Assessment and Computation of Working Capital Requirements

Numerical Questions

Q1. The following are the data of Z Ltd. taken from the accounting records:

Average Stock of raw materials during the year 1,80,000

Average Stock of works-in-progress during the year 1,00,000
Average Stock of finished goods during the year 54,000
Average Balance of debtors 1,50,000
Average Balance of creditors 1,20,000
Average Daily sales 2,000
Average Daily cost of finished goods sold 1,800
Average Daily consumptions of raw materials 1,200
Average period of credit available from the suppliers is 100 days.
Based on the above data, state:
(a) Average period of raw materials holding in stores;
(b) Credit period available to customers;
(c) Average period for which finished goods stay in godowns;
(d) Average period of conversion raw materials into finished goods;
(e) Working Capital Cycle (in days).

Q2. From the following information extracted from the books of a manufacturing
company, compute the operating cycle in days:

Period covered 365 days

Average period of credit allowed by Suppliers — 16 days.
Other data are as under: in (‘000)
Average Debtors (outstanding) 480
Raw Materials Consumption 4,400
Total Production Costs 10,000
Total Cost of Sales 10,500
Sales for the year 16,000
Average value maintained :
of Raw Materials 320
of Work-in-Progress 350
of Finished Goods 260

Q3. Using operating cycle method, calculate Working Capital required by X Ltd. from the
information given below:
(i) Estimated Sales 20,000 units p.a. @ 5 per unit.
(ii) Production and Sales quantities coincide and will be carried on evenly throughout
the year.
(iii) Production Cost is estimated as under:
Materials Rs.2.50 per unit
Labour Re. 1.00 per unit
Overheads Rs. 17,500

(iv) Customers are given 60 days' credit and 50 days credit availed from suppliers.
(iv) 40 days' supply of raw materials and 15 days' supply of finished goods are kept in
store. (vi) Production cycle is 20 days and all the materials are issued at the
commencement of each production cycle.
(v) 1/3 of average other Working Capital is kept as cash balance for contingencies.

Additional Questions-

Q1. Calculate (i) net operating cycle period and (ii) No. of operating cycles in a year from
the information given below:

1. Raw Materials inventory consumed during the year – Rs. 6,00,000

2. Average stock of Raw Materials- Rs. 50,000
3. Work-in-Progress inventory - Rs. 5,00,000
4. Average Work-in-Progress inventory - Rs. 30,000
5. Finished goods inventory- Rs. 8,00,000
6. Average finished goods stock held - Rs. 40,000
7. Average collection period- 45 days
8. Average credit period availed - 30 days
9. No. of days in year (assume) - 360 days

Q2. Find out Working Capital by Operating Cycle Method, taking 360 days in year:
Sales - 9,000 units @ 100 each
Material Cost - Rs. 50 per unit
Labour Cost – Rs. 25 per unit
Overheads- Rs. 15 per unit
Customers are given 45 days' credit and 50 days credit is taken from suppliers. Raw
Material for 30 days and finished goods for 15 days are kept in stock. Production cycle
period is 25 days.

Q3. From the following information, estimate the amount of Working Capital by
“Operating Cycle Method' taking 360 days in a year:
Sales - 50,000 units @ 20 per unit
Material Cost - Rs. 10 per unit
Labour Cost- Rs. 4 per unit
Overheads – Rs. 3.5 per unit
Customers are given 45 days' credit and 60 days' credit is taken from suppliers. Raw
materials for 36 days and finished goods for 15 days are kept in stock. Production cycle is 18
days. A cash balance equal to one-third of average of other working capital is kept for
contingencies.

Q4. Ram and Shyam who are willing to purchase business, have consulted you and one
point, on which you are asked to advise them, is the average amount of Working Capital
which would need to be employed in the first year's trading.
You are given the following estimates and requested to add 10% to your computed figure to
allow for contingencies: Per annum

(a) Average amount of Stocks:

Finished Goods Rs. 50,000

Raw Materials Rs. 80,000

(b) Average Creditors given

Home Sales—6 weeks Rs. 3,12,000

Export Sales -1 1/2 weeks Rs. 7,80,000

(c) Lag in Payment of Expenses:

Wages- 1 1/2 weeks Rs. 26,00,000

Other expenses including Materials (one Month) Rs. 9,60,000

Q5. Estimate the Working Capital requirements from the following information adding
20% as contingencies:

1. Amount blocked up in stocks:

Stock of Finished goods Rs. 6,000
Stock of Stores, Materials Rs. 10,000
2. Average Credit Sales:
Inland-8 weeks credit Rs.3,00,000
Export-2 weeks credit Rs. 80,000
3. Lag in Payment of Wages & other outgoings:
Wages—2 weeks Rs. 2,50,000
Stock of Materials—2 months Rs. 50,000
Rent, Royalties—6 months Rs. 10,000
Clerical Staff-1 month Rs. 5,000
Miscellaneous Expenses- 2 months Rs. 50,000
4. Payment-in-advances: Sundry Expenses (paid quarterly Rs. 10,000

Q6. Given the following information:

