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Surplus, Obsolete and Scrap management

Operating surplus is an accounting concept used in national accounts statistics (such as United Nations System of National Accounts (UNSNA)) and in corporate and government accounts. It is the balancing item of the Generation of Income Account in the UNSNA. It may be used in macro-economics as a proxy for total pre-tax profit income, although entrepreneurial income may provide a better measure of business profits. According to the 2008 SNA, it is the measure of the surplus accruing from production before deducting property income, e.g., land rent and interest.

Operating surplus is a component of value added and GDP. The term “mixed income” is used when operating surplus cannot be distinguished from wage income, for example, in the case of sole proprietorships. Most of operating surplus will normally consist of gross profit income. In principle, it includes the (separately itemised) increase in the value of output inventories held, with or without a valuation adjustment reflecting average prices during the accounting period.

Operating surplus therefore does not necessarily refer to all gross profit income realized in an economy. Profits are also realized from all kinds of property transactions which do not involve new production, such as capital gains, and net profits are often also received from foreign countries or paid to foreign countries. In addition, many profits arising from the use of natural resources, land, and financial assets (in the form of interest income) will not be included.

Derivation of operating surplus in UNSNA

A simple definition of business profit would be “sales less costs”, and the accounting derivation of operating surplus is similar (although the SNA concept of entrepreneurial income better matches what is thought of as business profits[1]). Starting off with Gross Output, expenditure on intermediate goods and services are deducted, to arrive at gross value added.

Value added may be stated gross (equal to the net output value, including consumption of fixed capital, i.e. depreciation charges) or net (excluding consumption of fixed capital). The net operating surplus (NOS) is thus the residual balancing item in the product account, obtained as follows:

  • Gross value added (GV)
  • less consumption of fixed capital. (CFC)
  • equals net value added (NV)
  • less Compensation of employees (CE)
  • less indirect taxes paid by producers, reduced by producer subsidies received (IT-SU)
  • equals net operating surplus (NOS)

Obsolete

Obsolete should be defined as materials, equipments or parts which are no longer usable in the service for which they are purchased and which cannot be utilised safely or economically for any other purpose. Broadly, it can be said that spares for plants sold become obsolescent when the machines they are carried for go out of production or are no longer available. Ordinarily, obsolescence arises on account of the following reasons

(a) Adoption of standardization or elimination of non-standard varieties.

(b) Faulty planning leads to over stocking of inventory.

(c) Non-implementation of project/job.

(d) Changes in demand due to change in fashions and supply conditions and change in business policy.

(e) Purchasing wrong items results in non-utilization of stores.

(f) Bad communication within the organization as well as with suppliers.

(g) The sudden emergence of new technology or a design change.

(h) Excess purchasing, whether due to wrong forecast of requirement or to take advantage of quantity discount.

Scrap Management

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