office supplies, etc, and in a workshop: the electric power, the compressed air, the lubricants, etc.
•  Maintenance (spare parts and labour);
•  Depreciation – calculated on the basis of the replacement value of the equipment, its expected lifespan, and the annual number of operating hours;
•  Area-related expenses include building depreciation or rent, maintenance and cleaning, heating, light, insurance, and others.

Calculating the Rate of UVA Entries

The rate of a UVA entry is given by its use of resources reduced to its unit of work. To calculate it, one must add up the unit expenses attributable to the entry.

Choosing the UVA Unit

By definition, the added-value unit corresponds to the amount of resources that have been used and which are required to carry out the basic process (producing a good or performing a service). Technically speaking, choosing a good/service over another in order to create a unit is of no consequence, because the basic process will only serve as a reference in later calculations. However, once the choice is made, it is imperative to define it as a reference as precisely as possible, because it will act as a measure unit.

Calculating the Indices of UVA Entries

Once all the rates of the entries have been calculated and the base rate has been chosen, one can calculate the UVA indices using the following formula:

$Index\ of\ a\ UVA\ entry={rate\ of\ the\ UVA\ entry \over base\ rate}$

Process (Operation Sequence) Descriptions

The concept of UVA entry allows one to define every process that they identify in a business – without making a distinction between the manufacturing processes and any other process that generate added value (management, marketing, etc), but rather viewing them as a sequence of operations carried out at the UVA entries during a given timeframe.

Calculating the UVA Equivalents of Processes

By multiplying the index of every UVA entry involved in a process execution by the usage time thereof, one obtains its use of resources (expressed as UVA) during that process. The sum of these uses constitutes the UVA equivalent of the process.

$UVA\ equivalent\ of\ a\ process=\sum _{i=1}^{N}entry\ index\ i\ \times \ usage\ time\ of\ the\ entry\ i$

The development of a UVA method within a company involves notions such as (UVA) unit, UVA entries, rates and indices of UVA entries, and UVA equivalents of processes. At no time is there a question of cost. Developing a UVA method helps modelling the business and expresses its entire activity as UVA. The calculation of costs will only intervene on the operating side. This is a key aspect to remember, to understand the UVA method.

Applying the UVA Method

To apply the method means:

•   to measure the added-value production, expressed as UVA;
•   to calculate the UVA cost;
•   to calculate the costs of products, customers, and sales;
•   to calculate the results of each sale;
•   to plot out profitability curves.

In order to measure the production of added value over a certain period of time, one needs to measure the number of UVAs produced by the company over that period. The value-added production – expressed as UVA – is made up of UVAs that concern products and UVAs that concern served customers. The production of UVAs that regard the products becomes apparent when items that are good for selling enter the shop. The production of UVAs that regard the customers becomes visible in the invoices that have been drawn up, because it is the invoices that summarise the actions that were needed in order to carry out the sale.

The total UVA production (UVAP) over a given period of time (one month, for instance) will be the sum of product-related UVAs (PP) and customer-related UVAs (CP).

$UVAP=PP+CP$

In general, the UVA cost is determined every month. To rule out any aspects related to seasonality, holidays, and working day number variation from one month to another, the UVA cost is calculated over twelve successive months. Every company activity that creates value is henceforth expressed as UVA. To calculate the cost of the unit, it is enough to divide the expenses that were incurred during a specific period of time by the number of UVAs produced during that period. The product-specific expenses and customer-specific expenses (PSE and CSE) are deducted from the cost amount (C) provided by the general accounting, because these expenses are taken into account directly. The cost of the UVA is a complete cost, since its calculation considers all the company’s expenses, including those that are not attributable to UVA entries. These expenses have to do with the internal operation of the company and include general management, financial accounting, and others (about 5-10 percent of the company’s overall expenses). They fall under the cost of the UVA – in other words, they are attributed to products and customers in proportion with the UVAs that these two categories use.

