Chapter 13

Working Capital Management An Overview

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WORKING CAPITAL MANAGEMENT AN OVERVIEW

Nature of Working Capital Planning of Working Capital Management of Working Capital in India Solved Problem Mini Case
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NATURE OF WORKING CAPITAL Working capital management is concerned with the problems that arise in managing the current assets (CA), current liabilities (CL) and the interrelationships between them. Its operational goal is to manage the CA and CL in such a way that a satisfactory/acceptable level of net working capital (NWC) is maintained. Concepts and Definitions of Working Capital There are two concepts of working capital: 1) 2) Gross and Net

Gross Working Capital Gross working capital means the current assets which represent the proportion of investment that circulates from one form to another in the ordinary conduct of business. Net Working Capital The term net working capital can be defined in two ways: 1) 2) the most common definition of net working capital (NWC) is the difference between current assets and current liabilities; and alternate definition of NWC is that portion of current assets which is financed with long-term funds.
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The task of the financial manager in managing working capital efficiently is to ensure sufficient liquidity in the operations of the enterprise. The liquidity of a business firm is measured by its ability to satisfy short-term obligations as they become due. The three basic measures of a firms overall liquidity are 1) 2) 3) the current ratio, the acid-test ratio, and the net working capital

The Common Definition of NWC and its Implications The NWC is necessary due to non-synchronous nature of expected cash inflows and required cash outflows. The more predictable the cash inflows are, the less NWC will be required and vice-versa.

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Determining Financing Mix Financing mix is the choice of sources of financing of current assets. There are three basic approaches to determine an appropriate financing mix: 1) 2) 3) Hedging approach, also called the Matching approach; Conservative approach, and Trade-off between these two.

(a) Hedging Approach The term hedging is often used in the sense of a risk-reducing investment strategy involving transactions of a simultaneous but opposing nature so that the effect of one is likely to counterbalance the effect of the other. This approach to the financing decision to determine an appropriate financing mix is, therefore, also called as Matching approach. According to this approach, the maturity of the source of funds should match the nature of the assets to be financed. For the purpose of analysis, the current assets can be broadly classified into two classes: 1. those which are required in a certain operation and, hence, do not vary over time. 2. those which fluctuate over time. amount for a given level of

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TABLE 1 Estimated Total Funds Requirements of Hypothetical Ltd Month (1) January Total funds required (2) Permanent requirements (3) Rs 8,500 Rs 6,900(minimum amount required in any month) 8,000 7,500 7,000 6,900 7,150 8,000 8,350 8,500 9,000 8,000 7,500 6,900 6,900 6,900 6,900 6,900 6,900 6,900 6,900 6,900 6,900 6,900

(Amount in Rs lakh) Seasonal requirements (4) Rs 1,600

February March April May June July August September October November December

1,100 600 100 0 250 1,100 1,450 1,600 2,100 1,100 600
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11,600

