Management Accounting Math

Problem: A pro forma cost sheet of a company provides the following data:

Estimated cost per unit of production is:

Costs per unit	Taka
Raw materials	52.00
Direct labor	19.50
Overheads	39.00
Total cost per unit	110.50
Profits	19.50
Selling 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 month
Credit allowed by supplier	One month
Credit allowed by debtor	Two month
Time lag in payment of wages	One and half month
Overheads	One month
Cash balance I expected	Tk.1,20,000
One 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