Urgent Query :Working Capital

Anuraag Sharma (Sr Executive Finance) (845 Points)

11 November 2009  

 

         
Question: PQ Ltd. A company newly commencing a business in 2005 has the undermentioned Projected Profit and Loss Account:
         
      Rs. Rs.
Sales       2,10,000
Cost of Goods Sold       1,53,000
Gross Profit       57,000
Administrative expenses     14,000  
Selling expenses     13,000 27,000
Profit Before Tax       30,000
Provision For Tax       10,000
Profit After Tax       20,000
The Cost of Goods sold has been arrived as under:      
Material Used     84,000  
Wages and Manufacturing expenses     62,500  
Depreication     23,500  
      1,70,000  
Less: Stock of Finished Goods        
(10% of goods produced not yet sold)     17,000  
      1,53,000  
The figure given above relate only to finished goods and not to work-in-progress. Goods equal to
15% of the year's production (in terms of physical unit) will be in process on the average requiring
full materials but only 40% other expenses. The company believes in keeping materials eqaul to 
2 months' consumption in stock.        
         
All Expenses will be paid in advance. Suppliers of materials wil extend 1-1/2 month credit. Sales will
be 20% for cash and the rest at 2 months' credit. 705 of the Income Tax will be paid in advance in
quarterly insatlments. The Company wishes to keep Rs. 8,000 in cash.    
         
Prepare an estimate of (i). Working capital, and (ii). Cash Cost of Working Capital.  
         
AS PER MY SOLUTION        
Estimate of working Capital Requirement:        
        (Amt in Rs.)
Particulars (i). Total Cost Basis (ii). Cash Cost Basis
         
Current Assets:        
Raw Material (84,000 x 2/12)   14000   14000
Work-in-Progress:        
Raw Material (15% of 84,000) 12600   12600  
Wages & Manufacturing Expenses   [15% of (40% of 62,500)] 3750   3750  
Depreciation [15% of (40% of 23,500)] 1410 17760 NIL 16350
Finished Stock:        
Raw Material (10% of 84,000) 8400   8400  
Wages & Manufacturing Expenses   (10% of 62,500) 6250   6250  
Depreciation (10% of 23,500)] 2350 17000 NIL 14650
Debtors:        
*[(2,10,000*80%)*2/12] * 28000    
**(WN 1)     ** 21180
Cash   8000   8000
Prepaid expenses:        
Wages & Manufacturing expenses (62,500/12) 5208   5208  
Administrative Expenses (14,000/12) 1167   1167  
Selling Expenses (13,000/12) 1083 7458 1083 7458
Total Current Assets (A) - 92218 - 81638
         
Current Liabilities:        
Sundry Creditors (84,000*1.5/12)   10500   10500
Provision For Taxation (30% of 10,000)   3000   3000
Total Current Liabilities (B) - 13500 - 13500
Working Capital Required [A-B] - 78718 - 68138
         
Working Notes:        
1.  Computation of Debtors as per Cash Cost Basis   Rs.  
         
Cost of Goods Sold     153000  
Less: Depreciation (90% of 23,500)     21150  
      131850  
Add: Administrative Expenses     14000  
  Selling Expenses     13000  
Total Cash Cost of Sales     158850  
Less: Cash Cost of Cash Sales 20% of above     31770  
Cash Cost of Credit Sales     127080  
Debtors at 2 months Credit  
21180  
         
AS PER ICAI STUDY MATERIAL        
 (i). Estimate of working Capital Requirement:        
         
Particulars Total Cost Basis    
         
Current Assets:        
Finished Stock:        
Raw Material (10% of 84,000) 8400      
Wages & Manufacturing Expenses   (10% of 62,500) 6250      
Depreciation (10% of 23,500)] 2350 17000    
Work-in-Progress:        
Raw Material (15% of 84,000) 12600      
Wages & Manufacturing Expenses   [15% of (40% of 62,500)] 3750      
Depreciation [15% of (40% of 23,500)] 1410 17760    
Raw Material [(84,000 + 12600) x 2/12]   16100    
Debtors [(2,10,000*80%)*2/12]   28000    
Cash   8000    
Prepaid expenses:        
Wages & Manufacturing expenses         [(62,500 + 3,750)/12) 5521      
Administrative Expenses (14,000/12) 1167      
Selling Expenses (13,000/12) 1083 7771    
Total Current Assets (A) - 94631    
         
Current Liabilities:        
Sundry Creditors [(84,000 + 12,600 + 16,100)*1.5/12]   14088    
Provision For Taxation (30% of 10,000)   3000    
Total Current Liabilities (B) - 17088    
Working Capital Required [A-B] - 77543    
         
(ii). Estimate of Cash Cost of Working Capital: Rs. Rs.    
         
Working Capital as per (i) above   77543    
Less: Profit & Depreciation for which funds are not needed:        
Depreciation:        
Finished Goods (10% of 23,500) 2350      
Work-in-progress [15% of (40% of 23,500)] 1410      
Debtors [(23,500-2,350)*28,000/2,10,000] 2820      
  6580      
Profit included in Debtors (including income tax, i.e., Rs. 1,333)[30,000*28,000/2,10,000] 4000 10580    
Cash Cost of Working capital Required   66963    
         
         
         
PLEASE NOTE THE DIFFERENCE AND GUIDE ME ON THE SAME AT THE EARLIEST BY TAKING THE MATTER AS THE MOST URGENT!!!

Thanks in advance!!!