Question 4 OR (b)
Operating cycle in two years
7 marks
- Time to write
- About 14 minutes
From an older CBCS paper
Question
Question 4 OR (b) · 7 marksFrom the data below, compute the operating cycle's duration in each of the two years, and comment on the increase/decrease:
| Rs. (Year 1) | Rs. (Year 2) | |
|---|---|---|
| Stock: | ||
| Raw Materials | 24,000 | 32,400 |
| Work-in-progress | 16,800 | 21,600 |
| Finished Goods | 25,200 | 28,800 |
| Purchases | 1,15,200 | 1,62,000 |
| Goods Sold, at Cost | 1,68,000 | 2,16,000 |
| Sales | 1,92,000 | 2,40,000 |
| Creditors | 38,400 | 60,000 |
| Debtors | 19,200 | 21,600 |
For computational purposes, assume 360 days per year.
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 360 days per yearThe paper fixes this: use it as given, and say so in your answer.
- and comment onThe comment carries marks too: say what the figures show, in two or three lines.
- computeFormula first, then the working, then the answer with its unit (₹, %, units).
What the paper leaves open
Material consumption and cost of production are not given; raw material is turned over on purchases and work in progress on cost of goods sold, and the answer states this.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Basis and components, year 1 2½ marks 4 min
- 2 Components, year 2 2½ marks 4 min
- 3 Comment 2 marks 4 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 14 minutes for 7 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.
Basis (paper note). Each period is the balance divided by the related annual flow × 360 days. Material consumption and cost of production are not given, so raw material is turned over on purchases and work in progress on the cost of goods sold. Each component of the cycle is analysed and estimated separately; the raw material period, for example, is the average raw material stock over the annual consumption × the days in the year. Net operating cycle = 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 (days) | Working, year 1 | Year 1 | Working, year 2 | Year 2 |
|---|---|---|---|---|
| Raw material (R) | 24,000 ÷ 1,15,200 × 360 | 75 | 32,400 ÷ 1,62,000 × 360 | 72 |
| Work in progress (W) | 16,800 ÷ 1,68,000 × 360 | 36 | 21,600 ÷ 2,16,000 × 360 | 36 |
| Finished goods (F) | 25,200 ÷ 1,68,000 × 360 | 54 | 28,800 ÷ 2,16,000 × 360 | 48 |
| Debtors (D) | 19,200 ÷ 1,92,000 × 360 | 36 | 21,600 ÷ 2,40,000 × 360 | 32.40 |
| Gross operating cycle | 201 | 188.40 | ||
| Less: creditors (C) | 38,400 ÷ 1,15,200 × 360 | 120 | 60,000 ÷ 1,62,000 × 360 | 133.33 |
| Net operating cycle | 81 | 55.07 |
Comment. The net operating cycle has shortened by about 26 days, from 81 to 55.07 days. Raw material is held 3 days less, finished goods 6 days less, and debtors pay 3.6 days faster; above all, the firm is taking longer credit from its suppliers (133.33 days against 120). A shorter cycle means less working capital is tied up per rupee of sales, which is favourable, although the much longer creditors' period may strain supplier relations if it reflects delayed payment.
Where the 7 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Basis and components, year 1 | 2.5 |
| 2 | Components, year 2 | 2.5 |
| 3 | Comment | 2 |
| Total | 7 |
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