Problems and Solutions under Working Capital Requirement

Problem 1
Prepare an estimate of working capital requirement from the following information of a trading
concern.
Projected annual sales 10,000 units
Selling price Rs. 10 per unit
Percentage of net profit on sales 20%
Average credit period allowed to customers 8 Weeks
Average credit period allowed by suppliers 4 Weeks
Average stock holding in terms of sales requirements 12 Weeks
Allow 10% for contingencies
Solution: Statement of Working Capital Requirements
Current Assets Rs.
Debtors (8 weeks) (at cost) (80,000/52 × 8) 12,307
Stock (12 weeks) (80,000/52 ×12) 18,463
30,770
Less: Current Liability
Credits (4 weeks) (80,000/52 × 4) 6,154
24,616
Add: 10% for Contingencies 2,463
Working Capital Required 27,078
Working Notes
Sales = 10000×10 = Rs. 1,00,000
Profit 20% of Rs. 1,00,000 = Rs. 20,000
Cost of Sales=Rs.1,00,000 – 20,000 = Rs. 80,000
As it is a trading concern, cost of sales is assumed to be the purchases.

Problem 2
Prepare an estimate of working capital requirement from the following informations of
a trading concern.
Projected annual sales Rs. 6,50,000
Percentage of net profit on sales 20%
Average credit period allowed to debtors 10 Weeks
Average credit period allowed by creditors 4 Weeks
Average stock holding in terms of sales requirements 8 Weeks
Allow 20% for contingencies
Solution: Statement of Working Capital Requirements
Current Assets Rs.
Debtors (10 weeks) (at cost) (5,20,000/52 × 10) 1,00,000
Stock (8 weeks) (5,20,000/52 ×8) 80,000
1,80,000
Less: Current Liability
Credits (4 weeks) (5,20,000/52 × 4) (40,000)
1,40,000
Add: 20% for Contingencies 28,000
Working Capital Required 1,68,000
Working Notes
Sales = Rs. 6,50,000
Profit 25/125 of Rs. 6,50,000 = Rs. 1,30,000
Cost of Sales = Rs. 6,50,000 – 1,30,000 = Rs. 5,20,000
As it is a trading concern, cost of sales is assumed to be the purchases.

Problem 3
The board of directors of Aravind mills limited request you to prepare a statement showing
the working capital requirements for a level of activity of 30,000 units of output for the year.
The cost structure for the company’s product for the above mentioned activity level is given
below.
Cost per Unit (Rs.)
Raw materials 20
Direct labour 5
Overheads 15
Total 40
Profit 10
Selling price 50
(a) Past experience indicates that raw materials are held in stock, on an average for
2 months.
(b) Work in progress (100% complete in regard to materials and 50% for labour and
overheads) will be half a month’s production.
(c) Finished goods are in stock on an average for 1 month.
(d) Credit allowed to suppliers: 1 month.
(e) Credit allowed to debtors: 2 months.
(f) A minimum cash balance of Rs 25,000 is expected to be maintained.
Prepare a statement of working capital requirements.

Solution
Output per annum = 30,000 units
Output per annum = 12% of 30,000 =2,500 units
Raw materials p. m. Rs. 20 × 2500 50,000
Labour p. m. Rs. 5 × 2,500 12,500
Overheads p. m. Rs. 15 × 2,500 37,500
1,00,000
 Statement of Working Capital Requirements
Particulars Rs.
Stock of raw materials (2 months) 50,000 x 2 1,00,000
Work-in-progress (1/2 months)
Raw materials = 50,000 x ½ 25,000
Labour = 12,500 x ½ x 50/100 3,125
Overheads = 37,500 x ½ x 50/100 9,375 37,500
Stock of finished goods (1 month) 1, 00,000 x 1 1,00,000
Debtors (2 month) 1,00,000 x 2 2,00,000
Cash balance required 25,000
462,500
Less: Current liability
Creditors (1 month) 50,000 x 1 (50,000)
Working capital required 412,500
Problem 4
Selva and Co. desires to purchase a business and has consulted you and one point on which
you are to advise them is the average amount of working capital which will be required in the
first year’s working.
You have given the following estimates and instructed to add 10% to your computed
figure to allow for contingencies.
(i) Amount blocked up for stocks: Figures for the year
Stocks of finished product 3,000
Stocks of stores, materials, etc., 5,000
(ii) Average credit given:
Inland sales 4 weeks credit 260,000
Export sales— 1.5 weeks credit 65,000
(iii) Lag in payment of wages and other outputs
Wages — 1.5 weeks 240,000
Stocks of materials, etc. — 1.5 month 36,000
Rent, Royalties, etc.—6 months 8,000
Clerical staff— 1.5 month 60,000
Manager— ½ month 4,000
Miscellaneous expenses— 1.5 month 36,000
(iv) Payment in advance
Sundry Expenses (paid quarterly in advance) 6,000
(v) Undrawn profit on the average throughout the year 9,000
State your calculations for the average amount of working capital required.

