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Unit 10: Working Capital Management
In the form of an equation, the operating credit process can be expressed as follows: Notes
Operating cycle = R + W + F + D – C
R = Raw material storage period
W = Work in progress holding period
F = Finished goods storage period
D = Debtors Collection period
C = Credit period allowed by the suppliers
The various components of operating cycle may be calculated as shown below:
Average stock of
raw material
1. Raw material storage period =
Avg. cost of raw material
consumption per day
Average work in progress inventory
2. Work in progress holding period =
Avg. cost of production per day
ì Est. production direct labour ü
ï × ï
ï (in units) per unit ï
3. Finished goods storage period = í ý
ï 12 months/ ï
ï 360 days ï
î þ
Average stock of finished goods
Avg. cost of goods sold per day
Average book debts
4. Debtors collection period =
Avg. credit sales per day
Avg. trade creditors
5. Credit period availed from the suppliers =
Avg. credit purchases per day
Example: From the following information of XYZ Ltd. Calculate:
1. Net operating cycle period
2. Number of operating cycles in a year
(a) Raw material inventory consumed during the year 12,00,000
(b) Average stock of raw material 1,00,000
(c) Work in progress inventory (cost of production) 10,00,000
(d) Average work in progress inventory 60,000
(e) Finished goods inventory (cost of goods sold) 16,00,000
(f) Average finished goods stock held 80,000
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