VI. THE PRODUCTION ACCOUNT
H. Intermediate consumption (P.2)
1. Introduction
| 6.147. | Intermediate consumption consists of the value of the goods and services consumed as inputs by a process of production, excluding fixed assets whose consumption is recorded as consumption of fixed captital. The goods or services may be either transformed or used up by the production process. Some inputs re-emerge after having been transformed and incorporated into the outputs; for example, grain may be transformed into flour which in turn may be transformed into bread. Other inputs are completely consumed or used up; for example, electricity and most services. |
| 6.148. | Intermediate consumption does not include expenditures by enterprises on valuables consisting of works of art, precious metals and stones and articles of jewellery fashioned out of them. Valuables are assets acquired as stores of value: they are not used up in production and do not deteriorate physically over time. Expenditures on valuables are recorded in the capital account. Intermediate consumption also does not include costs incurred by the gradual using up of fixed assets owned by the enterprise: the decline in their value during the accounting period is recorded as consumption of fixed capital. However, intermediate consumption does include the rentals paid on the use of fixed assets, whether equipment or buildings, that are leased from other institutional units, and also fees, commissions, royalties, etc., payable under licensing arrangements, as explained above. |
| 6.149. | Intermediate consumption includes the value of all the goods or services used as inputs into ancillary activities such as purchasing, sales, marketing, accounting, data processing, transportation, storage, maintenance, security, etc. The goods and services consumed by these ancillary activities are not distinguished from those consumed by the principal (or secondary) activities of a producing establishment even though the levels at which ancillary activities are carried out do not usually vary proportionately with the level of the principal activity. |
2. The timing and valuation of intermediate consumption
| 6.150. | The intermediate consumption of a good or service is recorded at the time when the good or service enters the process of production, as distinct from the time it was acquired by the producer. In practice, the two times coincide for inputs of services, but not for goods, which may be acquired some time in advance of their use in production. A good or service consumed as an intermediate input is normally valued at the purchaser's price prevailing at the time it enters the process of production; that is, at the price the producer would have to pay to replace it at the time it is used. As explained in more detail in paragraphs 6.215 to 6.217, the purchaser's price, at least in the case of certain goods, can be regarded as being composed of three elements:
(a) The basic price received by the producer of the good or service;
(b) Any transportation costs paid separately by the purchaser in taking delivery of a good at the required time and location plus the cumulative trade margin on a good which passes through the chain of wholesale or retail distribution;
(c) Any non-deductible tax (less subsidy) on the product payable on the good or service when it was produced or while in transit to the purchaser.
For purposes of the System's input-output tables, it may be necessary to distinguish all three elements but not in the accounts for institutional sectors or the central supply and use table. |
| 6.151. | In practice, establishments do not usually record the actual use of goods in production directly. Instead, they keep records of purchases of materials and supplies intended to be used as inputs and also of any changes in the amounts of such goods held in inventory. An estimate of intermediate consumption during a given accounting period can then be derived by subtracting the value of changes in inventories of materials and supplies from the value of purchases made. Changes in inventories of materials and supplies are equal to entries less withdrawals and recurrent losses on goods held in inventory. Thus, by reducing the value of changes in inventories recurrent losses increase intermediate consumption. Goods entering and leaving inventory are valued at the purchasers' prices prevailing at the times the entries, withdrawals or recurrent losses take place. This is exactly the same method as that used to value changes in inventories of goods produced as outputs from the production process. Thus, the earlier discussion of the properties and behaviour of the PIM applies, mutatis mutandis, to inventories of inputs. |
| 6.152. | When goods or services produced within the same establishment are fed back as inputs into the production within the same establishment, they are not recorded as part of the intermediate consumption or the output of that establishment. On the other hand, deliveries of goods and services between different establishments belonging to the same enterprise are recorded as outputs by the producing establishments and must, therefore, be recorded as intermediate inputs by the receiving establishments. |
3. The boundary between intermediate consumption and compensation of employees
