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

Decision making special order, MNO Ltd produces and sells for $25 an office...

MNO Ltd produces and sells for $25 an office machine for which there is a heavy demand which the company is prevented from meeting because of a shortage of skilled labour. The dire

Explain the growth, Explain the growth, index, sectoral, gilt and money mar...

Explain the growth, index, sectoral, gilt and money market methods? (i) What are the key variations among the open ended and close ended methods? What are the plus and minuses

Marginal costing technique, how company apply marginal costing techniques s...

how company apply marginal costing techniques show with an example

Describe the method of drawing a break even chart, Describe the method of d...

Describe the method of drawing a break even chart. 1) volume of production/output or sales is plotted on horizontal axis , i. e y - axis . the volume of sales or production ma

Define inputted cost, Determine the Inputted cost It is hypothetical c...

Determine the Inputted cost It is hypothetical cost required to be considered to make costs comparable. It is the owner of the factory charges rent of the factory to the cost

Define zero bases budgeting according to cima, Define Zero bases budgeting ...

Define Zero bases budgeting According to CIMA According to CIMA, ZBB is a method of budgeting whereby all activities are re evaluated each time a budget is set. Discrete l

Steps of choosing an accounting based performance, Steps of choosing an acc...

Steps of choosing an accounting based performance measure Consider the overall goal of the organization as a whole. It is important to choose a measure of accomplishment that r

Suppliers line of credit, In this scheme, non-revolving line of credit is e...

In this scheme, non-revolving line of credit is extended to the seller to be utilized inside a stipulated period. Assistance is provided to manufactures for promoting sale of their

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