PROBLEMS AND SOLUTIONS

Problem 1. From the following information, prepare a statement in column form showing the
working capital requirements. (i) In total and (ii) As regards each constituent part of working
capital.

Budgeted sales ( $10 per unit) $2,60,000 p.a.

Analysis of Costs

Raw Materials

3.00

Direct Labour

4.00

Overheads

2.00

Total Cost

9.00

Profit

1.00

Sales

10.00

It is estimated that
(i)
(ii)

Raw materials are carried in stock for three weeks and finished goods for two weeks.
Factory processing will take three weeks.

(iii)

Suppliers will give full five weeks credit.

(iv)

Customers will require eight weeks credit.

It may be assumed that production and overheads accrue evenly throughout the year.

Solution : Statement of Working Capital Requirement

Current Assets

Raw Materials 78,000 x 3/52

4,500

Work in Progress (Note)

9,000

Finished Goods 2,34,000 x 2/52 =

9,000

Debtors 2,60,000 x 8/52

Less : Current Liabilities

40,000

62,000

Trade Creditors (5 weeks) 5/52 x 78,000 =

7,500

Working Capital Required

55,000

Working Notes:

(i) Number of Units

26,000

(ii) Finished Goods

Raw Materials 26,000 x 3

= 78,000

Direct Labour 26,000 x 4

= 1,04,000

Overheads 26,000 x 2

= 52,000

Finished Goods

2,34,000

(iii) Work in Progress

Raw Material 78,000 x 3/52

4,500

Labour 1,04,000 x 3/52 x 112

3,000

Overhead 52,000 x 3/52 x 112

= 1,500

Work in Progress

9,000

(i)
NOTE : (i) Normally finished goods and work in progress are taken as same value.
Suppose wages and overheads accrue evenly throughout the year given in the problem, we have
to find out the work in progress value separately. At that time of computing work in progress
labour, overhead value is reduced to half.

(ii)
At the time of calculating working capital, debtor value will be taken as either
including profit element or excluding profit element.

Problem 3. The management of G Ltd has called for a statement showing the working capital
needed to finance a level of 3,00,000 units of output for the year. The cost structure for the
companys product, for the above mentioned activity level is detailed below.
Cost Element
Cost per unit ($)
Raw Materials

20

Direct Labour

Overheads

15

Total Cost

40

Profit

10

Selling Price

50

Past trends indicate that raw materials are held in stock on an average for two months.
Work in progress will approximate to half a months production.
Finished goods remain in warehouse on an average for a month.
Suppliers of materials extend a months credit.
Two months credit is normally allowed to debtors.
A minimum. cash balance of $ 25,000 is expected to be maintained.
The production pattern is assumed to be even during the year. Prepare the statement of working
capital determination.
Solution :
Working Capital Statement (or)
Statement of Working Capital Requirement
Current Assets
Raw Materials60,00,000 x 2/12
Work in Progress
Finished goods 1,20,00,000 x 1/12
Debtors

1,50,00,000 x 2/12

=
=
=
=

10,00,000
3,75,000
10,00,000
25,00,000
48,75,000

Less : Current Liabilities

Sundry Creditors 60,00,000 x 1/ 2

5,00,000
43,75,000

Add : Minimum Cash Balance

25,000

Working Capital

44,00,000

Workings :
(i) Finished Goods
Raw Materials

3,00,000 x 20

60,00,000

Direct Labour

3,00,000 x 5

Overheads

3,00,000 x 15

15,00,000
45,00,000

Finished Goods

Solution:
requirement

1,20,00,000

Statement of Working Capital

$.
5,000

Current Assets

8,000

Finished products and work in progress =

Stores, Material etc.

13,000

Account Receivable

3,000

Local Sales 78,000 X 2/ 52

Outside the state 3,12,000 X 6 / 52 = 36,000

36,000

52,000

Total Current Assets

Less : Current Liabilities
Account Payable 96,000 x 4/52

Outstanding wages 2,60,000 x 2 /52

Total Current Liabilities

Working Capital
Add : 10% Contingencies (34,615 x 10/100)
Working Capital required

7,385
10,000
17,385
34,615
3,462
38,077

Problem 7. From the following estimates of Sethal Ltd you are required to prepare a forecast of
working capital requirements.
(i) Expected level of production for the year 15,600 units
(ii) Cost per unit : Raw Materials $ 90, Direct labour $ 40, overheads $ 75.
(iii) Selling Price per unit $ 265
(iv) Raw Materials in stock on an average for 1 month
(v) Materials are in process on an average for 2 weeks.
(vi) Finished goods in stock on an average for 1 month.
(vii) Credit allowed by suppliers is one month.
(viii) Time lag in payment from debtors is 2 months.
(ix) Lag in payment of wages 11/2 weeks.
(x) Lag in payment of overheads is one month. All sales are on credit.

