Cambridge O Level Business Studies · Syllabus 7115 · Understanding Business Activity
Added Value
What is Added Value?
The difference between the selling price of a product and the cost of the bought-in materials and components used to make it. Added value measures the value the business itself creates through its own processes; it is not profit, because the wages, rent, energy and other overheads incurred in creating that value have not yet been deducted.
This definition is part of the Understanding Business Activity chapter in Cambridge O Level Business Studies.
Added Value in context
Business activity exists because resources are scarce and human wants are not. Every business takes scarce inputs, combines them, and produces goods or services worth more than the bought-in materials it started with — that difference is added value. Somebody must organise those inputs and accept the risk of being wrong: the entrepreneur. The legal form they choose decides who owns the business, who controls it and how much of their own money is exposed if it fails. The objectives they set decide what “success” even means — and different stakeholder groups will judge that success by different, sometimes conflicting, standards.
Common mistakes with Added Value
- “Added value is the same as profit.” Correct Added value deducts only bought-in materials and components. Wages, rent, energy and marketing are still to come out of it. A business can create high added value and still make a loss.
Questions students ask about Added Value
What is the difference between added value and profit?
Added value is the difference between the selling price of a product and the cost of the bought-in materials and components used to make it. Profit is the surplus remaining when the total costs of running the business are deducted from sales revenue. Added value deducts only bought-in materials; wages, rent, energy and marketing still have to come out of it, so a business can create high added value and still make a loss.