According to the hedging approach, the permanent portion of funds required (Col.3) should be financed with long-term funds and the seasonal portion (Col.4) with short-term funds. With this approach, the short-term financing requirements (current assets) would be just equal to the shortterm financing available (current liabilities). Permanent Needs Permanent needs implies financing needs for fixed assets plus the permanent portion of current assets which remain unchanged over the year Seasonal Portion Seasonal portion implies the financing requirements for temporary current assets which vary over the year. (b) Conservative Approach This approach suggests that the estimated requirement of total funds should be met from longterm sources; the use of short-term funds should be restricted to only emergency situations or when there is an unexpected outflow of funds. In the case of the Hypothetical Ltd in Table 1, the total requirements, including the entire Rs 9,000 needed in October, will be financed by long-run sources. The short-term funds will be used only to meet contingencies. The amounts given in column 4 of Table 1 represent the extent to which short-term financial needs are being financed by long-term funds, that is, the NWC. The NWC reaches the highest level (Rs 2,100) in October (Rs 9,000 Rs 6,900). Any long-term financing in excess of Rs 6,900 in permanent financing the needs of the company represents NWC.
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Comparison of Hedging Approach with Conservative Approach A comparison of the two approaches can be made on the basis of 1) Cost considerations, and 2) Risk considerations. (1) Cost Considerations The cost of these financing plans has a bearing on the profitability of the enterprise. We assume that the cost of short-term funds and long-term funds is 3 per cent and 8 per cent respectively. Hedging Plan The cost of financing under the hedging plan can be estimated as follows: 1) Cost of short-term funds: The cost of short-term funds = average annual short-term loan x interest rate. Average annual short-term loan = total of monthly seasonal requirements (Col.4)(see slide 6th) divided by the number of months. Average annual short-term loan = Rs 11,600 lakh 12 = Rs 966.67 lakh. Short-term cost = Rs 966.67 lakh 0.03(check lines in black) = Rs 29 lakh. Cost of long-term funds = (Average annual long-term fund requirement) (annual interest rate) = Rs 6,900 lakh(minimum requirement every month) 0.08 = Rs 552 lakh. Total cost under hedging plan = total of (i) + (ii) = Rs 29 lakh + Rs 552 lakh = Rs 581lakh McGraw-Hill Publishing Company Limited, Financial Management 13-8 13-8 Tata
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2)

3)

(2) Risk Considerationss The two approaches can also be contrasted on the basis of the risk involved. Hedging Approach The hedging approach is more risky in comparison to the conservative approach. There are two reasons for this. First, there is, as already observed, no NWC with the hedging approach because no long-term funds are used to finance short-term seasonal needs, that is, current assets are just equal to current liabilities. On the other hand, the conservative approach has a fairly high level of NWC. Secondly, the hedging plan is risky because it involves almost full utilisation of the capacity to use short-term funds and in emergency situations it may be difficult to satisfy the short-term needs.

Conservative Approach With the conservative approach, in contrast, the company does not use any of its short-term borrowings. Therefore, the firm has sufficient short-term borrowing capacity to cover unexpected financial needs and avoid technical insolvency.

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(c) A Trade-off Approaches

between

the

Hedging

and

Conservative

It has been shown that the hedging approach is associated with high profits as well as high risk, while the conservative approach provides low profits and low risk. Obviously, neither approach by itself would serve the purpose of efficient working capital management. A trade-off between these two extremes would give an acceptable financing strategy. The third approachtradeoff between the two approachesstrikes a balance and provides a financing plan that lies between these two extremes. Acceptable financing strategy is a trade-off between matching and conservative financing strategies.

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TABLE 2 Trade-off between Hedging and Conservative Approaches (Amount in Rs Lakh) Month (1) January February March April May June July August September October November December Total funds required (2) Rs 8,500 8,000 7,500 7,000 6,900 7,150 8,000 8,350 8,500 9,000 8,000 7,500 Permanent requirements (3) Rs 7,950 7,950 7,950 7,950 7,950 7,950 7,950 7,950 7,950 7,950 7,950 7,950 Seasonal requirements (4) Rs 550 50 0 0 0 0 50 400 550 1,050 50 0 2,700

The figures in Table 2 reveal that the maximum fund required is Rs 9,000 lakh (October) and the minimum is Rs 6,900 lakh (May). The average [(Rs 9,000 lakh + Rs 6,900) / 2]= Rs 7,950 lakh.
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Cost of the Financing Plan under the Trade-off Approach 1) Cost of short-term funds = (Average annual short-term funds required) (Rate of short-term interest) = Rs 2,700 lakh/12 = Rs 225 lakh 0.03 = Rs 6.75 lakh Cost of long-term funds = (Average long-term funds required) (Rate of interest on long-term funds) = Rs 7,950 lakh 0.08 = Rs 636 lakh Total cost of the trade-off plan = Rs 6.75 lakh + Rs 636 lakh = Rs 642.75 lakh

2)

3)

Risk Consideration The NWC under this plan would be Rs 1,050 lakh (Rs 7,950 lakh Rs 6,900 lakh).

