Question 4 (a)
Working capital of a manufacturer
8 marks
- Time to write
- About 16 minutes
From an older CBCS paper
Question
Question 4 (a) · 8 marksPQR Ltd's details are as below:
Production for the Year: 72,000 units
Finished Goods Inventory: 3 Months
Raw Material Inventory: Consumption of 2 Months
Production Process:1 Month
Credit from Creditors: 2 Months
Credit to Debtors: for 3 Months
Selling Price per unit: ₹ 50 per unit
Raw Material: equal to 50% of selling price.
Direct Wages: 10% of selling price.
Overheads: 20% of selling price.
Production on the sales cycle is regular, and wages and overheads accrue evenly. Wages are paid in the month after accrual. Material is used at the start of the production cycle. Work-in-process uses the full unit of raw materials at the start of the manufacturing process, together with other conversion costs equivalent to 50%. Find out PQR Limited's working capital.
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
- Find outFormula 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. Debtors and finished goods are valued at cost.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Cost per unit and basis 1½ marks 3 min
- 2 Raw material and work in progress 2½ marks 4 min
- 3 Finished goods and debtors 2 marks 4 min
- 4 Current liabilities and working capital 2 marks 3 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 16 minutes for 8 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 production = 72,000 ÷ 12 = 6,000 units. Cost per unit: raw material 50% × 50 = ₹25, wages 10% × 50 = ₹5, overheads 20% × 50 = ₹10; total ₹40. Finished goods and debtors are valued at cost. Work in progress carries the full raw material and 50% of the conversion cost (wages and overheads). Wages are paid a month in arrear; no lag is given for overheads, so none is assumed. Each item is the holding period × the monthly cost.
| Element | Working | ₹ |
|---|---|---|
| Raw material (full) | 6,000 × 25 | 1,50,000 |
| Conversion cost (50%) | 6,000 × (5 + 10) × 50% | 45,000 |
| Total | 1,95,000 |
| Particulars | Working | ₹ |
|---|---|---|
| Current assets | ||
| Raw material (2 months' consumption) | 6,000 × 2 × 25 | 3,00,000 |
| Work in progress (1 month) | as above | 1,95,000 |
| Finished goods (3 months, at cost) | 6,000 × 3 × 40 | 7,20,000 |
| Debtors (3 months, at cost) | 6,000 × 3 × 40 | 7,20,000 |
| Total current assets | 19,35,000 | |
| Current liabilities | ||
| Creditors (2 months of raw material) | 6,000 × 2 × 25 | 3,00,000 |
| Wages outstanding (1 month) | 6,000 × 5 | 30,000 |
| Total current liabilities | 3,30,000 | |
| Working capital required | 16,05,000 |
Where the 8 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Cost per unit and basis | 1.5 |
| 2 | Raw material and work in progress | 2.5 |
| 3 | Finished goods and debtors | 2 |
| 4 | Current liabilities and working capital | 2 |
| Total | 8 |
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