vapital Management -Estimation and Financing 9.

7
Both these kinds of working
capital capital are shown below:

working Temporary
working
capital line

Amount
of Level of temporary working
capital Permanent
working
capital
Level of permanent working
capital

Time
Fig. Working Capital in case of a
Stable Firm
R2 Working Capital in Case of
a Growing Firm:
In case of a growing firm, the
increasing over time to support permanent working capital may also keep on
arising level of activity and hence
working capital line may not alwavs be horizontal. Both permanent
capital are shown below: these kinds of working

capital Temporary

working capital
working
capital line
Permanent
Working

Amount capítal
working

t e m p o r a r y

of
L e v e lof capital
working

p e r m a n e n t

Level of

X
Time

Fig. Working Capital in case of a Growing Firm

9.0 MEANING OF WORKING CAPITAL MANAGEMENT
9.1 Meaning of Working Capital Management
Working Capital Management means planning, organizing, directing and controling
of working capital. Itprovides an answer to following two basicquestions:
(a) How much to invest in each type of Current Assets?
(b) How to finance the Current Assets?
9.2 How much to invest in each type of Current Assets?
It means what should be level of cash, receivables and inventory in the
organization. How much to invest in current assets willdepend on the operating
cycle. Larger the operating cycle, larger the current assets. Operating cycle in a
manufacturing firm is the length of time required:
(a) to convert cash into raw material and other resources such as labour, power
and fuel etc;
(b) to convert raw materialand other resources intowork in progress:
(c) to convert work in progress into finished goods;
9.8
Tulsian's Financial Management
() to convert finished goods into receivables;
(e) to convert receivables intocash. aSsets involves a trade
The firm's decision about the level of in current
investment
The effects of excessive and
profitability.
off between risk and return or liquidity and shown below:
inadequate investment inthe current assets are

Effect on Liquidity
Situation Effect on Profitability
1. Excessive Investment It results in law profitability It results in high liquidity
in Current Assets excess investment and
hence
does not
because remains threaten solvency
of the
in current assets
firm.
idle and hence earns
nothing.
2. Inadequate investmentIt results in high profitability It results in low liquidity and
in current assets since there are no idle hence it Can threaten
funds. solvency of the firm if the
firm fails to meet its current
obligations as and when
due.
9.3 How to finance the Current
Assets?
It means what portion of the working capital should be financed with
SOurces of funds such as equity share capital, preference long term
share
debentures, long term borrowings, retained earnings and what portion capital,
capital should be financed with short term sources of working
bank credit (e.g. cash credit, bank such as trade credit, short term
credit (i.e. public deposits, short termoverdraft,
loan
short term loan), short term non bank
Depending on the mix of short and long termfrom agencies other than bank).
the following approaches: financing, a firm may folow anyone of
(a) Aggressive
assets and someApproach-Under
portion of
Aggressive Approach, all temporary current
term sources of funds and permanent current assets are financed with
financed with long-term sources of funds. of permanent current assetsshort
some portion
are

Temporary Current Assets Short-term

t financing

As ets (b

Permanent Current Assets

Long-term
financing
Fixed Assets

Time
Fig. Aggressive Financing
(b) Conservative Approacn-Under Conservative
Current assets and some portion
of
temporary currentApproach, all permanent
assets are financed with
 Working Capital Management -Estimation and Financing 9.9

long term sources of funds and

financed with short term sources some portion of temporary current assets are
of funds.

Short-term
Termporary Current Assets t financing

Asets e(a)..
P e r m a n e n t C u r r e n tA s s e t s
Long-term
financing

Fixed Assets

Time

Fig. Conservative Financing

(c) Matching Approach or Hedging Approach-Under Matching Approach, all
permanent current assets are financed. with long term sources of fund and all
the temporary current assets are financed with short-term sources of funds.

Tenporary Current Assets

Short-term
financing

As ets
Long-term
Permanent Current Assets
financing

Time

Fig. Financing under Matching Plan

Comparative Study of Aggressive, Conservative &Matching Approach

Basis of Aggressive Conservative Matching
Comparision Approach Approach Approach
I. Permanent . Some portion fi- Al permanent cur- All permanent cur
Current Assets nanced with Short| rent assets are fi-rent assets are fi
Term sources of nanced with long- nanced with long
funds term sources of term sources of
funds. funds.

