Management Accounting Math

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	Taka
Raw materials	80
Direct labor	30
Overheads (exclusive of depreciation)	60
Total cost	170

Additional information:

Selling price	Tk.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% completion stage in respect of conversion costs)	Average 2 weeks
Finished goods in stock	Average 4 weeks
Credit allowed by suppliers	Average 4 weeks
Credit allowed by debtors	Average 8 weeks
Lag in payment of wages	Average 1.50 weeks
Cash 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