CASH

OPERATING
CYCLE
By Dr Sharon K Jose
RAW MATERIAL STORAGE
PERIOD
 1. Annual consumption of raw materials components etc.(1)
 2. average daily consumption of raw materials, assume an array of 360 days for conversion

= (1)/360    (2)
 3. Average stock of raw material, components etc. (3)

= (opening stock+ closing stock)/2

 4. raw material storage period =(3) / (2)= N1 in days 
COST OF PRODUCTION (1)
Opening stock of work in progress XXX

Consumption  of raw materials XXX

Other manufacturing costs such as

wages salary power and fuel
XXX
Depreciation XXX

Less:Closing work in progress XXX

AVERAGE DAILY COST OF THE
PRODUCTION
 Cost of production /360 (2)
CONVERSION PERIOD
 Average sock of W.I.P
 =Opening W.I.P + Closing W.I.P

2
Average Conversion Preiod =(3)/(2) =N2 days
FINISHED GOODS STORAGE PERIOD

ANNUAL COST OF SALES

Opening stock of  finished goods XXX

  cost of production XXX

  Other distribution & advertising

cost  XXX
Like excise duty selling and
distribution cost general
administrative cost, financing cost
Closing stock of finished goods
XXX
 Average sock of FG
 =Opening FG + Closing FG

2
Finished goods storage period =(3)/(2) =N3 days
AVERAGE COLLECTION PERIOD

 1.Annual credit sales of the company

 2. Average really had sales=(1)/360
 3. Average balance of sundry debtors
 = (opening balance+ closing balance)/2
 4. Average collection period=(3)+(2)=N4  days
AVERAGE PAYMENT PERIOD

  1.Annual credit purchase made by the company

 2. Average daily credit purchase=(1)/360
 3. Average balance of sundry creditors
 = (opening balance+ closing balance)/2
 4. Average payment period=(3)/(2) =N5 dyas
PRACTICE PROBLEM

Rs. Lakh

1 Opening balance of

a Raw materials stores and spares extra 3454.84

b work in progress 56.15
c finished goods 637.92
d accounts receivable 756.45
e accounts payable 2504.18
2. Closing balances of

a raw material stores and spares 4095.41

b work in progress 72.50
c finished goods 1032.74
d accounts receivable 1166.32
e accounts payable 3087.47
3. Purchase of raw materials stores 10676.10
4 Manufacturing expense 1146.76
5 Depreciation 247.72
6 Customs and excise duty 35025.56
7 Selling Administration and financial 4557.48