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Comparison of the Trade-off Plan with the Hedging and Conservative Approaches TABLE 3 Comparision of Trade-off Plan Financing Plan (1) Hedging Trade-off Conservative Maximum NWC* (2) 0 Rs 1,050 2,100 Degree of risk (3) Highest Intermediate Lowest (Amount in Rs Lakh) Total cost of financing (4) Rs 581.00 642.75 720.00 Level of profits (5) Highest Intermediate Lowest

*The minimum level would be zero in each case. Interpretation From the summary of results in Table 3, it can be seen clearly that the hedging approach is the most risky while the conservative approach is the least risky. The trade-off plan stands midway; less risky than the hedging approach but more risky than the conservative approach. The measure of risk is the level of NWC.

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Planning of Working Capital

The need for working capital (WC) arises from the cash/operating cycle of a firm. It refers to the length of time required to complete the following sequence of events: conversion of cash into inventory, inventory into receivables and receivables into cash. The operating cycle creates the need for working capital and its length in terms of time-span required to complete the cycle is the major determinant of the firms working capital needs.

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In other words, the term cash cycle refers to the length of time necessary to complete the following cycle of events: 1) 2) 3) Conversion of cash into inventory; Conversion of inventory into receivables; Conversion of receivables into cash.

The operating cycle, which is a continuous process, is shown in Fig. 1.

Phase 3

Receivables

Cash

Phase 2 Phase 1 Inventory

Figure1: Operating Cycle

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Working capital can be 1) 2) Permanent and Temporary

Permanent (fixed) Working Capital Permanent working capital is a certain minimum level of working capital on a continuous and uninterrupted basis. Temporary (fluctuating/variable) Working Capital Temporary (fluctuating/variable) working capital is the working capital needed to meet seasonal as well as unforeseen requirements. In the case of an expanding firm, the permanent working capital line may not be horizontal. This is because the demand for permanent current assets might be increasing (or decreasing) to support a rising level of activity. In that case the line would be a rising one as shown in Fig. 3. Both kinds of working capital are necessary to facilitate the sales process through the operating cycle. Temporary working capital is created to meet liquidity requirements .

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Amount of Working Capital

Temporary Permanent Time

Figure 2: Permanent and Temporary Working Capital

Amount of Working Capital

Temporary or fluctuating

Permanent Time

Figure 3: Permanent and Temporary Working Capital

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Changes in Working Capital The changes in the level of working capital occur for the following three basic reasons: 1) 2) 3) Changes in the level of sales and/or operating expenses, Policy changes, and Changes in technology.

(1) Changes in Sales and Operating Expenses The first factor causing a change in the working capital requirement is a change in the sales and operating expenses. The changes in this factor may be due to three reasons: First, there may be a long-run trend of change. In the second place, cyclical changes in the economy leading to ups and downs in business activity influence the level of working capital, both permanent and temporary. The third source of change is seasonality in sales activity. The change in sales and operating expenses may be either in the form of an increase or decrease. An increase in the volume of sales is bound to be accompanied by higher levels of cash, inventory and receivables. The decline in sales has exactly the opposite effecta decline in the need for working capital. A change in the operating expensesrise or fallhas a similar effect on the levels of working capital.

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(2) Policy Changes The second major cause of changes in the level of working capital is because of policy changes initiated by the management. The term current asset policy may be defined as the relationship between current assets and sales volume. A firm following a conservative policy in this respect having a very high level of current assets in relation to sales may deliberately opt for a less conservative policy and vice versa. (3) Technological Changes Finally, technological changes can cause significant changes in the level of working capital. If a new process emerges as a result of technological developments, which shortens the operating cycle, it reduces the need for working capital and vice versa.

