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

Features of a queue, Features of a queue A calling population – ref...

Features of a queue A calling population – refers to the number of potential customers. This number may be considered finite or infinite. An infinite calling population is

Need help, Pantheon Company has prepared the following forecasts of monthly...

Pantheon Company has prepared the following forecasts of monthly sales: July August September October Sales (in units) 4,300 5,100 3,800 2,500 Pantheon has decided that the num

Ratio Analysis., X ltd. has a current ratio of 4.5:1 and acid test ratio of...

X ltd. has a current ratio of 4.5:1 and acid test ratio of 3:1. If its inventory is Rs. 24000, find out its current liabilities.

Full service non recourse, Full Service Non Recourse: in this method the b...

Full Service Non Recourse: in this method the book debts are purchased through the factor assuming 100 percent credit risk. In case of default through the debtor the whole risk is

State direct material cost standard, State Direct material cost standard ...

State Direct material cost standard The determination of direct material cost standard would involve: a) Determination of quantity standards and b) Determination of pric

Advantages of value added statements, Advantages of Value Added Statements ...

Advantages of Value Added Statements 1) Managers might be in a better position to control their organizations own inputs than the cost and usage efficiency of purchased materia

Explain activity based costing versus traditional costing, Activity based c...

Activity based costing versus traditional costing Following are the main differences between activity based costing system and traditional costing system: Explain  1) Und

Eoq model with quantity discounts, EOQ Model with quantity discounts Ci...

EOQ Model with quantity discounts Circumstances frequently occur where firms are able to obtain quantity discounts for large purchase orders. Buying in bulkiness has some merit

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