Question 5
Working capital requirements on the cash-cost basis
15 marks
- Time to write
- About 30 minutes
From an older CBCS paper
Question
Question 5 · 15 marksDEF Ltd. plans to sell 2,16,000 units next year. The goods' expected cost is as below:
| Cost per unit (Rs.) | |
|---|---|
| Raw materials | 20 |
| Labour (direct) | 5 |
| Overheads (depreciation of Rs. 5 per unit included) | 15 |
| Total cost | 40 |
| Profit | 10 |
| Selling price | 50 |
Further information is as below:
| Raw material held in stock | Average 2 months |
| Work in progress held | Average 1/2 month |
| Finished goods held in stock | Average 1 month |
| Credit period allowed by suppliers | Average 1 month |
| Credit period allowed to debtors | Average 2 months |
| Time lag in payment of wages | Average 1 month |
| Time lag in paying overheads | Average 1/2 month |
75% of the goods are sold on a credit basis. Cash in hand is expected to be Rs. 24,000. From this information, prepare a statement showing the firm's working capital requirements. 15
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.
What the paper leaves open
Debtors are valued at cost excluding depreciation (cash cost); work in progress at full raw material and half of labour and overheads; the depreciation of Rs. 5 a unit is excluded from overheads paid.
Write it in this order
- Read the data; tick every adjustment as you plan it 2 min
- 1 Basis: cash cost and monthly figures 2 marks 3 min
- 2 Raw material and work in progress 4 marks 7 min
- 3 Finished goods, debtors and cash 4 marks 7 min
- 4 Current liabilities and net working capital 5 marks 9 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 (paper note). Monthly output = 2,16,000 ÷ 12 = 18,000 units. Working capital is estimated at cash cost: the depreciation of ₹5 a unit is excluded, so cash overheads are ₹10 a unit and cash cost ₹35 a unit (raw material 20 + labour 5 + overheads 10). Work in progress carries raw material in full and labour and overheads at half. Each item is the holding period × the monthly cost.
| Element | Working | ₹ |
|---|---|---|
| Raw material (full) | 18,000 × ½ × 20 | 1,80,000 |
| Labour (50%) | 18,000 × ½ × 5 × 50% | 22,500 |
| Overheads (50%) | 18,000 × ½ × 10 × 50% | 45,000 |
| Total | 2,47,500 |
Statement of working capital requirements
| Particulars | Working | ₹ |
|---|---|---|
| Current assets | ||
| Raw material stock (2 months) | 18,000 × 2 × 20 | 7,20,000 |
| Work in progress (½ month) | as above | 2,47,500 |
| Finished goods (1 month, cash cost) | 18,000 × 35 | 6,30,000 |
| Debtors (2 months, 75% credit, cash cost) | 18,000 × 75% × 2 × 35 | 9,45,000 |
| Cash in hand | given | 24,000 |
| Total current assets | 25,66,500 | |
| Current liabilities | ||
| Creditors (1 month of raw material) | 18,000 × 20 | 3,60,000 |
| Outstanding wages (1 month) | 18,000 × 5 | 90,000 |
| Outstanding overheads (½ month, cash) | 18,000 × 10 × ½ | 90,000 |
| Total current liabilities | 5,40,000 | |
| Net working capital required | 20,26,500 |
Where the 15 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Basis: cash cost and monthly figures | 2 |
| 2 | Raw material and work in progress | 4 |
| 3 | Finished goods, debtors and cash | 4 |
| 4 | Current liabilities and net working capital | 5 |
| Total | 15 |
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