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

results of quality improvements, At the starting of the year, Asquith Comp...

At the starting of the year, Asquith Company Ltd initiated a quality improvement program. The program was successful in decreasing scrap and rework costs. To help assess the impact

Explain the funded debt to total capitalization ratio, Funded debt to total...

Funded debt to total capitalization ratio The ratio establishes a link among the long term funds raised from outsider and total long term funds available in the business. The

What is master budget, What is Master budget Financial budget are conce...

What is Master budget Financial budget are concerned with cash receipts and disbursements working capital. Several functional budgets are integrated into master budget. This bu

Managerial Accounting, Computing equivalents units and assigning costs to c...

Computing equivalents units and assigning costs to completed units and ending work in process; no beginning inventory or cost transferred in (30 -45min) Sue Electronics makes CD p

Help, Jackson County Senior Services is a nonprofit organization devoted to...

Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. Three serv

What is the issue price for bond a and b, Q. What is the issue price for Bo...

Q. What is the issue price for Bond A and B ? On December 31, 20x7, the Jill Corporation issued $20,000,000 of 15 year face value bonds. The bonds pay interest on June 30 and D

The more competitive bid, Hornsby Manufacturing has four categories of ove...

Hornsby Manufacturing has four categories of overheads. The four categories and the expected overhead costs for each category for next year are as follows:   Maintenance  $140,000

Prepare a revised performance report, Yuma foods acquire Aldo's tortillas s...

Yuma foods acquire Aldo's tortillas several years ago. Aldo's continued to operate as an independent company, except that Yuma foods has exclusive authority over capital investment

Seasonal variations and size of business, Seasonal Variations : Commodities...

Seasonal Variations : Commodities along with seasonal demand results in raised level of working capital requirement. It could be offset through scaling down operations throughout t

Cash collection and disbursements, Once the cash budget has been arranged a...

Once the cash budget has been arranged and suitable net cash flows established the finance manager must ensure that there does not exists an important deviation in between actual a

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