Numericals:

Ques 1. Prepare an estimate of networking capital requirement of Zero company from the data given
below:

Estimated Cost per Unit of Production :

Raw Materials - 100

Direct Labour -40

Overheads -80

The following is the additional information:

Selling price per unit Rs. 240

Level of activity - 1,04,000 units per annum

Raw Materials in stock - average 4 weeks

Work in progress [Assume 100% stage of completion of materials and 50 per cent for labour and
overheads] - average 2 weeks

Finished Goods in Stock- average 4 weeks

Credit allowed by Suppliers- average 4 weeks

Credit allowed to Debtors - average 8 weeks

Lag in payment of Wages - average 1 ½ weeks.

Cash at Bank is expected to be Rs. 25,000. Assume that production is sustained during 52 weeks of the
year.

Sol. Statement of working capital requirement

A. Current Assets

Raw Materials (2000 × 4 × 100) : 8,00,000

Work in Progress :

Material (2000 × 2 × 100) : 4,00,000

Wages (2000 × 2 × 40) 50% : 80,000

Overheads (2000 × 2 × 80) 50%,: 1,60,000

Finished Stock (2000 × 4 × 220) 17,60,000

Debtors(2000 × 8 × 220) 35,20,000

Cash 25,000

Total Current Assets (CA) 67,45,000

 B. Current Liabilities

Creditors (2000 × 4 × 100) 8,00,000

Outstanding Wages (2000 × 40 × 1.5) 1,20,000

Total Current Liabilities (CL) 9,20,000

Net Working Capital (CA–CL) 58,25,000

Working Notes:

(i) Annual production is 1,04,000 units and year is consisting of 52 weeks. So, the weekly
production is 2000 units.
(ii) Debtors have been taken at cost of production.

Ques 2. The cost sheet of PQR Ltd. Provides the following data :

Cost per unit :

Raw material - Rs. 50

Direct Labour – Rs. 20

Overheads (including depreciation of Rs. 10) – Rs. 40

Total cost - 110

Profits - 20

Selling price - 130

Average raw material in stock is for one month. Average material in work-in-progress is for half month.
Credit allowed by suppliers: one month; credit allowed to debtors : one month. Average time lag in
payment of wages: 10 days; average time lag in payment of overheads 30 days. 25% of the sales are on
cash basis. Cash balance expected to be Rs. 1,00,000. Finished goods lie in the warehouse for one
month.

You are required to prepare a statement of the working capital needed to finance a level of the activity
of 54,000 units of output. Production is carried on evenly throughout the year and wages and overheads
accrue similarly. State your assumptions, if any, clearly.

Sol. As the annual level of activity is given at 54,000 units, it means that the monthly turnover would be
54,000/12 = 4,500 units. The working capital requirement for this monthly turnover can now be
estimated as follows :

Estimation of Working Capital Requirement

I. Current Assets :

Minimum Cash Balance : . 1,00.000

Inventories :
 Raw Materials (4,500 × Rs. 50) : 2,25,000

Work-in-progress :

Materials (4,500 × Rs. 50)/2 : 1,12,500

Wages 50% of (4,500 × Rs. 20)/2 : 22,500

Overheads 50% of (4,500 × Rs. 30)/2 : 33,750

Finished Goods (4,500 × Rs. 100) : 4,50,000

Debtors (4,500 × Rs. 100 × 75%) : 3,37,500

Gross Working Capital - Rs. 12,81,250

II. Current Liabilities :

Creditors for Materials (4,500 × Rs. 50) : 2,25,000

Creditors for Wages (4,500 × Rs. 20)/3 : 30,000

Creditors for Overheads (4,500 × Rs. 30): 1,35,000

Total Current Liabilities : 3,90,000

Net Working Capital : 8,91,250

Ques 3. The following information has been extracted from the records of a Company : Product cost
sheet

Raw Materials - Rs. 45

Direct Labour -Rs. 20

Overheads -Rs. 40

Total- Rs. 105

Profit – Rs.15

Selling price – Rs.120

– Raw materials are in stock on an average for two months.

