Nachembe Co is a recently established company specialising in the manufacture of a range of drugs for the pharmaceutical industry. Two brothers, Thomas and Gerald Broom, formed the company and have just finished the first year of business. Sales are made to customers on 60-day payment terms and all suppliers offer 30 days’ credit. All of the raw materials purchased by Nachembe Co only last for a limited time. Therefore, it is the company’s policy that such chemicals are used within 75 days of purchase. Whilst the brothers are experienced in the field of pharmaceuticals, they are finding it difficult to understand some of the financial matters associated with running a company. You are employed in the company as an accounting technician and have collated the following information for the last year.                                                                                                                                                       K Sales                                                    1,500,000 Raw material purchases                              378,000 Direct labour costs                                     240,000 Variable production overheads                     215,000 Apportioned fixed production overheads         185,000 Average receivables                                   356,000 Average inventories: Finished goods                                     210,000 Work-in-progress (WIP)                            58,000 Raw materials                                        82,000 Average payables: Materials                                              45,000 Variable and fixed overheads                    75,000 Direct labour                                           9,000 Other relevant information 1 All finished goods inventory and WIP values include raw materials, direct labour, variable production overheads and apportioned fixed production overhead costs. 2 Assume WIP is 70% complete. 3 Assume there are 365 days in one year. 4 Assume that production and sales volumes are the same. 5 The length of the average working capital cycle in this type of business is 90 days. Required: (a) Calculate Nachembe Co’s working capital cycle (cash operating cycle) in days. All workings should be rounded to the nearest complete day.  (b) Explain what working capital management is and why it is important.   (c) From your calculations in part (a), identify possible concerns that Nachembe Co’s chief accountant may have about the company’s working capital cycle.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Nachembe Co is a recently established company specialising in the manufacture of a range of drugs for the pharmaceutical industry. Two brothers, Thomas and Gerald Broom, formed the company and have just finished the first year of business. Sales are made to customers on 60-day payment terms and all suppliers offer 30 days’ credit. All of the raw materials purchased by Nachembe Co only last for a limited time. Therefore, it is the company’s policy that such chemicals are used within 75 days of purchase. Whilst the brothers are experienced in the field of pharmaceuticals, they are finding it difficult to understand some of the financial matters associated with running a company. You are employed in the company as an accounting technician and have collated the following information for the last year.                                                                                                                                                       K

Sales                                                    1,500,000

Raw material purchases                              378,000

Direct labour costs                                     240,000

Variable production overheads                     215,000

Apportioned fixed production overheads         185,000

Average receivables                                   356,000

Average inventories:

Finished goods                                     210,000

Work-in-progress (WIP)                            58,000

Raw materials                                        82,000

Average payables:

Materials                                              45,000

Variable and fixed overheads                    75,000

Direct labour                                           9,000

Other relevant information

1 All finished goods inventory and WIP values include raw materials, direct labour, variable production overheads and apportioned fixed production overhead costs.

2 Assume WIP is 70% complete.

3 Assume there are 365 days in one year.

4 Assume that production and sales volumes are the same.

5 The length of the average working capital cycle in this type of business is 90 days.

Required:

(a) Calculate Nachembe Co’s working capital cycle (cash operating cycle) in days. All workings should be rounded to the nearest complete day. 

(b) Explain what working capital management is and why it is important. 

 (c) From your calculations in part (a), identify possible concerns that Nachembe Co’s chief accountant may have about the company’s working capital cycle.

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