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

Collection policy, Exact management of receivables acquires a suitable coll...

Exact management of receivables acquires a suitable collection policy that outlines the collection procedures. Collection policy consider as the procedure adopted through a firm to

Positioning, Positioning An essential part of the planning process is p...

Positioning An essential part of the planning process is positioning the organization to attain its goals. Positioning is a wide concept and depends on gathering and evaluating

Terms of payment, Terms of payment vary broadly in practice. At one conclus...

Terms of payment vary broadly in practice. At one conclusion, if the seller has financial resources, she or he may extend liberal credit to the buyers, conversely the buyer pays in

Estimate the labor cost, The Knapp Company needs to predict the labor cost ...

The Knapp Company needs to predict the labor cost in producing small carrot patch dolls. The following production information is available: Year Dolls Pr

Determine the zero bases budgeting according to leonard mere, Determine the...

Determine the Zero bases budgeting According to Leonard mere According to Leonard mere,  ZBB is a technique which complements and links the existing planning budgeting and revi

Define activities based costing by horngren, Define Activities based costin...

Define Activities based costing by horngren According to horngren " ABC is a system that focuses on activities as fundamental cost object and utilizes cost of these activi

Generates paychecks and management reports, Time sheets are collected in a ...

Time sheets are collected in a batch, and the information is manually keyed into the system. This data is now stored on a magnetic disk. An editing program is run, which verifies w

Management, Discuss the different roles played by the qualitative and quant...

Discuss the different roles played by the qualitative and quantitative approaches to managerial decision making

Application areas of linear programming, 5 application areas of linear prog...

5 application areas of linear programing in management accounting

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