My query is related with working capital management and regarding operating cycle ..................
Raw material holding period (RMHP) = Average stock of RM *360/ Total RM consumed during the year
As per my view operating cycle starts when we place purchase order. Lets suppose the organization is following EOQ policy than the purchase order will be of EOQ and as soon as the EOQ received the working capital cycle should starts.
Raw material holding period is define as the time spent by the raw material in the stores , so when we recive eoq then it will be placed in stores and the time taken to consume it should be RMHP . The time require to convert eoq qty. into finished goods should be WIP holding perod (WIP holding period is define as the time taken to convert into finished goods).
I am very much confuses as why we are taking average stock in RMHP holding period , we should use the qty. which we are ordering.
CAclubindia