| 6.153. | Certain goods and services used by enterprises do not enter directly into the process of production itself but are consumed by employees working on that process. In such cases it is necessary to decide whether the goods and services are intermediate consumption or, alternatively, remuneration in kind to employees. In general, when the goods or services are used by employees in their own time and at their own discretion for the direct satisfaction of their needs or wants, they constitute remuneration in kind. However, when employees are obliged to use the goods or services in order to enable them to carry out their work, they constitute intermediate consumption. |
| 6.154. | It is immaterial to the employer whether they are treated as intermediate consumption or compensation of employees - they are both costs from the employer's viewpoint - and the net operating surplus is the same. However, reclassifying such goods and services from remuneration in kind to intermediate consumption, or vice versa, changes value added and balance of primary incomes, and hence GDP as a whole. |
| 6.155. | The following types of goods and services provided to employees must be treated as part of intermediate consumption:
(a) Tools or equipment used exclusively, or mainly, at work;
(b) Clothing or footwear of a kind which ordinary consumers do not choose to purchase or wear and which are worn exclusively, or mainly, at work; e.g., protective clothing, overalls or uniforms. However, uniforms or other special clothing which employees choose to wear extensively off-duty instead of ordinary clothing should be treated as remuneration in kind;
(c) Accommodation services at the place of work of a kind which cannot be used by the households to which the employees belong - barracks, cabins, dormitories, huts, etc.;
(d) Special meals or drinks necessitated by exceptional working conditions, or meals or drinks provided to servicemen or others while on active duty;
(e) Transportation and hotel services provided while the employee is travelling on business;
(f) Changing facilities, washrooms, showers, baths, etc. necessitated by the nature of the work;
(g) First aid facilities, medical examinations or other health checks required because of the nature of the work.
Employees may sometimes be responsible for purchasing the kinds of goods or services listed above and be subsequently reimbursed in cash by the employer. Such cash reimbursements must be treated as intermediate expenditures by the employer and not as part of the employee's wages and salaries. |
| 6.156. | The provision of other kinds of goods and services, such as meals, ordinary housing services, the services of vehicles or other durable consumer goods used extensively away from work, transportation to and from work, etc. should be treated as remuneration in kind, as explained more fully in chapter VII. |
4. The boundary between intermediate consumption and gross fixed capital formation
| 6.157. | Intermediate consumption measures the value of goods and services that are transformed or entirely used up in the course of production during the accounting period. It does not cover the costs of using fixed assets owned by the enterprise nor expenditures on the acquisition of fixed assets. The boundary between these kinds of expenditures and intermediate consumption is explained in more detail below. |
Small tools
| 6.158. | Expenditures on durable producer goods which are small, inexpensive and used to perform relatively simple operations may be treated as intermediate consumption when such expenditures are made regularly and are very small compared with expenditures on machinery and equipment. Examples of such goods are hand tools such as saws, spades, knives, axes, hammers, screwdrivers, spanners and so on. However, in countries where such tools account for a significant part of the stock of producers' durable goods, they may be treated as fixed assets. |
Maintenance and repairs
| 6.159. | The distinction between maintenance and repairs and gross fixed capital formation is not clear-cut. The ordinary, regular maintenance and repair of a fixed asset used in production constitutes intermediate consumption. Ordinary maintenance and repair, including the replacement of defective parts, are typical ancillary activities but such services may also be provided by a separate establishment within the same enterprise or purchased from other enterprises. |
| 6.160. | The practical problem is to distinguish ordinary maintenance and repairs from major renovations, reconstructions or enlargements which go considerably beyond what is required simply to keep the fixed assets in good working order. Major renovations, reconstructions, or enlargements of existing fixed assets may enhance their efficiency or capacity or prolong their expected working lives. They must be treated as gross fixed capital formation as they add to the stock of fixed assets in existence. |
| 6.161. | Ordinary maintenance and repairs are distinguished by two features:
(a) They are activities that owners or users of fixed assets are obliged to undertake periodically in order to be able to utilize such assets over their expected service lives. They are current costs that cannot be avoided if the fixed assets are to continue to be used. The owner or user cannot afford to neglect maintenance and repairs as the expected service life may be drastically shortened otherwise;
(b) Maintenance and repairs do not change the fixed asset or its performance, but simply maintain it in good working order or restore it to its previous condition in the event of a breakdown. Defective parts are replaced by new parts of the same kind without changing the basic nature of the fixed asset. |
| 6.162. | On the other hand, major renovations or enlargements to fixed assets are distinguished by the following features:
