urgent help

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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.

Replies (2)

U S Sharma

glidor@gmail.com

21068 Points Joined January 2010

a shadow portion in WIP is direct cost of manufacture added in values
direct cost of Purchase + direct cost of manufacture = WIP which is valuated mostly at the end of finance year exactly , balance of time breaks its taken as gross without quantitative break up.
banking stock system needs monthly stock sheets with quantity received / used/ balance and their value which is not possible precise way in WIP due to involvement of direct cost of manufacture.
for this reason stock taking procedure keeps the stock in Raw materials form for ease of banking statements and in minimum time frame ( mostly during the month of sale) they convert it to WIP and finished goods and exit from the stock.