_28 Polish Thcal Crisi_

# APPENDIX 2:

# INVENTORIES AND **THE INFLATION BiAS IN T1E POLISH ENTERPRISE SECrOR**

Polish enterprises report monthly on their inventories. Inventories are divided into four categories: (1) materials; (2) work-in-progress (WIP); (3) finished goods; (4) 'commodities' ("towary"). The difference between finished goods and 'commodities' depends on the reporting unit and not on the nature of the goods. An enterprise holding inventorias of goods which it has produced itself reports these goods as "finished goods"; an enterprise holding inventories of finished goods which it purchased complete and will resell reports these goods as "commodities".

This distinction between goods produced and goods marketed is also made in the output statistics. The definition of "sales of own production" includes sales of finished goods valued at their sales price, and commodities valued by their profit margin (the difference between the purchase price and the sales price). This is particularly important for the retail trade sector, where most sales are of commodities and hence "sales of own production" is something like 1/6 of total turnover. Figures on total turnover in **the** enterprise sector began to be pub!ished only in 1991. For 1991 as a whole, total turnover was **46%** greater than "sales of own production".

Inventories are valued at "cost". Materials and commodities are valued at their purchase price. Finished goods and work-in-progress are valued at their (historical) cost of production. The valuation of finished goods and WIP does not include certain general costs which are not attributed to specific production activities (notably depreciation of fixed capital). In 1988-91, the value of inventories in the enterprise sector typically broke down as follows: finished goods, 5-15%; commodities, 25-40%; materials, 40-55%; work-in-progress, 10-20%.

The most direct way to estimate the average life in inventory is to calculate the ratio of the value of inventories at sales prices to turnover. We do this as follows: Materials: we add in approximate valued added to get the total value of the sold products **that** will embody them.

Finished goods and commodities: we add in missing costs and a profit margin to get to value **at** sales prices.

WIP: I assume simply that the value added to a unit of WIP lies half-way between the value added to a unit of materials and a unit added to finished goods and commodities.

22. 'Tots, turnover" is calculated **as** total income less financial income and subsidies. Data from Biulel Statntvcmvz, No. 2, 1992, p. 47.

23. Why this is necessary can be seen from an example (with no inflation). Consider an enterprise which in a steady **sate** purchases one zloty of materials and seLs iO zloty of fin good eacn penuu. It holds the materials for S periods, aaa 9 zloty of value (labor) in the 6th period, and then sells it r: cost. In the steady **state** it will hold 15 zloty of inventories: **_5_** zloty of **materials** and 10 zloty of finished goods. To **get** the average life of inventories we **gross** up the value of inventories of materials **_(5_** zloty of materials will yield **50** zloty of **final** goods), **add** the value of finished goods (10), and divide by **turnover** per period (10 zloty). 60 + 10 = 6 periods, the correct **answer** for inventory life.