Question 5 (b)
Working capital required
12 marks
- Time to write
- About 24 minutes
- Topic
- Working capital
Question
Question 5 (b) · 12 marksM/s Vikas and Co. went to their bankers for their working capital requirements. On the basis of the following projections, find out the working capital the company requires - Annual Sales - Rs. 17,28,000 Cost of Production - Rs. 14,40,000 Raw Material Purchases - Rs. 8,46,000 Anticipated Opening Stock of Raw Material - Rs. 1,68,000 Anticipated Closing Stock of Raw Material - Rs. 1,50,000 Inventory norms are as follows - Raw Material - 2 Months' stock Work in Progress - 15 days Finished Goods - 1 Month's stock The firm gets 15 days' credit on its purchases and allows its customers one month's credit on sales. The company has received an advance of Rs. 18000 against a sales order.
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).
Write it in this order
- Read the data; note exactly what is asked 2 min
- 1 Raw material consumed 2 marks 3 min
- 2 Raw material, WIP and finished goods 4 marks 7 min
- 3 Debtors 2 marks 3 min
- 4 Creditors and advance; working capital 4 marks 7 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. Each element is estimated from the cost tied up in it and the period it is held: raw materials at consumption, work-in-progress and finished goods at cost of production, and debtors at cost, profit being ignored. No costs other than the cost of production are given, so the cost of sales equals the cost of production. A year of 360 days is used, so 15 days is half a month.
| ₹ | |
|---|---|
| Opening stock | 1,68,000 |
| Add: purchases | 8,46,000 |
| Total | 10,14,000 |
| Less: closing stock | 1,50,000 |
| Raw material consumed | 8,64,000 |
Statement of working capital requirement
| Particulars | Working | ₹ |
|---|---|---|
| Current assets | ||
| Raw material stock (2 months) | 8,64,000 × 2/12 | 1,44,000 |
| Work-in-progress (15 days, at cost of production) | 14,40,000 × 0.5/12 | 60,000 |
| Finished goods (1 month, at cost of production) | 14,40,000 × 1/12 | 1,20,000 |
| Debtors (1 month, at cost of sales) | 14,40,000 × 1/12 | 1,20,000 |
| Total current assets | 4,44,000 | |
| Current liabilities | ||
| Creditors (15 days of purchases) | 8,46,000 × 0.5/12 | 35,250 |
| Advance received against a sales order | 18,000 | |
| Total current liabilities | 53,250 | |
| Working capital required | 3,90,750 |
The advance from a customer is a source of short-term funds and is deducted like other current liabilities. (If debtors were taken at selling price, 17,28,000 × 1/12 = ₹1,44,000, the requirement would be ₹4,14,750.)
Where the 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Raw material consumed | 2 |
| 2 | Raw material, WIP and finished goods | 4 |
| 3 | Debtors | 2 |
| 4 | Creditors and advance; working capital | 4 |
| Total | 12 |
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