Under this method, approximation is made of payments and cash receipts in the ensuring period. The dissimilarity of these payments and receipts indicates deficiency or surplus of cash. The management formulates plans to procure the amount of deficit. This method, in a way, is a form of cash budget.
Illustration: Compute the operating cycle and the working capital requirements from the subsequent figures:
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Balance as at
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Balance as at
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1st January
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31st December
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Rs.
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Rs.
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Raw Material
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80,000
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1,20,000
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Work-in-Progress
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20,000
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60,000
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Finished goods
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60,000
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20,000
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Sundry Debtors
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40,000
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40,000
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Wages and Manufacturing Expenses
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-
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2,00,000
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Distribution and Other Expenses
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-
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40,000
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Purchases of Materials
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-
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4,00,000
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Total Sales
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-
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10,00,000
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(i) The Company acquires a credit for 60 days from its suppliers.
(ii) All goods were sold for credit.
Solution:
Computation of Operating Cycle
(i) Material Storage Period:
= Average Stock of Raw Materials/Daily Average Consumption
= ((Rs.80,000 + 1,20,000) / 2)/(Rs.3,60,000 / 365)
= Rs.1,00,000/ Rs.986.3
= 101.38 days
Material Consumed = Opening Stock + Purchases - Closing Stock
= Rs. 80,000 + 4,00,000-1,20,000
= Rs. 3,60,000
(ii) Conversion or Processing Period
= Average Stock of Work - in - progress/Daily Average Factory Cost
= ((Rs.20,000 + 60,000) / 2)/( Rs.5,20,000 / 365)
= (Rs.40,000) / (Rs.1,424.65)
= 28.07days
Factory Cost: Rs.
Opening Work-Progress 20,000
Material Consumed (as above) 3,60,000
Wages and Mfg. Expenses 2,00,000
5,80,000
Less: Closing Work-in-Progress 60,000
5,20,000
(iii) Finished Goods Storage Period
= Average Stock of Finished Good/Daily Average Cost of Goods Sold
= ((Rs.60,000 +20,000) / 2)/(Rs.5,60,000 / 365)
= (Rs.40,000)/ Rs.1,534.25
= 26.07days
Cost of Goods sold Rs.
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Opening Stock of Finished Goods
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60,000
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Factory Cost (as above)
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5,20,200
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5,80,000
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Less: Closing Stock of Finished Goods
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20,000
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5,60,000
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(iii) Debtors Collection period
= Average Debtors/Daily Average Sales
= ((Rs.40,000 + 40,000) / 2)/(Rs.10,00,000 / 365)
= (Rs.40,000) / Rs. 2,739.7
= 14.6 days