Production consumption

What it means

Production consumption is the total of materials, energy and purchased services used in a period, reported in the Slovak profit and loss statement. It includes, for example, raw materials, office supplies, electricity, gas, rent, repairs, transport, telecommunications and advisory services.

In the statement, production consumption is deducted from production and the trading margin to arrive at value added. This shows how much value the company created through its own activity beyond the inputs bought from others, and it is the basis for further indicators.

Production consumption belongs to the by-nature classification of costs and reflects how much the company spent on inputs from suppliers. It excludes personnel costs, depreciation, taxes and fees, and financial expenses, which are shown on separate lines.

How it works in practice

The share of production consumption in revenue varies widely by sector. Trading and manufacturing companies have high consumption of materials and goods, while consultancies and software firms have lower consumption and wages make up most of their costs.

Monitoring production consumption helps detect rising input prices or inefficiency. If consumption grows faster than output and revenue, value added falls and with it the margin. A detailed breakdown by type of cost shows where action is needed.

A decision to outsource changes the cost structure. If a company hands over, say, bookkeeping or cleaning to an outside firm, it reduces personnel costs but increases production consumption under services. Such changes are worth knowing when comparing years.

What to watch out for

Correct accruals matter for production consumption. Rent or subscriptions paid in advance for several periods must be spread over the right periods, otherwise consumption will be overstated in one year and understated in another.

When comparing production consumption with competitors, differences in business model must be considered, such as whether the company owns or rents its premises and whether it has its own staff or uses external contractors. Without that context the comparison can lead to wrong conclusions.