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Determinants of Working Capital Working capital requirements are determined by a variety of factors. These factors, however, affect different enterprises differently. In general, the factors relevant for proper assessment of the quantum of working capital required are: General Nature of Business Enterprises fall into some broad categories depending on the nature of their business. For instance, public utilities, The two relevant features are: (i) the cash nature of business, that is, cash sale, and (ii) sale of services rather than commodities. In view of these features, they do not maintain big inventories and have, therefore, probably the least requirement of working capital. At the other extreme are trading and financial enterprises. The nature of their business is such that they have to maintain a sufficient amount of cash, inventories and book debts. They have necessarily to invest proportionately large amounts in working capital. Production Cycle Another factor which has a bearing on the quantum of working capital is the production cycle. The term production or manufacturing cycle refers to the time involved in the manufacture of goods. It covers the time-span between the procurement of raw materials and the completion of the manufacturing process leading to the production of finished goods. Funds have to be necessarily tied up during the process of manufacture, necessitating enhanced working capital.

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Business Cycle The working capital requirements are also determined by the nature of the business cycle. Business fluctuations lead to cyclical and seasonal changes which, in turn, cause a shift in the working capital position, particularly for temporary working capital requirements. The variations in business conditions may be in two directions: (i) upward phase when boom conditions prevail, and (ii) downswing phase when economic activity is marked by a decline. During the upswing of business activity, the need for working capital is likely to grow to cover the lag between increased sales and receipt of cash as well as to finance purchases of additional material to cater to the expansion of the level of activity. Additional funds may be required to invest in plant and machinery to meet the increased demand. The downswing phase of the business cycle has exactly an opposite effect on the level of working capital requirement.

Production Policy The quantum of working capital is also determined by production policy. In the case of certain lines of business, the demand for products is seasonal, that is, they are purchased during certain months of the year.
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Credit Policy The credit policy relating to sales and purchases also affects the working capital. The credit policy influences the requirement of working capital in two ways: 1) through credit terms granted by the firm to its customers/buyers of goods; 2) credit terms available to the firm from its creditors. The credit terms granted to customers have a bearing on the magnitude of working capital by determining the level of book debts. The credit sales result in higher book debts (receivables). Higher book debts mean more working capital. On the other hand, if liberal credit terms are available from the suppliers of goods (trade creditors), the need for working capital is less. Growth and Expansion As a company grows, it is logical to expect that a larger amount of working capital is required. Vagaries in the Availability of Raw Material To meet vagaries in the unavailability, a firm should have excess inventory of raw materials to sustain smooth production. Such a firm would tend to have high level of WC.

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Profit Level Cash profit, per-se, should not be viewed as a source of financing WC. The actual availability of such funds would depend upon the firms requirement for payment of dividend, payment of loan instalment, creation of sinking fund, purchase of fixed assets, and so on. In case these requirements are substantial, cash profit is not likely to be available to meet the needs of a firm. Alternatively, only adjusted cash profits after provisioning for these requirements should be reckoned for WC financing. Level of Taxes The first appropriation out of profits is payment or provision for tax. The amount of taxes to be paid is determined by the prevailing tax regulation. Very often, taxes have to be paid in advance on the basis of the profit of the preceding year. Tax liability is, in a sense, short-term liability payable in cash. An adequate provision for tax payments is, therefore, an important aspect of working capital planning. If tax liability increases, it leads to an increase in the requirement of working capital and vice versa. Dividend Policy Another appropriation of profits which has a bearing on working capital is dividend payment. The payment of dividend consumes cash resources and, thereby, affects working capital to that extent. Conversely, if the firm does not pay dividend but retains the profits, working capital increases.
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Depreciation Policy Depreciation policy also exerts an influence on the quantum of working capital. Depreciation charges do not involve any cash outflows. The effect of depreciation policy on working capital is, therefore, indirect. Higher depreciation (enhanced rates of depreciations) has a positive impact on WC for two reasons: (i) lower tax liability and, hence, more cash profits and (ii) lower disposable profits and, therefore, a smaller dividend payment. They imply more cash with a corporate. Price Level Changes Changes in the price level also affect the requirements of working capital. Rising prices necessitate the use of more funds for maintaining an existing level of activity. For the same level of current assets, higher cash outlays are required. The effect of rising prices is that a higher amount of working capital is needed. Operating Efficiency Efficiency of operations accelerates the pace of cash cycle and improves the WC turnover resulting in reduced requirement of WC.
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Computation of Working Capital A firm should have adequate WC to support its budgeted level of activity in terms of production/sales. It should have neither more nor less WC than required. While the excessive WC adversely affects its profits, the inadequate WC interrupts its smooth operations. Therefore, its correct computation is an important constituent of efficient WC management. The relevant factors are the holding periods of the various types of inventories, debtors collection period, creditors payment period, budgeted yearly production/sales, cost of goods produced, cost of sales, average time-lag in payment of wages and other overheads, minimum cash balances and so on. Working capital requirements are to be computed with reference to cash costs (excluding depreciation) and not the sale price as depreciation is a non-cash cost and, hence, does not need WC. The investment required to finance debtors are at cost price. The cash cost approach is appropriate to determine WC requirement of a firm.

