Operating cycle period, Managerial Accounting

Assignment Help:

Period of operating cycle implies that total sum of number of days included in the various stages of operation commencing from the purchase of raw materials and ending along with collection of sale proceeds by debtors after adjusting the number of day's credit permitted through suppliers. Hence, the operating cycle is the total period concerned in different stages of operations, that may be computed by using the subsequent formula as:

OC = M+W+F+D-C

Here,    OC = Operating Cycle Period;

M = Material Storage Period;

W = Work in Process or Conversion Period;

F = Finished Goods Storage Period;

D = Debtors Collection Period;

C = Creditors Payment Period.

Material Storage Period (M)    = Average Stock of Raw Materials/Daily Average Consumption

Or

((Opening Stock + Closing Stock)1/2)/(Material Consumed for the Year/365)

WIP or Conversion Period (W) =

Average Stock of Work-in-Process/Daily Average Production Cost

OR

((Opening WIP + Closing WIP) / 2)/(Total Production Cost / 365)

(a) Total Factory or Production Cost is computed by adding opening stock of work-in progress into the total of direct material, factory and labour overheads and deducting by this the closing work-in-progress. Depreciation is not included being a non-cash item.

(b) Occasionally the Conversion Period is also termed as the Production Cycle Period. In such case, information regarding this period is specified, then conversion period is not to be computed with the above formula.

Finished Goods Storage Period (F) =

 Average Stock of Finished Goods/Daily Average Cost of Goods Sold

OR

 ((Opening Stock + Closing Stock) / 2)/(Total Cost of Goods Sold / 365)

Cost of Goods Sold is computed by adding excise responsibility with the factory cost after adjusting closing and opening stock of finished goods. Administration or selling and distribution expenses are not noticed in it, as, in financial accounting, stock of finished goods is importance at factory or production cost.

Debtors Collection Period (D) =     Average Debtors/ Credit Sales per Day

OR

((Opening Drs. + Closing Drs.) / 2)/(Total Credit Sales / 365)

Creditors Payment Period (C) = Average Creditors /(Total Credit Purchases / 365)

OR

 = ((Opening Crs. + Closing Crs.) / 2)/(Total Credit Purchases / 365)

Notes: Regarding the above formula the subsequent points are worth noting

- The 'Average' value in the numerator sets for the average of closing and opening balance of the respective items. Though, if only the closing balance is obtainable, then even the closing balance might be considered as 'Average'.

- The figure '365' shows number of days in a year. Although, there is no hard and rapid rule and occasionally even 360 days are taken.

- In the computation of M, W, F, D and C, the denominator is computed at cost basis and the profit margin is not included. The purpose being that there is no investment of funds in profits.

- In the lack of any information, total purchases and sales are considered as credit.


Related Discussions:- Operating cycle period

Capital investment decision, Your company is considering investing in its o...

Your company is considering investing in its own transport fleet. The presentposition is that carriage is contracted to an outside organization. The life of thetransport fleet woul

Explain the objectives of management accounting, Explain the Objectives of ...

Explain the Objectives of management accounting? 1. Planning and policy formulation: the object of management accounting is to supply necessary data to the management for fo

Motives for conducting cash balances, In this section we have discussed the...

In this section we have discussed the motives for conducting cash balances. In addition, we have discussed cash deficit or surplus situation and how it can be contained by the use

What are the objectives of budgetary control, What are the Objectives of bu...

What are the Objectives of budgetary control 1) Planning : planning is an important managerial function. it helps to decide in advance, what to do how to do it when to do it a

Total annual inventory cost , Ross White's machine shop uses 2,500 brackets...

Ross White's machine shop uses 2,500 brackets during the course of a year, and this usage is relatively constant by the year. These brackets are purchased from a supplier 100 miles

Determine the creditors turnover ratio, Creditors turnover ratio ( or payab...

Creditors turnover ratio ( or payables turnover ratio) Meaning: this ratio establishes a relation ship between net credit purchases and average trade creditors. Objective

Activity based management, Activity Based Management (ABM) Also referre...

Activity Based Management (ABM) Also referred to as activity based cost management (ABCM). This is used to describe the cost management application of ABC. To implement A

Explain kaizen and management, Kaizen and management Management has two...

Kaizen and management Management has two major components: 1) Maintenance 2) Improvement. The aim of  the maintenance function is to maintain current technological man

Managerial accounting, I need help with a solution in the Cornerstones of F...

I need help with a solution in the Cornerstones of Financial and Managerial Accounting textbook, Chapter 11, problem 11-51B on page 578. I need to create a statement of cash flows

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