(xi) Cash in hand and at Bank is expected to be $ 60,000.

It is assumed that production is carried on evenly throughout the year. Wages and overheads
accrued evenly and a period of 4 weeks is equivalent to a month.
Solution :

Statement of working capital Requirement

Current Assets
Raw materials 1,08,000 x 1 =

1,08,000

Finished goods 2,46,000 x 1

2,46,000

Debtors 2 months 2,46,000 X 2

4,92,000

Work in progress

88,500

Cash in hand and at Bank

60,000
9,94,500

Less : Current Liabilities

1,08,000

Creditors 1,08,000 x 1
Lag in payment of wages 1112 weeks
48 000 X 3/2 x 1/4

18,000

Lag in payment of overheads (90,000 x 1)

90,000
2,16,000

Working capital required

7,78,500

[9,94,500 - 2,16,000]
Working notes :
Estimated sales
= 15,600 units
A period of 4 weeks is taken as equivalent to one month.
Therefore, sales per month = 15,600 x 52

1200 units

Estimated sales per month = 265 x 1,200

= 3,18,000

Raw Materials p.m. 1,200 x 90

= 1,08,000

Direct Labour p.m. 1,200 x 40

= 48,000

Overheads p.m. 1,200 x 75

= 90,000

Cost of Sales/Finished Goods

= 2,46,000

Work in progress

= 54,000

Raw materials (2 weeks) 1,08,000 x 1/2

= 12,000

Labour (2 weeks) 48,000 x 1/2

= 22,500

Overhead (2 weeks) 90,000 x1/2 x 1/2

88,500

NOTE : Labour and overheads are reduced to one half as they accrue evenly during the year.
Problem 8. Prepare an estimate of working capital and projected Balance Sheet for the year
ended on 31.12.2002 from the following information.

(i) Share capital $ 5,00,000, 15% Debentures of $ 2,00,000, Fixed assets at cost of $ 3,00,000.
(ii) The expected ratios of cost to selling price are Raw materials 60%, Labour 10%,
Overheads 20%.
(iii) Raw materials are in stores for an average of 2 months.
(iv) Finished goods are kept in warehouse for 3 months.
(v) Expected level of production 1,20,000 units per year.
(vi) Each unit of production is expected to be in process for 1 month.
(vii) Credit given by suppliers is 2 months.
(viii) 20% of the output is sold against cash. Time lag in payment from debtors is 3 months.
(ix) Selling price is $ 5 per unit
(x) Labour and overheads will accrue evenly during the year.
Solution :

Statement of Working Capital requirement

Current Assets
Raw Materials (2 months)

60,000

Work in progress

37,500

Stock of finished goods (3 months)

1,35,000

Debtors 3 months

1,08,000

Total Current Assets

3,40,500

Less : Current Liability

Creditors 2 months

60,000

Working Capital required [3,40,500 60,000]

2,80,500

Working Notes:
Estimated production units 1,20,000 / 12

= 10,000 units

Sales p.m. 10,000 units x $ 5

= 50,000

(i) Finished goods :

Raw Materials 60% = 50,000 x 60/100

= 30,000

Direct Labour 10% = 50,000 x 10/100

= 5,000

Overheads 20% = 50,000 x 20/100

= 10,000

Finished goods/Cost of sales

= 45,000

(ii) Work in progress (1 month)

Raw materials

=30,000

Labour 5000 x 1/2

= 2,500

Overheads 10,000 x 1/2

= 5,000

W.I.P

= 37,500

(iii) Debtors (3months) at cost equivalent

Cost of sales pm

= 45,000

Less : Cash sales 20%

= 9,000

Cost of sales (credit) pm

= 36,000

Debtors (3 months) at cost equivalent

= 36,000 x 3

= 1,08,000

Projected Balance Sheet as on 31.12.2002

Liabilities
Share Capital

2,00,000

$
5,00,000

Assets
Fixed Assets at cost

15% Debentures

30,000

2,30,000

Current Assets :

60,000

Raw Materials

Creditors

Work in progress
Stock of Finished Goods
Debtors
Profit & Loss A/c
Cash (BF)
7,90,000