You are on page 1of 83

CAIIB-FM-Module D

topics

Marginal

Costing
Capital Budgeting
Cash Budget
Working Capital

COSTING

Cost accounting system provides


information about cost
Aim : best use of resources and
maximization of returns
cost
=
amount
of
expenditure
incurred( actual+ notional)
Purposes +profit from each job/product,
division,
segment+pricingdecision+control+profit
planning +inter firm comparison

Marginal costing
Marginal

costing
distinguishes
between fixed cost and variable cost
Marginal cost is nothing but variable
cost of additional unit
Marginal cost= variable cost
MC= Direct Material + Direct Labour
+Direct expenses

Marginal costing problems


Sales

(-) variable cost (=)


contribution
Contribution(/ divided by) sales
(=) C.S. Ratio
Contribution=Fixed cost
(=)Break even point
Fixed Cost (/ divided by)
contribution per unit = break even units

Basic formula

Sales price (-) variable cost= contribution


SP less

VC

Contributio
n

10
9
8
7
6
5
4

6
6
6
6
6
6
6

=
=
=
=
=
=
=

4
3
2
1
0
(1)
(2)

Marginal costing problems


SP

= Rs.10, VC =Rs.6 Fixed Cost


Rs.60000
Find
- Break even point (in Rs. & in units)
- C/S ratio
- Sales to get profit of Rs.20000

Marginal costing problems


Sales

Rs.100000
Fixed Cost Rs.20000
B.E.Point Rs.80000
What is the profit ?

Management decisions- assessing


profitability
CONTRIBUTION/SALES=C.S.RATIO
Produc sp
t

vc

Contribtio
n

c/s

Ratio %

ranking

20

10

10

10/2
0

50%

30

20

10

10/3
0

33% 2

40

30

10

10/4
0

25%

DECISION when limiting


factors
SP

Rs.14

Rs.11

VC

Contribution 6
Per unit
Labour hr. pu 2

Contri.per hr

DECISIONS
Make

or buy decisions
Close department
Accept or reject order
Conversion cost pricing

Marginal costing
costvolumeprofit

analysis is reliant upon


a classification of costs in which fixed and
variable costs are separated from one
another. Fixed costs are those which are
generally time related and are not
influenced by the level of activity.
Variable cost on the other hand are directly
related to the level of activity; if activity
increases, variable costs will increase and
viceversa if activity decreases.

Marginal costing

USES OF COSTVOLUMEPROFIT ANALYSIS


The ability to analyse and use costvolumeprofit
relationship is an important management tool. The
knowledge of patterns of cost behaviour offers
insights valuable in planning and controlling short
and longrun operations. The example of increasing
capacity is a good illustrations of the power of the
technique in planning.
The implications of changes in the level of activity
can be measured by flexing a budget using
knowledge of cost behaviour, thereby permitting
comparison to be made of actual and budgeted
performance for any level of activity.

Marginal costing

LIMITATIONS OF COSTVOLUME-PROFIT
ANALYSIS
A major limitation of conventional CVP analysis that
we have already identified is the assumption and
use of linear relationships. Yet another limitation
relates to the difficulty of dividing fixed costs among
many products and/or services. Whilst variable costs
can usually be identified with production services,
most fixed cost usually can only be divided by
allocation and apportionment methods reliant upon
a good deal of judgement. However, perhaps the
major limitation of the technique relates to the
initial separation of fixed and variable costs.

Marginal costing

ADVANTAGES AND DISADVANTAGES OF


MARGINAL COSTING
ADVANTAGES
1. More efficient pricing decisions can be made,
since their impact on the contribution margin can
be measured.
2. Marginal costing can be adapted to all costing
system.
3. Profit varies in accordance with sales, and is
not distorted by changes in stock level.
4. It eliminates the confusion and
misunderstanding that may occur by the presence
of overorunderabsorbed overhead costs in the
profit and loss account.

Marginal costing

5. The reports based on direct costing are far more


effective for management control than those based
on absorption costing. First of all, the reports are
more directly related to the profit objective or
budget for the period. Deviations from standards are
more readily apparent and can be corrected more
quickly. The variable cost of sales changes in direct
proportion with volume. The distorting effect of
production on profit is avoided, especially in month
following high production when substantial amount
of fixed costs are carried in inventory over to next
month. A substantial increase in sales in the month
after high production under absorption costing will
have a significant negative impact on the net
operating profit as inventories are liquidated.

