Prepare an approximation of working capital requirements, Managerial Accounting

On 1st January, 2005 the Board of Directors of Paushak Limited needed to identify the amount of working capital needed to meet the programme they have arranged for the year. From the subsequent information, prepare an approximation of working capital requirements.

Issued Share Capital                                            Rs. 2, 00,000

8% Debentures                                                   Rs.    50,000

Fixed Assets as on 1st January                              Rs. 1,25,000

Production throughout the earlier year was 60,000 units and this is proposed to keep the same throughout 2005. The expected ratio of cost to selling price is:

Raw Materials are 60 percent; direct wages 10 percent and Overheads 20 percent. The subsequent further information is presented:

a) Raw materials are probable to continue in the stores on an average for two months before being given to the production unit.

b) All unit of production is expected to be in process for one month.

c) Finished goods will continue in the warehouse awaiting transmit to customers for approximately three months.

d) Credit permitted through creditors is two months from the date of delivery of raw materials.

e) Credit provided to debtors is three months from the date of dispatch.

f) Selling price is Rs 5 per unit.

Solution:

Statement demonstrating working Capital Requirements:

(a)

Current Assets

Rs.

Rs.

 

(i)

 

Stock of raw material (2 months) (Rs.15,000 × 2)

 

 

30,000

 

(ii)

 

Work-in-Progress (1 month) Material (Rs.15,000 × 1) Labour (Rs.2,500 × 1) Overheads (Rs.5,000 × 1)

 

 

15,000

2,500

5000

 

 

 

 

22,500

 

(iii)

 

Stock of finished Goods (3 months) Material (Rs.15,000 × 3)

Labour (Rs.2,500 × 3) Overheads (Rs.5,000 × 3)

 

 

45,000

7,500

15,000

 

 

 

 

67,000

 

(iv)

 

Debtors (3 months) Material (Rs. 15,000 × 3) Labour (Rs. 2,500 × 3) Overheads (Rs. 5,000 × 3)

 

 

45,000

7,500

15,000

 

 

 

 

67,000

1,87,500

 

(B)

 

Current Liabilities:

Creditors for raw Material (2 months) Rs. 15,000 × 2)

Net working Capital required (A-B)

 

 

 

 

30,000

1,57,500

 

Working Notes:

1) Debtors have been valued and calculated on sales basis which would be Rs. 75,000 (60,000 ? 5 ? 3 ? 12). Hence, working capital taking Current Assets at total value

Working Capital required as per above statement    1,57,500 Rs.

Add: Increase in Debtors (Rs. 75,000-Rs.67, 500)     7,500 Rs.

                                                                                    1,65,000

2) Monthly amount of each components of cost is determined as follows:

 Total sales 60,000 . 5 = Rs. 3,00,000

(a)   Raw Materials =  (3,00,000 . 60)/(100 ×12)

= Rs.15,000

(b) Direct Labour =(3,00,000 . 10)/ (100 ×12)

= Rs.2,500

(c) Overheads       = (3,00,000 . 20)/ (100 ×12)

= Rs.5,000

3) This is assumed that labour and overhead in the starting. Thus, full amount of labour and overhead is involved in work-in-progress. If this is assumed that labour and overheads accrued equally, half of the amount will be comprised in work-in- progress.

4) Additional capital needed will be Rs. 35,500 it got from Rs. 1,57,500-1,25,000, since Rs. 1,25,000 is obtainable from long-term sources or share capital debentures- Fixed assets

Posted Date: 4/9/2013 3:25:26 AM | Location : United States







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