Question 5
Statement of working capital requirement
15 marks
- Time to write
- About 30 minutes
From an older CBCS paper
Question
Question 5 · 15 marksSTU Ltd.'s cost sheet gives the data below:
| Particulars | Cost per Unit (Rs.) |
|---|---|
| Raw Material | 50 |
| Direct Labour | 36 |
| Overheads | 24 |
| Total Cost | 110 |
| Profits | 24 |
| Selling Price | 134 |
The average backup stock held is:
| Raw materials | two months |
| Work in progress (50% completed) | half month |
| Finished goods | one month |
Suppliers allow a credit of one month, and debtors are allowed a credit of two months. On average, wages are paid with a time lag of 15 days, and overheads with a lag of one month. 40% of the sales are made on a cash basis. The cash balance is expected to be Rs. 2,40,000.
Prepare a statement of the working capital required to finance an activity level of 1,00,800 units of output. To allow for contingency, add 15% to your computed estimate. Production is carried on evenly over the year, and wages and overheads accrue in the same way. Clearly state your assumptions, if any.
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
- Prepare a statementDraw the format first (heading, columns, dates), then fill in the figures from your working.
- computedFormula first, then the working, then the answer with its unit (₹, %, units).
What the paper leaves open
Work in progress is valued at raw material in full plus half of labour and overheads (50% complete). Debtors are valued at cost of sales on the 60% credit share.
Write it in this order
- Read the data; tick every adjustment as you plan it 2 min
- 1 Monthly output, cost basis and assumptions 2 marks 4 min
- 2 Raw materials and work in progress 4 marks 7 min
- 3 Finished goods, 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 and contingencies 3 marks 5 min
- Check: every adjustment used, both sides agree, dates in 2 min
Try it first. About 30 minutes for 15 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 (profit excluded). Output = 1,00,800 ÷ 12 = 8,400 units a month; cost per unit ₹110 (raw material 50, labour 36, overheads 24). Assumptions, as the question asks:
- Work in progress carries raw material in full and half of labour and overheads, being 50% complete (paper note), as in the DU text's worked statement and ICAI's (wages and overheads at 50%).
- Debtors are taken at cost, on the 60% of sales made on credit (paper note); the funds blocked in debtors are their cost; ICAI likewise takes debtors at their cash cost.
- Creditors are for raw materials; wages are paid 15 days (half a month) and overheads one month in arrear.
Statement of working capital required (₹)
| Particulars | Working | ₹ |
|---|---|---|
| Current assets | ||
| Raw materials (2 months) | 8,400 × 2 × 50 | 8,40,000 |
| Work in progress (½ month): raw material | 8,400 × ½ × 50 | 2,10,000 |
| Work in progress: labour (50%) | 8,400 × ½ × 36 × 50% | 75,600 |
| Work in progress: overheads (50%) | 8,400 × ½ × 24 × 50% | 50,400 |
| Work in progress, total | 3,36,000 | |
| Finished goods (1 month, at cost) | 8,400 × 1 × 110 | 9,24,000 |
| Debtors (2 months, 60% credit, at cost) | 8,400 × 60% × 2 × 110 | 11,08,800 |
| Cash balance | 2,40,000 | |
| Total current assets | 34,48,800 | |
| Current liabilities | ||
| Creditors for raw materials (1 month) | 8,400 × 1 × 50 | 4,20,000 |
| Outstanding wages (15 days) | 8,400 × 36 × ½ | 1,51,200 |
| Outstanding overheads (1 month) | 8,400 × 24 × 1 | 2,01,600 |
| Total current liabilities | 7,72,800 | |
| Net working capital (current assets − current liabilities) | 26,76,000 | |
| Add: 15% for contingencies | 4,01,400 | |
| Working capital required | 30,77,400 |
Where the 15 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Monthly output, cost basis and assumptions | 2 |
| 2 | Raw materials and work in progress | 4 |
| 3 | Finished goods, debtors (credit share, at cost) and cash | 3 |
| 4 | Creditors, wages and overheads outstanding | 3 |
| 5 | Net working capital and contingencies | 3 |
| Total | 15 |
Report a problemopens an email to admin@getkunji.com with the question ID3010-Q5already filled in.