A newly formed company has applied to the commercial bank for the first time for financing its working capital requirements. The following…

CA Intermediate · Financial Management and Strategic Management · MTP · January 2026
A newly formed company has applied to the commercial bank for the first time for financing its working capital requirements. The following information is available about the projections for the current year: Estimated level of activity: 1,04,000 completed units of production plus 4,000 units of work-in-progress. Based on the above activity, estimated cost per unit is: Raw material 80 per unit Direct wages 30 per unit Overheads (exclusive of depreciation) 60 per unit Total cost 170 per unit Selling price 200 per unit Raw materials in stock: Average 4 weeks consumption, work-in-progress (assume 50% completion stage in respect of conversion cost) (materials issued at the start of the processing). Finished goods in stock 8,000 units Credit allowed by suppliers Average 4 weeks Credit allowed to debtors/receivables Average 8 weeks Lag in payment of wages Average 11/2 weeks Cash at banks (for smooth operation) is expected to be - 25,000 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. CALCULATE Net Working Capital.

Suggested Answer and Working Notes:

Estimate of the Requirement of Working Capital (₹) (₹) A. Current Assets: Raw material stock (Refer to Working note 3) 6,64,615 Work in progress stock (Refer to Working note 2) 5,00,000 Finished goods stock (Refer to Working note 4) 13,60,000 Debtors (Refer to Working note 5) 25,10,769 Cash and Bank balance 25,000 50,60,384 B. Current Liabilities: Creditors for raw materials (Refer to Working note 6) 7,15,740 Creditors for wages (Refer to Working note 7) 91,731 8,07,471 Net Working Capital (A - B) 42,52,913 Working Notes: 1. Annual cost of production Particulars ₹ Raw material requirements (1,04,000 units × ₹ 80) 83,20,000 Direct wages (1,04,000 units × ₹ 30) 31,20,000 Overheads (exclusive of depreciation) (1,04,000 × ₹ 60) 62,40,000 1,76,80,000 2. Work in progress stock Particulars ₹ Raw material requirements (4,000 units × ₹ 80) 3,20,000 Direct wages (50% × 4,000 units × ₹ 30) 60,000 Overheads (50% × 4,000 units × ₹ 60) 1,20,000 5,00,000 3. Raw material stock It is given that raw material in stock is average 4 weeks' consumption. Since, the company is newly formed, the raw material requirement for production and work in progress will be issued and consumed during the year. Hence, the raw material consumption for the year (52 weeks) is as follows: Particulars ₹ For Finished goods 83,20,000 For Work in progress 3,20,000 86,40,000 Raw material stock = (₹ 86,40,000 / 52 weeks) × 4 weeks i.e.6,64,615 4. Finished goods stock 8,000 units @170 per unit = 13,60,000 5. Debtors for sale Credit allowed to debtors: Average 8 weeks Credit sales for year (52 weeks) i.e. (1,04,000 units - 8,000 units) × ₹ 170 = 96,000 units × ₹ 170 = 1,63,20,000 Debtors = (₹ 1,63,20,000 / 52 weeks) × 8 weeks i.e.25,10,769 6. Creditors for raw material: Credit allowed by suppliers: Average 4 weeks Purchases during the year (52 weeks) i.e. (₹ 83,20,000 +3,20,000 -6,64,615) = 93,04,615 Creditors = (₹ 93,04,615 / 52 weeks) × 4 weeks i.e.7,15,740 7. Creditors for wages Lag in payment of wages: Average 11/2 weeks Direct wages for the year (52 weeks) i.e. (₹ 31,20,000 +60,000) = 31,80,000 Creditors = (₹ 31,80,000 / 52 weeks) × 1.5 weeks i.e.91,731

Topics: Part-A: Financial Management

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