CHAPTER 13

Solved Problems
P.13.8 A proforma cost sheet of a company provides the following particulars:
Particulars Amount per unit
Elements of cost:
Raw materials Rs 80
Direct labour 30
Overhead 60
Total cost 170
Profit 30
Selling price 200

The following further particulars are available:

Raw materials in stock, on average, one month; Materials in process (completion stage, 50 per cent), on
average, half a month; Finished goods in stock, on average, one month.
Credit allowed by suppliers is one month; Credit allowed to debtors is two months; Average time-lag in
payment of wages is 1.5 weeks and one month in overhead expenses; one-fourth of the output is sold
against cash; cash in hand and at bank is desired to be mantained at Rs 3,65,000.
You are required to prepare a statement showing the working capital needed to finance a level of activity
of 1,04,000 units of production. You may assume that production is carried on evenly throughout the year,
and wages and overheads accrue similarly. For calculation purposes, 4 weeks may be taken as equivalent
to a month.
Solution

TABLE 13.2 Statement showing determination of net working capital

(A) Current assets:
(i) Stock of materials for 1 month: (1,04,000 Rs 80 4/52) Rs 6,40,000
(ii) Work-in-progress for 0.5 month:
(a) Material (1,04,000 Rs 80 2/52) 0.50 1,60,000
(b) Labour (1,04,000 Rs 30 2/52) 0.50 60,000
(c) Overheads (1,04,000 Rs 60 2/52) 0.50 1,20,000
(iii) Finished goods for 1 month: (1,04,000 Rs 170 4/52) 13,60,000
(iv) Debtors for 2 months (78,000 Rs 170 8/52) 20,40,000
(v) Cash in hand and at bank 3,65,000
Total investments in current assets 47,45,000
(B) Current liabilities:
(i) Creditors, 1 months purchase of raw materials, (i.e. 1,04,000 Rs.80 4/52) 6,40,000
(ii) Average time-lag in payment of expenses
(a) Overheads (1,04,000 Rs 60 4/52) 4,80,000
(b) Labour (1,04,000 Rs 30 3/104) 90,000
Total estimate of current liabilities 12,10,000
(C) Net working capital = Current assets Current liabilities (A B) 35,35,000

Working Notes and Assumptions

(i) 26,000 units have been sold for cash. Therefore, credit sales pertain to 78,000 units only.
(ii) Year has 52 weeks.
(iii) All overheads are assumed to be variable. Presence of depreciation element in overheads will lower
the working capital requirement.
P.13.9 From the following information, extracted from the books of a manufacturing company, compute the
operating cycle in days:
Period covered: 365 days Average period of credit allowed by suppliers, 16 days
Other data are as follows:
(Rs 000)
 Average debtors (outstanding) 480
Raw material consumption 4,400
Total production cost 10,000
Total cost of sales 10,500
Sales for the year 16,000
Value of average stock maintained:
Raw material 320
Work-in-process 350
Finished goods 260

Solution

TABLE 13.7 Determination of operating cycle (amount in 000)

Particulars Days
(i) Raw material holding period (365 days Rs 320/4,400) 27
(ii) Less: Creditors payment period (16)
(iii) Work-in-process holding period (365 days Rs 350/Rs 10,000) 13
(iv) Finished goods holding period (365 days Rs 260/Rs 10,000) 9
(v) Debtors collection period (365 days Rs 480/Rs 16,000) (sales given are assumed equal to credit sales) 11
Duration of operating cycle 44

