Solution

Information Given,
1. Last Year Production 60000
2. Current year Production (Similar) 60000
3. Cost to Selling Price
Raw Materials 60%
Direct Wages 10%
Overheads 20%

4. Raw materials holding period (months) 2

5. Work-in-progress (months) 1
6. Finished goods (months) 3
7. Credit for Raw materials (Months) 2
8. Labour and Overhead Months 1
9. Credit for Debtor (Months) 3
10. Selling Price per unit 5
11. Cash in hand to keep 20000

TOTAL SALES (in ₹) 300000

Working Notes:
1. Calculation of Raw materials required (2 months)
Raw materials 60% of Sales (annual) 180000
Actual Requirement for 2 months 30000

2. Calculation of Work-in-Progress(1 month)

Raw materials (60% of Sales Value) 15000
 Direct Wages (10% of Sales Value) 2500 1250
-50%
Overheads (20% of Sales Value) 5000 2500
Actual WIP ( 1 Month) 18750

3. Calculation of Finished Goods (3months)

Raw materials (60% of Sales Value) 45000
Direct Wages (10% of Sales Value) 7500
Overheads (20% of Sales Value) 15000
Actual Finished goods (3 months) 67500

4. Calculation of Debtors (3 months) 75000

5. Calculation of Creditors (2 months of RM) 30000

6. Wages Payable (1 month) 2500

7. Overhead Payable (1 month) 5000

 Statement of Working Capital Requirement

A. CURRENT ASSETS:
Inventory:
Raw Materials (W/N-1)
Work-in-Progress (W/N-2)
Finished Goods (W/N-3)
Accounts Receivable/Debtors (W/N -4)
Cash in hand
TOTAL CURRENT ASSETS (A)

B. CURRENT LIABILITIES:
Creditors for Raw Materials (W/N - 5)
Wages Payable (W/N - 6)
Overheads Payable (W/N - 7)
TOTAL CURRENT LIABILITIES (B)

Working Capital Requirements (A - B)

equirement

Amount (in ₹)

30,000
18,750
67,500
75,000
20,000
211,250

30,000
2,500
5,000
37,500

173,750
Solution:
Information Given,
Sales (at 2 month's credit) 3,600,000
Materials Consumed (2 month's credit) 900,000
Wages Paid (monthly in arrear) 720,000
Manufacturing Expenses (1 month arrear or monthly) 80,000
Total Administrative Expenses 240,000
Sales Promotion Expenses (paid quarterly in advance) 120,000
Cash Balance 100,000
Safety Margin 20%
Raw Materials holding period (months) 1
Finished Goods holding Period (Months) 1
Debtors holding period (months) 2
Creditors for Materials (months) 2

Working Notes:
1. Computation of Annual Cash Cost of Production Amount (₹)
Material Consumed 900,000
Wages Paid 720,000
Manufacturing Expenses (80000*12) 960,000
Total Cash Cost of Production 2,580,000

2. Computetion of Annual Cost to Sales: Amount (₹)

Total Cash cost fo production (W/N - 1) 2,580,000
Administratve Expenses 240,000
Sales promotion expenses 120,000
Total Cash Cost of Sales 2,940,000
 Statement of Working Capital Requirements (Cash to Cost Basis)
Amount (₹)
A. CURRENT ASSETS:
Inventory:
Raw Materials (900000/12) 75,000
Finished Stock (W/N-1) (2580000/12) 215,000
Debtors (W/N - 2) [2 months] (294000*2/12) 490,000
Cash Balance 100,000
Prepaid Expenses (Sales Promotion) (120000/4) 30,000
Total Current Assets (A): 910,000
B. CURRENT LIABILITIES:
Creditors for Materials [2 months] (900000*2/12) 150,000
Wages Outstanding (720000/12) 60,000
Manufacturing Expenses 80,000
Administrative Expenses (240000/12) 20,000
Total Current Liabilities (B) 310,000
Net Working Capital (A-B) 600,000
Add: Safety Margin (20%) 120,000
Total Working Capital Requirements 720,000
Illustration5: PQ Ltd., a company newly commencing business in 2013 has the under-
mentioned projected Profit and Loss A/s:
Amount (₹)
Sales
Less: Cost of goods sold
Gross profit
Administrative expenses 14,000
Selling expenses 13,000
Profit before tax
Provision for taxation
Profit after Tax

The cost of goods sold has been arrived as under:

Materials used 84,000
Wages and manufacturing expenses 62,500
Depreciation 23,500
170,000
Less: Stock of Finished Goods 17,000
(10% of the goods produced not yet sold)
153,000

The figure given above relate only to finished goods and not to work-in-progress. Goods
equal to 15% of the year's production (in terms of physical units) will be in posses on the
average requiring full materials but only 40% of the other expenses. The company
believes in keeping materials equal to two month's consumption in stock.