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Estimation of Current Assets: Raw Materials Inventory The investment in raw materials inventory is estimated on the basis of Eq. 1. Budgeted production (in units) Cost of raw material(s) per unit 12 months/365 days Work-in-Process (W/P) Inventory The relevant costs to determine work-in-process inventory are the proportionate share of cost of raw materials and conversion costs (labour and manufacturing overhead costs excluding depreciation). In case, full unit of raw material is required in the beginning, the unit cost of work-in-proess would be higher, that is, cost of full unit + 50 per cent of conversion cost, compared to the raw material requirement throughout the production cycle; W/P is normally equivalent to 50 per cent of total cost of production. Symbolically, Budgeted production (in units) Estimated workin-process cost per unit 12 months/365 days
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Average inventory holding period (months/days)

Average time span of work-in-progress inventory (months/days)

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Finished Goods Inventory Working capital required to finance the finished goods inventory is given by factors summed up in Eq. 3. Budgeted production (in units) Cost of goods produced per unit (excluding depreciation) 12 months/365 days Debtors The WC tied up in debtors should be estimated in relation to total cost price (excluding depreciation) Symbolically, Budgeted credit sales (in units) Cost of sales per unit excluding depreciation Average debt collection period (months/days) Finished goods holding period (months/days)

12 months/365 days

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Cash and Bank Balances Apart from WC needs for financing inventories and debtors, firms also find it useful to have some minimum cash balances with them. Estimation of Current Liabilities The working capital needs of business firms are lower to the that extent such needs are met through the current liabilities (other than bank credit) arising in the ordinary course of business. The important current liabilities (CL), in this context are, trade-creditors, wages and overheads:

Trade Creditors Budgeted yearly production (in units) Raw material cost per unit 12 months/365 days Note: Proportional adjustment should be made to cash purchases of raw materials. Direct Wages Budgeted yearly production (in units) Direct labour cost per unit 12 months/365 days
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Credit period allowed by creditors (months/days)

Average time-lag in payment of wages (months/days)

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The average credit period for the payment of wages approximates to a half-a-month in the case of monthly wage payment: The first days monthly wages are paid on the 30th day of the month, extending credit for 29 days, the second days wages are, again, paid on the 30th, extending credit for 28 days, and so on. Average credit period approximates to half-a-month.
Overheads (Other Than Depreciation and Amortisation) Budgeted yearly production (in units) Overhead cost per unit 12 months/365 days Average time-lag in payment of overheads (months/days)

The amount of overheads may be separately calculated for different types of overheads. In the case of selling overheads, the relevant item would be sales volume instead of production volume. The computation of working capital is summarised in format 1.

