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Estimation for Working Capital

From the following information prepare an estimate of working capital required to finance level of activity of 312000 units p.a.. (52 weeks) and how will you finance the working capital
Particulars                        Per Units (Rs.)
Raw Material                     90
wages                               40
Manufacturing                     30
Administrative                     40
Selling                                10
profit                                   40
Selling Price                     250

Other Information:

1. Raw Material are held in stock for a period of 4 weeks. 
2. Materials remain in process for 2 weeks requiring 50% wages and 40% overheads. 
3. Finished goods remain in stock for period of 4 weeks 
4. Credit allowed to customers is 8 weeks but 20% of the invoice price is collected immediately. 
5. Time lag in payment of wages is 1.5 weeks and in overheads is 4 weeks. 
6. Credit available from suppliers is 4 weeks but 20% of creditors are pain 4 weeks in advance. 7. Bank balance is to be maintained at Rs. 60000.

Abhijit from India

Abhijit, this is good question. Suppose, for few minutes, I am not your teacher but I am an Advocate at this time and  I ask following question and answer which will help you reach the answer.

Q:- 1 Do you know really meaning of working capital?

Ans. Not, first know it.

Q:- 2. Do you know, what are the current assets?

Ans. Not, first know it.

Q: - 3 Do you know,  how to calculate the estimated value of current assets?

Ans.  Not, first know it.

Q:- 4. Do you know, what are the current liabilities?

Ans. Not, first know it.

Q: - 5 Do you know,  how to calculate the estimated value of current Liabilities?

Ans. Not, first know it.

Q: - 6 Do you know,  what is the problem?

Ans. Problem is simple, businessman wants to know the working capital if he will produce 312000 units p.a (52 weeks).

Q:- 7. Do you know, why will we need working capital? 

Ans. Answer is simple for production and for day to day expenses.

Q:- 8. Do you know, what is cost of per unit of production?

Ans. Rs. 210

Q:- 9. Do you know, how much working capital, we need for production of per unit?

Ans. Rs. 210, it may be in cash or kind because working capital is excess of current assets over current liabilities. For example, we have only debtors and only creditors. Then excess of debtors over creditors will be our working capital which is not in cash but still working capital. After getting money from debtor, we can convert working capital into cash. Then cash will also be working capital.

Q:- 10 Do you know, raw material in stock is the part of current asset?

Q :- 11 Do you know, work-in-process is also part of current asset?

Q:- 12. Do you know, finished goods are the part of current asset?

Q:- 13. Do you know, when we will calculate the cost of finished goods, we will add raw material cost, labor cost and overhead cost?

Q:- 14. Do you know, creditors are the part of our current liabilities?

Q:- 15. Do you know, when we calculate the value of creditors, we will adjust the amount of given advance to them?

Q:- 16. Do you know bank balance at the end will be the part of current asset? 

Dear judge, give me two days more, as per given facts by my client, I have collected some facts.  I have to do more research. Only after two days, I can go to analyze and then take best decision about the correct estimation of working capital. 


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Accounting Education: Estimation for Working Capital
Estimation for Working Capital
Accounting Education
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