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Question 175 - CSCP discussion

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A juice manufacturer wants to determine the time required to convert a dollar spent on materials into a dollar received in sales. Which of the following metrics would be most appropriate to make this determination?

A.
Activity-based costing
Answers
A.
Activity-based costing
B.
Inventory carrying cost
Answers
B.
Inventory carrying cost
C.
Cash-to-cash cycle time
Answers
C.
Cash-to-cash cycle time
D.
Average financial turnover
Answers
D.
Average financial turnover
Suggested answer: C

Explanation:

The metric most appropriate for determining the time required to convert a dollar spent on materials into a dollar received in sales is the cash-to-cash cycle time. Here's the explanation:

Definition: Cash-to-cash cycle time (C2C) is a key performance indicator that measures the time taken between outlaying cash for raw material and receiving cash from product sales. It reflects the efficiency of a company's cash conversion process.

Components of C2C:

Days Inventory Outstanding (DIO): The average number of days that inventory is held before it is sold.

Days Sales Outstanding (DSO): The average number of days that receivables are outstanding before they are collected.

Days Payable Outstanding (DPO): The average number of days that the company takes to pay its suppliers.

Calculation:

Cash-to-CashCycleTime=DIO+DSODPOCash-to-CashCycleTime=DIO+DSODPO

Importance: This metric helps in understanding the liquidity and operational efficiency of the company. A shorter C2C indicates a more efficient operation, as it shows that the company can quickly convert its investments in inventory and other resources into cash flows.

Hopp, W. J., & Spearman, M. L. (2008). Factory Physics.

Stevenson, W. J. (2018). Operations Management.

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asked 16/09/2024
TJOE INKAWATI
29 questions
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