Information Given,
Avg. Time for Payment of All expenses (months) 1
Suppliers of Materials (months) 1.5
Sales (months) 2
Cash Sales 20%
Credit Sales 80%
Cash in hand 8,000.00
Safety Margin/Contingencies 10%
Work in Progress : Raw Materials 15%
Work in Progress: Other Expenses 40%
Rate of depreciation:
Finished Goods 10%
Debtors 90%
ASSUMPTION AND WORKING NOTES
1. Depreciation is not a cash expense and therefore, excluded from cost of goods sold for the purp
investment in debtors.

2. Since the profit is not taken into consideration in our calculation as a source of working capital
n 2013 has the under-
SOLUTION
Amount (₹)
210,000 (A) CURRENT ASSETS:
153,000 (i) Raw materials in stock
57,000 (ii) Work-in-Progress:
Raw Materials
27,000 Wages and manufacturing expenses
30,000 (iii) Stock of Finished Goods
10,000 (iv) Debtors (Credit Sales @80%)
20,000 (a) Cost of Goods sold
Less: Depreciation (23500*90/100)

(b) Administrative expenses

(c) Selling expenses
Total

(v) Cash Balance required

TOTAL INVESTMENT IN CURRENT ASSETS

work-in-progress. Goods (B) CURRENT LIABILITIES:

) will be in posses on the
ses. The company
in stock.

(i) Average time lag in payment of all Expenses (1 month):

Wages and manufacturing expenses
Administrative expenses
Selling expenses
TOTAL EXPENSES:
(ii) Creditors (1.5 months)
TOTAL CURRENT LIABILITIES (B)
Net Working Capital (A - B)
Add: 10% Contingencies/Safety Margin
Net Working Capital Required
m cost of goods sold for the purpose of determining work-in-progress, finished goods and

on as a source of working capital, income tax has been excluded as it is to be paid out of profits.
 Amount (₹)

(84000*2/12) 14,000

(84000*15/100) 12,600
(62500*40/100*15/100) 3,750
[17000-2350 i.e. (10% of 23500)] 14,650
21,180
153,000
21,150
131,850
14,000
13,000
158,850

8,000
URRENT ASSETS (A) 74,180

7,458
62,500
14,000
13,000
89,500
10,500
ABILITIES (B) 17,958
ital (A - B) 56,222
5,622
al Required 61,844
Illustration 6: Shellcal Limited sells good at a uniform rate of gross profit of 20% on sales in

Sales (at 2 month's credit)

Materials Consumed (Supplier Credit 2 months)
Wages paid (Monthly at the beginning of subsequent month)
Manufacturing Expenses (Cash expenses are paid - one month in arrear)
Administration Expenses (Cash expenses are paid - one month in arrear)
Sales Promotion Expenses (Paid quarterly in advance)

The Company keeps one month stock each of materials and finished goods. A minimum cas
maintenance of working capital. The company has no work-in-progress.
Find out the requirements of working capital of the company on cash cost basis.

SOLUTION
Information Given,
Sales (months)
Suppliers credit for materials (months)
Manufacturing Expenses (months)
Wages paid (months)
Administration Expenses (months)
Sales Promotion Expenses (quarterly)
Gross Profit
Minimum Cash Balance
Margin of Safety
Raw Mateerials and Finished goods (months)

WORKING NOTES
1. Computation of Total Manufacturing Expenses:
Sales
Less: Gross Profit @20%
Manufacturing Cost:
Less: Materials
Wages
Total Manufacturing Expenses:
2. Cash Manufacturing Expenses:

3. Depreciation (Total Manufacturing Exp. - Cash Manufacturing Exp.)

4. Cost to Sales (Cash Expenses):

Manufacturing Cost
Less: Depreciation (W/N - 3)
Cash Cost of Manufacture:
Add: Administrative Expenses
Sales Promotion Expenses
Total Cash Cost to Sales:
fit of 20% on sales including depreciation as part of cost of production. Its annual figures are as unde

Amount (₹)
2,400,000
600,000
480,000
600,000
150,000
75,000

ods. A minimum cash balance ₹ 80,000 is always kept. The company wants to adopt a 10% safety ma
.
cash cost basis.

