Question 5 OR (b)
Estimate of working capital requirement
11 marks
- Time to write
- About 22 minutes
From an older CBCS paper
Question
Question 5 OR (b) · 11 marksThe information below is taken from DEF Ltd.'s Annual accounts of last year:
| Details | Per Unit Amount (₹) |
|---|---|
| Raw Material cost | 120 |
| Direct labour cost | 45 |
| Overheads\cost | 90 |
| Total cost | 255 |
| Profit | 45 |
| Selling Price | 300 |
On an average, the company keeps raw material in stock for four weeks, work-in-progress for one week and finished goods for two weeks. Suppliers allow it three weeks' credit, and it allows its debtors four weeks' credit. Wages are paid with a lag of one week, and overhead expenses with a lag of two weeks. One-fifth of the output is sold against cash, and the company keeps cash in hand and at bank, put together, at ₹ 45,000.
You are required to prepare an estimate of the working capital needed for financing an activity level of 1,56,000 units of production. Assume production to be carried on evenly over the year, with overheads and wages accruing in the same way. The work-in-progress stock is 80% complete in all respects. 11
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Assume production to be carried on…The paper fixes this: use it as given, and say so in your answer.
- estimateFormula first, then the working, then the answer with its unit (₹, %, units).
What the paper leaves open
"Overheads\cost" is kept as printed. Debtors are valued at cost on the four-fifths credit share; work in progress at 80% of all elements.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Weekly output and cost basis 1 mark 2 min
- 2 Raw materials, WIP and finished goods 3 marks 6 min
- 3 Debtors (credit share, at cost) and cash 3 marks 5 min
- 4 Creditors, wages and overheads outstanding 3 marks 5 min
- 5 Net working capital 1 mark 2 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 22 minutes for 11 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Basis. Cash-cost basis: stocks and debtors at cost. Output = 1,56,000 ÷ 52 = 3,000 units a week; cost per unit ₹255 (raw material 120, labour 45, overheads 90). Work in progress is valued at its stage of completion, here 80% in all respects (the DU text's worked statement values it element by element by its completion), and debtors are at cost on the four-fifths of sales made on credit (paper note). In the DU text's worked statement, finished goods and debtors are likewise taken at cost and creditors for raw materials deducted.
Estimate of working capital (₹)
| Particulars | Working | ₹ |
|---|---|---|
| Current assets | ||
| Raw materials (4 weeks) | 3,000 × 4 × 120 | 14,40,000 |
| Work in progress (1 week, 80%) | 3,000 × 1 × 255 × 80% | 6,12,000 |
| Finished goods (2 weeks, at cost) | 3,000 × 2 × 255 | 15,30,000 |
| Debtors (4 weeks, 4/5 credit, at cost) | 3,000 × 4 × 255 × 4/5 | 24,48,000 |
| Cash in hand and at bank | 45,000 | |
| Total current assets | 60,75,000 | |
| Current liabilities | ||
| Creditors (3 weeks' raw material) | 3,000 × 3 × 120 | 10,80,000 |
| Outstanding wages (1 week) | 3,000 × 1 × 45 | 1,35,000 |
| Outstanding overheads (2 weeks) | 3,000 × 2 × 90 | 5,40,000 |
| Total current liabilities | 17,55,000 | |
| Net working capital required (current assets − current liabilities) | 43,20,000 |
Where the 11 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Weekly output and cost basis | 1 |
| 2 | Raw materials, WIP and finished goods | 3 |
| 3 | Debtors (credit share, at cost) and cash | 3 |
| 4 | Creditors, wages and overheads outstanding | 3 |
| 5 | Net working capital | 1 |
| Total | 11 |
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