Some portion fi
nanced with Long
Term Sources of
funds
9.10 Tulsian's Financial Managemen fi-All
temporary cur-
Some
portion

Long|
rent assets are fË.
All temporary current with nanced with Shont
II. Temporary assets are financed
nanced
sOurces
of
Term SOurces of
Current Term
with Short Term funds.
Assets funds.
SOurces of funds. has no
When the firm
need for temporary

current assets;
the
long-term finance

released can be
invested in mar
ketable securities to
liquidity
build up the
position of the firm.
Some portion fi
nanced with Short
Term SOurces ot
funds.
Moderate
II. Liquidity Lower Higher
IV. Profitability Lower Moderate
Higher
9.4 Major Issues in Working Capital Management
Working Capital Management refers to the administration of allaspects of current
assets (i.e. cash, marketable securities, receivables and inventories) and current
liabilities. It is basically concerned with:
(a) Determining the need for working capital.
(b) Determining the optimum levels of investment in various current assets.
(c) Determining the appropriate sources for financing current assets.
() Ensuring the payment of current liabilities as and when due.
9.5 Objective of Working Capital Management
The objective of working capital
management is to avoid the
and inadequate working capital and to determine and maintainsituation of excessive
working capital after achieving a trade off the optimum level of
as to maximize the wealth of between the profitability and liquidity so
shareholders as a whole.
Whenever the situation
and timely action should ofbeexcessive or inadequate working capital arises,
taken by tne management to prompt
correct the imbalances.
10.0 EFFECT OF WORKING CAPITAL
10.1 Working Capital Management MANAGEMENT POLICIES
liquidity and its structural health,. Policies have a great
effect on firm's profitability,
10.2 Effect of Working Capital
Management
Profitability and liquidity are inversely Polices on Profitability and |
decreases. Afirm having high liquidity related. When one Liquidity
investment in current assets remains will have a increases, the other
hand, a firm having low liquidity will idle and hencelower profitability since excess
idle fund. The effects of working have high earns nothing. On the other
profitability are as follows: capital profitability since there remains no
management policies on liquidity and
 Working Capital Management -Estimation and Financing 9.19

14.0 AND
ESTIMATE OF FUTURE WORKING CAPITAL BASED ON CURRENT ASSETS
CURRENT LIABILITIES
The holding period of various constituents of operating cycle may either contract or
expand the net operating cycle period. Shorter the operating cycle, lower will be the
requirement of working capital and vice versa. It may be noted that working capital
requirements are to be determined on an average basis and not at any specific point of
time.
The estimation of Working Capital involves the following steps.
Step 1: Make the estimates of various Current Assets as follows:
1. Stockof Raw material Estimated Annual Cost of Raw Material to be Consumed Average Raw Materials
12 months or 365 days Holding Period
2 Stock of W.LEStmated Annual Cost of Goods to be produced Average W.I.P
12 months or 365 days X Holdingperiod or Process Period
3. Stock of Finished Goods = Estimated Annual Cost of Goods to be Produced Average Finished Goods
12 months or 365 days
X
Storage Period
4. Average Trade Debtors= Estimated Annual Cost of Credit Sales x Average Collection Period
12 months or 365 days
5. Cash and Bank Balance = Minimum as desired by the Firm

Step 2 : Make the estimates of various Current Liabilities as follows :

Estimated Annual Cost of Credit Purchases
1. Average Trade Creditors= x Average Credit period availed
12 months or 365 days
Expenses for the year
2. Average Creditors for Expenses = 12
months or 365 days x Average Time Lag in Payment

Step 3: Make the Estimate of Working Capita bytaking out the difference between the
estimated Current Assets (as per Step 1 )and the estimated Current Liabilities
(as per Step 2).
Step 4: Add Safety Margin as %of Working Capital before adding safety margin

