Operating cycle concepts, Managerial Accounting

Assignment Help:

Operating cycle considers to the average time lapse among the acquisition of raw material and the final cash realization. This notion is used to determine the needs of cash working capital to meet the operating expenses. Here figure 3 depicts the cash cycle and the operating cycle.

1667_OPERATING CYCLE CONCEPTS.png

Figure: Operating cycle

By the above figure you can simply estimate that the time that lapses among the purchase of raw material and the set of cash for sales is termed to as operating cycle, while the time length among payment of raw material purchases and collection of cash for sales is considered to as cash cycle.

The inventory period in the operating cycle comprises:

(i) RMCP that is Raw Material Conversion Period that is the time gap among purchase of raw material and the issuance of raw material for production.

(ii) WIPCP i.e. Work in Progress Conversion Period that is the time gap among issuance of raw material and the transfer of raw material in finished goods.

(iii) Finished Goods Conversion Period i.e. FGCP that is the time gap among sale of goods and the conversion of completed goods by shop floor to the warehouse.

(iv) Book Debt Collection Period i.e. BDCP that is the time gap between realisation and sales of cash

Currently the length of the operating cycle for direct material can be computed as given below:

Gross operating cycle = RMCP+WIPCP+FGCP+BDCP

Net Operating Cycle = Gross Operating Cycle - PDP

= RMCP+WIPCP+FGCP+BPCP-PDP

Here PDP is the Payment Deferral Period; it is the credit time extended through suppliers to pay for the purchases.


Related Discussions:- Operating cycle concepts

What are the advantages of budgetary control, What are the Advantages of bu...

What are the Advantages of budgetary control This budgetary control system helps in fixing the goals for the organization as a whole and concerts efforts are made for its achie

What is suggestion system, Suggestion system  The suggestion system is ...

Suggestion system  The suggestion system is as integral part of an established management system that aims at involving employees in kaizen. The number of worker s suggestion i

DQ 3-2, Using one of the companies from DQ 1, describe how inventory planni...

Using one of the companies from DQ 1, describe how inventory planning and accuracy can be defined using the Pareto principle. The company is Target, Inc.

How would you characterize the politics of food, Given the persistent probl...

Given the persistent problem with starvation in some parts of the world, and the anticipated population growth in developing nations, do we need genetically modified foods? Is it r

Cost behaviour, How costs behave as the level of activity/volume changes.  ...

How costs behave as the level of activity/volume changes.  Why an understanding of cost behaviour is important ? Types Variable e.g. petrol, direct materials Fixed e.g.

What are the categories of zero base budgeting, Categories of zero base bud...

Categories of zero base budgeting The preceding discussion will reveal that zero base budgeting is based primarily on: 1) Development of decision units 2) Identification

Find the formula for the quarrys short-run supply curve, Let a quarry's cos...

Let a quarry's cost function of producing Q tons of stone per hour be given by TC = Q 3 - 10Q 2 + 40Q + 25, so that marginal cost function is MC= 3Q 2 - 20Q + 40. (i) Find th

The least-cost method, The least-cost method The process is described a...

The least-cost method The process is described as follows: Assign as much as possible to the variable with the least unit cost in the whole tableau. (Ties are broken randomly).

Monitor, Monitor Let's start by having you think about the controlling ...

Monitor Let's start by having you think about the controlling your car (aka "driving")! Your steering, acceleration, and braking are not the random things to be done; they are

Operating leverage, How do you compare two companies operating leverage? Mu...

How do you compare two companies operating leverage? Must the sales volume be set the same or the net operating income?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd