Problem: A newly formed company has applied for a short term loan to a commercial bank for financing its working capital requirements. You are requested by the bank to prepare an estimate of the requirements of working capital for that company. The information about the company is as under:Estimated cost per unit of production is:

Particulars TakaRaw materials 80Direct labor 30Overheads (exclusive of depreciation) 60

Total cost 170Additional information:

Selling price Tk.200 per unitLevel of activity 1,04,000 units of

production per annumRaw materials in stock Average 4 weeksWork in progress (assume 50% completion stage in respect of conversion costs)

Average 2 weeks

Finished goods in stock Average 4 weeksCredit allowed by suppliers Average 4 weeksCredit allowed by debtors Average 8 weeksLag in payment of wages Average 1.50 weeksCash at bank expected to be Tk.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.Required: Estimate the net working capital required for the company.Solution:Estimation of working capital requirements:

(A) Investment in Inventory(i) Investment in Raw materials = RM consumption * RM consumption period/No. of weeks

(ii) Investment in WIP=Cost of goods sold*WIP consumption period /No. of weeks

(iii) Investment in finished goods=cost of production* FG consumption period/No. of weeks

(80*1,04,000*4) 52

(170*1,04,000*0.5*2) 52

(170*1,04,000*4) 52

64,000

3,40,000

1360,000

Total Inventory Investment (i+ii+iii) 23,40,000(B) Investment in debtors= (Credit sale at cost*8)/No. of weeks

(170*1,04,000*8) 52

27,20,000

(C) Cash Balance required 25,000(D) Total investment in current assets (A+B+C) 50,85,000(E) Current Liabilities(i) Creditors= (Purchase of RM*CP)/No. of week(ii) Deffered wages= Labor cost*CP)/ No. of week

(80*1,04,000*4) 52(30*1,04,000*1.5) 52

6,40,000

90,000(E) Total Current Liabilities 7,30,000(F) Net working capital requirements (D-E) 43,55,000

Problem: A proforma cost sheet of a company provides the following data: Estimated cost per unit of production is:

Costs per unit TakaRaw materials 52.00Direct labor 19.50Overheads 39.00

Total cost per unit 110.50Profits 19.50Selling price 130.00

The following is the additional information available:Average raw materials and finished goods in stock

One month

Average materials in process Half a monthCredit allowed by supplier One monthCredit allowed by debtor Two monthTime lag in payment of wages One and half monthOverheads One monthCash balance I expected Tk.1,20,000One forth of the sales are on cash basis

You are required to prepare a statement showing the working capital needed to finance a level of activity of 70,000 units of output. You may assume that production is carried on evenly throughout the year (52 weeks) and wages and overheads accrue similarly.Solution:Estimation of working capital requirements:

(A) Investment in Inventory(i) Investment in Raw materials = RM consumption * RM consumption period/No. of weeks

(ii) Investment in WIP=Cost of goods sold*WIP consumption period /No. of weeks

(iii) Investment in finished goods=cost of production* FG consumption period/No. of weeks

(52*70,000*4) 52

(110.5*70,000*2) 52

(110.5*70,000*4) 52

2,80,000

2,97,500

5,95,000

Total Inventory Investment (i+ii+iii) 11,72,500(B) Investment in debtors= (Credit sale at cost*8)/No. of weeks

(130*70,000*0.75*8) 52

10,50,000

(C) Cash Balance required 1,20,000(D) Total investment in current assets (A+B+C)

23,42,500

(E) Current Liabilities(i) Creditors= (Purchase of RM*CP)/No. of week(ii) Deffered wages= Labor cost*CP)/ No. of week(iii) Deferred overheads

(52*70,000*4) 52

(19.5*70,000*1.5) 52

(39*70,000*4) 52

2,80,000

39,375

2,10,000

(E) Total Current Liabilities (i+ii+iii) 5,29,375(F) Net working capital requirements (D-E) 18,13,125