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Operating cycle is 120 day (4 months) or 3 cycles in a year
NOTE :(i) Normally finished goods and work in progress are taken as same value. Suppose
wages and overheads accrue evenly throughout the year given in the problem, we have to
find out the work in progress value separately. At that time of computing work in progress,
labour and overhead value is reduced to half.
Case-2 - Traditional Method
The following information is extracted from the books of accounts of ABC Ltd;
Monthly sales = 100 lakhs
Cost of Production P.M. = 90 lakhs
Cost of Raw Material per month = 80 lakhs
Item Stocking Margin
Period (%)
Raw Material 1m 20
Work in process 2w 33
Finished Goods 2w 20
Receivable 1m 50
Expenses 1m 100
Advance Payment to creditors -15 lakhs
Credit on purchase -10 lakhs
Liquid surplus in B/S at the end of last year = 40 lakhs
Calculate the working capital requirement of ABC Ltd. under traditional method and
the maximum credit limit from bank.
Solution
Unit: ABC Ltd (Rs. In lacs)
Monthly sales = 100
Cost of Production P.M. = 90
Cost of Raw Material per month = 80
Item Stocking WC Margin Amoun Permissible
period required (%) t Limit
Raw Material 1m 80 20 16 64
Work in process 2w 45 33 15 30
Finished Goods 2w 45 20 09 36
Receivable 1m 90 (100)40 40 60
Expenses 1m 10 100 10 -
Total 270 190
Less: Advance Payment 15
Credit on purchase 10
Working Capital Required 245
Liquid surplus in B/S at the end of last year = 40 Net Deficit = 245 40 = 205
Limit from Bank = 190