Add Safety Margin as %of Working Capital after adding safety margin.
Step 5: Calculate Total Working Capital after adding Safety Margin as per Step 4 to
the Working Capital (excluding Safety Margin) as per Step 3.
15.0 FORMAT OF STATEMENT SHOWING THE REQUIREMENTS OF WORKING
CAPITAL
Statement showing the Estimate of Working Capital requirements (on Cash Cost basis)
Particulars Computation Rs.
A. Current Assets :
Stock of Raw Material Estimated Annual Cost of Raw Material to be consumed Average Raw Materials
12 months or 365 days Holding Period
Stock of Work-in-progress As per Working Note
Stock of Finished Goods Estimated Annual Cost of Goods to be produced X
Average Finished Goods
12 months or 365 days Storage Period
Debtors (at Cash Cost) Estimated Annual Cost of Credit Sales x Average Collection Period
12monthsor 365 days
Cash in Hand (Minimum Required as per policy)
Prepaid Wages
Prepaid Admn expenses
Prepaid Selling & Distri. exp.
 Tulsian's Financial Management

9.20
Credit
Period Allowed by Supplers
Total Current Assets Purchases
Average

Payment
Time Lag in
Credit
B. Current Liabilities : Annual days Average
Estimated
or365 year
Creditors for Raw Materials months
for the
12
Annual
Wages
days x
Average
Time
Lag in Payment
or 365 yea
tor tne
Estimated

Creditors for Wages 12

months Overheads

Estimated
Annual
Mta,
or 365
days
the year
Average Time Lag in Payment
Creditors for Mtg. Overheads 12
months
Exp.. for
Annual
Sell, &Dist. days
Estimated or365
Cr. for Selling &Distri. Exp. 12
months

Provision for Taxation

Total Current Liabilities
C. Net Working Capital (A- B)
D. Add : Safety Margin
E. Net Working Capital (C + D)
Working Notes:
of Sales
s and Cost
(i) Calculation of Stock of Finished Goods
Particulars
Direct Material Cost
Direct Labour Cost
Direct Expenses
Variable Manufacturing Expenses
Depreciation)
Fixed Manufacturing Expenses (excluding
Variable Administrative Expenses
Fixed Administrative Expenses
Total Cash Cost of Goods Produced

Add :Opening Stock of Finished Goods

Total Cash Cost of Goods available
Less: Closing Stock of Finished Goods
Total Cash Cost of Goods Sold
Add: Variable Selling and Distribution expenses
Add: Fixed Seling and Distribution expenses
Total Cash Cost of Sales
Total Cash Cost of Credit Sales

(ii) Calculation of Stock of Work in Progress if physical units of WIP are not given
Particulars Computation
Raw Material Annual Cost of Raw-Materials to be consumed Process Degree of
12 months x Period XCompletion
Wages Alual Wages ProOcess Degree of
12 months period *Completion
Mig. Overheads Annual Manufacturing Overheads
(Variable + Fixed) 12 months Process x Period Degree of
Completion
Alternative Method [if Physical Units of WIP are aiven 1
Items of Cost Computatlon
WIP (units) x Degree of
WIP (units) x Degree of Completion x RaW-material Cost per unit
Raw-Material

WIP (units) x Degree of Completion x Labour Cost per unit

Wages
Mfg. Overheads
(Variable + Fixed) Completion x Mfg. Overheads
per unit
 9.22 Tulsian's Financial Management Rs. 20,000
Rs. 4 x2 months =
units x
2.5 Kg x
12,000
12 months

Case (b) Stock of Raw-material = GOODSI

FINISHED

STOCK OF
OF
ILLUSTRATION 13 [CALCULATION information
units
following
Tulsian (3) Ltd. provides youthe of 60,000 Rs. 5
activity level
1 Unit Cost Structure of Product at an Rs. 4
Raw Material Rs. 3
Wages Depreciation
Re. 1) Re. 1
Manufacturing Overtheads (including Rs. 2
Administrative Expenses
Selling and Distribution expenses
months
2. Finished Goods Storage Period-2 Goods in each
of the following alternative
Finished
Stock of
Required: Calculate the Cash Cost
cases :
Case (a) if no other information is given.
COSt.
Goods is to be valued at factory
Case (b) If Stock of Finished
SOLUTION
(including Adm. Exp.) per unit
Case (a) Cash Cost of Goods Produced
= Rs. 5 + Rs. 4 + Rs. 2 + Re. 1 = Rs. 12
60,000units x Rs. 12
x2months = Rs. 1,20,000
Stock of Finished Goods = 12 months
Rs. 4+ Rs. 2 = Rs. 11
Case (b) Factory Cash cost ofGoods Produced = Rs. 5+
60,000 units x Rs. 11
Stock of Finished Goods = x 2months = Rs. 1,10,000
12 months