(a) The decision to renovate, reconstruct or enlarge a fixed asset is a deliberate investment decision which may be undertaken at any time and is not dictated by the condition of the asset. Major renovations of ships, buildings or other structures are frequently undertaken well before the end of their normal service lives;
(b) Major renovations or enlargements increase the performance or capacity of existing fixed assets or significantly extend their previously expected service lives. Enlarging or extending an existing building or structure obviously constitutes a major change in this sense, but a complete refitting or restructuring of the interior of a building, or ship, also qualifies. |
Research and development
| 6.163. | Research and development are undertaken with the objective of improving efficiency or productivity or deriving other future benefits so that they are inherently investment - rather than consumption - type activities. However, other activities, such as staff training, market research or environmental protection, may have similar characteristics. In order to classify such activities as investment type it would be necessary to have clear criteria for delineating them from other activities, to be able to identify and classify the assets produced, to be able to value such assets in an economically meaningful way and to know the rate at which they depreciate over time. In practice it is difficult to meet all these requirements. By convention, therefore, all the outputs produced by research and development, staff training, market research and similar activities are treated as being consumed as intermediate inputs even though some of them may bring future benefits. |
| 6.164. | As already noted, research and development is not an ancillary activity like purchasing, book-keeping, storage and maintenance which tend to be found frequently in all kinds of establishments. When research and development is carried out on a significant scale within an enterprise, it would be desirable to identify a separate establishment for it so that the relevant inputs and outputs could be distinguished for analytical purposes. Because of the difficulty of obtaining price data, the output will usually have to be valued by total costs of production, as in the case of most other own-account production. The output produced has then to be treated as being delivered to the establishment, or establishments, which make up the rest of the enterprise and included in their intermediate consumption. When there are several other establishments, the amounts of research and development delivered can be distributed in proportion to their total costs or other indicator, in much the same way that the output of head offices or other central facilities has to be allocated. |
| 6.165. | When an enterprise contracts an outside agency to undertake research and development, staff training, market research or similar activities on its behalf, the expenditures incurred by the enterprise are treated as purchases of services used for purposes of intermediate consumption. |
Mineral exploration
| 6.166. | Expenditures on mineral exploration are not treated as intermediate consumption. Whether successful or not, they are needed to acquire new reserves and are, therefore, all classified as gross fixed capital formation. |
Military equipment
| 6.167. | In the past, it has been conventional in national accounts to treat all goods except dwellings acquired by governmental establishments engaged in the production of defence services, that is Class 7522 of the ISIC, as intermediate inputs whether the goods are non-durable or durable. Thus, ships, aircraft, vehicles and other equipment acquired by military establishments, and the construction of buildings, roads, airfields, docks, etc. for use by military establishments have always been treated as intermediate consumption rather than capital formation. This implies that the output from Class 7522 is produced without any inputs of capital although the rationale for this has never been clear. It has sometimes been suggested that it is impossible to estimate service lives for the assets concerned, but this is not true for most of them. |
| 6.168. | In order to be treated as capital, a good must not only be durable but used repeatedly or be continuously in production over a number of accounting periods. However, if military weapons such as rockets, missiles and their warheads, are actually used in combat, they are used to destroy and not to produce. Thus, the actual use of destructive weapons can scarcely be treated as an input into an economic process of production. |
| 6.169. | The provision of defence, however, can certainly be construed as a form of production from which people benefit and for which they are prepared to pay, individually or collectively. Moreover, the provision of defence, like any other productive activity, does require the repeated or continuous usage of certain durable goods over a number of accounting periods. Thus, a distinction can be drawn between those durable goods that are actually used in much the same way as in any other type of production, and those which either are never used or, if they are used, do not constitute inputs into a productive process. This suggests a distinction between ordinary producers' durable goods of a kind used throughout the economy and destructive military weapons designed for combat. |
