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Unit 10: Working Capital Management
allowed by the supplier is the total working capital cycle i.e., 60 + 15 + 30 + 30 – 15 days i.e., 120 Notes
days.
In the form of an equation, the operating credit process can be expressed as follows:
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:
1. Raw material storage period =
2. Work in progress holding period =
3. Finished goods storage period =
4. Debtors collection period =
5. Credit period availed from the suppliers =
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
(g) Average collection period for debtors 45 days
(h) Average credit period availed from suppliers 30 days
(i) No. of days in a year 360 days
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