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

What are direct expanses, What are Direct expanses These are expanses ...

What are Direct expanses These are expanses which can be directly, conveniently and wholly allocated to a specific cost centres or cost units examples of such expanses are hir

What is sealed bid pricing, What is Sealed bid pricing Another from of ...

What is Sealed bid pricing Another from of competition oriented pricing is the sealed bid pricing. In a large number of projects, industrial marketing and marketing to the gove

What is the significance of performance budgeting, Significance of performa...

Significance of performance budgeting Performance budgeting will help the management of companies by introduction of management objective to improve performance. Further it wi

Factoring services, Factoring Services: All subsequent services are offer ...

Factoring Services: All subsequent services are offer through the factor apart from the core service of purchasing receivables. 1)    Sales credit management and Ledger adminis

Describe budgetary control according to brown and howard, Budgetary Control...

Budgetary Control According to brown and Howard According to brown and Howard," budgetary control is a system of controlling costs which includes the preparation of budget coor

The role of computers in simulation, The Role of Computers in Simulation ...

The Role of Computers in Simulation Computers can be used to: 1) To generate the random numbers 2) To simulate thousands of trials. This is done extremely fast, accuratel

Optimum solution, Optimum Solution From the stand point of implementing...

Optimum Solution From the stand point of implementing the LP solution, the mathematical classification of the variables as basic and non-basic is of no importance and should be

Explian national income and economic welfare, Question 1: (a) Discuss t...

Question 1: (a) Discuss the main features and problems which Mauritius has to face as a small island developing country. (b) What are the factors which have led to the f

Manufacturing Budget Analysis, Tom Emory and Jim Morris strolled back to th...

Tom Emory and Jim Morris strolled back to their plant from the administrative offices of Ferguson & Son Manufacturing Company. Tom is manager of the machine shop in the company''s

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