how to calculate dpo
to manufacture a salable product a company needs raw material utilities and other resources in terms of accounting practices the accounts payable represents how much money the company owes to its supplier s for purchases made on credit additionally there is a cost associated with manufacturing the salable product and it includes payment for utilities like electricity and employee wages this is represented by cost of goods sold cogs which is defined as the cost of acquiring or manufacturing the products that a company sells during a period both of these figures represent cash outflows and are used in calculating dpo over a period of time the number of days in the corresponding period is usually taken as 365 for a year and 90 for a quarter the formula takes account of the average per day cost being borne by the company for manufacturing a salable product the numerator figure represents payments outstanding the net factor gives the average number of days taken by the company to pay off its obligations after receiving the bills two different versions of the dpo formula are used depending upon the accounting practices in one of the versions the accounts payable amount is taken as the figure reported at the end of the accounting period like at the end of fiscal year quarter ending sept 30 this version represents the dpo value as of the mentioned date in another version the average value of beginning ap and ending ap is taken and the resulting figure represents the dpo value during that particular period cogs remains the same in both versions dpo is a form of turnover ratio that measures the efficiency of a company 