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FORMAT 1 Determination of Working Capital (I) Estimation of Current Asset: (a) Minimum desired cash and bank balances (b) Inventories Raw material Work-in-process Finished Goods (c) Debtors* Total Current Assets (II) Estimation of Current Liabilities: (a) Creditors** (b) Wages (c) Overheads Total Current Liabilities (III)Net Working Capital (I II) Add margin for contingency (IV)Net Working Capital Required *If payment is received in advance, the item would be listed in CL. **If advance payment is to be made to creditors, the item would appear under CA. The same would be the treatment for advance payment of wages and overheads.
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Amount

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MANAGEMENT OF WORKING CAPITAL IN INDIA Indian corporates seem to have adequate and satisfactory level of working capital as reflected in their liquidity ratios. The foreign controlled companies are placed in a better position relative to the domestic companies. There are wide inter-industry variations in the liquidity ratios of the corporate enterprises. With the exception of sugar, all other industry groups have safe and satisfactory liquidity position. The majority of Indian companies maintains relatively lower cash/bank balances. Marketable securities are yet to emerge as a popular means of cash management. The excess cash is deployed to retire short-term debt/in short-term bank deposits. In spite of the notable decline over the years, inventory consitutes a sizeable part of the total current assets of the Indian corporates. The most important objective of inventory management in India is avoid loss of production/sales. The popular control techniques are ABC, FSN and SDE and inventory turnover ratio and comparison with competitors are widely used to assess the performance of inventory management. Debtors/receivables also constitute a significant component of current assets. growth in sales is the most important objective of credit policy and the open credit with approval if exceeds a specified limit is the most favoured policy. It is common practice to prepare ageing schedule of debtors to assess the financial health of the customers before granting credit and monitoring purposes. To speed up collections, the corporates offer cash discount. The majority of the companies also charge penal interest. Accounts payable and short-term loans/advances are the major components of current liabilities. The length of the operating cycle is the most widely use method to determine working capital need. The working capital financing policy is based on the matching approach. The majority of the companies have occasionally experienced working capital shortage due mainly to excess inventory accumulation and poor debt collection.

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SOLVED PROBLEM

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While preparing a project report on behalf of a client you have collected the following facts. Estimate the net working capital required for that project. Add 10 per cent to your computed figure to allow contingencies: Particulars Estimated cost per unit of production: Raw material Direct labour Overheads (exclusive of depreciation, Rs 10 per unit) Total cash cost Additional information: Selling price, Rs 200 per unit Level of activity, 1,04,000 units of production per annum Raw materials in stock, average 4 weeks Work in progress (assume 50 per cent completion stage in respect of conversion costs and 100 per cent completion in respect of materials), average 2 weeks Finished goods in stock, average 4 weeks Credit allowed by suppliers, average 4 weeks Credit allowed to debtors, average 8 weeks Lag in payment of wages, average 1.5 weeks 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.
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Amount per unit

Rs 80 30 60 170

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Solution Net working capital estimate of a project (A) Current assets: (i) Raw materials in stock, (1,04,000 Rs 80 4/52) (ii) Work-in-progress (a) Raw material (1,04,000 Rs 80 2/52) (b) Direct Labour (1,04,000 Rs 15 2/52) (c) Overheads (1,04,000 Rs 30 2/52) (iii) Finished goods stock: (1,04,000 Rs 170 4/52) (iv) Debtors: (1,04,000 Rs 170 8/52) (v) Cash at bank Total investment in current assets (B) Current liabilities: (i) Creditors, average 4 weeks: (1,04,000 Rs 80 4/52)
Tata McGraw-Hill Publishing Company Limited, Financial Management (ii) Lag inpayment of wages (1,04,000 Limited, Financial Management Tata McGraw-Hill Publishing Company Rs 30 1.5/52)

Rs 6,40,000

3,20,000 60,000 1,20,000 13,60,000 27,20,000 25,000 52,45,000 6,40,000

13-34 13-34 90,000

Working Notes A full unit of raw material is required at the beginning of the manufacturing process and, therefore, total cost of the material, that is, Rs 80 per unit has been taken into consideration, while in the case of expenses, viz. direct labour and overheads, the unit has been finished only to the extent of 50 per cent. Accordingly, Rs 15 and Rs 30 have been charged for direct labour and overheads respectively in valuing work-in-process.

