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WCM Estimation

This document contains 4 practice questions about estimating working capital requirements for different companies. It provides details on production levels, inventory levels, credit terms, expenses, and other financial information needed to calculate the working capital for each scenario. The questions require calculating net working capital, preparing working capital forecasts, and estimating working capital requirements based on projected profit and loss statements and additional company information. A 10% contingency is to be added to account for unforeseen circumstances.

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48 views3 pages

WCM Estimation

This document contains 4 practice questions about estimating working capital requirements for different companies. It provides details on production levels, inventory levels, credit terms, expenses, and other financial information needed to calculate the working capital for each scenario. The questions require calculating net working capital, preparing working capital forecasts, and estimating working capital requirements based on projected profit and loss statements and additional company information. A 10% contingency is to be added to account for unforeseen circumstances.

Uploaded by

tanya.p23
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Working Capital Estimation – Practice Questions

Q1. While preparing a project report on behalf of a client you have collected the following facts.
Estimate the net working capital required for that project. Add 10 percent to your computed
figure to allow contingencies:

Additional information:
 Overheads given in the above table are manufacturing overheads.
 Selling and administration overheads are ₹20 per unit
 Selling price, ₹220 per unit
 Level of activity, 1,04,000 units of production per annum
 Raw materials in stock, average 4 weeks
 Work in progress (assume 50 percent completion stage in respect of conversion costs
and 100 percent completion in respect of materials), average 2 weeks
 Finished goods in stock, average 4 weeks
 Credit allowed by suppliers, average 4 weeks
 Credit allowed by debtors, average 8 weeks
 Lag in payment of wages, an average of 1.5 weeks
 Cash at bank is expected to be, ₹25,000.

You may assume that production is carried on evenly throughout the year (52 weeks), and
wages and overheads accrue similarly. All sales are on a credit basis only.

Q2. The Board of Directors of Ruby Ltd. requests you to prepare a statement showing the
working capital requirements forecast for a level of activity of 1,56,000 units of production.
The following information is available for your calculation:

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(a) Raw materials are in stock on average one month.
(b) Materials are in process, on average 2 weeks.
(c) Finished goods are in stock, on average one month.
(d) Credit allowed by suppliers – one month.
(e) Time lag in payment from debtors – 2 months.
(f) Lag in payment of wages – 1.5 weeks.
(g) Lag in payment of overheads – one month.
20% of the output is sold against cash. Cash in hand and at bank is expected to be Rs.
60,000. It is to be assumed that production is carried on evenly throughout the year. Wages
and overheads accrue similarly, and a time period of 4 weeks is equivalent to a month.

Q3. Estimate the working capital for Ajanta Pharma Ltd. with the following figures:

Sales (at 2 months credit) 36,00,000


Material Consumed (suppliers extend 2 months credit) 9,00,000
Wages paid (monthly in arrears) 7,20,000
Monthly Manufacturing Expenses (Expenses are paid one month in 80,000
arrears)
Total administrative expenses (monthly in arrears) 2,40,000
Sales promotion expenses incurred at the beginning of each quarter 1,20,000
COGS 2700000
Depreciation 1,20,000

 Raw Material Holding Period is one month


 Finished Goods Holding period is one month
 No WIP inventory

The company sells its products at a gross profit of 25%, counting depreciation as part of the
cost of production. It keeps one month's stock of raw materials, one month's stock of
finished goods, and a cash balance of ₹100,000. Assuming a 20% safety margin, calculate
the company's working capital requirements on a cash cost basis.

Q4. A newly formed company has applied for a loan to a commercial bank to finance its working
capital requirements. The bank has requested that you prepare an estimate of the company's
working capital requirements. Add 10 percent to your estimated figure to cover unforeseen
contingencies. The information about this company's projected profit and loss account is as
follows:

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Particulars Amount in rupees
Sales 2100000
COGS 1530000
Gross profit 570000
Administrative expenses 140000
Selling expenses 130000
PBT 300000
Tax expense 100000
PAT 200000

The COGS is calculated as follows:

Materials used 840000


Wages and other manufacturing expenses 625000
Depreciation 235000
Total cost of production 1700000
Less: Stock of finished goods (10% of the product
170000
not yet sold)
COGS 1530000

The figures given above relate only to the goods that have been finished and not to work-in-
progress goods. Work equal to 15 per cent of the year’s production (in terms of physical
units) is in progress on an average requiring full materials but only 40 per cent of other
expenses. The company believes in keeping two months of consumption of material in
stock. Desired cash balance, ₹40,000.

The average time lag in payment of all expenses is 1 month; suppliers of materials extend
1.5 months credit; sales are 20 percent cash; the rest are at two months credit; and 70
percent of the income tax has to be paid in advance.

You can make such other assumptions as you deem necessary for estimating working capital
requirements.

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