Page 243 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes
Example: XYZ Co. Ltd. is a pipe manufacturing company. Its production cycle indicates
that materials are introduced in the beginning of the production cycle; wages and overhead
accrue evenly throughout the period of this cycle. Wages are paid in the next month following
the month of accrual, work in process includes full units of raw material used in the beginning
of the production process and 50% of wages and overheads are supported to be conversion costs.
Details of production process and the components of working capital are as follows:
Production of pipes per annum 12,00,000 units
Duration of the production cycle One month
Raw materials inventory held One-month consumption

Finished goods inventory held for Two months
Credit allowed by creditors One month
Credit given to debtors Two months
Cost price of raw materials 60 per unit
Direct wages 10 per unit
Overheads 20 per unit

Selling price of finished pipes 100 per unit
Required to calculate: the amount of working capital required for the company.
Solution:
Statement showing determination of working capital
1. Current Assets:

1200,000 × 60
(a) Raw material inventory (1 month) 60,00,000
12
(b) Work in progress - Production cycle 1 month
Raw materials (materials added at the beginning) 60,00,000
Wages and overheads (avg. 50% complete)
(10 + 20) × 50% × 12,00,000/12 15,00,000 75,00,000

(c) Finished goods inventory (hold for 2 mths)
Total cost (60+10+20) × 12,00,000 × 2/12 1,80,00,000
(d) Debtors - 2 months credit (Total cost 90)
Hence, 90 × 12,00,000 × 2/12 1,80,00,000

Total Current Assets 5,55,00,000
2. Current Liabilities:
(a) Creditors for raw materials (1 month credit period on purchases)

60 × 12,00,000 × 1/12 60,00,000
(b) Creditors for wages - one month
10 × 12,00,000 × 1/12 10,00,000 70,00,000
Net Working Capital 4,25,00,000

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