Operating and Cash Conversion Cycles †Free Samples to Students

Question: Discuss about the Operating and Cash Conversion Cycles. Answer: Introduction: The approximate forecast of the company which it looks to obtain in the future with regard to its financial results is provided in a financial budget. This financial budget can be created on different basis it may be annually, monthly or quarterly. At the end of the period the budget is thoroughly checked for finding out the various reasons for delegation in financial results. During the period actual results of the company is compared with the budget as it has been forecasted for the purpose of taking actions on the actual results which is derived by the company. The purpose of comparison between the budget and the actual results is to understand the issues faced by the departments of the company and hence to act for the purpose of resolution of those issues. If the company opt for a static budget then assumption of the budget is make as per output of the business and in case there is deviation of actual output with respect to the budgeted numbers the static budget would not be good. So for the purpose of evaluation of the profit centre the company realizes the importance of flexible budget which helps in understanding the line items wise details of the income statement considering the same number of outputs and hence helps to take actions on the issues identified. For ex If a company budgeted 2000 units @ variable cost of $ 4/unit totaling to $ 8000 costs while if actual production decreased to 1700 units @ variable cost of $ 4.1/unit ,total cost amounting to $6970.Hence overall cost is lower , however, there is per unit cost has increased has company has to identify the reason for increase in variable cost. The purpose of the cash budget is understood the sources and uses of estimated cash requirement. Hence sales budget provides sources while production budget will provide the uses and for the purpose of production budget direct material budget is also required. The sales budget estimates the expected sales revenue for a particular period. Estimated sales revenue helps in understanding and estimating the cash inflows within the company. Favorable of unfavorable change in economic scenario will affect the estimated sales budget and hence the cash budget as well. The base on which production budget is created in the sales projection. Sales revenue used to project the output quantity required production budget provides the estimate with regard to finished goods to be kept hence change in production budget would eventually affect the cash budget as cash outflow is linked to production budget. Production budget is the base for material budget as the output quantity required determines the requirement of the direct material estimate. In case of change in economic condition impacting direct material cost would result in change in material budget and hence cash budget as well. Operating cycle refers to the time that has been taken by the company from acquisition of inventory and receipt of cash after sale of that inventory purchased. On the other hand, cash cycle refers to the number of days that has been to convert the resources into cash. The operating cycle and the cash conversion cycle are same but the operating cycle tests the operating efficiency of the company. On the other hand the cash conversion cycle tests the companys ability in managing the cash flow of the company. The operating and cash cycle helps in managing the working capital of the company in an efficient manner. Through the help of these cycles, the management can determine the time frame within money needs to be collected from the debtors and when the same needs to be paid to the creditors, Ratios like working capital ratio, cash conversion ratio, debt to equity ratio are used for better working capital management. Accounting isnt as important in the government organizations as it is in private enterprises, since the government does not have to worry about earning a profit. We do not support the above statement. Similar to a private organization, accounting is equally important for government organizations as well. The government and its organizations are equally responsible and answerable to the stakeholders i.e. the public for their activities. The profit that has been earned by the government is used by them for the welfare activities and for developing the economy. It is important for them to stay competitive in the market; however they are not supposed to run behind profit earning at the cost of the society. The funds that are collected by the government are used for developing infrastructure and for the purpose of providing various subsidies to the general public. Thus, the profit that has been earned by the government is indirectly being spent on the welfare of the society. Overall, it i s important for them to keep a check on the profit that has been earned by them on their activities and should follow all the accounting standards that are applicable on a normal company functioning in the country. The main purpose behind setting up a costing system is to ensure that the same provide adequate valuation of cost for the products. A costing system helps the firms to make proper estimates of the cost which is being used by them for determining the profitability of the products, for the purpose of inventory valuations and cost control. For manufacturing organizations, an adequate costing system is used for keeping a control check on the cost factor being the same is important determining the profitability of the firm. The essential purpose of a good costing system is as follows: It helps in subdivision and classification of cost. A costing system helps in better management of material, labor and overhead cost. Through the help of the costing system, management can very well do the budgeting exercise for the company. It helps in placing better standards which will help in judging the production efficiency It helps in determining whether the price of the final products that has been decided by the management is adequate or not. The costing system that has been used by the management has been treated as an instrument of control through which the management exercise control over the manufacturing exercise. It provides information to the management about special factors like seasonal variations in the volume and prices of the products. The manufacturing overheads allocation rate for Wonder Products is calculated as follows: Manufacturing overheads for the year $ 598,080 Total machine hours for the year 7,000 Allocated cost per hour $ 85.44 The administrative overhead allocation rate for Wonder Products is calculated as follows: Administrative overheads for the year $ 695,520 Direct labor hours for the year 14,000 Allocated cost per hour $ 49.68 Direct materials $ 19,000 Manufacturing overheads (400 hours*85.44) $ 34,176 Administrative overheads (750 hours*49.68) $ 37,260 Total Cost $ 90,436 Profit $ 36,174 Price $ 126,610 In the current world, overhead cost is a very important portion of the total cost of a product. It is not possible to determine the exact overhead cost that can be allocated to the product. In this scenario, the total overhead cost is allocated based on some allocating cost factor. Once the overhead cost is allocated we can reach out to the actual cost price of the product which is important in determining the sales price of the product. We generally face trouble in determining the actual cost drivers which are used in allocating thehe operating and cash cycle helps in managing the working capi overhead cost of the product. There are different techniques that has been by the management with includes the traditional approach and the ABC costing techniques. The companies prefer using the budgeted rate for overhead allocation rather than using actual rate of overhead. The budgeted rate that has been determined by the management is majorly based on the actual overhead rate for the last years. Due to time frame, the actual rates of overhead is available at year end, and the cost of the product is determined in the very beginning being the company is required to make regular sales of its products. In this scenario, the management prefers budgeted rates for overhead allocation rather than using the actual rates. Bibliography Lodha, A., 2015. Top 11 Advantages of Good Cost Accounting System. [Online] Available at: https://www.yourarticlelibrary.com/cost-accounting/top-11-advantages-of-good-cost-accounting-system/55229/ [Accessed 27 Sept 2017]. Nordmeyer, B., n.d. The Difference Between Operating Cash Conversion Cycles. [Online] Available at: https://smallbusiness.chron.com/difference-between-operating-cash-conversion-cycles-24738.html [Accessed 17 Sept 2017]. Ori, J., 2017. Difference Between Operating Cycle Cash Cycle. [Online] Available at: https://pocketsense.com/difference-between-operating-cycle-cash-cycle-1763.html [Accessed 17 Sept 2017].