Question 4 OR (b)
Estimate of working capital requirement
12 marks
- Time to write
- About 24 minutes
- Topic
- Working capital
Question
Question 4 OR (b) · 12 marksThe production of a company during the year 2025 was 6,00,000 units. The same level of activity is expected to continue during the year 2026. The expected ratios of cost of selling price are as follows:
Raw materials: 40%, direct wages 20%, overheads 20%
Raw materials ordinarily stay in the store for three months before production, and production remains in process for two months and is assumed to consist of 100% raw materials, wages and overheads. Finished goods stay in the warehouse for three months. Creditors allow credit of four months from the date on which raw material is delivered, and debtors are given credit of three months from the date of dispatch.
The estimated cash balance to be held is ₹1,20,000. Wages and expenses are paid with a lag of half month.
The selling price is ₹8 per unit.
A provision of 10% for contingency (except cash) is to be made.
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
What the paper leaves open
The paper gives no explicit instruction. It is read as asking for an estimate of the working capital requirement. "Ratios of cost of selling price" is read as each element's ratio to the selling price. Work in progress is taken at full cost (raw materials, wages and overheads), as the question states.
Write it in this order
- Read the data; note exactly what is asked 2 min
- 1 Annual sales and the cost of each element 1 mark 2 min
- 2 Raw materials, work-in-progress and finished goods 4 marks 7 min
- 3 Debtors at cost 2 marks 3 min
- 4 Creditors and outstanding wages and overheads 2 marks 3 min
- 5 Contingency provision, cash and total working capital 3 marks 5 min
- Check: arithmetic, units (₹, %), final answer underlined 2 min
Try it first. About 24 minutes for 12 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. The estimate takes each current asset and current liability from the period it is held and the cost it carries (materials, wages, overheads), then deducts the liabilities and adds a margin for contingencies. Debtors are taken at cost, profit being ignored. Sales are taken equal to production (the same level of activity continues).
Annual figures. Sales = 6,00,000 × ₹8 = ₹48,00,000. Materials (40%) ₹19,20,000; wages (20%) ₹9,60,000; overheads (20%) ₹9,60,000; total cost ₹38,40,000.
Statement of working capital requirement
| Particulars | Working | ₹ | ₹ |
|---|---|---|---|
| A. Current assets | |||
| Stock of raw materials (3 months) | 19,20,000 × 3/12 | 4,80,000 | |
| Work-in-progress (2 months, at full cost): materials | 19,20,000 × 2/12 | 3,20,000 | |
| — wages | 9,60,000 × 2/12 | 1,60,000 | |
| — overheads | 9,60,000 × 2/12 | 1,60,000 | 6,40,000 |
| Finished goods (3 months): materials | 19,20,000 × 3/12 | 4,80,000 | |
| — wages | 9,60,000 × 3/12 | 2,40,000 | |
| — overheads | 9,60,000 × 3/12 | 2,40,000 | 9,60,000 |
| Debtors at cost (3 months): materials | 19,20,000 × 3/12 | 4,80,000 | |
| — wages | 9,60,000 × 3/12 | 2,40,000 | |
| — overheads | 9,60,000 × 3/12 | 2,40,000 | 9,60,000 |
| Current assets other than cash | 30,40,000 | ||
| B. Current liabilities | |||
| Creditors for materials (4 months) | 19,20,000 × 4/12 | 6,40,000 | |
| Wages outstanding (½ month) | 9,60,000 × 0.5/12 | 40,000 | |
| Overheads outstanding (½ month) | 9,60,000 × 0.5/12 | 40,000 | 7,20,000 |
| Net working capital other than cash (A − B) | 23,20,000 | ||
| Add: provision for contingency (10%, cash excluded) | 23,20,000 × 10% | 2,32,000 | |
| Add: cash balance | 1,20,000 | ||
| Working capital required | 26,72,000 |
Notes. Work-in-progress is taken at full cost of materials, wages and overheads, as the question states. Purchases are taken equal to the materials consumed, since the level of activity is unchanged. The 10% contingency provision is applied to working capital other than cash, as the question excludes cash from it. If debtors were taken at selling price instead of cost, they would be 48,00,000 × 3/12 = ₹12,00,000.
Where the 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Annual sales and the cost of each element | 1 |
| 2 | Raw materials, work-in-progress and finished goods | 4 |
| 3 | Debtors at cost | 2 |
| 4 | Creditors and outstanding wages and overheads | 2 |
| 5 | Contingency provision, cash and total working capital | 3 |
| Total | 12 |
Report a problemopens an email to admin@getkunji.com with the question ID1403-Q4ORbalready filled in.