P.13.10 Foods Ltd is presently operating at 60 per cent level, producing 36,000 packets of snack foods and
proposes to increase its capacity utilisation in the coming year by 33.33 per cent over the existing level of
production. The following data has been supplied:
(i) Unit cost structure of the product at current level:
Raw material Rs 4
Wages (variable) 2
Overheads (variable) 2
Fixed overhead 1
Profit 3
Selling price 12
(ii) Raw materials will remain in stores for 1 month before being issued for production. Material will remain
in process for further 1 month. Suppliers grant 3 months credit to the company.
(iii) Finished goods remain in godown for 1 month.
(iv) Debtors are allowed credit for 2 months.
(v) Average time-lag in wages and overhead payments is 1 month and these expenses accrue evenly
throughout the production cycle.
(vi) No increase either in cost of inputs or selling price is envisaged.
Prepare a projected profitability statement and a statement showing working capital requirement at the
new level, assuming that a minimum cash balance of Rs 19,500 has to be maintained.
Solution
TABLE 13.10 Projected profitability statement at 80 per cent level of capacity (48,000
packets)
Sales revenue (48,000 Rs 12) Rs 5,76,000
Less: Cost of sales:
Raw material (48,000 Rs 4) Rs 1,92,000
Wages (48,000 Rs 2) 96,000
Overheads, variable (48,000 Rs 2) 96,000
Fixed overheads (48,000 Rs 0.75) 36,000@ 4,20,000
Profit 1,56,000
@
It is assumed the total fixed overheads are Rs 36,000 (earlier Re 1 per unit was the absorption rate 36,000
Re 1; at 48,000 units, per unit fixed overheads are Re 0,75).

TABLE 13.11 Statement showing determinatison of net working capital at 48,000

packets
 (A) Current assets:
(i) Stock of raw materials (48,000 Rs 4 1/12) Rs 16,000
(ii) Work-in-process (48,000 Rs 6.375* 1/12) 25,500
(iii) Finished goods (48,000 Rs 8.75 1/12) 35,000
(iv) Debtors (48,000 Rs 8.75 2/12) 70,000
(v) Cash 19,500
Total current assets 1,66,000
(B) Current liabilities:
(i) Creditors (48,000 Rs 4 3/12) 48,000
(ii) Wages (48,000 Rs 2 1/12) 8,000
(iii) Variable overheads (48,000 Rs 2 1/12) 8,000
(iv) Fixed overheads (48,000 Re 0.75 1/12) 3,000
Total current liabilities 67,000
(C) Net working capital (A B) 99,000
*Material = Rs 4.0 + 50 per cent of other conversion costs (Rs 2 wages + Rs 2 variable overheads + Re 0.75
fixed overheads)
Assumption: Since wages and overhead expenses accrue evenly throughout the production cycle, it is
assumed that they will be in process for half-a-month on an average. In other words, conversion costs will
be 50 per cent. Fixed overheads are exclusive of depreciation.
P.13.11 You are supplied with the following information in respect of XYZ Ltd for the ensuing year:
Production of the year, 69,000 units
Finished goods in store, 3 months
Raw material in store, 2 months consumption
Production process, 1 month
Credit allowed by creditors, 2 months
Credit given to debtors, 3 months
Selling price per unit, Rs 50
Raw material, 50 per cent of selling price
Direct wages, 10 per cent of selling price
Manufacturing and administrative overheads, 16 per cent of selling price
Selling overheads, 4 per cent of selling price
There is a regular production and sales cycle and wages overheads accrue evenly. Wages are paid in
the next month of accrual. Material is introduced in the beginning of the production cycle. You are required
to ascertain its working capital requirement.
Solution
Statement showing working capital requirement
(A) Current assets:
(i) Raw material in store (69,000 Rs 25 2/12) Rs 2,87,500
(ii) Work-in-process (69,000 Rs 31.5* 1/12) 1,81,125
(*Material, Rs 25 + 0.50 (Rs 5, Direct wages + Rs 8,
Manufacturing and other administrative overheads)
(iii) Finished goods in store (69,000 Rs 38 3/12) 6,55,500
(iv) Debtors (69,000 Rs 40 3/12) 6,90,000
Total current assets 18,14,125
(B) Current liabilities:
(i) Creditors (69,000 Rs 25 2/12) 2,87,500
(ii) Wages (69,000 Rs 5 1/12) 28,750
Total current liabilities 3,16,250
(C) Net working capital (A B) 14,97,875

