Computation of Working Capital Required
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1.
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Operating Cycle Period
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=
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M+W+F+D-C
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|
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=
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101.38 +28.07+26.07+14.60-60
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=
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110.12 or 110 days
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2. Total Cost of Sales Rs
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Cost of Goods Sold
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5,60,000
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Distribution and other Expenses
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40,000
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6,00,000
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3. Cash Working Capital = C + (OC/N) . CS
= O + (110/365). Rs.6,00,000
= Rs.1,80,822
Illustration 5: Manekchand Ltd. Plans to sell 30,000 units subsequent year. The probable cost of goods sold is as given here:
Rs. (Per units)
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Raw Material
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100
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Manufacturing Expenses
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30
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Selling Administration And Finance Expanses
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20
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Selling Price
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200
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The duration of different stages of the operating cycle is expected to be as given below:
Raw Material Stage 2 month
Work in Progress 1 month
Fished Goods Stage ½ month
Debtors Stage 1 months
Suppose that the monthly sales level of 2,500 units; evaluates the gross working capital requirements if the needed cash balance is 5 percent of the gross working capital requirement.
Solution:
Statement of Gross Working Capital Requirements
Current Assets: Rs. Rs.
(i) Raw Material (2 months) (Rs. 2,500 ? 100 ? 2) 5,00,000
(ii) Work in progress (1 month)
Raw material (Rs. 2,500 × 100 × 1) 2,50,000
Mfg. Expenses (Rs. 2,500 × 30 × 1) 75,500 3,25,000
(iii) Finished goods (1/2 months)
Raw Material (Rs. 2,500 × 100 × 5) 1,25,000
Mfg. Expenses (Rs. 2,500 × 30 × .5) 37,500 1,62,500
(iv) Debtors (1 month) (Rs. 2,500 × 150 × 1) 3,50,000
(v) Cash 13,62,500 71,711
(5percent of gross working capital that is, 13,62,500 ? 5/95) 14,34,211
Gross Working Capital Required
Working Notes:
1. Finance expenses and selling administration are not contained in the value of closing stock of finished goods although added in the cost of sales for valuing debtors.
2. It is assumed as degree of completion of work-in-progress is 100 percent as regards labour, overhead and materials and as manufacturing and material expenses for the full period are involved in the cost of work-in-progress.
3. It is assumed that each sale is credit sales.
4. Profit has not been termed as source of working capital thus fully ignored.