ILLUSTRATION 4 [CALCULATION OF CASHCOST OF DEBTORS]

Tulsian (4) Ltd. provides you the following information :
1. Cost-Price Structure of a Product an activity level of 60,000units.
Raw-Material Rs. 5
Wages Rs. 4
Manufacturing Overheads (including Depreciation Re. 1) Rs. 3
Administrative expenses Rs. 1
Selling and Distribution Expenses Rs. 2
Profit Rs. 5
Seling Price Rs. 20
2. Credit Period allowed to Customers -2 months
3. Cash Sales -20%
Required : Calculate the amount of Debtors.
SOLUTION
Cton 1. Cash Cost of Sales Per unit
(Hs. 5+ Rs. 4 + Rs. 2 + Re. 1+ Rs.
Sten 2 : Total Cash Cost Of Sales 21 = Rs. 14
[b0,000 Units x Rs. 14] = Rs. 8.40.000
Sten 3: Total Cash Cost of Credit
Sales (Rs. 8,40,000 x 80%1 = Rs 6 72 000
Rs. 6,72,000
Step 4: Debtors = 12 months x2 months = Rs.
1,12,000
 Working Capital Management -Estimation and Financing 9.23

LUSTRATION 5 [CALCULATION OFSTOCK OF WORK-IN-PROGRESSJi

Tulsian (5)Ltd. provides you the following
1 Unit Cost Structure of Product at an information :
activity level of 60,00 units.
Raw Material
Rs. 5
Wages Rs. 4
Manufacturing Overheads (including Depreciation Re. 1) Rs. 3
Administrative Expenses Re. 1
Selling and Distribution expenses Rs. 2
9 Production Cycle - Half Month.
Required : Calculate the Stock of Work-in-Progress in each of the following alternative cases
Case (a) If no other information is given,
Case (b) lf expenses are incurred evenly.
Case (c) If materialare issued at the start of the processing and expenses accrue evenly.
Case (d) If work-in-progress is 50% complete as to conversion cost.
Case (e) if the degree of completion is 50%.
Case (f) If the degree of completion as to material is 80% and as to conversion cost is 60%.
Case (g) Ifthe material is required only to the extent of 50% in the beginning and the remaining is
needed at a uniform rate duringthe process. Direct wages and other manufacturing
Overheads accrue similarly at a uniform rate throughout the process.
sOLUTION
60,000 units
Units of WIP =
12 x;=2500 units
Case (a) Calculationof Stock of Work-in-Progress
A. Raw material [2,500 units x Rs. 5 x 100%] Rs. 12,500
B.Wages [2,500 units x Rs. 4 x50%] Rs. 5,000
C. Manufacturing Overheads (Ex. Dep) (2,500 units x Rs. 2 x50%] Rs. 2,500
Rs. 20,000
Notes :
() Administrative Expenses and Selling and Distribution Expenses do not form part of cost of
stock of WIP
been
(i) Stock of WIP has been calculated on Cash Cost Basis. Hence depreciation has
ignored.
Case (b) Same as in case (a)
Case (c) Same as in case (a)
Case (d) Same as in case (a)
50%] Rs. 6,250
Case (e) A. Raw Material [2,500 units x Rs. 5 x Rs. 5,000
B. Wages (2,500 units x Rs. 4 x 50%) Rs. 2,500
units x Rs. 2 x50%]
C. Manufacturing Overheads (Ex. Dep.) (2,500 Rs. 13,750
Rs. 10,000
Rs. 5 x 80%]
Case () A. Raw Material [2,500 units x Rs. 6,000
x60%]
B. Wages [2,500units x Rs. 4 Rs. 3,000
Dep.)[2,500 units x Rs. 2 x60%1
C. Manufacturing Overheads (Ex. Rs. 19,000
Rs. 6,250
units x Rs. 2.50 x 100%]
Case (g) A. Raw Material [2,500 Rs. 3,125
x Rs. 2.50 x 50%]
B. RawMaterial [2,500 units Rs. 5,000
Rs. 4 x 50%]
C.Wages [2,500 units x Rs. 2,500
[2,500 units x Rs. 2 x 50%1
D. Mfg. overheads (Ex. Dep.) Rs. 16,875
 9.24 Tulsian's Financial Management
RAW-MATERIALS
CREDITORS FOR
ILLUSTRATION 6 (CALCULATION OF
EXPENSES)
Tulsian (6) Ltd. provides you the following information :
1 Ont Cost Structure of Product at an activity Level of 60,000 uniIS:
Rs. 5
Raw Material
Rs. 4
Wages Rs. 3
Manufacturing Overheads [including depreciation Re. 1) Re. 1
Administrative expenses
Rs. 2
Sellingand Distribution Expenses
2. Credit period allowed bysupplier of materials - 2 montns
3 Cash Purchases -20%.
4 me lag in payment of Wages, Manufacturing Overheads, Adm. Exp. and Selling and
Distribution Expenses-1 month.
Required: Calculate the Creditors for Raw-Material and Expenses.
sOLUTION
1. Creditors for Raw-Material = 60,000 units x Rs. 5 x 80% x2 months = Rs. 40,000
12 months