Assumptions: (i) Conversion costs (wages, manufacturing and other administrative overheads) are
assumed to be equivalent to 50 per cent to determine WIP (ii) sales are credit sales and equivalent to units
produced (69,000).
P.13.12 On April 1 of the current year, the board of directors of Dowell Ltd wishes to know the amount of
working capital that will be required to meet the programme of activity they have planned for the year. The
following information is available:
(i) Issued and paid-up capital, Rs 2,00,000.
(ii) 5% Debentures (secured on assets), Rs 50,000.
(iii) Fixed assets valued at Rs 1,25,000 on March 31 of the previous year.
 (iv) Production during the previous year was 60,000 units; it is planned that this level of activity should
be maintained during the present year.
(v) The expected ratios of cost to selling price are - raw materials 60 per cent, direct wages 10 per
cent and overheads 20 per cent.
(vi) Raw materials are expected to remain in store for an average of two months before these are
issued for production.
(vii) Each unit of production is expected to be in process for one month. Full unit of raw materials is
required in the beginning of production.
(viii) Finished goods will stay in warehouse for approximately three months.
(ix) Creditors allow credit for 2 months from the date of delivery of raw materials.
(x) Credit allowed to debtors is 3 months from the date of dispatch.
(xi) Selling price per unit is Rs 5.
(xii) There is a regular production and sales cycle.
Prepare:
(a) working capital requirement forecast; and
(b) an estimated profit and loss account and balance sheet at the end of the year.
Solution
(a) Forecast of working capital of Dowell Ltd
(A) Current assets:
(i) Raw materials (60,000 Rs 3 2/12) Rs 30,000
(ii) Work-in-process (60,000 Rs 3.75 1/12) 18,750
(Rs 3 material cost + 50 per cent of wages and overheads i.e., Rs 1.5)
(iii) Finished goods (60,000 Rs 4.5 3/12) 67,500
(iv) Debtors (60,000 Rs 4.5 3/12) 67,500
Total current assets 1,83,750
(Contd.)
(B) Current liabilities: Creditors (60,000 Rs 3 2/12) 30,000
(C) Net working capital (A B) 1,53,750

(b) Projected profit and loss account of the current year

Sales revenue (60,000 Rs 5) Rs 3,00,000
Less: Cost of sales:
Raw material (0.60 Rs 3,00,000) Rs 1,80,000
Direct wages (0.10 Rs 3,00,000) 30,000
Overheads (0.20 Rs 3,00,000) 60,000 2,70,000
Less: Interest (Rs 50,000 0.05) 2,500
Profit 27,500

Projected balance sheet at the end of March 31, current year

Liabilities Assets
Share capital Rs 2,00,000 Fixed assets Rs 1,25,000
Reserves & surplus: Current assets:
Profit of the current year 27,500 Raw material 30,000
Profit & loss A/c (balancing figure) 8,750 Work-in-progress 18,750
5% Debentures 50,000 Finished goods 67,500
Creditors 30,000 Debtors at selling price
(15,000 units Rs 5) 75,000
3,16,250 3,16,250

P.13.13 A company is considering its working capital investment and financial policies for the next year.
Estimated fixed assets and current liabilities for the next year are Rs 2.60 crore and Rs 2.34 crore
respectively. Estimated sales and EBIT depend on current assets investment, particularly inventories and
book-debt. The financial controller of the company is examining the following alternative working capital
policies (Rs crore):
Working capital policy Investment in current assets Estimated sales EBIT
Conservative 4.50 12.30 1.23
Moderate 3.90 11.50 1.15
Aggressive 2.60 10.00 1.00
 After evaluating the working capital policy, the financial controller has advised the adoption of the
moderate working capital policy. The company is now examining the use of long-term and short-term
borrowings for financing its assets. The company will use Rs 2.50 crore of the equity funds. The corporate
tax rate is 35 per cent. The company is considering the following debt alternatives:
Financing Policy Short-term debt Long-term debt
Conservative 0.54 1.12
Moderate 1.00 0.66
Aggressive 1.50 0.16
Interest rate-Average (%) 12 16

