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Question
What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm.
Solution
The stock of unsold goods (finished and semi-finished), which a firm carries forward from one year to another year is termed as an inventory.
Inventory accumulation can be planned or unplanned. The planned inventory accumulation refers to the inventory that a firm can anticipate or plan. For example, a firm wants to raise its inventory from 1000 to 2000 units of denims and expects sales to be 10000 units. Thereby, it produces 10000 + 1000 units, i.e. 11000 units (in order to raise the inventory by 1000 units). If, at the end of the year it is found that the actual sales that got realised were also 10000, then the firm experiences the rise in its inventory from 1000 to 2000 units. The closing balance of inventory is calculated in the following manner:
Final Inventory = Opening inventory + Production − Sale
= 1000 + 11000 − 10000
= 2000 units of denims
In this case the inventory accumulation is equal to the expected accumulation. Hence, this is an example of a planned inventory accumulation.
Unplanned inventory accumulation is an unexpected change in an inventory. There is an unplanned accumulation in an inventory when the actual sales are unexpectedly low or high. For example, let us assume, a firm wants to raise inventory from Rs 1000 to 2000 and expects sales to be 10000 and thereby produces 11000 units of denims. If, at the end of the year, the actual sales realised were 9000 units only, which were not anticipated by the firm and therefore the inventory rose by 3000 units. The unexpected inventory accumulation is calculated as:
Final Inventory = Opening inventory + Production − Sale
= 1000 + 11000 − 9000
= 3000 units of denims
Hence, this is example of unexpected inventory accumulation.
The relation between value added and the change in inventory is shown by the given equation:
Gross value added by a firm = Sales + Change in inventory − Value of intermediate goods
It implies that, as inventory increases, the value added by a firm will also increase, thus confirming the positive relationship between the two.
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RELATED QUESTIONS
Calculate Gross Value Added at Factor Cost:
| i | Units of output sold (units) | 1,000 |
| ii | Price per unit of output (Rs) | 30 |
| iii. | Depreciation (Rs) | 1,000 |
| iv. | Intermediate cost (Rs) | 12,000 |
| v. | Closing stock (Rs) | 3,000 |
| vi. | Opening stock (Rs) | 2,000 |
| vii. | Excise (Rs) | 2,500 |
| viii. | Sales tax (Rs) | 3,500 |
Find net value added at market price:
| (Rs lakh) | ||
| (i) | Fixed capital good with a life span of 5 years | 15 |
| (ii) | Raw materials | 6 |
| (iii) | Sales | 25 |
| (iv) | Net change in stock | (-)2 |
| (v) | Taxes on production | 1 |
Find gross value added at market price
| (Rs lakh) | ||
| (i) | Depreciation | 20 |
| (ii) | Domestic sales | 200 |
| (iii) | Net change in stocks | (-) 10 |
| (iv) | Exports | 10 |
| (v) | Single use producer goods | 120 |
Calculate “sales” from the following data:
|
(Rs in lakhs) |
|||||
|
(i) |
Intermediate costs |
700 |
|||
|
(ii) |
Consumption of fixed capital |
80 |
|||
|
(iii) |
Change in stock |
(−) 50 |
|||
|
(iv) |
Subsidy |
60 |
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|
(v) |
Net value added at factor cost |
1300 |
|||
|
(vi) |
Exports |
50 |
Calculate ‘Sales’ from the following data:
|
(Rs in lakhs) |
|||
|
(i) |
Subsidies |
200 |
|
|
(ii) |
Opening stock |
100 |
|
|
(iii) |
Closing stock |
600 |
|
|
(iv) |
Intermediate consumption |
3,000 |
|
|
(v) |
Consumption of fixed capital |
700 |
|
|
(vi) |
Profit |
750 |
|
|
(vii) |
Net value added at factor cost |
2,000 |
|
Given the following data, find Net Value Added at Factor Cost by Sambhav (a farmer) producing Wheat:
| Items | (₹ in crore) | |
| i) | Sale of wheat by the farmer in the local market | 6800 |
| ii) | Purchase of Tractor | 5000 |
| iii) | Procurement of wheat by the Government from the farmer | 200 |
| iv) | Consumption of wheat by the farming family during the Year | 50 |
| v) | Expenditure on the maintenance of existing capital stock | 100 |
| vi) | Subsidy | 20 |
From the following data, calculate Net Value Added at Factor Cost (NVAFC):
| S. No. | Particulars | Amount in (₹ Crores) |
| (i) | Price per unit of output | 20 |
| (ii) | Output sold (units) | 1250 units |
| (iii) | Excise duty | 5,000 |
| (iv) | Consumption of fixed capital | 1,000 |
| (v) | Change in stock | (-) 500 |
| (vi) | Single use producer goods | 6,000 |
