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Which of the following will affect the working capital cycle?
1) An increase in the credit period agreed with customers
2) A reduction in inventory of raw materials calculated as a percentage of the amount used in production
3) Delayed payment to suppliers
4) An increase in the finished goods turnover period.
1 and 3 only
2 and 4 only
1, 2 and 3 only
1, 2, 3 and 4Answer is D. I have no logic and concept of statement 2 and 4. I would be grateful if you explain Professor Ken Garett.
An overhead cost budget for the next calendar year includes:
Depreciation charged on a straight-line basis at $11,200 per month;
Machine maintenance of $5,900 per quarter, payable in advance in January, April, July and October.
The remaining overheads, of $207,600 for the year, are budgeted to be incurred at an even rate per month, payable one month in arrears. The expected accrued overhead, at the end of the calendar year prior to the budget year, is $16,800.
What amount of overhead should be included in the cash budget for January?
$23,200
$22,700
$33,900
$28,500Answer is B. I did correct but my logic was not correct. I thought we will charge
expected accrued overhead of 16800 instead of remaining overhead per month which is 17300 (207600/12= 17300) as we are making cash budget and overhead budgeted overhead would be in forecast.
However, examiner’s analysis said something else which I could not understand. If i am not clear so just summarizing that sir please tell why not answer is A.
Can you please explain sir?Q1 WCC = Receivables days + Inventory days – Payable days
Statement 2 Inventory is used in production so if this percentage falls, inventory is being used more quickly so Inventory days fall.
Statement 4 If finished goods turnover period increases, finished goods are staying in Inventory longer (FGTOP = FG / (Cost of sales/365)).
Q2 So, we look at cash.
Depreciation irrelevant as not cash.
Machine maintenance…5900 paid Jan.
Remaining overheads, not paid until 1 Feb
$16800 accrued 31/12 paid 1/1.
Total cash out in Jan = 5900 + 16800 = 22,700
In Q1
Sir, how second statement in question 1 means that the inventory is used faster than before. It is saying that inventory of RM is reduced which is calculated in percentage of production.In Q2:
Are remaining overhead and accrued overhead same thing? As it is saying that remaining overhead are paid in Arrears following month so 17300 of accrued overhead in December would be paid in January?If inventory goes down it will move to production sooner.
If there was 4 weeks worth of inventory then an item coming in would spend about 4 weeks in stores before use. If only 2 weeks worth of inventory then it would be used about 2 weeks after receipt.
There isn’t 17300 accrued oh at end of December. Accruals are not made until benefits are received. At the end of Jan there is an accrual for January’s OH, but this is not paid until Feb.
Sir Thank you. I got first question.
I am still unclear of question 2.
Like we have benefits in December so it would be paid in January? Why it is not paid in January?16800 is the benefit enjoyed in Dec, accrued 31/12 and paid in Jan ie one month in arrears.
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