CA.CS.MBA.

Naveen, Rohatgi

TYBMS: FM

Home work section Illustration 1 The Board of Directors of Century Ltd., requests you to prepare a statement showing the requirements of working capital for a forecast level of activity of 52,000 units in the ensuing year (52 weeks) from the following information made available:Cost Per Unit Rs. Raw Material 400 Direct Labour 150 Overheads Manufacturing 200 Overheads Selling & 100 Distribution Total 850

Additional Information : (1) Selling Price - Rs. 1,000 per unit. (2) Raw material in Stock - Average 4 weeks. (3) Work - in - Progress - Average 4 weeks. (4) Finished Goods in Stock - Average 4 weeks. (5) Credit allowed to Debtors - Average 8 weeks. (6) Credit allowed by Suppliers Average 4 weeks (7) Cash at Bank is expected to be As. 50,000. (8) All sales are on credit basis. (9) All the activities are evenly spread out during the year. (10) Debtors are to be valued at sales. (11) Overheads manufacturing and selling expenses are paid at the beginning of the month. Overheads are daily paid expenses Solution 1: Particulars Rs. Rs.

1 Always bear in mind that your own resolution to succeed is more important than any other one thing.

CA.CS.MBA. Naveen, Rohatgi Current Assets Stock of Raw Materials (1000 x 400 x 4) Stock of WIP Raw Material (1000 x 400 x 4) Labour (1000 x 150 x 4 x 50%) Overheads (1000 x 200 x 4 x 50%) Stock of Finished Goods (1000 x 4 x 750) Debtors (1000 x 1000 x 8) Cash & Bank Manufacturing & Selling OHs (1000 x 200 x 0.5) (1000 x 100 x 0.5) Current Liabilities Creditors (1000 x 400 x 4) Working Capital AB WNI Production & Sales per week 52,000 52 = 1000 units Illustration 2

TYBMS: FM

16,00,000

16,00,000 3,00,000 4,00,000 23,00,000 30,00,000 80,00,000 50,000

1,00,000 50,000 A B

1,50,000 1,51,00,000 16,00,000 16,00,000 1,35,00,000

The Management of German Collaboration Limited has called for a statement showing the working capital needed to finance a level of activity of 3,00,000 units output for the year. The cost structure for the companys product for the said activity level is detailed below: Cost Per Unit (Rs.) Raw Material 20 Direct Labour 5 Overheads 15 Total Cost 40 2 Always bear in mind that your own resolution to succeed is more important than any other one thing.

CA.CS.MBA. Naveen, Rohatgi

TYBMS: FM

Profit 10 Selling Price 50 (1) Past trend indicates that raw material are held in stock on an average for two months. (2) Work in Progress will approximate to half a months production. (3) Finished goods remain in warehouse on average for a month. (4) Suppliers of materials extend a months credit. (5) Two months credit is normally allowed to debtors. (6) A minimum cash balance of As. 25,000 is expected to be maintained. The production pattern is assumed to be even during the year. Prepare the statement of working capital requirements. SOLUTION: Particulars Rs. Rs. Current Assets Stock of Raw Materials 10,00,000 (25,000 x 20 x 2) Stock of WIP Raw Materials 2,50,000 (25,000 x 20 x 0.5) Labour 31,250 (25,000 x 5 x 0.5 x 50%) Overheads 93,750 3,75,000 (25,000 x 15 x 0.5 x 50%) Stock of finished goods 10,00,000 (25,000 x 4 x 0 x 1) Debtors 25,00,000 (25,000 x 50 x2) Cash & Bank 25,000 A 49,00,000 Current Liabilities Creditors (25,000 x 20 x 1) B Working Capital WNI Production & Sales per month 3, 00,000 12 A-B

5,00,000 5,00,000 44,00,000

= 25,000 units.

Illustration 3 3 Always bear in mind that your own resolution to succeed is more important than any other one thing.

CA.CS.MBA. Naveen, Rohatgi

TYBMS: FM

From the following details, prepare an estimate of the requirement of Working Capital: Production 60,000 Units Selling Price per unit Rs.5 Raw Materials 60% of Selling Price Direct Wages 10% of Selling Price Overheads 20% of Selling Price Materials in Hand 2 months Production time 1 month Finished Goods in Stores 3 months Credit for Material 2 months Credit allowed to 3 months Customers Average Cash Balance Rs.20,000 Wages and overheads after one month. In production all the required materials are charged in the initial stage and wages and overheads accrue evenly. SOLUTION: Particulars Current Assets Stock of Raw Materials (5000 x 3 x 2) Stock of WIP (5000 x 3 x 1) Labour (5000 x 0.5 x 1 x 50%) Overheads (5000 x 1 x 1 50%) Stock of finished goods (5000 x 4.5 x 3) Debtors (5000 x 5 x 3) Cash & Bank Current Liabilities Creditors (5000 x 3 x 2) O/S Wages (5000 x 0.5 x 1) O/S Overheads (5000 x 1 x 1) B Rs. Rs. 30,000 15,000 1256 2500 18,750 67,500 75,000 20,000 2,11,250 30,000 2500 5000 37,500 4 Always bear in mind that your own resolution to succeed is more important than any other one thing.

CA.CS.MBA. Naveen, Rohatgi Working Capital A-B

TYBMS: FM 1,73,750

WNI

Production & Sales per month

60,000 12 = 5000 units Illustration 4. The following annual figures relate to XYZ Co. Sales (at two months credit) Material consumed (Suppliers extend 2 months credit) Wages paid (Monthly in arrear) Manufacturing expenses outstanding at the end of the year(Cash expenses are paid one month in arrear) Rs. 36,00,000 9,00,000 7,20,000 80,000

Total administrative expenses, paid as above 2,40,000 Sales promotion expenses, paid quarterly in advance 1,20,000 It keeps one months stock, each of raw materials and finished goods and a cash balance of Rs. 1,00,000. Assuming a 20% safety margin, work out the working capital requirements of the company on cash cost basis. Ignore work-in-progress. SOLUTION : Particulars Rs. Rs. Current Assets Stock of Raw Materials 75,000 (9,00,000 x 1/12) Stock of finished goods(9,00,000+7,20,000+9,60,000+2,40,000= 2,35,000 28,20,000*1/12) Debtors (36,00,000 x 2/12) 6,00,000 Sales Promotion expense (1,20,000 x ) 30,000 Cash & Bank 1,00,000 5 Always bear in mind that your own resolution to succeed is more important than any other one thing.

CA.CS.MBA. Naveen, Rohatgi A Current Liabilities Creditors (9,00,000 x 2/12) O/S Wages (7,20,000 x 1/12) O/S Manufacturing expenses (9,60,000 x 1/12) B (A-B) Safety Margin (20%) Working Capital Required.

TYBMS: FM 10,40,000

1,50,000 60,000 80,000

2,90,000 7,50,000 1,50,000 9,00,000

Illustration 5. Foods Ltd. is presently operating at 60 per cent level, producing 36,000 packets of snack foods and proposes to increase its capacity utilisation in the coming year by 33.33 per cent over the existing level of production. The following data has been supplied: (i) Unit cost structure of the product at current level: Rs. Raw material 4 Wages (variable) 2 Overheads (variable) 2 Fixed overhead 1 Profit 3 Selling price 12 (ii) Raw materials will remain in stores for 1 month before being issued for production. Material will remain in process for further 1 month. Suppliers grant 3 months credit to the company. (iii) Finished goods remain in godown for 1 month. (iv) Debtors are allowed credit for 2 months. 6 Always bear in mind that your own resolution to succeed is more important than any other one thing.

CA.CS.MBA. Naveen, Rohatgi

TYBMS: FM

(v) Average time-lag in wages and overhead payments is 1 month and these expenses throughout the production cycle. (vi) No increase either in cost of inputs or selling price is envisaged. Prepare a projected profitability statement and a statement showing working capital requirement at the new level, assuming that a minimum- cash balance of Rs. 19,500 has to be maintained. Answer: Particulars Current Assets Stock of Raw Materials (4000 x 4 x4) Stock of WIP Raw Materials (4000 x 4 x 1) Wages (4000 x 2 x 1 x 50%) Overheads (4000 x 2 x 1 x 50%) Overheads fixed (3000 x 1 x 1 x 50%) Stock of finished goods (4000 x 8 x 1) (3000 x 1 x 1) Debtors (4000 x 12 x2) Cash Current Liabilities Creditors (4000 x 4 x 3) O/S Wages (4000 x 2 x 1) O/S Overheads (4000 x 2 x 1) O/S Fixed Overheads (3000 x 1 x 1) Working Capital B (A B) Rs. Rs. 16,000

