Question

Write down a summary of your understanding in 300 words.

On 1st January, the Managing Director of ‘N’ Ltd. wishes to know the amount of working capital that will be required during the year. From the following information prepare the working capital requirements forecast (Statement of Working Capital) # · Production during the previous year was 60,000 units. It is planned that this level of activity would be maintained during the present year. · The expected ratios of the cost to selling prices are Raw materials 60%, direct wages 10% and Overheads 20%. · Raw materials are expected to remain in store for an average of 2 months before issue to production. · Each unit is expected to be in process for one month, the raw materials being fed into the pipeline immediately and the labour and overhead costs accruing evenly during the month. · Finished goods will stay in the warehouse awaiting dispatch to customers for approximately 3 months. · Credit allowed by creditors is 2 months from the date of delivery of raw material. · Credit allowed to debtors is 3 months from the date of dispatch. · Selling price is INR. 5 per unit. · There is a regular production and sales cycle. · Wages and overheads are paid on the 1st of each month for the previous month. · The company normally keeps cash in hand to the extent of INR. 20,000.

Answer 1

Answer)

Here,as per given details production is constant and hence there is no changes in the cost of raw materials and h eceethe previous year budget is sufficient.

Asper given data 10% of cost of product is fixed costs as 90% costs are variable comprising 60% rawmaterials,10% direct wages and 20% are manufacturing overheads.

Itseems like that manufacturing costs mostly contains carrying cost mostly as it needs the inventory almost stays with us for 6 months i.e two months before going to production,one month in process and 3 months awaiting for dispatch which can be reduced with properly planning which decreases our cost.

Here given that selling price is INR 5 where profit per unit is unable measure as the cost per unit is not given.

Here,the credit period given for customer is 3 months and allowed by creditor is 2 months and wages and overheads are paid at 1st. of every months.This may lead to liquidity crisis as although there is profit and cash incoming the credit period given by us more than what we have go and hence,it is advised either reduced the credit period given to customers or ask for more days from the suppliers.

The cash in hand will be held not more than INR 20000 which is a good practice as it has all the necessary cash in hand and prevent holding more than what required.