| 6.170. | On this line of reasoning, rockets, missiles and their warheads are not to be treated as fixed assets. By extension, missile silos, warships, submarines, fighter aircraft and bombers, and tanks whose sole function is to release such weapons should also not be treated as fixed assets. On the other hand, the airfields, docks or other facilities used as bases by these same ships, submarines or aircraft can be used with little or no modification for quite different purposes of a non-military nature. Very often such facilities are shared between military and civilian use. Moreover, the manner in which the facilities are utilized is essentially the same whether they are used by military personnel or others. |
| 6.171. | For these reasons, only expenditures by the military on weapons of destruction and the equipment needed to deliver them should be classified as intermediate consumption. Conversely, the construction of buildings for use by military personnel, including hospitals and schools, and also of roads, bridges, airfields, docks, etc. for use by military establishments should be treated as gross fixed capital formation. In addition, machinery and equipment of the same type as that used by civil establishments for non-military purposes should also be treated as fixed capital formation; for example, vehicles, ships or aircraft used for the transport of persons or goods; computers and office machinery and equipment; etc. |
| 6.172. | Light weapons and armoured vehicles are also acquired by non-military establishments engaged in internal security or policing activities, including establishments owned by market security services. Weapons or armoured vehicles acquired by police and security services are treated as fixed assets, even though expenditures on the same kind of equipment by military establishments would be treated as intermediate. |
5. Collective services
| 6.173. | Collective services provided by government units are not included in the intermediate consumption of enterprises, even though enterprises benefit from the provision of transport facilities, security, etc. It would be impossible to identify those collective services that benefit enterprises rather than households and to allocate such services between individual enterprises. Some individual non-market goods or services may also be provided to market producers, such as free veterinary services to farmers. By convention they are not included in their intermediate consumption and they are not separated from collective services. |
6. Social transfers
| 6.174. | Expenditures by government or NPISHs on goods or services produced by market producers that are provided directly to households, individually or collectively without any further processing constitute final consumption expenditures by government or NPISHs and not intermediate consumption. The goods and services in question are one form of social transfers and enter into the actual consumption of households. |
7. Services of business associations
| 6.175. | Non-profit institutions in the form of business associations that exist to protect the interests of their members and are financed by them are market producers. The subscriptions paid by the businesses constitute payments for services rendered. These services are consumed as intermediate inputs by the members of the association and are valued by the amounts paid in subscriptions, contributions or dues. |
8. The boundary between intermediate consumption and value added
| 6.176. | The boundary between intermediate consumption and value added is not a rigid one fixed purely by the technology of production. It is also influenced by the way in which the production is organized and distributed between different establishments or enterprises. |
| 6.177. | The types of services produced by ancillary activities can either be produced for own use within the same establishment or obtained from outside, i.e., from specialist market enterprises. If an establishment obtains the services from outside instead of from ancillary activities, its value added is reduced and intermediate consumption increased, even though its principal activity remains completely unchanged. As ancillary activities themselves have intermediate inputs, however, the increase in intermediate consumption is likely to be less than the value of the additional services purchased. Nevertheless, the distribution of value added between establishments and enterprises is bound to be influenced by the extent to which the services of ancillary activities are produced in-house or obtained from outside. Similarly, observed input-output ratios may vary significantly for the same reason, even between equally efficient establishments utilizing the same technology for their principal activity. |
| 6.178. | The decision to rent, rather than purchase buildings, machinery or equipment, can also have a major impact on the ratio of intermediate consumption to value added and the distribution of value added between producers. Rentals paid on buildings or on machinery or equipment under an operating lease constitute purchases of services that are recorded as intermediate consumption. However, if an enterprise owns its buildings, machinery and equipment, most of the costs associated with their use are not recorded under intermediate consumption. The capital consumption on the fixed assets forms part of gross value added while interest costs, both actual and implicit, have to be met out of the net operating surplus. Only the costs of the materials needed for maintenance and repairs appear under intermediate consumption. Decisions to rent rather than purchase may be influenced by factors quite unrelated to the technology of production, such as taxation, the availability of finance, or the consequences for the balance sheet. |
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