2 Creditors of Wages = 60,000 units x Rs. 4 x1month = Rs. 20,000

12months
3. Creditors of Manufacturing Overheads = 60,000 units x Rs. 2 x1 month = Rs. 10,000
12months
4. Creditors for Adm. Expenses = 60,000 units x Re. 1 x 1 month = Rs. 5,000
12months
5 Creditors for Selling & Distribution exp. = 60,000 units x Rs. 2
12 months x 1 month = Rs. 10,000

ILLUSTRATION 7
From the following details prepare an
existing company XLtd. : estimate of requirements of working capital
of an
Production
Selling Price 60,000 units p.a.
Raw Material Rs. 5 per unit
Direct Wages 60% of selling price
Manufacturing Overheads (Excluding Depreciation) 10% of selling price
Materials hand 20% of selling price
Production time 2 months' requirements
Finished goods in store 1month
Credit for materials
3month
Credit allowed to Customers
2month
Average Cash Balance 3 month
Safety Margin Rs. 20.000
Wages and 20%
reguired materialsoverheads are paid at the beginning of
are charged in the initial the month following. In
stage and wages and
overheads accrueproduction
evenly.
all the
 Working Capital Management --Estimation
and Financing 9.25
SOLUTION

Statement showing the

Particulars requlrements of Working Captal
A. Current Assets : Computatlon Rs.
Stock of Raw Material
Stock of Work-in-progress Rs. 1,80,000 x 2 /l 12 30,000
Stock of Finished goods As Per Working note (i) 18,750
Debtors Rs. 2,70,000 x 3 / 12 67,500
Cash in Hand Rs. 2,70,000 x 3 / 12 67,500
Total Current Assets 20,000
B Current Liabilities : 2,03,750
Creditors for Raw materials
Creditors for Wages Rs. 1,80,000 x 2 I12 30,000
Creditors for Manufacturing Expenses Rs. 30,000 x1/12 2,500
Total Current Liabilities Rs. 60,000 x1/ 12 5,000
C. Net Working Capital (A- B) 37,500
D. Add: Safety Margin 1,66,250
E. Net Working Capital Required (C + Rs.1,66,250 x 20 /100 33,250
D) 1,99,500
Working Notes:
(i) Calculation of Stock of Finished
Goods and Cost of Sales Rs.
Direct Material Cost
Direct Labour Cost 1,80,000
30,000
Manufacturing Overheads (Excluding Depreciation) 60,000
Total Cash Cost of Goods Produced
2,70,000
Add:Opening Stock of Finished Goods [Rs. 2,70,000 x 3/12]
67,500
Total Cash Cost of Goods available
3,37,500
Less: Closing Stock of Finished Goods
(67,500)
Total Cash Cost of Goods Sold
2,70,000
Add: Selling and Distribution expenses NiI
Total Cash Cost of Sales
2,70,000
(ü) Calculation of Stock of Work in progress Rs.
Raw Material (Rs. 1,80,000 x 1/12 x 100%) 15,000
Wages (Rs. 30,000 x1/12 x50%) 1,250
Manufacturing Expenses (Rs. 60,000 × 1/12 x 50%) 2,500
18,750
(in Since it is an existing company and no specific information regarding opening stock has been given, it
has been assumed that stock level is uniform throughout the year. Hence, opening stock equals closing
stock.

ILLUSTRATION 8
The following annual figures relate to CAMID Ltd.
Rs.
Sales (at two months' credit) 36,00,000
Materials consumed (Suppliers extend two months' Credit) 9,00,000
Wages paid (monthly in arrear) 7,20,000
Manufacturing expenses outstanding at the end of the year
(Cash expenses are paid one month in arrear) 80,000
Total administrative expenses, paid as atbove 2,40,000
Total Sales promotion expenses (paid quarterly in advance) 1,20,000
 9.26 Tulsian's Financial Management
part of the cost
on gross profit of 25% counting depreciation as (iv)
Ihe company sells its month's stock each of raw materials and finished goods, and a cash
products
of production. It keeps one (v)
balance of Rs. 1,00,000. Stock of finished stocks
in valued at factory cOst.
the working capital requirements of the (vi)
work out
Hequired: Assuming at 20% safety margin,
company on cash cost basis. lgnore work-in progress. Sales
SOLUTION Materi
Statement showing the requirements of Working Capital Re.
Wage
Computation Manu
Particulars
(cash
A Current Assets:
Rs. 9,00,000 x 1 /12 75,000 Total
Stock of Raw Material
Rs. 25,80,000 x 1/12 2,15,000 Sales
Stock of Finished goods
Rs. 29,40,000 x 2/12 4,90,000
Debtors
Prepaid Sales Promotion Expenses Rs. 1,20,000 x 3/12 30,000 SOL
Cash in Hand 1,00,000
Total Current Assets 9,10,000
B. Current Liabilities: A.
Creditors for Raw Materials Rs. 9,00,000 x 2/12 1,50,000
Creditors for Wages Rs. 7,20,000 x1/12 60,000
Creditorsfor Manufacturing Expenses Rs. 9,60,000 x1/12 80,000
Creditors for Office & Adm.Expenses Rs. 2,40,000 x1 /12 20,000
Total Current Liabilities 3,10,00O
C. Net Working Capital (A- B) 6,00,000
D. Add: Safety Marsin Rs. 6,00,000 x 20/100 1,20,000 B
E. Net Working Capital Required (C +D) 7,20,000
Working Notes:
(9 has
Sincebeen
it isassumed
an existing
thatcompany andisnouniform
stock level specificthroughout
information
the regarding opening
year. Hence, stockstock
opening has equals
been given,
closingit
stock.
() Calculation of Stock of Finished goods and Cost of Sales
Particulars Rs.
Direct Material Cost
9,00,000
Direct Labour Cost
7,20,000
Variable Manufacturing Expenses (excluding Depreciation) (Rs. 80,000 x 12) 9,60,000 W
Total Cash Cost of Goods Produced
25,80,000 ()
Add :Opening Stock of Finished Goods [Rs. 25,80,000 x 1/12] 2,15,000
Total Cash Cost of Goods available
27,95,000
Less: Closing Stock of Finished Goods
Total Cash Cost of Goods Sold
(2,15,000)
25,80,000
Add: Office &Adm.Expenses
Add: Variable Selling and Distribution expenses
2,40,000
Total Cash Cost of Sales
1,20,000
29,40,000
ILLUSTRATION 9
CAMID LId. sells goods at a gross proft of 20%. It includes depreciation as part of cost of
production. The folowing figures for the 12 months period ending 31st December, 20X7 are aiven
to enable you to ascertain the requirements of working capital of the company on a cash cost base
Inyour working, youare required to assume that:
(0) as safety margin of 15% will be maintained;
(i) cash is to be held to the extent of 50% of current liabilities;
 lagement -Estimation and Financing 9.27
(iv) tax is to be ignored.
(v) the stock of finished goods in to be valued
Stocks of raw materials and at
finished goods areFactory Cost.
kept at one month's
requirements.
Sales-at 2 months' credit Rs.
Materials consumed (suppliers' credit is for 2 months) 27,00,000
Wages (paid the beginning of the next 6,75,000
expenses includes
Manufacturing month) 5,40,000
ingsh expenses are paid one monthdepreciation
in arrear)
of Rs. 2,25,000 ?
Total Administrative expenses (paid as
ales promotion expenses-paid quarterlyabove) 1,80,000
and advance
90,000
SOLUTION

Statement showing the requlrements of

Particulars
Working Capital
A Current Assets: Computation Rs.
Stock of Raw Material
Stock of Finished goods 6,75,000 x1/12 56,250
Debtors 19,35,000 x 1/ 12 1,61,250
Cash in Hand
22,05,000x 2/12 3,67,500
2,32,500x1/2 1,16,250
Selling&Distribution Expenses 90,000 x1/4 22,500
Total Current Assets
7,23,750
B. Current Liabilities:
Creditors for RaW materials 6,75,000 x2/12 1,12,500
Creditors for Wages 5,40,000x1/12 45,000
Creditors for Manufacturing Expenses 7,20,000 x1 /12 60,000
Creditors for Administrative Expenses 1,80,000 x1/12 15,000
Total Current Liatbilities 2,32,500
C. Net Working Capital (A-B) 4,91,250
D. Add: Safety Margin 4,91,250 x 15 /100 73,688
E. Net Working Capital Required (C+D) 5,64,938

Working Notes:
() Calculation of Cash Manufacturing Expenses
A. Sales 27,00,000
B. Less: Gross Profit @ 20% (5,40,000)
21,60,000
C. Cost of Goods Sold
D. Less: Costs other than Cash Manufacturing Expenses
6,75,000
() Direct Material Cost
5,40,000
(ii) Direct Labour Cost
2,25,000
(üi) Depreciation
(14,40,000)
7,20,000
E. Cash Manufacturing Expenses
(") Calculation of Stock of Finished Goods and Cost of Sales
6,75,000
A. Direct Material Cost 5,40,000
B. Direct Labour Cost 7,20,000
C. Manufacturing Expenses 19,35,000
D. Total Cash Cost of Goods Produced 1,61,250
Goods
E. Add:Opening Stock of Finished 20,96,250
available
F. Total Cash Cost of Goods
9.28 Tulsian's Financial Managemnent
Less Csino Stork of Finiehed Goods
(1,61,250,
19,1,385000
H Total aeh net of Oode Sold 0.0
I Variable Adminietretve Fxpence 0.000
H)
JAdd Variabte Seling ad ietributnexee*
Sinne Total Caeh
it is An Coet of
erteting Sales an NO specifc information regarding opening stock hag teen
comDay
22,054,
gyen, it han
boen aRmed that etock level is Unitormthroughout the year Hence, opening stock equals closing stock

ILLUSTRATION 10 paarticulars:
Determine the working capital requirements from the following Amount (As. in lakh
Annual budpet for
Rew materiats 720
240
Supplies and components
Manpower Expenses 480
130
Factory expenses (including Depreciation Rs. 10 lakhs)
Administration Expenses 180
Sales 2.380

Your are given the following additional information

() Stock-levels planned : Raw materials, 30 days: supplies and components, 90 days.
() 50per cent of the sales is for cash: for the remaining 20 days credit IS norma.
() Finished goods are held in stock for a period of 7 days before they are released
tor sale and are valued at factory cost.
(iv) Goods remain in process for 5 days. Materials &Components are supplied in the
beginning and expenses are incurred evenly.
(v) The Company enjoys 30 days credit facilities on 20 per cent of the purchases.
(vi) Cash and bank balances had been planned to be kept at the rate of half months' budogeted
expenses [Assume 360 days in a yearl
sOLUTION
Statement showing the requirements of Working Capital
Particulars Computation Rs
Current Assets:
Stock of Raw Material 720 x 30/360 60.00
Stock of Supplies &Components 240 x 90/360 60.00
Stock of Work-in-progress
As per working Note 17.50
Stock of Finished goods 1560 x 7/360
Debiors 30.33
870 x 20/360 48.33
Cash in Hand
780 x 15/360 32.50
Total Current assets
248.66
B Current Liabilities :
Ciediiors for Raw materials
720 × 20% x 30/360 12 00
Credilors tor Supplies &Components
240 x 20% x 30/360 4.00
Total Current Liabilities
C Net Working Capital (A - B) 16.00
232.66
Working Notes:
() Cakculation of Stock of Work-nprogress
Rs. (in lakhs)
Raw Material (720 x 5/360 x 100%)
10.00
Supplies &Components (240 5/360 x 100%)
3.333
Wages Expenses (480 5/360 x 50%)
3.333
Factory Expenses (120 x 5/360 50%)
0.833
Total
17.50