(a) Projected annual sales 80,000 units

(b) Selling price per unit Rs. 8
(c) Percentage of net profit on sales 20
(d) Average credit period allowed to customers—10 weeks
(e) Average credit period allowed by suppliers—8 weeks
(f) Average stock of holding in terms of sales requirement—10 weeks
(g) Allow 20% for contingencies
Q7. Estimate the Working Capital requirements from the following data for a particular
year: Add 20% Contingencies.
(a) Amount locked up in the Inventory:
(i) Stock of finished goods - Rs. 7,000
(ii) Stock of stores, materials- Rs. 10,000

(b) Average credit sales:

(i) Inland sales — 8 weeks – Rs. 3,00,000
(ii) Export sales - 2 weeks – Rs. 80,000

(c) Average Time lag in payment of wages and other payments:

(i) Wages 2 weeks – Rs. 3,00,000
(ii) Materials — 2 months - Rs. 50,000
(iii) Rent - 5 months – Rs. 15,000
(iv) Clerical Staff - 1 month - Rs. 65,000
(v) Manager's Salary - 1 month – Rs. 5,000
(vi) Miscellaneous expenses 1 month- Rs. 50,000

(d) Payments in advance:

Sundry expenses (paid quarterly in advance) – Rs. 10,000

Q8. A proforma cost sheet of X Ltd. provides the following particulars:

Per Unit
Materials Rs. 80
Labour (Direct) Rs. 30
Overheads Rs. 60
Total Cost Rs. 170
Profit Rs. 30
Selling Price Rs. 200

Additional information:

(i) Raw Materials are in stock on an average for one month.

(ii) Each unit of production is in process on an average for half a month.
(iii) Finished goods are in stock on an average for one month.
(iv) Credit allowed by suppliers is one month.
(v) Lag in payment of wages 1 1/2 weeks.
(vi) Lag in payment of overheads is one month.
(vii) 1/4 of output is sold against cash.
(viii) Cash in hand is expected to be Rs. 25,000.
(ix) Credit allowed to customers 2 months.

You are required to prepare a statement showing the working capital needed to finance the
level of activity of 1,04,000 units of production.
You may assume that production is carried on evenly throughout the year; Wages &
Overheads accrue similarly and a time period of 4 weeks is equivalent to a month.
Q9. From the following information taken from the Budget of X Ltd. prepare a statement
showing average amount of Working Capital required by the company using operating cycle
method:
(i) Annual Sales are estimated at 1,00,000 units @ Rs. 10 per unit.
(ii) Production and sales quantities coincide and will be carried on evenly throughout
the year and production cost is:
Materials 5 p.u
Wages 2 p.u
Overheads 1.75 p.u

(iii) Customers are given 60 days' credit and 50 days' credit is taken from suppliers.
(iv) Forty days supply of raw materials and fifteen days supply of finished goods are kept
in store.
(v) The production cycle is 20 days and all materials are issued at the commencement
of each production cycle.
(vi) A cash balance equal to one-third of the average other Working Capital is kept for
contingencies.
Q10. The following information has been submitted by a borrower:
(i) Expected level of production 2,40,000 units
(ii) Raw materials to remain in stock 2 months
(iii) Processing period 1 month
(iv) Finished goods stay in stock 3 months
(v) Credit allowed to customers 3 months
(vi) Expected rate of cost of sales:
Materials 60%
Wages 10%
Overheads 20%
(vii) Selling price per unit Rs. 20
(viii) Expected margin on sale 10%

You are requested to estimate the Working Capital requirements of the borrower.

Q11. From the information given below, calculate the Working Capital requirements:
Budgeted Sales Rs. 6,50,000
Percentage of net profit on cost of sales 25%
Average credit allowed to customers 10 weeks
Average credit allowed by suppliers 4 weeks
Average Stock Carrying (in terms of sales requirement) 8 weeks

Q12. The Board of Directors of Sagar Vikas Co. ask you to prepare a Statement showing
working capital estimates for a level of activity of 20,000 units of production. The following
information is available for your calculations:
(A) Per unit cost and selling price:
Raw Material Rs. 60
Labour Rs. 35
Overheads Rs. 55
Total Cost Rs. 150
Profit Rs. 50
Selling Price Rs. 200

(B) (i) Raw Materials are in stock on average for one month.
(ii) Materials are in process on average for two weeks.
(iii) Finished goods are in stock on average for one month.
(iv) Credit allowed to debtors two months.
(v) Credit allowed by suppliers one month.
(vi) Lag in payment of wages 1 1/2 weeks.
(vii) Lag in payment of overheads in one month.

20% of the production is sold against cash. Cash in hand 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 time period of 4 weeks is equivalent to one month.

Q13. Brighto Ltd. sells its products on a profit margin of 20% of Sales. The following
information is extracted from its annual accounts for the year ending 31st March, 2008:

Sales at 3 months' credit Rs. 40,00,000

Raw Materials Rs. 12,00,000
Wages paid—15 days in arrears Rs. 9,60,000
Manufacturing Expenses—1 month in arrears Rs. 12,00,000
Administrative Expenses—1 month in arrears Rs. 4,80,000
Sales Promotion expenses payable 1/2 year in advance Rs. 2,00,000
Income Tax (payable quarterly last instalment falls due in March 2008) Rs. 4,00,000

The company enjoys one month's credit from Suppliers of Raw Materials and maintains two
months' Stock of Raw Materials and 1 1/2 month's Stock of Finished goods. Cash balance is
maintained at Rs. 1,00,000 2 as a precautionary balance. Assume 10% margin. Find out the
Working Capital requirements of the Company.