2
2
1
1
1
0.25
20%
80,000
10%
1

Amount (₹)

2,400,000
480,000
1,920,000
600,000
480,000
840,000
 600,000

240,000

Amount (₹)
1,920,000
240,000
1,680,000
150,000
75,000
1,905,000
uding depreciation as part of cost of production. Its annual figures are as under:

alance ₹ 80,000 is always kept. The company wants to adopt a 10% safety margin in the

COMPUTATION OF WORKING CAPITAL REQUIREMENT

Amount (₹)
A. Current Assets:
Inventory:
Raw Materials 50,000
Finished Goods (W/N - 4) 140,000
Debtors (W/N -4) 317,500
Cash balance in hand 80,000
Prepaid expenses (Sales Promotion) 18,750
TOTAL CURRENT ASSETS (A) 606,250

B. Current Liabilities:
Sundry Creditors 100,000
Manufacturing Expenses 50,000
Administrative expenses 12,500
Wages Outstanding 40,000
TOTAL CURRENT LIABILITIES (B) 202,500

Net Working Capital (A - B) 403,750

Add: Safety Margin @10% 40,375
Total Working Capital requirement basis on cash cost basis 444,125
in in the
Illustration 7:
M.A. Limited is commencing a new project for manufacturer of a plastic component. The followi
Cost per Unit(₹)
Materials 40
Direct Labour and Variable Expenses 20
Fixed Manufacturing Expenses 6
Depreciation 10
Fixed Administration Expenses 4
80
The selling price per unit is expected to be ₹96 and the selling expenses ₹5 per unit, 80% of whic

In the first two years of operations, production and sales are expected to be as follows:

Year Production (No.

Of units)
1 6000
2 9000

To assess the Working Capital requirements, the following information is available:

(a) Stock of Materials
(b) Work-in-Progress
(c) Debtors
(d) Cash Balance
(e) Creditors for supply of Materials
(f) Creditors for expenses
2.25 month's average consumption
Nil
1 month's average sales
₹ 10,000
1 month's average purchase during the year
1 month's average for all expenses during the year.

Prepare, for the two years:

i) A Projected statement of Profit/Loss (Ignoring Taxation), and
ii) A projected statement of working capital requirements

SOLUTION
Information Given,
Production Capacity 12,000
Selling Price per Unit ₹ 96
Selling Expenses per Unit:
Variable (80% of ₹5) 4
Fixed (20% of ₹5) 1
5

Cost per Unit(₹)

Materials 40
Direct Labour and Variable Expenses 20
Fixed Manufacturing Expenses 6
Depreciation 10
Fixed Administration Expenses 4

Production (Units):
Year 1 6000
Year 2 9000

Sales (Units) Total Production (Year 2

Year 1 5000 Closing Stock (Year 1)
Year 2 8500 Closing Stock (Year 2)

Holding Months
Stock of Materials (Month's Avg. Consumption) 2.25
Work-in-Progress Nil
Debtors (Month's avg. Sales) 1
Cash Balance ₹ 10,000
Creditor for Supply of Materials (Month's Avg.
Purchase) 1
Creditors for Expenses (Month's Avg. for all
expenses ) 1

INVENTORY Year 1 Year 2

Opening Inventory 1000
Closing Inventory 1000 1500

Goods Available 6000 10000

ponent. The following cost information has been ascertained for annual production of 12000 units which is

er unit, 80% of which is variable.

Sales
(No. Of
units)
5000
8500

g the year
s during the year.
10000 [Closing stock of 1st year/Opening stock of 2nd year+ Production of 2nd Year]
1000
1500
of 12000 units which is the full capacity:
(i) Projected Statement of Profit/Loss of M.A. Ltd.
(Ignoring Taxation)
PARTICULARS YEAR 1
Production (Units) 6000
Sales (Units) 5000
Amount in (₹)
(A) Sales Revenue @ ₹96 per unit ₹ 480,000

Cost of Production:
Materials @ ₹40 per unit 240000
Direct Labour & Variable Expenses @ ₹20 per unit 120000
Fuxed Manufacturing Expenses (Production capacity:
12,000 units @ ₹6 per unit) 72000
Depreciation (12,000 Units @ ₹ 10 per unit) 120000
Fixed Administration Expenses (12000 units @ 4 p.u.) 48000
Total Cost of Production 600000
Add: Opening stock of Finished Goods (1000 units @
production cost per unit)
Cost of Goods Avialable (Y-1: 6000 units; Y-2: 10000
Units 600000

Less: Closing Stock of Finished Goods at Average Cost 100,000

Cost of Goods Sold: 500000

Add: Selling Expenses:

Variable @ ₹ 4 per unit 20000

Fixed (Capacity: 12000 units @ ₹ 1 per unit) 12000
(B) Cost of Sales 532000
Profit(+) / Loss(-): [A-B] ₹ -52,000

