Working Capital (Part 1)
CHAPTER
6 WORKING CAPITAL
Concept #1 Operating Cycle/ Cash Cycle
1
FINANCIAL MANAGEMENT
By GOURAV KABRA
Concept #2 Working Capital Computation
Question #1 PTP J17 Ans: 177 Days; 198 Days
From the following data, compute the duration of the Operating Cycle for each of
the two years:
Particulars Year 1 (₹) Year 2 (₹)
Stock:
Raw Materials 20,000 27,000
Work-in-progress 14,000 18,000
Finished goods 21,000 24,000
Purchases 96,000 1,35,000
Cost of goods sold 1,40,000 1,80,000
Sales 1,60,000 2,00,000
Debtors 32,000 50,000
2
Working Capital (Part 1)
Creditors 16,000 18,000
Assume 360 days per year for computational purposes.
Question #2 PTP J19; MQP J23/D23 Ans: ₹ 369.16 Lakhs
GOLDILOCKS LTD. sells goods to domestic market on a gross profit of 25% on sales
without considering depreciation. Its estimates for the year 2019-20 are as follows:
Amount
Particulars
(₹ Lakh)
Sales:
Domestic Market at 2 months’ Credit 1,600
Export (Selling price 10% below home price) 540
(Exports at 3 months’ Credit)
Costs:
Materials used (Suppliers extend 2 months’ Credit) 600
Wages paid (1/2 month in Arrear) 400
Manufacturing Expenses (Paid 1 month in Arrear) 600
Sales Promotion (Payable quarterly in advance) 80
Administration Expenses (Paid 1 month in Arrear) 200
The company maintains one month’s stock of each raw material and finished goods.
A cash balance of ₹ 20 lakh is also maintained.
There is no Work-in-Progress (WIP).
All expenses and incomes are made evenly throughout the year.
Required: Prepare a statement of Working Capital Requirements of the Company for
2019-20 on Cash Cost basis.
Question #3 PTP D23 Ans: ₹ 38,56,250
A proforma cost sheet of BOSM Ltd., a manufacturing Company provide the following
particulars:
Particulars Amount per unit (₹)
Raw materials cost 100.00
Direct labour cost 37.50
Overheads cost 75.00
Total Cost 212.50
Profit 37.50
Selling price 250.00
The Company keeps raw material in stock, on an average for one month; work-in-
progress, on an average for one week; and finished goods in stock on an average for
two weeks. The credit allowed by suppliers is three weeks and company allows for six
weeks credit to its debtors. The lag in payment of wages is one week and lag in
payment of overhead expenses is two weeks.
3
FINANCIAL MANAGEMENT
By GOURAV KABRA
The Company sells one-fifth of the output against cash and maintains cash-in-hand
and at bank put together at ₹ 37,500.
Required:
Prepare a statement showing estimate of working capital needs 1o finance an activity
level of 1,30,000 units of production. Assume that production is carried on evenly
throughout the year, and wages and overheads accrue similarly. Work-in-progress
stock is 80% complete in all respects.
Question #4 PTP J23/D23 Ans: ₹ 31,68, 399
Oli Ltd. provides you with the following information:
Estimated Level of Activity: Completed Units of Production 1,04,000 plus units of WIP
Raw material 19.6% of the selling price
Wages 10.6% of the selling price
Production Overheads (including depreciation of ₹15 17.6% of the selling price
per unit at the budgeted level of activity)
Selling Price ₹ 500 per unit
Average raw material in stock 3 weeks
Average work-in-progress (% of completion with respect 2 weeks
to Material - 75%, Conversion Cost - 70%)
Finished goods in stock 4 weeks
Credit allowed to debtors 2.5 weeks
Credit allowed by creditors 3.5 weeks
Time lag in payments of labour 2 weeks
Time lag in payments of Production Overheads 1.5 weeks
Cash Sales and Cash Purchases 25%
The company believes in keeping ₹ 3,00,000 available to it including the overdraft limit
of ₹ 75,000 not yet utilized by the company.
Provision for contingencies is required @ 4% of the working capital requirement
including that provision.
Assume that production is carried on evenly throughout the year (52 weeks) and
wages and overheads accrue similarly.
You are required to calculate the Net Working Capital Requirement on Cash Cost
Basis if Oli Ltd. is an existing company.
Question #5 PTP J24/D23/J18; MQP J24/D23/J23 Ans: ₹ 3,87,500
MJK Ltd. has called for a statement showing the working capital needed to finance a
level of activity of 30,000 units of output for the year. The cost structure for the
company’s product for the above-mentioned activity level is detailed below:
Cost per Unit:
Raw Material = ₹ 20, Direct Labour = ₹ 5, Overheads = ₹ 15,
4
Working Capital (Part 1)
Total Costs = ₹ 40, Profit = ₹ 10, Selling Price = ₹ 50
Additional Information
1. Raw Materials are held in stock, on an average, for two months.
2. Work in Progress (100% completed in regard to materials and 50% for labour
and overheads) will approximately be half a month's production.
3. Finished goods remain in warehouse, on an average, for a month.
4. Suppliers of materials give a month's credit.
5. Two months credit is allowed to Debtors. Calculation of debtors may be made
at selling price.
6. A minimum cash balance of ₹ 25,000 is expected to be maintained.
7. 30% of the production is sold for cash.
8. It may be assumed that production is continued evenly throughout the year.
Prepare the statement showing working capital requirement.
Question #6 PTP D24 Ans: ₹ 4,45,625
JBC Ltd. sells goods at a gross profit of 25%. Depreciation is considered as a part of
cost of production. The following are the annual figures given to you:
Sales (2 months’ credit) ₹ 18,00,000
Materials consumed (1 month credit) ₹ 4,50,000
Wages paid (1 month lag in payment) ₹ 3,60,000
Cash manufacturing expenses (1 month lag in payment) ₹ 4,80,000
Administrative expenses (1 month lag in payment) ₹ 1,20,000
Sales promotion expenses (paid quarterly in advance) ₹ 60,000
The company keeps one month’s stock each of raw materials and finished goods. It
also keeps ₹ 1,00,000 in cash.
You are required to estimate the working capital requirements of the company on
cash cost basis, assuming 15% safety margin.
Question #7 MQP D23/J23 Ans: ₹ 28,99,819
A proforma cost sheet of a Company provides the following data:
Particulars ₹
Raw material cost per unit 117
Direct Labour cost per unit 49
Factory overheads cost per units (includes depreciation of ₹18 per unit 98
at budgeted level of activity)
Total cost per unit 264
Profit 36
Selling price per unit 300
Following additional information is available:
Average raw material in stock : 4 weeks
Average work-in-process stock : 2 weeks
5
FINANCIAL MANAGEMENT
By GOURAV KABRA
(Material 80%; Lab & OH 60%)
Finished goods in stock : 3 weeks
Credit period allowed to debtors : 6 weeks
Credit period availed from suppliers : 8 weeks
Time lag in payment of wages : 1 week
Time lag in payment of overheads : 2 weeks
The company sells one-fifth of the output against cash and maintains cash balance
of ₹ 2,50,000.
Required:
Prepare a statement showing estimate of working capital needed to finance a
budgeted activity level of 87,000 units of production. You may assume that production
is carried on evenly throughout the year and wages and overheads accrue similarly.
Question #8 MQP D24 Ans: ₹ 3,84,922
A company plans to manufacture and sell 400 units of a domestic appliance per
month at a price of ₹ 600 each. The ratio of costs to selling price is as follows:
Particulars % of selling price
Raw materials 30%
Packing materials 10%
Direct labour 15%
Direct expense 5%
Fixed overheads are estimated at ₹4,32,000 per annum. The following norms are
maintained for inventory management:
Raw materials 30 days
Packing materials 15 days
Finished goods 200 units
Work-in-progress 7 days
Other particulars are given below:
(A) Credit sales represent 80% of total sales and the dealers enjoy 30 working days’
credit. Balance 20% is cash sales.
(B) Creditors allow 21 working days credit for payment.
(C) Lag in payment of overheads and expenses is 15 working days.
(D) Cash requirements to be 12% of net working capital.
(E) Working days in a year are taken as 300 for budgeting purpose.
Prepare a Working Capital requirement forecast for the budget year.
6
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