Solution: Statement of Working Capital

Particulars Rs.
Current Assets
Stock of finished products 3,000
Stock of stores material, etc. 5,000
Sundry debtors
(a) Inland (4 weeks) 2,60,000 × 4/52 20,000
(b) Export Sales (1.5 weeks) 65,000 × 1.5/12 1,875 21,875
Payments in advance 6,000 × ¼ 1,500
Total (A) 31,375
Less: Lag in payment of wages (1.5 weeks) 24,000 × 1.5/12 6,923
Stock, Materials etc. (1.5 months) 36,000 × 1.5/12 4,500
Rent, Royalties, etc. (6 months) 8,000 × 6/12 4,000
Clerical staff (1.5 month) 60,000 × 1.5/12 7,500
Manager (1/2 month) 4000 × 0.5 167
Miscellaneous Expenses (1.5 months) 36,000 × 1.5/12 4,500
Total (B) 27,590

Net Working Capital (A – B) 3,785

Add: 10% Margin for Contingencies 379
Net Working Capital Required 4,164
Problem 5
A proforma cost sheet of a company provides the following particulars:
Elements of Cost Amt. Per Unit (Rs.)
Raw Materials 140
Direct Labours 60
Overheads 70
Total Cost 270
Profit 30
Selling Price 300
Further particulars available are:
Raw materials are in stock on an average for one month. Materials are in process on an
average for half a month. Finished goods are in stock on an average for one month.
Credit allowed by suppliers is one month – credit allowed to customers is two months. Lag in
payment of wages is 1.5 weeks. Lag in payment of overhead expenses is one month. One
fourth of the output is sold against cash. Cash in hand and at bank is expected to be Rs.
50,000.
You are required to prepare a statement showing the working capital needed to finance, a
level of activity of 2,40,000 units of production. You may assume that production is carried
on evenly throughout the year; wages and overhead accrue similarly and a time period of 4
weeks is equivalent to a month.
Note: Year = 4×12 = 48 weeks

Solution: Statement of Working Capital

Particulars Rs. Rs.
Current Assets
(i) Stock of raw materials (4 weeks) 2,40,000/48 × 140
= 7,00,000 × 4 28,00,000
(ii) Work in process (2 weeks)
Raw materials 7,00,000 × 2 14,00,000
Direct labour 2,40,000 × 60/48, 3,00,000 × 2 6,00,000
Overheads 2,40,000 × 70/48, 3,50,000 × 2 7,00,000 27,00,000
(iii) Stock of finished goods (4 weeks)
Raw Materials 7,00,000 × 4 28,00,000
Direct Labour 3,00,000 × 4 12,00,000
Overheads 3,50,000 × 4 14,00,000 54,00,000
(iv) Sundry Debtors (8 weeks)
Raw Materials 7,00,000 × 8 × ¾ 42,00,000
Direct Labour 3,00,000 × 8 × ¾ 18,00,000
Overheads 3,50,000 × 8 × 3/4 21,00,000 81,00,000
Cash in hand and at Bank 50,000
1,90,50,000
Less: Current Liabilities
(i) Sundry creditors (4 weeks) 7,00,000 × 4 28,00,000
(ii) Wages Outstanding (1.5 weeks) 3,00,000 × 3/2 4,50,000
(iii) Lag in payment of overhead (4 weeks) 3,50,000 × 4 14,00,000 46,50,000
Net Working Capital Required 1,44,00,000
Problem 6

