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

Service time-probability distribution curve, Service time-probability distr...

Service time-probability distribution curve A common example is that service times follow an exponential probability distribution i.e. y=e -x Service channels - t

Explain the shut down cost, Explain the Shut down cost A cost which wi...

Explain the Shut down cost A cost which will be still be required to be incurred even though a plant is closed or shut down for a temporary period. Ffor example the cost of

Collection float, Collection float considers to the gap among the times, pa...

Collection float considers to the gap among the times, payment is made through the customer/debtor and the time while funds are obtainable for use in the company's bank account. In

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

Explain briefly about life cycle costing, LIFE CYCLE COSTING Introduc...

LIFE CYCLE COSTING Introduction Life cycle costing as its name implies costs the cost object i.e., product project etc. over its projected life. It is used to explain a s

How much to order, How much to order Supposing the estimated annual usa...

How much to order Supposing the estimated annual usage of a component by Machinery Ltd is 20,000 units.  Usage is even throughout the year and only one order per annum is place

Order acceptance or rejection, Excess machine hours 20,000. Received offers...

Excess machine hours 20,000. Received offers from two companies to buy 210,000 units of F at 0.60 and 300,000 units of D at 0.70. Estimated costs for the two products are;

Accounting exam, hello do your staff help with exams ?

hello do your staff help with exams ?

Attributes of good information, Attributes of good information 1) Informa...

Attributes of good information 1) Information is anything that is communicated and is sometimes said to be processed data. It is data processed in such a way as to be of meaning

Credit policy variables, Each company must establish its own credit policy ...

Each company must establish its own credit policy based on the ground condition and the environment wherein it is operating. The major goal of the credit policy is to stimulate sal

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