Production Cycle, Operating Cycle, Standard Costing, Common Misconceptions in pricing , Shortcomings of Traditional method of credit analysis

 Production Cycle: The period during which the objects of labor (raw products and materials) remain in the production process, from the beginning of manufacturing through the output of a finished product. In addition to the working time, the production cycle includes interruptions in production owing to physical, chemical, and biological (natural) processes (for example, the period required for tanning leather); the character of the objects of labor; or the technology and organization of production. The production cycle represents part of the production time, excluding the period during which the objects of labor are in production reserves. The reduction of the production cycle accelerates the output of products and contributes to the better utilization of productive capital, to the acceleration of the rate of turnover of circulating capital under socialism, and to the turnover of capital under capitalism. The most important factors for reducing the production cycle are the introduction of advanced technology and the automation of production processes.

 

Operating Cycle

 The operating cycle is the amount of time it takes for a company to turn cash used to purchase inventory into cash once again. This number is calculated by adding the age of inventory (the number of days that inventory is held prior to sale) with the collection period (the number of days required to collect receivables). A company with a short operating cycle is able to quickly recover its investment. A company with a long operating cycle will have less cash available to meet an} short-term needs, which can result in increased borrowing and interest expense.

 Standard Costing

 A management tool used to estimate the overall cost of production, assuming normal operations. An estimated or predetermined cost of performing an operation or producing a good or service, under normal conditions.

 The concept of recording historical costs was taken further, by allocating the company's fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production. This allowed the full cost of products that were not sold in the period they were produced to be recorded in inventory using a variety of complex accounting methods, which was consistent with the principles of GAAP (Generally Accepted Accounting Principles). It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the "standard cost" for any given product. An important part of standard cost accounting is a variance analysis, which breaks down the variation between actual cost and standard costs into various components (volume variation, material cost variation, labor cost variation, etc.) so managers can understand why costs were different from what was planned and take appropriate action to correct the situation. An estimated or predetermined cost of performing an operation or producing a good or service, under normal conditions.

 Common Misconceptions in pricing

Pricing is an accounting practice of an once-in-a-lifetime experience for most practice owners. Because it is such a common event, sellers/buyers need to be aware of the key misconceptions about the process. These are as:

1) The seller/buyer needs to stay around for months or years to assist the product in the transition.                                ,

2) The best offer for an accounting practice is another accounting firm.

3) The average pricing for practices determines the value of a specific practice.

4) Accounting practices have some intrinsic value which all potential prices of the product recognize and with which all agree.

 

Shortcomings of Traditional method of credit analysis

 Traditional method of credit analysis is based on standardized reports and credit officer judgments. In most firms, the credit quality of a particular loan is to be judged by a reviewing officer and placed into one of several credit categories. Categories range from risk-free or low risk to potential or full loss.

 Limitations of traditional method of credit analysis:

 1. Accounting Information of Different Accounting Policies : The choices of accounting policies may distort intercompany comparisons. Example - IAS 16 allows valuation of assets to be based on either revalued amount or at depreciated historical cost.

2.Creative accounting : The businesses apply creative accounting in trying to show the better financial performance or position which can be misleading to the users of financial accounting.

3. Information problems: Traditional methods are not definitive measures for credit analysis needed to be interpreted carefully. They cannot show whether performance is good or bad. It also requires some quantitative information for an informed analysis to be made.

4. Outdated information in financial statement: The figures in a set of accounts are likely to be at least several months out of date, and so might not give a proper                    indication    of the company's current              financial    position.

5.Financial statements contain summarized information: Traditional methods are based on financial statements which are summaries of the accounting records. Through the summarization some important information may be left out which could have been of relevance to the users of accounts. The traditional methods are based on the summarized year end information which may not be a true reflection of the overall year's results.

6.Technological changes: When comparing performance over time, there is need to consider the changes in technology. The movement in performance should be in line with the changes in technology.