Required: (1) Working capital investment for each policy. (a) Net working capital position, (b) Rate of
return, and (c) Current ratio
(2) Financing for each policy. (a) Net working capital position, (b) Rate of return on shareholder equity,
and (c) Current ratio
Solution
(1) Statement showing working capital investment under each policy
Particulars Working capital policy
Conservative Moderate Aggressive
(A) Current assets 4.50 3.90 2.60
(B) Fixed assets 2.60 2.60 2.60
(C) Total assets (A) + (B) 7.10 6.50 5.20
(D) Current liabilities 2.34 2.34 2.34
(E) Net worth (C) (D) 4.76 4.16 2.86
(F) Estimated sales 12.30 11.50 10.00
(G) EBIT 1.23 1.15 1.00
(a) Net working capital position (A) (D) 2.16 1.56 0.26
(b) Rate of return (G)/(C) (in per cent) 17.3 17.7 19.2
(c) Current ratio (A)/(D) 1.92 1.67 1.11

(2) Statement showing effect of financing under alternative financing policy

(Rs in crores)
Particulars Financing policy
Conservative Moderate Aggressive
(A) Current assets 3.90 3.90 3.90
(B) Fixed assets 2.60 2.60 2.60
(C) Total assets (A) + (B) 6.50 6.50 6.50
(D) Current liabilities 2.34 2.34 2.34
(E) Short-term debt 0.54 1.00 1.50
(F) Long-term debt 1.12 0.66 0.16
(G) Equity capital 2.50 2.50 2.50
Total liabilities (D) + (E) + (F) + (G) 6.50 6.50 6.50
Estimated sales 11.50 11.50 11.50
(H) EBIT 1.15 1.15 1.15
(I) Less: Interest on short-term debt [12% of (E)] (0.06) (0.12) (0.18)
(J) Interest on long-term debt [16% of (F)] (0.18) (0.11) (0.03)
(K) EBT [(H) (I) (J)] 0.91 0.92 0.94
(L) Less: Taxes @ 35% (0.32) (0.32) (0.33)
(M) EAT [(K) (L)] 0.59 0.60 0.61
(a) Net working capital [(A) (D) (E)] 1.02 0.56 0.06
(b) Rate of return on equity funds [(M)/(G)%] 23.6% 24% 24.4%
(c) Current ratio [(A)/(D) + (E) 1.35 1.17 1.02

Review Questions
13.12 The management of Gemini Ltd has called for a statement showing the working capital needed to
finance a level of activity 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 per unit
 Raw materials Rs 20
Direct labour 5
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 Rs 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.
13.13 A client of yours, Care Ltd, is about to commence a new business, and finance has been provided in
respect of fixed assets. They have, however, asked you to advise the additional amount which they
should make available for working capital.
They provide you with the following estimates for their first year and inform you that they have
arranged on overdraft limit with their banker of Rs 1,50,000.
Average period Estimate for
of credit the first year
Purchase of materials 6 weeks Rs 26,00,000
Wages 1.5 weeks 19,50,000
Overheads:
Rent, etc. 6 months 1,00,000
Directors and managers salaries 1 month 3,60,000
Travellers and office salaries 2 weeks 4,55,000
Travellers commission 3 months 2,00,000
Other overheads 2 months 6,00,000
Sales cash 1,40,000
credit 7 weeks 65,00,000
Average amount of stocks and work-in-progress 3,00,000
Average amount of undrawn profits 3,10,000

Sales were made at an even rate for the year.

