Accounting for Managers: Cash Cycle Period and Special Order Decision

This article discusses the cash cycle period and special order decision in accounting for managers. It explains the importance of liquidity and profitability in decision making. It provides solutions and proposals with cost statements and bid prices. The article also highlights the need for considering both quantitative and qualitative factors in decision making. The subject is Accounting for Managers and the course code is not mentioned. The college/university is not mentioned.

ACCOUNTING FOR MANAGERS

Solution 1:
The estimated time period in which the company makes all the payments and receives all the
payments is known as the cash cycle period (McLaney & Adril, 2016). The cash cycle is
calculated by adding the inventories period and debtor’s period and then subtracting the
creditors period. A shorter cash cycle is always preferable. It helps to know about the
liquidity position of the company. It is very important for the company to maintain adequate
levels of liquidity as lack of liquidity or availability of huge liquidity might hamper the
workings of the company. It has a direct impact on the financial performance and position of
the company (Seal, 2012).
The following table shows the data that has been used to calculate the cash cycle period:
Particulars 2018 2017 2016 2015 2014
Inventory
2,32,08
0 1,67,898
1,92,39
8 1,94,889 1,84,167
Debtors
2,00,56
1 1,68,536
1,43,67
3 1,19,508 1,06,660
Creditors
2,25,91
0 1,69,324
1,56,04
4 1,39,081 1,64,152
Cogs 11,66,329 10,72,436 10,42,595 9,91,538 9,42,455
Sales 14,38,281 12,26,663 11,95,967 11,12,630 10,69,392
The calculation of the cash cycle is shown below:
Inventory
Turnover
6
3
6
1
6
8
7
0
3
6
Debtor Turnover
4
7
4
6
4
0
3
7
1
8
Creditor Turnover
6
2
5
5
5
2
5
6
3
2
Cash Cycle
4
8
5
2
5
6
5
1
2
2

There has been an increase in the cash cycle from the year 2014 to 2017 but it has been
observed that in current year the cash cycle has become shorter when compared to the
previous year (Horngren, 2012). A shorter cash cycle is considered to favourable for the
company. A cash cycle of 48 days means that the cash is usually settled in the span of 48
days.
It is observed from the financial statements that the cash from operating activities has
declined to $58564 from $70221 in the recent two years which shows that the company’s
performance declining (Holtzman, 2013). However, the company might be observing a
growth opportunity in the future because we can see that the company has spent a lot of
money in doing investments. The cash inflow from investing activities in the year 2017 was $
138110 but this year the amount is in negative which shows that the company has made huge
investments.

Solution 2:
The financial data that has been provided to us are as follows:
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
3
6
Fixed selling and administrative costs 5,00,000
Statement showing profit
Particulars Amount
Sales 21,00,000
Less:
Variable manufacturing cost 7,20,000
Fixed manufacturing costs 4,60,000
Variable selling and administrative costs 1,80,000
Fixed selling and administrative costs 5,00,000
Profit/Loss 2,40,000
Proposal 1:
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
3
6
Fixed selling and administrative costs 5,00,000
Advertisement charges 30,000

Statement showing profit
Particulars Amount
Sales 27,30,000
Less:
Variable manufacturing cost 11,18,000
Fixed manufacturing costs 4,60,000
Variable selling and administrative costs 2,34,000
Fixed selling and administrative costs 5,00,000
Advertisement charges 30,000
Profit/Loss 3,88,000
Alternative 2:
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
3
6
Fixed selling and administrative costs 5,00,000
Advertisement charges 50,000
Statement showing profit
Particulars Amount
Sales 21,60,000
Less:
Variable manufacturing cost 6,48,000
Fixed manufacturing costs 4,60,000
Variable selling and administrative costs 1,62,000
Fixed selling and administrative costs 5,00,000
Advertisement charges 50,000

Profit/Loss 3,40,000
Alternative 3:
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
3
6
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:
Variable manufacturing cost 8,64,000
Fixed manufacturing costs 4,60,000
Variable selling and administrative costs 2,16,000
Fixed selling and administrative costs 5,00,000
Rebate 45,000
Advertisement charges 60,000
Profit/Loss 4,80,000
The primary objective of the company is to earn higher profits. So, it is easily understandable
that the management will opt for the alternative which will help to generate the highest

profits ( Datar, 2015). Therefore, the management must go for the alternative provided by
Jennifer and this decision can be supported by the calculations done earlier.
The company has to take decision based on both qualitative as well as quantitative factors.
On the basis of quantitative factors the company must opt for the alternative which has
minimum cost and highest profits but on the basis of qualitative factors a company has to
look upon various matters such as the satisfaction of the customers and the employees, long
term impact on the reputation of the company and will the acceptance of such project will
lead to long term success or not (Datar, 2016).

Solution 3:
Part 1.
(a)
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
The bid price calculated in this alternative is $ 140 unit per unit.
(b)
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
The bid price calculated in this alternative is $ 191.8 unit per unit.
Part 2.
The annual capacity to produce bikes of the company is 100000 units per annum but only
utilises a capacity of 72000 units per annum. So, there is still a capacity of (100000-72000)
i.e. 28000 units left behind (Atkinson, 2012). The company will not have to spend any
additional amount as capital investment if it accepts any order that is equal to or less than
28000 units. In the given scenario provided to us, it is observed that the company has got an
offer to produce more 25000 units. Since, the company has a spare capacity of 28000 units so
it should accept the offer as it will have to incur only variable costs (Boyd, 2013). The
management should not charge below $140 per unit for these 25000 units which are
additionally produced.

Bibliography
Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.
Boyd, W. K. (2013). Cost Accounting For Dummies. Hoboken: Wiley.
Datar, M. S. (2015). Cost accounting. Boston: Pearson.
Datar, S. (2016). Horngren's Cost Accounting: A Managerial Emphasis. Hoboken: Wiley.
Holtzman, M. (2013). Managerial Accounting For Dummies. Hoboken, NJ: Wiley.
Horngren, C. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.
McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United
Kingdom: Pearson.
Seal, W. (2012). Management accounting. Maidenhead: McGraw-Hill Higher Education.