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:
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(a)
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Current Assets
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Rs.
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Rs.
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(i)
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Stock of raw material (2 months) (Rs.15,000 × 2)
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30,000
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(ii)
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Work-in-Progress (1 month) Material (Rs.15,000 × 1) Labour (Rs.2,500 × 1) Overheads (Rs.5,000 × 1)
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15,000
2,500
5000
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22,500
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(iii)
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Stock of finished Goods (3 months) Material (Rs.15,000 × 3)
Labour (Rs.2,500 × 3) Overheads (Rs.5,000 × 3)
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45,000
7,500
15,000
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67,000
|
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(iv)
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Debtors (3 months) Material (Rs. 15,000 × 3) Labour (Rs. 2,500 × 3) Overheads (Rs. 5,000 × 3)
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45,000
7,500
15,000
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67,000
1,87,500
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(B)
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Current Liabilities:
Creditors for raw Material (2 months) Rs. 15,000 × 2)
Net working Capital required (A-B)
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30,000
1,57,500
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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