(^190) Financial Management
Average time-lag in payment of wages is 1.5 weeks and one month in overhead
expenses; one-fourth of the output is sold against cash; cash in hand and at bank is
desired to be, maintained at Rs 3,65,000.
You are required to prepare a statement showing the working capital needed to finance
a level of activity of 1,04,00 units of production. You may assume that production is
carried on evenly throughout the year, and wages and overheads accrue similarly.
Solution
Statement showing Determination of Net Working Capital
(A) Current assets:
(i) Stock of materials for 1 month: (1,04,000 x Rs 80 ◊ 4/52) Rs 6,40,000
(ii) Work-in-progress for 0.5 month:
(a) Material (1,04,000 x Rs 80 ◊ 2/52) ◊ 0.50 1,60,000
(b) Labour (1,04,000 x Rs 30 ◊ 2/52) ◊ 0.50 60,000
(c) Overheads (1,04,000 x Rs 60 ◊ 2/52) ◊ 0.50 1,20,000
(iii) Finished goods for 1 month: (1,04,000 ◊ Rs 170 ◊ 4/52) 13,60,000
(iv) Debtors for 2 months (78,000 ◊ Rs 170 ◊ 8/52) 20,40,000
(v) Cash in hand and at bank 3,65,000
Total investments in current assets 47,45,000
(B)Current liabilities:
(i) Creditor8, 1 monthís purchase of raw materials, (i.e. 1,04,000 x Rs.80 x 4/
52)6,40,000
(ii) Average time-lag in payment of expenses
(a) Overheads (1,04,000 ◊ Rs 80 ◊ 4/52) 4,80,000
(b) Labour (1,04,000 ◊ Rs 30 ◊ 3/104) 90,000
Total estimate of current liabilities 12,10,000
(C) Net working capital = Current; assets - Current liabilities(A-B) 35,36,000
Working notes and assumptions
(i) 26,000 units have been sold for cash. Therefore, credit sales pertain to 78,000
units only.
(ii) Year has 52 weeks.
(iii) All overheads are assumed to be variable. Presence of depreciation element in
overheads will lower the working capital requirement.
- While preparing a project report on behalf of a client you have collected the
following facts. Estimate the net working capital required for that project. Add
10 per cent to your compacted figure to allow contingencies: