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i am CAT student and doing T10 (Foundation in Financial Management)
the formula for Credit Period Taken from Suppliers is Average Payable divided by Cost of Sales
there’s one Past Year Question and the suggested solutions by BPP is that Average Payable divided by Total Overheads ; the question states that all purchases and wages are paid by cash. so left with Production overheads and sales overheads which are on credit. i do understand the suggested solutions sum up both overheads since both of them are on credit terms.
in the suggested solutions, it stated that the cost of sales would exclude the Sales Overheads since it is not related to the production. but in the calculations of credit term taken from supplier it sum up both overheads as if both of them are treated as Cost of Sales.
hope you understand my question. thank you
The formula for the credit period is actually average payables divided by purchases on credit (times 365 days).
Most questions do not give enough detail and very often all you know is ‘cost of sales’. In this case you have no choice but to assume that all of the cost of sales are purchases on credit (and that nothing else is bought on credit).
However, in the question you describe, we do actually know what is bought on credit – it is all the overheads. It does not matter whether they are production or non-production – the payables occur because of buying on credit.
Hope that helps 🙂
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