Marginal costing
6.

Marginal costing can help to pinpoint


responsibility according to organisational
lines: individual performance can be
evaluated on reliable and appropriate data
based on current period activity. Operating
reports can be prepared for all segments of
the company, with costs separated into
fixed and variable and the nature of any
variance clearly shown. The responsibility
for costs and variances can then be more
readily attributed to specific individuals and
functions, from top management to down
management

Marginal costing

DISADVANTAGES OF MARGINAL COSTING


1. Difficulty may be experienced in trying to
segregate the fixed and variable elements of
overhead costs for the purpose of marginal costing.
2. The misuse of marginal costing approaches to
pricing decisions may result in setting selling prices
that do not allow the full recovery of overhead costs.
3. Since production cannot be achieved without
incurring fixed costs, such costs are related to
production, and total absorprtion costing attempts to
make an allowance for this relationship. This avoids
the danger inherent in marginal costing of creating
the illusion that fixed costs have nothing to do with
production.

CAPITAL BUDGETING
It

involves current outlay of funds in


the expectation of a stream of
benefits extending far into the
future
Year
Cash flow
0
1
2
3
4

(100000)
30000
40000
50000
50000

CAPITAL BUDGETING

1.

A capital budgeting decision is one that involves


the allocation of funds to projects that will have a
life of atleast one year and usually much longer.
Examples would include the development of a
major new product, a plant site location, or an
equipment replacement decision.
Capital budgeting decision must be approached
with great care because of the following reasons:
Long time period: consequences of capital
expenditure extends into the future and will have
to be endured for a longer period whether the
decision is good or bad.

CAPITAL BUDGETING
2.

3.

4.

. Substantial expenditure: it involves


large sums of money and necessitates a
careful planning and evaluation.
Irreversibility: the decisions are quite
often irreversible, because there is little
or no second hand market for may types
of capital goods.
Over and under capacity: an erroneous
forecast of asset requirements can result
in serious consequences. First the
equipment must be modern and secondly
it has to be of adequate capacity

CAPITAL BUDGETING

1.

2.

3.

Difficulties
There are three basic reasons why capital
expenditure decisions pose difficulties for the
decision maker. These are:
Uncertainty: the future business success is todays
investment decision. The future in the real world is
never known with certainty.
Difficult to measure in quantitative terms: Even if
benefits are certain, some might be difficult to
measure in quantitative terms.
Time Element: the problem of phasing properly the
availability of capital assets in order to have them
come on stream at the correct time.

CAPITAL BUDGETING

Methods of classifying investments

Independent
Dependent
Mutually

exclusive
Economically independent and statistically
dependent
Investment
may fall into two basic
categories, profit-maintaining and profitadding when viewed from the perspective
of a business, or service maintaining and
service-adding when viewed from the
perspective of a government or agency.

CAPITAL BUDGETING

Expansion and new product investment

1.

Expansion of current production to meet


increased demand
Expansion of production into fields closely
related to current operation horizontal
integration and vertical integration.
Expansion of production into new fields not
associated with the current operations.
Research and development of new products.

2.

3.
4.

CAPITAL BUDGETING

Reasons for using cash flows


Economic value of a proposed investment can be
ascertained by use of cash flows.
Use of cash flows avoids accounting ambiguities
Cash flows approach takes into account the time
value of money
For any investment project generating either
expanded revenues or cost savings for the firm, the
appropriate cash flows used in evaluating the project
must be incremental cash flow.
The computation of incremental cash flow should
follow the with and without principle rather than
the before and after principle

Types of capital investments


New

unit
Expansion
Diversification
Replacement
Research & Development

Significance of capital budgeting


Huge

outlay
Long term effects
Irreversibility
Problems in measuring future cash
flows

Facets of project analysis


Market

analysis
Technical analysis
Financial analysis
Economic analysis
Managerial analysis
Ecological analysis

Financial analysis
Cost

of project
Means of finance
Cost of capital
Projected profitability
Cash flows of the projects
Project appraisal

