Discuss About The Horngre Cost Accounting A Managerial Emphasis.
Calculation of Cash Conversion Cycle for Cash Convertors International Limited
The net estimated time taken to receive and make all payments is known as the cash conversion cycle. A shorter cash conversion cycle is always considered to be favourable for the company. It helps to determine and maintain the liquidity position of the company. It is a known fact that it is important for the company to have an adequate liquidity so that it does not affect the performance and profitability of the company. The cash conversion cycle is calculated by adding debtor’s period and inventories period and subtracting creditor’s period from it. (Atkinson, 2012)
|
Particulars |
2017 |
2016 |
2015 |
2014 |
2013 |
|
Inventory |
20,991 |
17,612 |
27,684 |
25,562 |
21,783 |
|
Debtors |
7,574 |
13,651 |
28,120 |
29,443 |
13,032 |
|
Creditors |
21,288 |
19,821 |
26,450 |
26,794 |
20,048 |
|
Cogs |
97,803 |
1,09,084 |
1,38,457 |
1,18,869 |
94,158 |
|
Sales |
2,71,473 |
3,09,995 |
3,74,893 |
3,31,669 |
2,72,723 |
|
Inventory Turnover |
72 |
76 |
70 |
73 |
42 |
|
Debtor Turnover |
14 |
25 |
28 |
23 |
9 |
|
Creditor Turnover |
77 |
77 |
70 |
72 |
39 |
|
Cash Cycle |
10 |
23 |
28 |
24 |
12 |
From the above table, it is observable that the cash conversion cycle is the lowest of the five years. However, we can also see that there has been an increasing period over the five years. The inventory has been moving faster because of which there has been an increase in the production as well as sales volume. We can conclude that the company is at a good liquidity position as it is able to settle it in 10 days.
There has been an increase in the cash inflows when compared to the previous years. (Datar M. S., 2015) This increase is mainly because of the increase of cash inflow from operating activities by $700000. This huge difference was cause because the company has tax refund this year while it had to pay taxes in the last year.
|
Financial data of FreeWheels from last year |
|
|
Sales |
5,000 |
|
Selling price |
420 |
|
Variable manufacturing cost |
144 |
|
Fixed manufacturing costs |
4,60,000 |
|
Variable selling and administrative costs |
36 |
|
Fixed selling and administrative costs |
5,00,000 |
|
Statement showing profit |
|
|
Particulars |
Amount |
|
Sales |
21,00,000 |
|
Less: Manufacturing cost |
|
|
Variable |
7,20,000 |
|
Fixed |
4,60,000 |
|
Less: Selling and administrative costs |
|
|
Variable |
1,80,000 |
|
Fixed |
5,00,000 |
|
Profit/Loss |
2,40,000 |
|
Proposal 1- Aaron Jacobsen |
|
|
Sales |
6,500 |
|
Selling price |
420 |
|
Variable manufacturing cost |
172 |
|
Fixed manufacturing costs |
4,60,000 |
|
Variable selling and administrative costs |
36 |
|
Fixed selling and administrative costs |
5,00,000 |
|
Advertisement charges |
30,000 |
|
Profit statement |
|
|
Particulars |
Amount |
|
Sales |
27,30,000 |
|
Less: Manufacturing cost |
|
|
Variable |
11,18,000 |
|
Fixed |
4,60,000 |
|
Less: Selling and administrative costs |
|
|
Variable |
2,34,000 |
|
Fixed |
5,00,000 |
|
Advertisement charges |
30,000 |
|
Profit/Loss |
3,88,000 |
|
Proposal 2- Joanne Arnett |
|
|
Sales |
4,500 |
|
Selling price |
480 |
|
Variable manufacturing cost |
144 |
|
Fixed manufacturing costs |
4,60,000 |
|
Variable selling and administrative costs |
36 |
|
Fixed selling and administrative costs |
5,00,000 |
|
Advertisement charges |
50,000 |
|
Statement showing profit |
|
|
Particulars |
Amount |
|
Sales |
21,60,000 |
|
Less: Manufacturing cost |
|
|
Variable |
6,48,000 |
|
Fixed |
