Question 4 OR (b)
Estimate of net working capital requirement
10 marks
- Time to write
- About 20 minutes
From an older CBCS paper
Question
Question 4 OR (b) · 10 marksFrom the information below, prepare an estimate of the net working capital requirement of MN Ltd. Add 10% for contingencies.
The estimated cost per unit of production, ₹170, includes
Raw material ₹80, Direct labour ₹30, and, exclusive of depreciation, overheads ₹60
The selling price is ₹200 per unit
Level of activity: 2,49,600 units per annum.
Average periods: 4 weeks for raw material in stock; for work in progress (assume 50% completion stage), 2 weeks; 4 weeks for finished goods in stock; 4 weeks for credit allowed by suppliers; 8 weeks for credit allowed to debtors; 1.5 weeks for the lag in payment of wages. Cash at bank is expected to be ₹60,000.
Production is carried on evenly over the year (52 weeks), and wages and overheads accrue in the same way. All sales are on a credit basis.
You may 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
- assume 50% completion stage), 2 weeksThe 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
No payment lag is given for overheads; they are taken as paid when incurred.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Weekly output and the cost basis, with assumptions 1 mark 2 min
- 2 Raw materials and work in progress 3 marks 5 min
- 3 Finished goods, debtors and cash 2 marks 4 min
- 4 Creditors and outstanding wages 2 marks 4 min
- 5 Net working capital and contingencies 2 marks 3 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 20 minutes for 10 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 and assumptions. Working capital is estimated on the cash-cost basis: stocks and debtors at cost, with depreciation excluded (it is not in the ₹170). Output per week = 2,49,600 ÷ 52 = 4,800 units. As the question invites, these assumptions are stated:
- Work in progress is taken at 50% of the full cost of ₹170 for each element, since the question says only "50% completion stage". (The DU text's worked illustration takes material in full and conversion at 50%, but there the question says so expressly: "with full material consumption", as does ICAI's. That reading is shown below.)
- Debtors and finished goods are taken at cost, the amount of funds actually blocked; ICAI likewise takes debtors at their cash cost.
- Overheads are paid as incurred, since no lag is given (paper note); creditors are for raw materials only.
Statement of net working capital requirement (₹)
| Particulars | Working | ₹ |
|---|---|---|
| Current assets | ||
| Stock of raw materials (4 weeks) | 4,800 × 4 × 80 | 15,36,000 |
| Work in progress (2 weeks): raw material (50%) | 4,800 × 2 × 80 × 50% | 3,84,000 |
| Work in progress: direct labour (50%) | 4,800 × 2 × 30 × 50% | 1,44,000 |
| Work in progress: overheads (50%) | 4,800 × 2 × 60 × 50% | 2,88,000 |
| Work in progress, total | 8,16,000 | |
| Stock of finished goods (4 weeks, at cost) | 4,800 × 4 × 170 | 32,64,000 |
| Debtors (8 weeks, at cost) | 4,800 × 8 × 170 | 65,28,000 |
| Cash at bank | 60,000 | |
| Total current assets | 1,22,04,000 | |
| Current liabilities | ||
| Creditors for raw materials (4 weeks) | 4,800 × 4 × 80 | 15,36,000 |
| Outstanding wages (1.5 weeks) | 4,800 × 1.5 × 30 | 2,16,000 |
| Total current liabilities | 17,52,000 | |
| Net working capital (current assets − current liabilities) | 1,04,52,000 | |
| Add: 10% for contingencies | 10,45,200 | |
| Net working capital required | 1,14,97,200 |
The other reading. If materials are issued at the start, so that work in progress carries the full material cost and 50% of labour and overheads (the DU illustration's basis), it is ₹12,00,000 instead of ₹8,16,000, and the requirement with contingencies is ₹1,19,19,600.
Where the 10 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Weekly output and the cost basis, with assumptions | 1 |
| 2 | Raw materials and work in progress | 3 |
| 3 | Finished goods, debtors and cash | 2 |
| 4 | Creditors and outstanding wages | 2 |
| 5 | Net working capital and contingencies | 2 |
| Total | 10 |
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