How to Calculate Gross Output for a Firm

Gross Output for an economy is the total value of new goods and services produced during a given period e.g. a year. It includes all final goods (used directly by end-consumers; not processed any further) and intermediate goods (goods that are processed further/used as inputs in the production of other goods). 

Gross Output is different from Gross Domestic Product (GDP), which is = the value of all final goods and services produced in an economy.

In this post, we will explain how Gross Output is calculated for an individual firm. Summation across firms gives us the Gross Output for the economy. 

The basic principles for this exercise are provided by the United Nation’s SNA (System of National Accounts). This framework is what most governments and economists in the world use for estimating macro economic aggregates.

Note: Net Output = Gross Output - Depreciation 

1. Formula for Gross Output

Gross Output = Sales + Changes in Inventory

We can get the value of Sales from the Income Statement (business accounts) of an enterprise. However, Output is not equal to Sales, because all that is produced in a year may not be sold. Some of it may remain with the firm in the form of ‘Closing Inventory’. Similarly, the firm may sell more than its output for the year, if it sells units from its ‘Beginning Inventory’ as well. This is why, Gross Output = Sales + Changes in Inventory (i.e. Ending inventory - Beginning inventory). 

2. When and at What Price to record Gross Output

• Output should be recorded at the time it is produced, and valued at the same price whether it is immediately sold or entered into inventory.

• The price at which Gross Output should be valued is the ‘Basic price’. Basic price refers to the price (per unit) received by the producer from the purchaser minus any product taxes (like sales tax, excise tax, import/export duties or a single comprehensive tax such as GST) and plus any product subsidies. 

          Basic price = Price received by Producer - Product taxes + Product subsidies

• Goods entering inventory should be valued at the Basic price prevailing at the time that they were first produced, and goods withdrawn should be valued at the Basic price prevailing at the time they are withdrawn.

To understand 1) What Basic price and Producer’s price really mean, 2) What is VAT and how it   works, and 3) How Product taxes are different from Production taxes, read our post:

• Say VAT? ..... And Other Concepts

3. Example of Gross Output Calculation

We have assumed that the Basic Price of output remains constant throughout the year in 2015 and 2016 at Rs 10 and Rs 11 respectively. 

• Value of 2015 Gross Output = Value of Sales (100 units * Rs. 10/unit) + Value of Change in Inventory (5 units * Rs. 10/unit) =Rs. 1,000 + Rs. 50 =Rs. 1,050. 

• Value of 2016 Gross Output = Value of Sales (100 units * Rs. 11/unit) + Value of Change in Inventory (-5 units * Rs. 11/unit) =Rs. 1,100 - Rs. 55 =Rs. 1,045. 

4. Work-in-Progress included in Gross Output

Work-in-progress (WIP) refers to the inventory of incomplete output that is partially processed, and not yet marketable. It is included as part of Inventory held by producers, and thus any increase in WIP during a given period is included in the value of Gross Output for that period. 

Assuming that the Basic price of the finished product remains unchanged over the period, the value of the addition to WIP in that period is obtained by multiplying the Basic price by the share of the total production costs incurred during that period.

In the example above, let’s assume that in 2015 along with the 5 units of final product added to inventory, 5 units of WIP are also added. Let’s also assume these WIP units are 50% complete (i.e. 50% of the total production cost of these units has been incurred). Then, the total Value of Change in Inventory = (5 units * Rs. 10/unit) + (5 units * 50% * Rs. 10/unit) = Rs 50 + 25 = Rs 75. Value of 2015 Gross Output = Rs 1,075. 

5. Materials and Supplies not included in Gross Output

Changes in materials and supplies inventory is not included in Gross Output because it has not been processed in any way. It is included in Intermediate Consumption. Intermediate consumption is the value of goods and services consumed as inputs by a process of production, excluding fixed assets whose consumption is recorded as depreciation. To understand what is included in Intermediate Consumption, read:

• What is Intermediate Consumption? And how is it different from COGS?

The United Nation’s System of National Accounts (SNA)

The United Nation’s SNA is an international standard system of national accounts, followed by most countries (including India) to the extent that they can, to prepare and present the Macroeconomic accounts of their nation. The first complete version of the SNA was published in 1953 and referred to as ‘SNA, 1953’. The second was the SNA, 1968. Then came the SNA, 1993, and finally, the SNA, 2008. The principles that I’ve highlighted in this post are from the SNA, 2008.