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    WCM Problems

    Uploaded by

    parika khanna
    The document provides information on calculating working capital requirements using the operating cycle method, including estimating inventory levels, receivables, payables, and a 5% reserve for contingencies. It then gives a specific example calculation for a manufacturing organization based on production levels, cost ratios, inventory holding periods, credit terms, and cash balances. The example shows the calculation of current assets, current liabilities, net working capital, and the final working capital requirement including a 10% contingency provision.

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    WCM Problems

    Uploaded by

    parika khanna
    19 views9 pages
    The document provides information on calculating working capital requirements using the operating cycle method, including estimating inventory levels, receivables, payables, and a 5% reserve for contingencies. It then gives a specific example calculation for a manufacturing organization based on production levels, cost ratios, inventory holding periods, credit terms, and cash balances. The example shows the calculation of current assets, current liabilities, net working capital, and the final working capital requirement including a 10% contingency provision.

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    The document provides information on calculating working capital requirements using the operating cycle method, including estimating inventory levels, receivables, payables, and a 5% reserve for contingencies. It then gives a specific example calculation for a manufacturing organization based on production levels, cost ratios, inventory holding periods, credit terms, and cash balances. The example shows the calculation of current assets, current liabilities, net working capital, and the final working capital requirement including a 10% contingency provision.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    19 views9 pages

    WCM Problems

    Uploaded by

    parika khanna
    The document provides information on calculating working capital requirements using the operating cycle method, including estimating inventory levels, receivables, payables, and a 5% reserve for contingencies. It then gives a specific example calculation for a manufacturing organization based on production levels, cost ratios, inventory holding periods, credit terms, and cash balances. The example shows the calculation of current assets, current liabilities, net working capital, and the final working capital requirement including a 10% contingency provision.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 9

    From the following information calculate the working capital requirement under

    operating cycle method taking 5% reserve for contingencies:

    Calculation of operating cycle Period


    Forecasting Net Current Assets Method:

    It’s a method which is also recommended by Tandon Committee for computing


    working capital requirements. In this method of forecasting first of all, estimate of
    stock of raw materials, estimated value of work-in-process, estimated value of stock of
    finished goods, amount receivable from debtors and others and estimate minimum
    cash balance required to meet day-to-day payments required. Then also estimate
    outstanding payment for material, wages, and other adm. expenses. Now, difference
    between forecasted amount of current assets and current liabilities gives net working
    capital requirements of the firm. A flat percentage may be added in this amount of
    provision for contingencies.

    For a manufacturing organization, the following factors have to be taken into


    consideration while making an estimate of working capital requirements:

    1. Total cost incurred on materials, wages and overheads

    2. The length of time for which raw materials are to remain in stores before they are
    issued of production

    3. The length of the production cycle or Work-in-progress

    4. The length of the period during which finished goods are to be kept waiting for
    sales

    5. The average period of credit allowed to customers

    6. The amount of cash required to pay day-to-day expenses of the business

    7. The average amount of cash required to make advance payments

    8. The average credit period expected to be allowed by suppliers

    9. Time lag in the payment of wages and other expenses

    10. In order to provide for contingencies, some extra amount generally calculated as a
    fixed percentage of the working capital may be added as Margin of Safety
    Prepare a Working Capital forecast from the following information:-

    Production level during the previous year was 10 Lakh units. During the current year,
    the firm is likely to maintain its level of production at the previous year’s level.

    The expected ratios of costs to selling price for the firm are as follows:-

    Raw materials – 40%

    Direct Wages – 20%

    Overheads – 20%

    The past data of the firm reveals that raw materials normally remain in stores for a
    period of 3 months before production. Every unit of production remains in process for
    2 months and is assumed to be constituting of 100% of raw materials. Work-in-
    process is 50% complete as regards wages and overheads.

    Finished goods remain in the warehouse of the firm for 3 months. Credit allowed by
    creditors is 4 months from the date of delivery of raw materials, and credit given to
    customers is 3 months from the date of dispatch.

    The firm on an average maintains a cash balance of Rs. 1, 50,000. Wages and other
    overheads are paid by the firm with a lag of 15 days. The selling price of the firm’s
    products is Rs. 10 per unit. The firm also maintains a contingency provision of 10%
    in addition to the regular cash balance.
    WORKINGS:-

    By problem,

    Selling price/unit = Rs. 10 (given)

    Raw Material cost = 40% of Rs. 10 = Rs. 4 per unit

    Wages = 20% of Rs. 10 = Rs. 2 per unit

    Overheads = 20% of Rs. 10 = Rs. 2 per unit

    -----------------------------------------------------------------------------------------
    Total cost = Rs. 8 per unit

    Add: Profit (Balancing Figure) = Rs. 2 per unit

    -------------------------------------------------------------------------------------------
    Selling Price = Rs. 10 per unit
    Statement showing Working Capital Requirements of the firm:-

    Particulars Amount (in Rs.) Amount (in Rs.)


    A. CURRENT ASSETS

    (i) Investment in Raw Materials Stock


    10,00,000
    [10,00,000 x 4 x 3]/12

    (ii) Investment in W-I-P Stocks

    R.M.: [(10,00,000 x 4 x 2)/12] x 100%


    6,66,666
    Lab: [(10,00,000 x 2 x 2)/12] x 50%
    1,66,667
    OH: [(10,00,000 x 2 x 2)/12] x 50%
    1,66,667
    10,00,000
    ------------------------
    (iii) Investment in Finished Goods Stock

    R.M.: [(10,00,000 x 4 x 3)/12] x 100% 10,00,000

    Lab: [(10,00,000 x 2 x 3)/12] x 100% 5,00,000

    OH: [(10,00,000 x 2 x 3)/12] x 100% 5,00,000


    ------------------------ 20,00,000

    25,00,000
    (iv) Investment in Debtors (Credit pd.= 3 month)

    [10,00,000 x 10 x 3]/12
    1,50,000
    (v) Cash & Bank balances

    ∑CURRENT ASSETS (A) 66,50,000

    B. CURRENT LIABILITIES

    (i) Creditors for Raw Materials (Credit pd.= 4 month)


    13,33,333
    [10,00,000 x 4 x 4]/12

    (ii) Creditors for Wages (Lag pd.= 15 days = Half a


    month) 83,333
    [10,00,000 x 2 x ½ ]/12

    (iii) Creditors for Overheads (Lag pd.= 15 days = 83,334


    Half a month)
    ----------------------- 15,00,000
    [10,00,000 x 2 x ½ ]/12

    ∑CURRENT LIABILITIES (B) 15,00,000

    NET WORKING CAPITAL 51,50,000

    (A) – (B)

    Add: 10% Provision for future Contingencies 5,15,000


    (10% on Rs. 51,50,000)
    Working Capital Requirement 56,65,000

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