A proforma cost sheet of a company provides the following particulars:

Particulars Amount per unit
Elements of Cost:
Raw materials 80
Direct labour 30
Overheads 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 maintained 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: Statement showing determination of net working capital
Particulars Rs.
(A) Current assets:
(i) Stock of materials for 1 month: (1,04,000 x Rs 80 x 4/52) 6,40,000
(ii) Work-in-progress for 0.5 month:
(a) Material (1,04,000 x Rs 80 x 2/52) x 0.50 1,60,000
(b) Labour (1,04,000 x Rs 30 x 2/52) x 0.50 60,000
(c) Overheads (1,04,000 x Rs 60 x 2/52) x 0.50 1,20,000
(iii) Finished goods for 1 month: (1,04,000 x Rs 170 x 4/52) 13,60,000
(iv) Debtors for 2 months (78,000 x Rs 170 x 8/52) 20,40,000
(v) Cash in hand and at bank 3,65,000
Total investments in current assets (A) 47,45,000
(B) Current liabilities:
(i) Creditors, 1 month’s purchase of raw materials, (i.e. 1,04,000 x Rs.80 x 6,40,000
4/52)
(ii) Average time-lag in payment of expenses
(a) Overheads (1,04,000 x Rs 60 x 4/52) 4,80,000
(b) Labour (1,04,000 x Rs 30 x 3/104) 90,000
Total estimate of current liabilities (B) 12,10,000
Net Working Capital = Current assets – Current liabilities (A – B) 35,35,000
Working Notes and Assumptions
1. 26,000 units have been sold for cash. Therefore, credit sales pertain to 78,000 units only.
2. Year has 52 weeks.
3. All overheads are assumed to be variable. Presence of depreciation element in overheads
will lower the working capital requirement.
Problems for Practice
Problem 1
V.S.M. Ltd. is engaged in large scale retail business.
From the following informations you are required to
forecast their working capital requirements.

(Ans: 2,475,000)
Projected Annual Sales Rs. 13,000,000
Percentage of net profit on sales 25%
Average credit period allowed to debtors 8 weeks.
Average credit period allowed by creditors 4 weeks.
Average stock carrying 8 weeks (in terms of sales requirements).
Add : 10% to computed figures to allow for contingencies.

Problem 2
Prepare an estimate of working capital requirements.
(i) Projected annual sales — 80,000 units.
(ii) Selling price Rs. 8 per unit.
(iii) Percentage of profit 20%.
(iv) Credit allowed to debtors — 10 weeks.
(v) Credit allowed to suppliers — 8 weeks.
(vi) Average stock holding (in terms of sales) — 10 weeks.
(vii) Allow 20% for contingencies.
(Ans: 141,786)
Problem 3
Arvind Ltd. supplies the following information’s for calculating the working capital. Firm
levels of activity of Rs. 2,40,000 units. The cost structure particulars are:
Cost Per Unit (Rs.)
Raw materials 30
Direct labour 10
Over-heads 20
Total 60
Profit 15
Selling price 75
(a) Raw materials are in store on average for 1 month.
(b) Work in process (100% complete in regard to materials and 50% for labour and overheads
for half a month’s production.
(c) Finished goods remain in godown on average for a month.
(d) Suppliers one month to customers 2 months (calculation of customers may be made on
selling price).
(e) Minimum cash balance required is Rs. 30,000.
(f) The production is evenly throughout the year.
(Ans: 4,680,000)
Problem 4
A company Ltd. supplies the following cost sheet:
Element of cost
Raw material — 45%
Labour — 15%
Overheads — 25%
The following further particulars are available.
(i) Raw materials remain in shares 5 weeks.
(ii) Cash in processing 4 weeks.
(iii) Finished goods in own house 6 weeks.
(iv) Credit period to customers 8 weeks supplies 4 weeks.
(v) Lag in payment wages 2 weeks.
(vi) Selling price per unit Rs. 60.
You are required to prepare the working capital requirements adding 15% for contribution
in all levels of activity of 1,04,000 units of production made during the period.
(Ans. Rs. 2,017,100)
Problem 5
Q Ltd sells goods at a uniform rate of grass profit of 20% on sales including depreciation as
part of cost of production its annual figures are as follows.
Sales (At 2 months credit) 24,00,000
materials consumed (supplier, credit 2 months) 6,00,000
Wages paid (monthly at the beginning of subsequent month) 4,80,000
Manufacturing expenses (Cash expenses are paid one month in arrear) 6,00,000
Administration expenses (Cash expenses are paid one month in arrears) 1,50,000
Sales promotion expenses 75,000
The company keeps one month stock each of raw materials and finished goods.
A minimum cash balance of Rs. 80,000 is always keep. The company wants, to adopt a 10%
safety margin in the maintenance of working capital The company has no work in progress
Find out the requirement of working capital of the company on cash cost basis.
(Ans: 444,125)

