CPIM Practice Exam

In accounting, what does 'value added' mean?

1. The costs incurred during the manufacturing process

2. The profit made from selling a product

3. The increase in utility perceived by the customer from a product transformation

4. The total expenses associated with manufacturing

The correct answer is: The increase in utility perceived by the customer from a product transformation

Value added refers to the enhancement that a company gives its products or services before offering them to customers. This concept is closely tied to the perceived utility that a customer experiences as a result of a transformation process. When a raw material undergoes changes, such as manufacturing or assembly, it typically results in a product that the customer values more highly than the original inputs. This increased utility is what customers are willing to pay for, as they perceive an added benefit or improvement in the product that they receive. Therefore, value added is specifically about the increase in worth that arises from creating a product through labor, resources, and skill, which in turn enhances customer satisfaction and demand. In contrast, the other options focus on costs or profits without relating them directly to how customers perceive the value of the changes made during production. Consequently, they do not encapsulate the essence of what 'value added' truly signifies in the context of accounting and supply chain management.