A firm starts the year with an inventory of 300 shirts and wants to reduce it to 200 shirts by the end of the year. It expects to sell 1,500 shirts, so it produces 1,400 shirts. Its actual sales turn out to be only 1,320 shirts. Which of the following describes the change in its inventories?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Planned decumulation of 100 shirts and unplanned accumulation of 180 shirts
Given:
Opening inventory = 300 shirts
Planned closing inventory = 200 shirts
Expected sales = 1,500 shirts
Production = 1,400 shirts
Actual sales = 1,320 shirts
Planned change is what the firm intends; unplanned change comes from sales differing from what it expected.
Planned change = 200 − 300 = −100 (planned decumulation of 100)
Actual closing stock = 300 + 1,400 − 1,320 = 380
Unplanned change = 380 − 200 = +180 (unplanned accumulation of 180)
The actual change, +80, is the sum of the two: −100 + 180.
Option (1) Planned decumulation of 100 shirts and unplanned accumulation of 80 shirts — mistakes this net +80 for the unplanned part.
NCERT (2026-27): “2.2.1 The Product or Value Added Method … Change in inventories may be planned or unplanned. In case of an unexpected fall in sales, the firm will have unsold stock of goods which it had not anticipated. Hence there will be unplanned accumulation of inventories. In the opposite case where there is unexpected rise in the sales there will be unplanned decumulation of inventories. …” “2.2.1 The Product or Value Added Method … On the other hand if the firm had wanted to reduce the inventories from 100 to 25 (say), then it would produce 1000 – 75 = 925 shirts. This is because it plans to sell 75 shirts out of the inventory of 100 shirts it started with (so that the inventory at the end of the year becomes 100 – 75 = 25 shirts, which the firm wants). …” |