Computation of Working Capital Required

2.       Total Cost of Sales                                              Rs

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)

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.