Question 4 OR (b)
Operating cycle and working capital requirement
11 marks
- Time to write
- About 22 minutes
From an older CBCS paper
Question
Question 4 OR (b) · 11 marksCalculate, from the information below:
The operating cycle, in days. Assume a year of 360 days.
The amount of working capital needed.
| Annual consumption of raw material | Rs. 18,00,000 |
| Total purchases | Rs. 19,20,000 |
| Total cost of production | Rs. 30,00,000 |
| Total cost of goods sold | Rs. 33,60,000 |
| Total cost of sales | Rs. 36,00,000 |
| Total sales | Rs. 43,20,000 |
| Average stock | |
| Raw material | Rs. 3,00,000 |
| Work in progress | Rs. 1,80,000 |
| Finished goods | Rs. 4,20,000 |
| Average Debtors | Rs. 4,20,000 |
| Average Creditors | Rs. 3,00,000 |
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Assume a year of 360 daysThe paper fixes this: use it as given, and say so in your answer.
- CalculateFormula first, then the working, then the answer with its unit (₹, %, units).
What the paper leaves open
Raw material is turned over on consumption, work in progress and finished goods on cost of production and cost of goods sold, debtors on sales and creditors on purchases, each in 360-day years.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Raw material, work-in-progress and finished goods periods 4 marks 7 min
- 2 Debtors and creditors periods 2 marks 4 min
- 3 Gross and net operating cycle 2 marks 4 min
- 4 Number of cycles and working capital needed 3 marks 5 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 22 minutes for 11 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
(i) Operating cycle. Each component is the average balance divided by the matching flow per day (360-day year): raw material on consumption, work in progress on cost of production, finished goods on cost of goods sold, debtors on sales and creditors on purchases. The net operating cycle is R + W + F + D − C.
1The carpenter's cash becomes a cartload of timber.
Raw material storage periodCash is turned into raw materials.
2Saw and hammer turn the timber into half-made chairs.
Conversion (work-in-progress) periodRaw materials into work-in-progress.
3The finished chairs line the store room, ready.
Finished goods storage periodWork-in-progress into finished goods.
4The chairs go out on credit, and Lakshmi's notebook follows the money home.
Debtors' collection periodFinished goods into debtors and debtors back into cash.
| Component | Working | Days |
|---|---|---|
| Raw material storage (R) | 3,00,000 ÷ 18,00,000 × 360 | 60 |
| Work in progress (W) | 1,80,000 ÷ 30,00,000 × 360 | 21.60 |
| Finished goods storage (F) | 4,20,000 ÷ 33,60,000 × 360 | 45 |
| Debtors collection (D) | 4,20,000 ÷ 43,20,000 × 360 | 35 |
| Gross operating cycle | 161.60 | |
| Less: creditors' payment period (C) | 3,00,000 ÷ 19,20,000 × 360 | 56.25 |
| Net operating cycle | 105.35 |
(ii) Working capital needed. Number of operating cycles in a year = 360 ÷ 105.35 = 3.42. The working capital required is the annual operating cost divided by the number of operating cycles:
Working capital = 36,00,000 ÷ (360 ÷ 105.35) = 36,00,000 × 105.35 ÷ 360 = ₹10,53,500.
(The total cost of sales, ₹36,00,000, is the annual operating cost. Adding up the balances given, current assets of ₹13,20,000 less creditors of ₹3,00,000, gives ₹10,20,000; the operating-cycle method, which the question asks for, gives ₹10,53,500.)
Where the 11 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Raw material, work-in-progress and finished goods periods | 4 |
| 2 | Debtors and creditors periods | 2 |
| 3 | Gross and net operating cycle | 2 |
| 4 | Number of cycles and working capital needed | 3 |
| Total | 11 |
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