Question 5 (b)
Net working capital on the cash cost basis
12 marks
- Time to write
- About 24 minutes
- Topic
- Working capital
Question
Question 5 (b) · 12 marksM/s Bhalla gives you the information below. Estimate the net working capital needed for the project,
| Cost per unit of production (estimated) | Amount (in Rs.) |
|---|---|
| Raw Material | 60 |
| Direct Labor | 20 |
| Overheads (depreciation of Rs. 20 included) | 40 |
| Total Cost | 120 |
Further information:-
Selling Price Rs. 150 per unit.
Activity level: 24,960 units produced per annum.
Raw Material in stock – 2 weeks on average
Work in progress (assume a 60% completion stage as to conversion cost and 100% completion as to materials) 2 weeks on average.
Finished Goods in stock – 3 weeks on average
Credit allowed by supplier – 2 weeks on average
Credit allowed to debtors – 4 weeks on average
Lag in paying wages 1.5 weeks on average
Cash at bank expected: Rs. 36,000
You may assume that production was evenly carried out evenly over the whole year. 20% output was sold for cash. To allow for contingencies, add 10% to your computed estimate.
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 a 60% completion stage as…The 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
"Evenly carried out evenly" is printed so and kept.
Write it in this order
- Read the data; note exactly what is asked 2 min
- 1 Cash cost per unit and weekly output 2 marks 3 min
- 2 Raw material and work-in-progress 3 marks 5 min
- 3 Finished goods and debtors at cash cost 3 marks 5 min
- 4 Current liabilities 2 marks 3 min
- 5 Contingency and total 2 marks 3 min
- Check: arithmetic, units (₹, %), final answer underlined 3 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. Working capital is estimated on the cash cost basis: finished goods and debtors are taken at cash cost, since the funds tied up in them exclude profit, and depreciation, a non-cash cost, is left out. Each element is the weekly cost tied up × the weeks it is held, as in the DU text's weekly working. Production is even, so weekly output = 24,960 ÷ 52 = 480 units.
Cash cost per unit: raw material ₹60 + direct labour ₹20 + overheads excluding depreciation (40 − 20) ₹20 = ₹100.
Statement of working capital requirement
| Particulars | Working | ₹ |
|---|---|---|
| A. Current assets | ||
| Raw material stock (2 weeks) | 480 × 2 × 60 | 57,600 |
| Work-in-progress (2 weeks): materials (100%) | 480 × 2 × 60 | 57,600 |
| — conversion cost (60%): (20 + 20) × 60% = ₹24 | 480 × 2 × 24 | 23,040 |
| Work-in-progress total | 80,640 | |
| Finished goods (3 weeks, at cash cost ₹100) | 480 × 3 × 100 | 1,44,000 |
| Debtors (4 weeks; credit sales 80%; at cash cost ₹100) | 480 × 80% × 4 × 100 | 1,53,600 |
| Cash at bank | 36,000 | |
| Total current assets | 4,71,840 | |
| B. Current liabilities | ||
| Creditors for raw material (2 weeks) | 480 × 2 × 60 | 57,600 |
| Wages outstanding (1.5 weeks) | 480 × 1.5 × 20 | 14,400 |
| Total current liabilities | 72,000 | |
| Net working capital (A − B) | 3,99,840 | |
| Add: 10% for contingencies | 39,984 | |
| Net working capital required | 4,39,824 |
Only the 80% of output sold on credit gives rise to debtors; cash sales tie up no funds after the sale.
Note. On the total-cost basis instead (depreciation included in work-in-progress, finished goods and debtors), the requirement would be ₹5,17,968.
Where the 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Cash cost per unit and weekly output | 2 |
| 2 | Raw material and work-in-progress | 3 |
| 3 | Finished goods and debtors at cash cost | 3 |
| 4 | Current liabilities | 2 |
| 5 | Contingency and total | 2 |
| Total | 12 |
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