WORKING NOTES:
1. Calculation of Creditors for Supply of Materials: Year 1 (₹)

Materials Consumed During the Year 240000

Add: Closing Stock (2.25 Month's average consumption) 45000
285000
Less: Opening Stock
Purchase during the year 285000
Average Purchases per month (Creditors) 23750

2. Calculation of Creditors for Expenses Year 1 (₹)

Direct Labour and Variable Expenses 120000
Fiixed Manufacturing and Administration Expenses [12000
@ ₹ 10 i.e. (6+4)] 120000
Selling Expenses (Fixed and Variable): 32000
Fixed - 12000 units @ ₹1 per unit 12000
Variable @ ₹ 4 per unit 20000
Total Direct Labour, Manufacturing, Administration
and Selling Expenses for the year 272000

Average per month 22667

 YEAR 2
9000
8500
Amount in (₹)
₹ 816,000

360000
180000

72000
120000
48000
780000 79

100,000 Year 1 Year 2

Opening Stock (Units) 0 1000
880,000
Closing Stock (Units) 1000 1500
132000
748,000 No. Of units produced 6000 10000
(Opening Stock+Production made during
the year)

Production Cost
Value of Opening Stock = per unit*Units of
Opening Stock
34000
12000 Value of Opening Stock 0 100000
794000 Value of Closing Stock 100000 132000
₹ 22,000
Production Cost per Unit 100 88
[Total Cost of Production/ No. Of units produced]

Year 2 (₹) ****

360000 Here, while valuing closing stock of 2nd year we have to
 67500 concider two important aspect:
427500 1. Value of Opening Stock (2nd year)/Closing stock of 1st year
45000 i.e. To be added with the value of cost of production
382500 2. No. Of Opening stock Units is also to be added with
31875 the value of production units i.e. 1000+500 = 1500

Year 2 (₹)
180000

120000
46000
12000
34000

346000

28833
 (ii) Projected Statement of Working Capital Requirements

Year 1 (₹)
A. CURRENT ASSETS:
Stock of Materials (2.25 month's average consumption) 45000
Finished Goods 100000
Debtors (1 month's average sales) ₹ 40,000
Cash Balance 10000
Total Current Assets (A) 195000
B. CURRENT LIABILITIES:
Creditors for Supply of Materials [W/N -1] 23750

Creditors for Expenses [W/N -2] 22667

Total Current Liabilities (B) 46417
Estimated Working Capital Requirements 148583

(ii) Projected Statement pof Working Capital Requirements (Cash Cost Basis)

A. CURRENT ASSETS:
(i) Stock of Raw Materials

(ii) Finished Goods:

Year 1 (₹)

Cash Cost of Production

Materials @ ₹ 40 per unit 240000
**** Labour & Variable Expenses @ ₹20 per unit 120000
Total Fixed and Administration Expenses (12000 @ ₹10) 120000
Current Cost (Cash) 480000
Add: Opening Stock at Average Cost (for two years)
80000

Less: Closing Stock at Average Cost

e have to Cost of Goods Sold: 400000
 (iii) Debtors
tock of 1st year Cost of Goods Sold (Cash): 400000
Add: Variable Expenses @ ₹4 per unit 20000
Add: Fixed Selling Expenses @₹1 per unit 12000
432000
(iv) Minimum Desired Cash
Total Investment in Current Assets(A) :
B. CURRENT LIABILITIES:
Year 1 (₹)
Creditors for Supply of Materials
Materials Consumed 240000
Add: Closing Stock (2.25 month's average consumption) 45000
Less: Opening Stock

Purchases 285000

Creditors for Expenses:

Direct Labour and Variable Expenses 120000
Fiixed Manufacturing and Administration Expenses [12000
@ ₹ 10 i.e. (6+4)] 120000
Selling Expenses (Fixed and Variable): 32000
Total Expenses: 272000
Total Current Liabilities (B)
Net Working Capital (A-B)
Year 2 (₹)

67500
132000
₹ 68,000
10000
277500

31875

28833
60708
216792

Year-1 Year-2
Fig. In Fig. In
(₹) (₹)

45000 67500

80000 111000

Year 2 (₹)

360000
180000
120000
660000
80000

111000
629000
 ₹ 36,000.00 56250
629000
34000
12000
675000
₹ 10,000 ₹ 10,000
171000 244750

Year 2 (₹)
47500 63750 Why *2/12 As 1month's avg sales
360000
67500
-45000

382500

22667 28833
180000

120000
46000
346000
70167 92583
100833 152167