Illustration 1 From the following information taken from the books of A Ltd, compute the operating cycle days:

Period covered Average period of credit allowed by suppliers Average debtor outstanding Raw materials consumption Total production cost Total cost for sales Sales for the year Value of average stock maintained: Raw materials Work in progress Finished goods Solution: (i) Raw material ( R ) Average Raw material Raw material consumed 3200 44000 (ii) = 27 days Work in progress (W) Average Work in progress Total Cost of Production 3500 100000 = 13 days Finished goods (F) Average Stock Total cost sales 3200/3500/2600/44000/100000/105000/160000/2500/4800/365 days 16 days

(iii)

2500 105000 = (iv) Debtors (D) Average Debtors Credit Sales 4800 160000 = 11 days The credit allowed by creditors = 16 days O=R+W+F+D-C = 27 + 13 + 9 + 11 - 16 = 44 days Illustration 2 The following information is preparing to B LTD. Prepare the operating cycle for each of the two years: Year 2(Rs in 000) Particulars Year 1 Stock Raw materials 2000 2700 Work in Progress 1400 1800 Finished goods 2100 2400 Purchases 9600 13500 Cost of goods sold 14000 18000 Sales 16000 20000 Debtors 3200 5000 Creditors 1600 1800 Assume that 360 days per year is for the purpose of this example comment on the increase or decrease. Solution: Operating Cycle(o) for Year 1: (i) Raw Material held in stock (R) Average stock of raw material Average Consumption per day 20000 9600 = 75 days Note: purchases have been considered as consumption in the absence of information. 9days

(ii)

Work in progress (W) Average Work in progress Average Cost of production per day 1400 14000 = 36 days Finished goods (F) Average Finished goods Maintained Average Cost of Goods Sold per days 2100 14000 = 54 days Debt Collection (D) Average Total Outstanding Debtors Average Credit Sales per day 3200 16000 = 72 days

(iii)

(iv)

Credit Period Allowed by Creditors (C) Average Total Creditors Average Credit Purchases per day 1600 9600 = 60 days Operating Cycle (O) = R + W + F + D C = 75 + 36 + 54 + 72 60 = 177 days Operating cycle for year 2 (i) Raw Material (R) 2700 13500 = 72 days Work in Progress (W)

(ii)

(iii)

(iv)

(v)

1800 18000 = 36 days Finished goods (F) 2400 18000 = 48 days Debtors (D) 5000 20000 = 90 days Creditors (C) 1800 13500 = 48 days

Operating Cycle (O) = R + W + F + D C = 72 + 36 + 48 + 90 48 = 198 days The operating Cycle period has increased by (198-177) 21 days in year 2 when compared to year 1.