Adding value - Transformation Process

Adding value - the process of adding value to the cost of inputs into and through the transformation process

Define: added value
Added value = the difference between the price of the finished product/service and the cost of the inputs involved in making it.

Define: factor of production
The four categories of resources (or inputs) into the production process that results in goods and services being produced or delivered.
The four categories are usually taken as land, labour, capital and enterprise

Define: transformation process
The process or processes that factors of production go through in order to produce goods and services.
The transformation process can range from very simple (e.g. food ingredients into cooking) to highly complex (e.g. designing the iPad)

Adding value can be done at any stage of the product life.

Calculating value = REVENUE - BOUGHT IN GOODS AND SERVICES

In the different ways all businesses add value by taking resource inputs and transforming them into goods and services this is known as the transformation process.

The transformation process describes what happens inside the business. This is where value is added to inputs to create outputs.

INPUTS >>>>>> PROCESS/TRANSFORMATION PROCESS >>>>>>>>>>> OUTPUTS

Example

Industry - Restaurants
Key Inputs - People, Ingredients, Buildings
Added value through transformation process - Value added during cooking and through customer service.

Q1) Identify three benefits of a business that successfully manages to add value in the production
process

▪ Improved profitability, leading to better returns for investors
▪ Higher selling prices to customers prepared to pay for additional value added
▪ Competitive advantage over competing firms who struggle to remain viable
▪ Better cash flow arising from improved profitability

Q2) Explain why added value is not the same as the profit earned by a business

Valid points include:

▪Added value is the difference between sales revenue and the direct costs ofsatisfying that demand - i.e. the value (that is effectively added to the cost of theinputs into production)

▪Profit is the difference between sales revenue and ALL costs of a business. I.e. itincludes costs (overheads) not directly related to the production process (e.g.admin, marketing)

▪However, added value is a source of profitability - it contributes to the overallprofit earned by a business