16,000 4,000 4,000 1500 25,500 35,000 96,000 19,500 1,92,000 48,000 8000 8000 3000 67,000 1,25,000

Illustration 6 Blue Ltd., furnishes the following Income Statement for the year 2001. 7 Always bear in mind that your own resolution to succeed is more important than any other one thing.

CA.CS.MBA. Naveen, Rohatgi Rs.

TYBMS: FM Rs. 12,00,000

Sales (Credit 2 months) Purchases (Credit I month) 4,00,000 Wages (Credit 1/2 a month) 1,92,000 Factory rent (payable quarterly in 52,000 advance) Factory expenses (1 months credit) 96,000 Office expenses (1 months credit) 12,000 Managing Directors Salary (1 months 48,000 8,00,000 credit) Profit 4,00,000 Additional Information: Average investment in stock of raw materials and work-in-progress is expected to be Rs. 90,000 and Rs. 60,000 respectively. Average investment in stock of finished goods is expected to be Rs. 55,000. You are required to forecast the working capital requirements of the company. Particulars Rs. Rs. Current Assets Stock of Raw Materials 90,000 Stock of WIP 60,000 Stock of finished goods 55,000 Debtors 2,00,000 (12,00,000 x 2/12) Factory Rent 13,000 (52,000 x ) 4,18,000 A Current Liabilities Creditors 33,333 (4,00,000 x 1/12) O/S Wages 8000 (1,92,000 x 0.5/12) O/S Factory Expenses 8000 (96,000 x 1/12) O/S Office Expenses 1000 (12,000 x 1/12) O/s Managing Director Salary 4000 (48,000 x 1/12) 54,333 B Working Capital Illustration 7 8 Always bear in mind that your own resolution to succeed is more important than any other one thing. (A B) 3,63,667

CA.CS.MBA. Naveen, Rohatgi

TYBMS: FM

Premier Ltd. is desirous to purchase a business and has consulted you, and one point on which you are asked to advise them is the average amount of working capital which will be required in the first years working. You are given the following estimate and are instructed to add 20% to your computed figures to allow for contingencies. Figure for the Year. Rs. (a) Average amount looked up for stocks: Stock of Finished Product 64,000 Stocks of Material etc. 4,800 (b) Average credit given: Inland Sales - 6 weeks 6,24,000 Export Sales - 2 weeks 5,20,000 (c) Lag in payment of wages and other outgoing: Wages 3 weeks 4,29,000 Stores, Materials - 2 1/2 weeks 97,200 Rent, Rates & Taxes - 3 months 24,000 Staff - 1/2 month 81,600 (d) Payment in Advance: Sundry Expenses (Paid quarterly in 12,480 advance) Set up your calculations for the average amount of Working Capital Required. Solution: Statement Showing estimated working capital of Premier Ltd. Particulars Rs. Current Assets Stock of Raw Materials Stock of FG Debtors Inland (6,24,000 x 6/52) Export (5,20,000 x 2/52) Sundry Expenses (12,480 x 3/12) Total Current Assets Current Liabilities 9 Always bear in mind that your own resolution to succeed is more important than any other one thing. A 72,000 20,000

Rs.

4,800 64,000

92,000 3,120 1,63,920

CA.CS.MBA. Naveen, Rohatgi Creditors (97,200 x 2.5/52) O/S Wages (4,29,000 x 3/52) O/s Rent, Rates & Taxes (24,000 x 3/12) O/s Staff (81,600 x 0.5/12) Total Current Liabilities Estimated Working Capital +10% contingencies Total Estimated Working Capital B (A B)

TYBMS: FM 4,673 24,750 6,000 3400 38,823 1,25,097 25,019 1,50,116

10 Always bear in mind that your own resolution to succeed is more important than any other one thing.