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MINI CASE

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Strong Cement Company Ltd has an installed capacity of producing 1.25 lakh tonnes of cement per annum; its present capacity utilisation is 80 per cent. The major raw material to manufacture cement is limestone which is obtained from the company's own mechanised mine located near the plant. The company produces cement in 200 kgs bags. From the information given below, determine the net working capital (NWC) requirement of the company for the current year. Cost structure per bag of cement (estimated) Gypsum Limestone Coal Packing material Direct labour Factory overheads (including depreciation of Rs 10) Administrative overheads Selling overheads Total cost Profit margin Selling price Add: Sale tax (10 per cent of selling price) Invoice price to consumers Rs 25 15 30 10 50 30 20 25 205 45 250 25 275

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Additional information: 1) 2) Desired holding prriod of raw materials: Gypsum, 3 months, Limestone, 1 month, Coal, 2.5 months, and Packing material, 1.5 months The product is in process for a period of 0.5 month (assume full units of materials, namely gypsum limestone and coal are required in the beginning; other conversion costs are to be taken at 50 per cent). Finished goods are in stock for a period of 1 month before they are sold. Debtors are extended credit for a period 3 months. Average time lag in payment of wages is approximately 0.5 month and of overheads, 1 month. Average time lag in payment of sales tax is 1.5 months. The credit period extended by various suppliers are: Gypsum, 2 months, Coal, 1 month, and Packing material, 0.5 month. Minimum desired cash balance is Rs 25 lakh.

3) 4) 5) 6) 7)

1)

You may state your assumptions, if any.

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SOLUTION Statement showing determination of net working capital of Strong Cement Company Ltd Current assets: Minimum desired cash balance Raw materials: Gypsum (5 lakh bags1 Rs 25 3/12) Limestone (5 lakh bags Rs 15 1/12) Coal (5 lakh bags Rs 30 2.5/12) Packing material (5 lakh bags Rs 10 1.5/12) Work-in-process: (5 lakh bags Rs 115 1/24) Raw material cost 100 per cent (Rs 25 + Rs 15 + Rs 30) Other conversion costs (Rs 50 + Rs 20 cash factory overheads + Rs 20) 0.5 Finished goods (5 lakh bags Rs 170** 1/12) Debtors (5 lakh bags Rs 220** 3/12) Total

Rs 25,00,000 31,25,000 6,25,000 31,25,000 6,25,000 23,95,833 Rs 70 45 115 70,83,333 2,75,00,000 4,69,79,166

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Current liabilities: Creditors: Gypsum (5 lakh bags Rs 25 2/12) Coal (5 lakh bags Rs 30 1/12) Packing material (5 lakh bags Rs 10 1/24) Wages (5 lakh bags Rs 50 1/24) Overheads (5 lakh bags Rs 65 1/12) Sales tax (5 lakh bags Rs 25 1.5/12) Total NWC

20,83,333 12,50,000 2,08,333 10,41,667 27,08,333 15,62,500 88,54,166 3,81,25,000

*1.25 lakh tons 0.8 = 1 lakh ton/200 kgs = 5,00,000 bags **(Total cost, Rs 205 Depreciation, Rs 10 selling overheads, Rs 25) ***(Cash cost, Rs 195 + sale tax, Rs 25)
Tata McGraw-Hill Publishing Company Limited, Financial Management Tata McGraw-Hill Publishing Company Limited, Financial Management

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