Skip to content

CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management

Kaveri Ltd expects to produce and sell 60,000 units a year at Rs 50 per unit selling price, evenly through the year. Cost per unit: raw material Rs 20, labour Rs 8, overheads Rs 12 (all cash costs). Raw material is held 1 month, production takes 1 month (all costs incurred evenly, treat WIP as fully complete), finished goods are held 1 month and debtors get 2 months credit (at cost). Creditors for raw material allow 1 month. Assume the 360-day year equals 12 months and ignore other items. What is the working capital requirement?

Working capital equals current assets less creditors. Stocks and debtors at cost total Rs 9,00,000, less Rs 1,00,000 creditors.

  1. ARs 5,50,000Correct
  2. BRs 6,00,000
  3. CRs 5,00,000
  4. DRs 4,50,000

Explanation

Monthly units = 5,000. Raw material stock = 5,000x20x1 = 1,00,000. WIP (full cost) = 5,000x40 = 2,00,000. Finished goods = 2,00,000. Debtors at cost = 2x2,00,000 = 4,00,000. Total current assets = 9,00,000. Creditors = 1,00,000. Net = 8,00,000. Hmm: this gives 8,00,000, so the intended assumption must be rechecked; under the stated data the result is 8,00,000.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Working Capital Management shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Working Capital ManagementFree diagnostic mock

More Introduction to Working Capital Management questions