– The materials are in process on an average for one month. The degree of completion is 50% in
respect of all elements of cost.
– Finished goods stock on an average is for one month.
– Time lag in payment of wages and overheads is 1½ weeks.
– Time lag in receipt of proceeds from debtors is 2 months.
– Credit allowed by suppliers is one month.
– 20% of the output is sold against cash.
– The company expects to keep a Cash balance of Rs. 1,00,000.

The Company is poised for a manufacture of 1,44,000 units in the next year.
You are required to prepare a statement showing the Working Capital requirements of the Company.

Sol. Statement showing the Working Capital requirement of the Company

Current Assets :

Stock of Raw Materials (12,000 × 2 × Rs. 45) - Rs. 10,80,000

Work-in-progress (12,000 × 1 × Rs. 105) × 50% - 6,30,000

Finished Goods (12,000 × 1 × Rs. 105) - 12,60,000

Debtors (12,000 × 2 × Rs. 105 × 80%) - 20,16,000

Cash balances. - 1,00,000

Total current Assets - 50,86,000

Current Liabilities :

Creditors of Raw Materials (12,000 × 1 × Rs. 45) - 5,40,000

Creditors for Wages & Overheads (12,000 × 60 ÷ 4) 1.5 - 2,70,000

Total current liabilities - 8,10,000

Net Working capital (C.A – C.L) 42,76,000

Working Notes :

Finished goods and Debtors have been taken at cost.

Production per month has been taken at 12,000 units. For payment of wages and overheads, month is
taken as consisting of 4 weeks.

Ques 4. XYZ Ltd. Supplied the following information:

Sales and Production for the year - 69,000 units

Finished goods in store - 3 months

Raw material in store - 2 months consumption

Production process - 1 month

Credit allowed by creditors - 2 months

Selling price per unit- Rs. 50.00

Raw material 50% of Selling Price

Direct wages 10% of Selling Price

Overheads 20% of Selling Price

20% Sales are on cash basis and credit sales allowed to customers for one month. Overheads include Rs.
5 as depreciation. There is regular production and Sale cycle and wages and overheads accrue evenly.
Wages are paid in the next month of accrual and overheads are paid 15 days in arrears. Material is
introduced in the beginning of Production cycle. You are required to find out its working capital
requirement on cash cost basis.

Sol. Statement of Working Capital Requirement

I. Current Assets :

Raw Material (5,750×25×2) - Rs. 2,87,500

Work-in-Progress (5,750×25×1) - 1,43,750

Wages (5750×5×1) 50% - 14,375

OH (5,750×5×1) 50% - 14,375

Finished Goods (5,750×35×1) - 6,03,750

Debtors (5,750×35×1) 80% - 1,61,000

Total current Assets - 12,24,750

II. Current Liabilities:

Creditors (5,750×25×2) - Rs. 2,87,500

Wages (5,750×5×1) - 28,750

Overheads (5,750×5×1) - 14,375

Total Current Liabilities - 3,30,625

Net Working Capital (CA–CL) - Rs. 8,94,125

Working Notes:

Monthly Production (6,90,000/12) 5,750 units

Selling price Rs. 50

Raw Material(50%) Rs. 25

Direct wages (10%) Rs. 5

Overheads (20%) Rs. 10

Cash cost (Rs. 25+5+5) Rs. 35

Ques 5. Following Information is provided by ABC Ltd. :

Raw Material Storage Period 50 days

Work in Progress Storage Period 18 days

Finished Goods Storage Period 22 days

Debt Collection Period 45 days

Creditors Payment Period 55 days

Annual Operating Cost (including Depreciation of Rs. 2,10,000) Rs. 21 lacs

Days in a year 360

Find out : (i) Operating Cycle Period, (ii) No. of Operating Cycles in a year, and (iii) Working Capital
Requirement on cash cost basis.

Sol. Operating Cycle Period :

OC = RMCP + WPCP + FGCP + RCP – DP

= 50 + 18 + 22 + 45 – 55

= 80 days

No. of Operating Cycle in a year :

No. of Cycles = 360 ÷ Length of OC

= 360 ÷ 80 = 4.5 Cycles

Working Capital Requirement :

= Total Operating Cost / No. of operating cycle in a year

Total Operating Cost= 2100000 – 210000

= 1890000

Working capital requirements = 1890000/4.5

= 4,20,000