Question 3 (b)
Working capital on a cash-cost basis
11 marks
- Time to write
- About 22 minutes
From an older CBCS paper
Question
Question 3 (b) · 11 marksOn a cash cost basis, calculate the working capital required from the estimates below, made by Kartik Ltd. for the next year:
| ₹ | |
|---|---|
| Sales (at gross profit of 20%) | 32,40,000 |
| Raw material | 8,10,000 |
| Wages | 6,48,000 |
| Manufacturing Expenses outstanding at the end of the year | 72,000 |
| Total Administrative Expenses | 2,16,000 |
| Total Selling Expenses | 1,08,000 |
| Desired cash balance | 1,20,000 |
Finished goods and raw material are held in stock to meet 1 month's requirement. The company allows its customers a credit of 2 months, and its suppliers allow it 2 months' credit. Wages are paid 15 days in arrear, and all other expenses 1 month in arrear. There is no work in progress. Depreciation is included in the company's cost of production. Finished goods are valued at manufacturing cost. A 15% safety margin is to be maintained. 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
- calculateFormula first, then the working, then the answer with its unit (₹, %, units).
What the paper leaves open
Depreciation is included in the cost of production but its amount is not given; the answer derives the cost of production from sales less gross profit and states how depreciation is excluded on the cash cost basis.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Cost of production, cash manufacturing expenses and depreciation excluded 3 marks 6 min
- 2 Current assets on the cash-cost basis 3 marks 5 min
- 3 Current liabilities 3 marks 5 min
- 4 Net working capital and safety margin 2 marks 4 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.
Cash costs. On the cash-cost basis only cash costs are counted for finished goods and debtors (profit is left out), and the non-cash expense, depreciation, is excluded. Cost of production = sales less 20% gross profit = 32,40,000 × 0.80 = ₹25,92,000. All expenses other than wages are paid one month in arrear, so the ₹72,000 of manufacturing expenses outstanding is one month's: cash manufacturing expenses = 72,000 × 12 = ₹8,64,000. Depreciation inside the cost of production = 25,92,000 − (8,10,000 + 6,48,000 + 8,64,000) = ₹2,70,000 (paper note).
| Cash costs | ₹ |
|---|---|
| Raw material | 8,10,000 |
| Wages | 6,48,000 |
| Manufacturing expenses (cash) | 8,64,000 |
| Cash cost of production | 23,22,000 |
| Administrative expenses | 2,16,000 |
| Selling expenses | 1,08,000 |
| Cash cost of sales | 26,46,000 |
Statement of working capital required (₹). Finished goods are taken at manufacturing cost without depreciation, and debtors at the cash cost of sales, the funds actually blocked.
| Particulars | Working | ₹ |
|---|---|---|
| Current assets | ||
| Raw material (1 month) | 8,10,000 × 1/12 | 67,500 |
| Finished goods (1 month, cash cost of production) | 23,22,000 × 1/12 | 1,93,500 |
| Debtors (2 months, cash cost of sales) | 26,46,000 × 2/12 | 4,41,000 |
| Cash balance | 1,20,000 | |
| Total current assets | 8,22,000 | |
| Current liabilities | ||
| Creditors (2 months' raw material) | 8,10,000 × 2/12 | 1,35,000 |
| Wages (15 days in arrear) | 6,48,000 × 1/24 | 27,000 |
| Manufacturing expenses (1 month) | 72,000 | |
| Administrative expenses (1 month) | 2,16,000 × 1/12 | 18,000 |
| Selling expenses (1 month) | 1,08,000 × 1/12 | 9,000 |
| Total current liabilities | 2,61,000 | |
| Net working capital (current assets − current liabilities) | 5,61,000 | |
| Add: 15% safety margin | 84,150 | |
| Working capital required | 6,45,150 |
There is no work in progress. Raw material purchases are taken equal to consumption for the creditors.
Where the 11 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Cost of production, cash manufacturing expenses and depreciation excluded | 3 |
| 2 | Current assets on the cash-cost basis | 3 |
| 3 | Current liabilities | 3 |
| 4 | Net working capital and safety margin | 2 |
| Total | 11 |
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