$Cost\ of\ the\ UVA={\frac {C-(PSE+CSE)}{UVAP}}$

Once the cost of the UVA is calculated, one can determine the cost of each product by applying the cost of the unit to the manufacturing process of that product. Similarly, one calculates the cost of the customer service by applying that same cost of the UVA to the customer-related process.

The introduction of this measure unit makes it possible to accurately calculate the cost and the accounting result of each sale. The cost of a sale is the sum of the product costs and the customer costs that the company has incurred to carry out the sale.

$Cost\ of\ a\ sale=cost\ of\ products+customer\ cost$

The result of the sale is the difference between the invoiced amount and the cost of the sale.

The profit curve is one of the most valuable indicators provided by the UVA method. It is a graph that shows a summarised structure of the result that the company has obtained during a given time period. All the sales made during that period are plotted on the abscissa, in ascending order of the result rate represented on the ordinate. The profit curve emphasises the heterogeneity of the transaction results obtained by the business. The company’s global result may be positive, but the results of the sales that make it up will be highly-variable. One distinguishes four categories of sales: highly-deficient sales – the so-called “hemorrhagic” ones (which have a result rate below –20 percent), deficient sales (going from –20 to 0 percent), profitable sales (0 to 20 percent), and the so-called dangerously-profitable sales (of over 20 percent). The graph displays a sales profit curve in its canonical form. Turnover percentages may vary a lot from one category to another; on the other hand, result variation is common in all companies. In addition to the base curve that groups all sales together, one may plot out curves to represent a higher level of data aggregation. A sale that is represented by an invoice is in fact a “foundation brick” that enables one to form various types of groups. For instance, by grouping together all the invoices per customer, one obtains a customer profitability curve. The most frequent grouping criteria are commercial representatives, geographic areas, markets, product families or invoiced amounts. One may also select sales by one criterion – e.g. only the invoices related to a specific customer – and determine the profitability curve of that customer.

Profit curve in canonical form

Innovations of the UVA Method

The UVA method is not a method of cost allocation. In management accounting, one “cuts up” the whole (= the company) into “pieces” (sections/centres of analysis/activities). Then in the same way, all the expenses are discharged/allocated to each portion that was cut out. This approach may be described as “cost allocation” [as done in traditional bookkeeping]. It is a top-down approach. With the UVA method, one does the reverse – a re-composition: at a micro-scale (namely, at the level of one sale), one identifies each and every element that has helped carry out the sale. Then by adding up all the sale transactions, one recomposes almost all the resources of the company. The only resources that are not allocated directly here are those that are associated with the internal management processes; however, they are to be found in the cost of each transaction, via the UVA cost. This is a bottom-up approach.

The UVA method regards the company as a network of processes. The method makes a precise analysis of all these processes. The novelty of the UVA method is to analyse not only the processes related to sold products, but also the ones related to served customers.

According to the UVA method, the object of the costing is the sale, not the product. Thanks to this new way of viewing things, product-related costs that were indirect now become direct, as from the viewpoint of a sale, all costs are direct: the cost of sold products, the freight cost, the cost of order processing and invoicing, etc. The difference between the amount that is invoiced to the customer and the cost of the sale gives the result: profit or loss. The UVA method is the only one that allows one to calculate the profitability of each sale.

The profitability curve is a tool that has been made possible by choosing to view the sale as a cost object. The curve can be plotted out, since one calculates the profitability of each invoice. Thanks to the profitability curve, the account managers determine the structure of the company’s result and can make precisely-targeted decisions.

Bibliography

1.  Perrin G. : Prix de revient et contrôle de gestion par la méthode GP, Dunod, 1963.
2.  Fiévez J., Kieffer J.-P., Zaya R. : La méthode UVA : du contrôle de gestion à la maîtrise du profit, Dunod, 1999.
3.  Gervais M., La Villarmois O. de, Levant Y. : La méthode UVA, Economica, 2012.
4.  Fiévez J., Staykov D. : La méthode UVA. Une aide à la décision pour les PME, Revue Fiduciaire Comptable n° 341, juillet-août 2007
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