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MB0045 : Given the following information in terms of per unit costs, prepare a statement showing the working capital requirement.

Posted on: October 18, 2011

MB0045: Given the following information in terms of per unit costs, prepare a statement showing the working capital requirement.

Raw material            60

Direct labour            22

Overheads                44

Total cost                 126

Profit                        18

Selling price             140

 

The following additional information is available:

Average raw material in stock              one month

Average materials in process                15 days

Credit allowed by suppliers                  one month

Credit allowed to debtors                     two months

Time lag in payment of wages             15 days

Time lag in payment of overheads       one month

Sales on cash basis                               20%

Cash balance to be maintained            80,000

 

You are required to prepare a statement showing the working capital required to finance a level of activity of 100,000 units of output. You may assume production is carried out evenly throughout the year and payments occur similarly. Assume 360 days in a year.


Solution:

Estimation of Working Capital

 a)      Investment in inventory

 1.      Raw material                        =          RMC x RMCP

 360

=          100,000 x 60 x 30

360

=          500,000

2.      Work in process inventory =          COP x WIPCP

 360

                                              

=          100,000 x 126 x 15

360

=          525,000

3.      Finished goods inventory     =          COS x FGCP

 360

                                               =          100000 x 126 x 60

360

=          2,100,000

b)     Investment in debtors                 =          Cost of credit sales x DCP

360

=          80,000 x 126 x 60

360

=          1,680,000

c)      Cash Balance                               =          80,000

d)     Total Current Asset (A+B+C)   =          4,885,000

e)      Current Liabilities

 1.      Creditors                                =          Purchase of raw materials x PDP

360

=          100,000 x 60 x 30 / 360 = 500,000

Wages                                     =          100,000 x 22 x 15 / 360 =91,667

3.      Overheads                              =          100000 x 44 x 30/360 = 366,667

f)       Total Current Liabilities             =          958334

                                    Net Working Capital (D – F)           =          3,926,666      

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