You are required to prepare from the above figures and information table for submission to your
clients, giving an estimate of the average amount of working capital which they should provide. State
your assumptions, if any, clearly.
13.14 Hi-Tech Ltd plans to sell 30,000 units next year. The expected per unit cost of goods is as follows:
Raw material Rs 100
Manufacturing expenses 30
Selling, administrative and financial expenses 20
Selling price 200

The duration at various stages of the operating cycle is expected to be as follows:

Raw material stage, 2 months
Work-in-process stage, 1 month
Finished goods stage, 1/2 month
Debtors stage, 1 month
Assume the monthly sales level of 2,500 units. Calculate the investment in various current assets
and estimate the gross working capital requirement if the desired cash balance is 5 per cent of the
gross working capital requirements.
13.15 Prepare an estimate of net working capital requirement for the WCM Ltd adding 10 per cent for
contingencies from the information given below:
Estimated cost per unit of production Rs 170 includes raw materials Rs 80, direct labour Rs 30 and
overheads (exclusive of depreciation) Rs 60. Selling price is Rs 200 per unit. Level of activity per
annum 1,04,000 units. Raw material in stock: average 4 weeks; work-in-progress (assume 50 per
cent completion stage): average 2 weeks; finished goods in stock: average 4 weeks; credit allowed by
the suppliers: average 4 weeks; credit allowed to debtors: average 8 weeks; lag in payment of wages:
average 1.5 week; and cash at bank is expected to be Rs 25,000.
 You may assume that production is carried on evenly throughout the year (52 weeks) and wages
and overheads accrue similarly. All sales are on credit basis only. You may state your assumptions, if
any.
13.16 Determine the working capital requirements from the following particulars:
Annual budget for: Amount (Rs lakhs)
Raw materials 360
Supplies and components 120
Manpower 240
Factory expenses 60
Administration 90
Sales 1,190

You are given the following additional information:

(i) Stock-levels planned: Raw materials, 30 days, supplies and components, 90 days.
(ii) 50 per cent of the sales is for cash; for the remaining 20 days credit is normal.
(iii) Finished goods are held in stock for a period of 7 days before they are released for sale.
(iv) Goods remain in process for 5 days.
(v) The company enjoys 30 days credit facilities on 20 per cent of the purchases.
(vi) Cash/bank balances had been planned to be kept at the rate of half months budgeted
expenses.
You may make assumptions as considered necessary and relevant in this connection.
13.17 M/s PQR Ltd have approached their bankers for their working capital requirement, who have agreed to
sanction the same by retaining the margins as under:
Raw material 20 per cent
Stock-in-process 30
Finished goods 25
Debtors, net 10

From the following projections for next year, you are required to work out:
(a) the working capital required by the company; and
(b) the working capital limits likely to be approved by bankers.
Estimates for next year
Annual sales Rs 14,40,000
Cost of production 12,00,000
Raw material purchases 7,05,000
Monthly expenditure 25,000

Anticipated opening stock of raw materials: Rs.1,40,000:

Anticipated closing stock of raw materials: Rs.1,25,000
Inventory norms:
Raw material 2 months
Work-in-progress 15 days
Finished goods 1 month
The firm enjoys a credit of 15 days on its purchases and allows one month credit on its supplies. On
sales orders the company has received an advance of Rs 15,000. State your assumptions, if any.
13.18 PQR Ltd sells goods in domestic market on a gross profit of 25 per cent, not counting depreciation as
a part of the cost of goods sold. Its estimates for next year are as follows:
Amount (Rs in lakh)
SalesHome at one months credit 1,200
Exports at 3 months credit, selling price 10 per cent below home price 540
Materials used (suppliers extend 2 months credit) 450
Wages paid, 1/2 month in arrears 360
Manufacturing expenses (cash) paid, one months arrears 540
Depreciation on fixed assets 60
Administrative expenses, paid one month in arrears 120
Sales promotion expenses (payable quarterlyin advance) 60
Incometax payable in 4 instalments of
which one falls in the next financial year 150
 The company keeps one months stock of each of raw materials and finished goods and believes in
keeping Rs 20 lakh as cash.
Assuming a 15 per cent safety margin, ascertain the estimated working capital requirements of the
company (Ignore work-in-process).

Answers
13.12 Rs 40,25,000.
13.13 Rs 1,50,000.
13.14 Rs 1,19,517.
13.15 Rs 49,66,500.
13.16 Rs 111.42 lakh.
13.17 (a) Rs 3,35,625, (b) Rs 2,62,500.
13.18 Rs 237.5 lakh.