##### What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm.

Planned inventory refers to changes in stock or inventories which has occurred in a planned way. In a situation of planned inventory accumulation the firm will plan to raise its inventories. In case of planned inventory accumulation firm has and an expected fall in sales, the firm will have unsold stock of goods which has been anticipated.

For example, if a firm has opening inventory of 1000 units and it wants to raise its inventory from 1000 to 2000 units and expects sales to be 10000 units, it will produce 11000 units, if at the end of the year it is found that the actual sales were also 10000 the firm will raise its inventory from 1000 to 2000. The closing inventory will be –

Final Inventory or Closing Inventory = Opening Inventory + Production – Sale

= 1000 + 11000 – 10000

= 2000 units

In this case inventory accumulation is equal to the expected accumulation therefore it is a planned inventory accumulation.

Unplanned inventory refers to change in stock or inventories which has incurred unexpectedly. In a situation of unplanned inventory accumulation due to unexpected fall in sales, the firm will have unsold goods, which has not been anticipated.

For example, if a firm has opening inventory of 1000 units and it wants to raise its inventory from 1000 to 2000 units and expects sales to be 10000 units, it will produce 11000 units, if at the end of the year it is found that the actual sales were 9000 units only then the closing inventory will be –

Final Inventory or Closing Inventory = Opening Inventory + Production – Sale

= 1000 + 11000 – 9000

= 3000 units

This was not expected, so it 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, therefore there is a positive relationship between value added and the change in inventory.

4