Problem 6
The following information has been extracted from the records of the company.
Product cost sheet Rs/unit
Raw materials 45
Direct labour 20
Over heads 40
Total 105
Profit 15
Selling price 120
1. Raw materials are in stock on an average of two months.
2. The materials are in process on an average for 4 weeks. The degree of completions 50%.
3. Finished goods stock on an average is one month
4. The log in payment of wages & over heads is 1 ½ weeks
5. Time lag in receipts of proceeds from debtors is 2 months
6. Credit allowed by suppliers is one month
7. 20% of the output is sold against cash
8. The company is expects to keep a cash balance of Rs. 1,00,000
9. Take 52 weeks per annum.
The company is poised for a manufacture of 1,44,000 unit, in the year.
You are required to prepare working capital requirement of the company.
(Ans: 4,536,307)
Problem 7
A proforma cost sheet of a company provides the following data:
Rs
Raw material cost per unit 117
Direct labour cost per unit 49
Factory over head cost per unit
(Includes depreciation of 18 per unit 98
Total cost per unit 264
Profit 36
Selling price per unit 300
Following additional information is available;
Average Raw material in Stock 4 weeks
Average work - in - progress 2 weeks
(% completion with respect to materials 80%, Labour & overheads 60%)
Finished goods in stock 3 weeks
Credit period allowed to debtors 6 weeks
Credit period availed from supplier 8 weeks
Time lag in payment of wages 1 week
Tine lag in payment of overheads 2 week
The company sells one - fifth of the output against cash & maintains cash balance of Rs.
2,50,000
Required:
Prepare a statement showing estimate of working capital needed to finance a budgeted
activity level of 78,000 units. You may assume that production is carried an evenly
throughout the year & wages & overheads accrue similarly.
(Ans: 2,625,700)
Problem 8
The Board of Directors of Nanak Engineering Company Private Ltd. request you to prepare
a statement showing the working Capital Requirements for a level of activity of Rs. 1,56,000
units of production.
The following information’s are available for your calculations:
Cost Per Unit (Rs.)
Raw materials 90
Direct labour 40
Over-heads 75
Total 205
Profit 60
Selling price 265
(i) Raw materials are in stock, on average one month.
(ii) Materials are in process, on average 2 weeks.
(iii) Finished goods are in stock, on average one month.
(iv) Credit allowed by suppliers, one month.
(v) Time lag in payment from debtors, 2 months.
(vi) Lag in payment of wages, 1.5 weeks.
(vii) Lag in payment of overheads is one month.
20% of the output is sold against cash. Cash in hand and at bank is expected to be Rs.
60,000. It is to be assumed that production is carried on evenly throughout the year; wages
and overheads accrue similarly and a time period of 4 weeks is equivalent to a month.
(Ans: 6,606,000