Question 3 OR
Statement of working capital requirement
15 marks
- Time to write
- About 30 minutes
From an older CBCS paper
Question
Question 3 OR · 15 marksThe cost sheet of a company shows the estimated cost per unit as follows:
| Cost Elements | Amount Per Unit (₹) |
|---|---|
| Raw material | 12 |
| Direct labour | 5 |
| Overheads | 7 |
Additional Information:
| Level of activity | 1,82,000 units per annum |
| Raw materials in store | 5 weeks |
| Work in progress | 3 weeks |
| Finished goods in stock | 5 weeks |
| Credit allowed by suppliers | 5 weeks |
| Credit allowed to debtors | 6 weeks |
| Selling price per unit | ₹30 per Unit |
| Lag in Payment of wages | 3 weeks |
| Cash Balance | (₹) 60,000 |
Production is carried out evenly through the year (52 weeks), and wages and overheads accrue in the same way. 20% of the sales are on cash basis. You are asked to prepare a statement showing the Working Capital requirement.
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
No stage of completion is given for work in progress, no valuation basis for debtors, and no payment lag for overheads. Our reading: work in progress is complete in materials, labour and overheads and is valued at full cost; finished goods and debtors are valued at cost; overheads are paid as they accrue; debtors arise on the credit sales only.
Write it in this order
- Read the data; tick every adjustment as you plan it 2 min
- 1 Cost per unit, weekly output and assumptions 2 marks 4 min
- 2 Stock of raw materials 2 marks 4 min
- 3 Work in progress 3 marks 5 min
- 4 Finished goods 2 marks 3 min
- 5 Debtors and cash 2 marks 3 min
- 6 Creditors and outstanding wages 3 marks 5 min
- 7 Working capital required 1 mark 2 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 and assumptions. Cost per unit = raw material ₹12 + direct labour ₹5 + overheads ₹7 = ₹24; selling price ₹30. Weekly output = 1,82,000 ÷ 52 = 3,500 units, and since production is even, materials are bought and used at the same weekly rate. The readings of the paper note are followed:
- Work in progress is taken as complete in all three elements and valued at the full cost of ₹24 a unit.
- Finished goods and debtors are valued at cost, because cost is the amount of funds actually locked up in them; the profit element in debtors needs no financing. The DU text likewise shows debtors at cost and deducts creditors for raw materials.
- Debtors arise on credit sales only: 80% of the output, 3,500 × 80% = 2,800 units a week.
- Overheads are paid as they accrue, so no outstanding overheads are shown; wages are paid with a 3-week lag.
Statement showing the working capital requirement (₹)
| Particulars | Working | ₹ |
|---|---|---|
| Current assets | ||
| Stock of raw materials (5 weeks) | 3,500 × 5 × 12 | 2,10,000 |
| Work in progress (3 weeks): raw material | 3,500 × 3 × 12 | 1,26,000 |
| Work in progress: direct labour | 3,500 × 3 × 5 | 52,500 |
| Work in progress: overheads | 3,500 × 3 × 7 | 73,500 |
| Work in progress, total | 2,52,000 | |
| Stock of finished goods (5 weeks, at cost) | 3,500 × 5 × 24 | 4,20,000 |
| Debtors (6 weeks, credit sales at cost) | 2,800 × 6 × 24 | 4,03,200 |
| Cash balance | 60,000 | |
| Total current assets | 13,45,200 | |
| Current liabilities | ||
| Creditors for raw materials (5 weeks) | 3,500 × 5 × 12 | 2,10,000 |
| Outstanding wages (3 weeks) | 3,500 × 3 × 5 | 52,500 |
| Total current liabilities | 2,62,500 | |
| Working capital required (current assets − current liabilities) | 10,82,700 |
Conclusion. The company needs net working capital of ₹10,82,700 at the level of 1,82,000 units a year.
The other readings. Two points in the paper note change the figure if read the other way:
| Reading | Changed item | Working capital required (₹) |
|---|---|---|
| Work in progress with materials in full but wages and overheads at half, as when they build up evenly during the process | Work in progress 1,89,000 | 10,19,700 |
| Debtors at the selling price of ₹30 instead of cost | Debtors 5,04,000 | 11,83,500 |
Where the 15 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Cost per unit, weekly output and assumptions | 2 |
| 2 | Stock of raw materials | 2 |
| 3 | Work in progress | 3 |
| 4 | Finished goods | 2 |
| 5 | Debtors and cash | 2 |
| 6 | Creditors and outstanding wages | 3 |
| 7 | Working capital required | 1 |
| Total | 15 |
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