Inventories are the unsold goods, unused raw materials or semifinished goods which a firm carries from a year to the next year. Change in inventories may be planned or unplanned. A planned change in inventories is the change in the stock of inventories which has occurred in a planned way. The planned accumulation and decumulation of inventories are explained with example as follows.
Suppose a firm wants to increase the inventories from 200 Tshirts to 400 T-shirts during the year. Expecting sales of 2000 Tshirts during the year, the firm produces 2000 + 200 = 2200 Tshirts. If the sales are actually 2000 T-shirts, the firm ends up with a rise of inventories. The new stock of inventories is 400 T-shirts, which was planned by the firm. This is planned accumulation of inventories.
On the other hand, if the firm had wanted to reduce the inventories from 200 to 50, then it would produce 2000 – 150 = 1850 T-shirts. This is because it plans to sell 150 T-shirts out of the inventory of 200 T-shirts it started with. Then the inventory at the end of the year becomes 200 – 150 = 50 T-shirts, which the firm wants. If the sales turn out to be 2000 T-shirts as expected by the firm, the firm will be left with the planned reduced inventory (decumulation) of 50 T-shirts.
These are the two instances of planned accumulation and planned decumulation of inventories.
