Question 5 (a)
Operating cycle, number of cycles and working capital
8 marks
- Time to write
- About 16 minutes
From an older CBCS paper
Question
Question 5 (a) · 8 marksYou are given the information below:
| Period covered | 360 days |
| Period allowed by suppliers (average) | 30 days |
| Credit period allowed to debtors (average) | 45 days |
| Raw material consumed | Rs. 7,20,000 |
| Average stock of raw material | Rs. 6,00,000 |
| Annual work in progress inventory | Rs. 36,000 |
| Work in progress inventory, average | Rs. 36,000 |
| Annual finished goods inventory | Rs. 9,60,000 |
| Finished goods stock held, average | Rs. 48,000 |
| Total cost of sales | Rs. 10,08,000 |
Compute:
The Net operating cycle period
How many operating cycles there are in a year
The working capital amount. 8
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
- ComputeFormula first, then the working, then the answer with its unit (₹, %, units).
What the paper leaves open
The average stock of raw material is printed as Rs. 6,00,000 and the annual work in progress as Rs. 36,000; the Hindi version gives the average raw material stock as one-tenth of the English figure and the annual work in progress at the English raw-material stock figure. The printed English figures are used, and the answer points out the conflict and shows the other reading's figures. Periods use 360 days.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Components of the cycle and net operating cycle 4 marks 7 min
- 2 Number of cycles 1 mark 2 min
- 3 Working capital 2 marks 3 min
- 4 Comment on the data, with the other reading 1 mark 2 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Short on time? Step 1 carries 4 of the 8 marks: guard its minutes.
Try it first. About 16 minutes for 8 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.
Approach. Each component is the average balance divided by the matching annual flow, × 360; net operating cycle = R + W + F + D − C; working capital = annual operating cost ÷ number of cycles. The printed English figures are used (paper note); "annual work in progress" and "annual finished goods" are taken as the annual flows (cost of production and cost of goods sold) against which the averages are turned over.
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 (R) | 6,00,000 ÷ 7,20,000 × 360 | 300 |
| Work in progress (W) | 36,000 ÷ 36,000 × 360 | 360 |
| Finished goods (F) | 48,000 ÷ 9,60,000 × 360 | 18 |
| Debtors (D) | as given | 45 |
| Gross operating cycle | 723 | |
| Less: creditors (C) | as given | 30 |
| Net operating cycle | 693 |
(ii) Number of operating cycles in a year = 360 ÷ 693 = 0.5195.
(iii) Working capital = 10,08,000 ÷ 0.5195 = 10,08,000 × 693 ÷ 360 = ₹19,40,400.
Comment on the data. A raw-material period of 300 days and a WIP period of 360 days are implausible: the average raw material stock is almost a year's consumption, and the "annual" WIP equals the average WIP. The Hindi version gives an average raw material stock of ₹60,000 and annual work in progress of ₹6,00,000 (paper note). On those figures R = 30 days, W = 21.6 days, the net cycle is 84.6 days, there are 4.26 cycles a year and working capital is ₹2,36,880, a far more realistic result.
Where the 8 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Components of the cycle and net operating cycle | 4 |
| 2 | Number of cycles | 1 |
| 3 | Working capital | 2 |
| 4 | Comment on the data, with the other reading | 1 |
| Total | 8 |
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