Himalaya Ltd.'s Profit and Loss Account for the year ended on 31st December 2005 is specified below. You are needed to determine the working capital needs under operating cycle method.
Trading and Profit & Loss Account
For the year ended 31st December, 2005
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Particulars
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Rs.
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Particulars
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Rs.
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To Opening stock: Raw Materials Work-in-Progress Finished Goods
To Purchases (Credit)
To Wages & Mfg. Expenses
To Gross Profit c/d
To Administrative Exp. To Selling and Dist.Exp. To Net Profit
Total
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10,000
30,000
5,000
35,000
15,000
1,50,000
15,000
10,000
30,000
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By Sales (Credit) By Closing stock: Raw Materials Work-in-progress Finished Goods
By Gross Profit b/d
Total
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1,00,000
11,000
30,500
8,500
1,50,000
55,000
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55,000
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55,000
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Debtors' closing and opening was Rs. 6,500 and 30,500 in that order, where opening and closing creditors were Rs 5,000 and Rs. 10,000 correspondingly.
Solution: Computation of Operating Cycle
1. Raw Material Storage Period:
= Average Stock of Raw Material/Daily Average Consumption
= ((Rs.10,000 + 11,000) / 2)/(Rs.34,000 / 365)
= Rs.10,500 ?113 days
= Rs.93.15
Raw Material Consumed = Opening Stock +Purchases - Closing Stock
= Rs.10, 000+35,000-11,000
= Rs.34, 000
2. Conversion or Processing Period
= (Average Stock of work -in -Progress)/Daily Average Production Cost
=((Rs.30, 000 + 30,500) / 2)/(Rs. 48,500 / 365)
= Rs.30,250/132.88
Production Cost: Rs.
Opening Work-Progress 30,000
Add: Material Consumed (as Above) 34,000
Add: Wages and Mfg. Expenses 15,000
79,000
Less: Closing Work-in Progress 30,500
48,500
3. Finished Goods Storage Period
= Average Stock of Finished Goods/Daily Average Cost of Goods Sold
= ((Rs.5,000 + 8,500) / 2)/(Rs.45,000 / 365)
= Rs. 6,750 / Rs.123.29
= 55 days
Cost of goods sold: Rs.
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Opening Stock of Finished Goods
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5,000
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Add: Production Cost (As above)
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48,500
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53,500
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Less: Closing Stock of Finished Goods
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8,500
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45,000
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4. Debtors Collection Period
= Average Debtors/Daily Average Sales
= ((Rs.6,500 + 30,500) / 2)/(Rs.1,00,000 / 365)
= Rs.18,500/ Rs. 273.97
= 67 days
5. Creditors Payment Period
= Average Creditors/Daily Average Purchases
= ((Rs.5,000 + 10,000) / 2)/(Rs.35,000 / 365)
= Rs.7,500/ Rs.95.89
= 78 days
6. Net Operating Cycle Period:
OC = M + W + F + D - C
= 113+228+55+67-78
= 385 Days
Computation of Working Capital Requirement
1. Number of Operating Cycle Per Year = 365/Net Operating Cycle Period
= 365 /385
= 0.948
2. Total Operating Expenses: Rs
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Total cost of Production (as per 3)
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45,000
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Add: Administrative Expenses
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15,000
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Add: Selling And Distribution Expenses
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10,000
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70,000
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3. Working Capital Required = Total Operating Expenses/No.of Operating Cycles in a year
= Rs.70,000/0.948
= Rs.73, 839
Alternatively, WC = C + (OC/ N) . CS
Here WC = Working Capital
C = Cash Balance Required
OC = Operating Cycle Period
CS = Estimated Cost of Goods Sold
N = Number of days in a year
WC = O + (385 /365) * Rs.70,000
= Rs. 73,835