What is meant by added value?

The difference between the price a business charges for its output and the cost of the bought-in materials and services used to produce it.

A business sells 8,000 units at £25 each and pays £110,000 for bought-in materials and services. Calculate its added value.

Revenue is 8,000 × £25 = £200,000, so added value is £200,000 − £110,000 = £90,000.

A product sells for £40 and the bought-in materials in it cost £16. Calculate the added value per unit.

Added value per unit is £40 − £16 = £24.

A firm has sales revenue of £480,000 and bought-in costs of £312,000. Express its added value as a percentage of revenue.

Added value is £480,000 − £312,000 = £168,000, which is (168,000 ÷ 480,000) × 100 = 35% of revenue.

Why is added value not the same thing as profit?

Added value is measured before the firm's own costs such as wages, rent, energy and marketing are deducted, so profit is what remains of added value once those are paid.

OCR A-Level Business (H431) H431

Introduction to Business

Topic overview Entrepreneurs, enterprise and the value they create Land, labour, capital and enterprise Sectors of industry, forms of ownership and the reach of a market Sole traders, partnerships, companies and limited liability Choosing a legal structure and what it means for stakeholders Franchising and co-operatives The functions of a business and how they depend on each other Measuring the size of a business, and what limits its growth Joint ventures and strategic alliances

Business Objectives and Strategy

Topic overview Aims, objectives and the hierarchy that links them Setting SMART objectives Communicating and revising business objectives Stakeholders and their objectives Stakeholder conflict and its management Stakeholder power and influence Mission statements and business purpose Corporate social responsibility and the profit trade-off Building and judging a CSR profile Strategy, tactics and implementation The business plan and the Plan-Do-Review cycle Risk and reward Quantifiable and unquantifiable risk Uncertainty and its causes Opportunity cost in business decisions Contingency planning and crisis management Porter's Five Forces Porter's generic strategies and competitive advantage The purpose of performance measurement Financial measures of business performance Ratio analysis: profitability, liquidity and efficiency Non-financial measures of business performance Forecasting and its limits Qualitative forecasting methods Forecasting sales, costs, profit and cash flow Time series analysis and moving averages Correlation, extrapolation and index numbers The business decision-making process Decision trees and expected values Ansoff's matrix Conflicting results from decision-making tools Causes, types and barriers to change Change management models: Lewin, Kotter and 7-S Leading change and using external consultants

External Influences

Topic overview The market, its size, growth and share Market structures and a firm's decision-making power Demand, supply and their determinants Equilibrium, shortages and surpluses Market forces and the dynamic market Physical and non-physical markets Competition, and barriers to entry and exit Market dominance and how it is regulated Globalisation and the forces driving it Multinationals, global strategy and global brands International trade, its barriers and its practicalities Exchange rates and currency conversion Free trade, trading blocs and the European Union Emerging markets and the changing global environment Political factors and political stability The business cycle and key economic indicators Taxation, government spending and subsidies Monetary, fiscal and supply-side policy Social factors and changing consumer lifestyles Technology in business and technological change The digital revolution and the information age Business ethics and ethical trading Managing conflicts between ethical and other objectives Legislation, compliance and the cost of breaking it Environmental issues and environmental policy Sustainability in practice Reading the external environment and the cost of ignoring it

Accounting and Finance

Human Resources

Topic overview Human resource objectives Chain of command, span of control and delegation Tall, flat, matrix and divisional structures Organisational culture and what shapes it Formal and informal communication and group norms Verbal, non-verbal and electronic communication The communication model and barriers to communication Workforce planning Flexible working practices Recruitment and the choice between internal and external hiring Selection methods: interviews, tests and references Training methods and training needs analysis Appraisal: 360°, peer and self-assessment Measuring workforce performance: turnover, absenteeism and productivity Redundancy and fair dismissal Unfair dismissal, grievance procedures and employment tribunals The functions of management Leadership theories and styles Maslow, Herzberg and the theories of motivation Monetary and non-monetary motivation in practice Employee relations and employment legislation Trade unions and employee participation External influences on human resources The human resources strategy

Marketing

Topic overview Marketing objectives and why a business sets them Marketing resources and SWOT analysis Primary market research and trial marketing Secondary market research and desk sources Sampling methods and sample reliability Normal distribution and standard deviation Market share and market growth Using market analysis to make decisions Consumer buying behaviour and the marketing models Niche marketing and mass marketing Customer orientation, product orientation and customer service Market segmentation Customers, consumers and business-to-business marketing The product life cycle and its stages Extension strategies The marketing mix and the marketing strategy Product, USP, branding and differentiation The Boston matrix, Ansoff's matrix and portfolio analysis Pricing strategies Price and income elasticity of demand Cross elasticity and advertising elasticity of demand Place and channels of distribution Promotion above the line, below the line and digital Service marketing and the extended marketing mix External influences on marketing

Operations Management

Topic overview Operations objectives and operations strategy Added value and how it is measured Innovation and research and development Job, batch, flow and cell production Specialisation and the division of labour Service provision and customer service Project management and Gantt charts Critical path analysis and network diagrams PERT and the limits of project planning Productivity and how to raise it Economies and diseconomies of scale Capacity utilisation and capacity management Stock control charts and reorder levels Reordering systems and the cost of holding stock Lean production, just in time and kanban Technology in operations Quality control, quality assurance and TQM External quality standards and benchmarking Choosing a location for a business Logistics and supply chain management Outsourcing, offshoring and re-shoring External influences on operations

Operations Management

Added value and how it is measured

2 things to know
Components 01, 02 and 03

Overview

Recall questions on added value, the formula for it, how to calculate it per unit and in total, and the ways a business raises it.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

Why can a rise in added value be accompanied by a fall in profit?

Numbers

State the formula for added value.

Questions from this subtopic

Each one with the model answer underneath.

1
What is meant by added value?
Model answer
The difference between the price a business charges for its output and the cost of the bought-in materials and services used to produce it.
2
State the formula for added value.
Model answer
Added value = sales revenue − the cost of bought-in goods and services.
3
A business sells 8,000 units at £25 each and pays £110,000 for bought-in materials and services. Calculate its added value.
Model answer
Revenue is 8,000 × £25 = £200,000, so added value is £200,000 − £110,000 = £90,000.
4
A product sells for £40 and the bought-in materials in it cost £16. Calculate the added value per unit.
Model answer
Added value per unit is £40 − £16 = £24.
5
A firm has sales revenue of £480,000 and bought-in costs of £312,000. Express its added value as a percentage of revenue.
Model answer
Added value is £480,000 − £312,000 = £168,000, which is (168,000 ÷ 480,000) × 100 = 35% of revenue.
6
Why is added value not the same thing as profit?
Model answer
Added value is measured before the firm's own costs such as wages, rent, energy and marketing are deducted, so profit is what remains of added value once those are paid.

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Introduction to Business

Business Objectives and Strategy

External Influences

Accounting and Finance

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Revenue the cost of sales.

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