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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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