4,60,000 |
|
Less: Selling and administrative costs |
|
|
Variable |
1,62,000 |
|
Fixed |
5,00,000 |
|
Advertisement charges |
50,000 |
|
Profit/Loss |
3,40,000 |
|
Proposal 3- Jennifer Saunders |
|
|
Sales |
6,000 |
|
Selling price |
420 |
|
Variable manufacturing cost |
144 |
|
Fixed manufacturing costs |
4,60,000 |
|
Variable selling and administrative costs |
36 |
|
Fixed selling and administrative costs |
5,00,000 |
|
Rebate |
45,000 |
|
Advertisement charges |
60,000 |
|
Statement showing profit |
|
|
Particulars |
Amount |
|
Sales |
25,20,000 |
|
Less: Manufacturing cost |
|
|
Variable |
8,64,000 |
|
Fixed |
4,60,000 |
|
Less: Selling and administrative costs |
|
|
Variable |
2,16,000 |
|
Fixed |
5,00,000 |
|
Rebate |
45,000 |
|
Advertisement charges |
60,000 |
|
Profit/Loss |
4,80,000 |
It is obvious that the management of the company will choose the alternative which will provide highest profits. (Datar S. , 2016) Therefore, the alternative proposed by Jennifer must be accepted.
However, the management cannot take its decision based on the quantitative factors only it also has to look upon the qualitative factors. Based on the quantitative factors the company will choose the alternative which will provide highest profits and lowest cost but there are certain qualitative factors also that have to be considered. The management has to analyse the impact of their decision on the customers and the society as a whole. It should check whether this proposal will lead to long term success or not. (Girard, 2014)
|
When the production capacity is 100000 unit |
||
|
Spare capacity |
= |
100000-72000 |
|
= |
28000 |
|
|
Special order for |
= |
25000 |
|
Cost statement for special order |
||
|
Direct Material Cost |
1875000 |
|
|
Direct Labour Cost |
875000 |
|
|
Variable Factory Overhead |
250000 |
|
|
Fixed Factory Overhead |
500000 |
|
|
Total Manufacturing Cost |
3500000 |
|
|
Units |
25000 |
|
|
Bid Price |
140 |
|
|
When the production capacity is 90000 unit |
||
|
Spare capacity |
= |
90000-72000 |
|
= |
18000 |
|
|
Special order for |
= |
25000 |
|
Loss of Profits from 7000 units |
= |
1295000 |
|
Cost statement for special order |
||
|
Direct Material Cost |
1875000 |
|
|
Direct Labour Cost |
875000 |
|
|
Variable Factory Overhead |
250000 |
|
|
Fixed Factory Overhead |
500000 |
|
|
Total Manufacturing Cost |
3500000 |
|
|
Loss of profits from existing demand (7000*185) |
1295000 |
|
|
Total Cost |
4795000 |
|
|
Units |
25000 |
|
|
Bid Price |
191.8 |
|
Free wheels produce 72000 units per annum whereas its annual capacity to produce bikes is 100000 units. So, there is a spare capacity of 28000 units available. (Horngren, 2012) The company must accept the offer to produce additional units if the special order is less than or equal to 28000 units as their will be no additional capital investments. (Mattessich, 2016)The company has been offered to produce only 25000 units and so the company must accept the offer as it will have to incur variable costs only. So, based on the above calculations the management can charge anything above $140 per unit for these 25000 units.
References
Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.
Datar, M. S. (2015). Cost accounting. Boston: Pearson.
Datar, S. (2016). Horngren's Cost Accounting: A Managerial Emphasis. Hoboken: Wiley.
Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.
Horngren, C. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.
Mattessich, R. (2016). Reality and accounting. [S.I.]: Routledge
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