Decision process

INVESTMENT OPPORTUNITIES

PROPOSALS
Improvement in planning & Evaluation procedure

NEW INVESTMENT OPPORTUNITIES

PLANNING PHASE
D IES
TE IT
EC UN
EJ RT
R O
PP
O

d
te ls
c
je osa
e
R op
Pr
d
te s
c
je ect
e
R roj
p

PROPOSALS
EVALUATION PHASE
PROJECTS
SELECTION PHASE
ACCEPTED PROJECTS
IMPLEMENTATION PHASE
ONLINE PROJECTS
CONTROL PHASE
PROJECT TERMINATION
AUDITING PHASE

Methods of capital investment


appraisal
DISCOUNTING

NON-DISCOUNTING

Net present value


(NPV)

Pay back period

Internal rate of return Accounting rate of


(IRR)
return
Profitability Index or
Benefit cost ratio

Present value of cash flow


stream- (cash outlay
Rs.15000)@
12%PV
Year
Cash flow PV factor
@12%

1
2
3
4
5
6
7
8

1000
2000
2000
3000
3000
4000
4000
5000

0.893
0.799
0.712
0.636
0.567
0.507
0.452
0.404

893
1594
1424
1908
1701
2028
1808
2020

Present value of cash flow


stream- (cash outlay Rs.15000 )
@10%
PV factor
Year
Cash flow
PV
@10%

1
2
3
4
5
6
7
8

2000
2000
2000
3000
3000
4000
4000
5000

0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.466

1818
1652
1502
2049
1863
2256
2052
2330

Methods of capital investment


appraisal

Solution IRR
NAV
Project A 20% 309
Project B 15%
1441
These project are mutually exclusive
The IRR ranks project A higher, whereas the NPV
ranks project B first.
The conflict arises because B is ten times the size
of A. This gives a higher NPV but in relative terms
it is less profitable with a lower percentage
return. Naturally, B is preferable because it gives
the greatest increase in shareholders wealth.

Methods of capital investment


appraisal
The

advantages of IRR over NPV are:


1. It gives a percentage return which is easy
to understanding at all levels of management.
2. The discount rate/required rate of return
does not have to be known to calculate IRR. It
does have to be decided upon at sometime
because IRR must be compared with
something. The discussion as to what is an
acceptable rate of return can however be left
until much later stage. In a NPV calculation
the discount rate must be specified prior to
any calculation being performed.

Methods of capital investment


appraisal

The advantages of NPV over IRR are:


1. NPV gives an absolute measure of profitability and
hence immediately shows the increase in shareholders
wealth due to an investment decision.
2. NPV gives a clear answer in an accept/reject decision.
IRR gives multiple answers.
3. NPV always gives the correct ranking for mutually
exclusive project while IRR may not.
4. NPVs of projects are additive while IRRs are not.
5. Any changes in discount rates over the life of a project
can more easily be incorporated into the NPV calculation.
The NPV approach provides as absolute measure that fully
represents in value of the company if a particular project is
undertaken. The IRR by contrast, provides a percentage
figure from which the size of the benefits in terms of wealth
creation cannot always be grasped.

@27%
0
1
2
3
NPV

-102
51
51
61

1
0.78740
0.62000
0.48818

Value
-102
40
32
30
0

The evaluation of any project


depends on the magnitude of the
cash flows, the timing and the
discount rate.
The discount rate is highly
subjective. The higher the rate , the
less a rupee in the future would be
worth today.
The risk of the project should
determine the discount rate.

Internal Rate of Return


(IRR)
IRR is the rate at which
the discounted cash flows
in the future equal the
value of the investment
today. To find the IRR one
must try different rates
until the NPV equals zero.

Future value
Assume

that an investor has $1000


and wishes to know its worth after
four years if it grows at 10 percent
per year. At the end of the first year,
he will have $1000 X 1.10 or 1,100.
By the end of the year two, the
$1,100 will have grown to $1,210
($1,100 X 1.10). The four-year
pattern is indicated below.

BUDGET
Quantitative

expression
management objective
Budgets and standards
Budgetary control
Cash budget

of

PROFIT PLANNING
Budget

& budgetary control


Marginal costing
CVP and break even point
Comparative cost analysis
ROCE

PRICING DECISIONS
Full

cost pricing
Conversion cost pricing
Marginal cost pricing
Market based pricing

PRICING DECISIONS

PRICING AND ITS OBJECTIVES


The objective of pricing in practice will
probably be one of the following:
(a) To skim the market (in the case of new
products) by the use of high prices;
(b) To penetrate deeply into the market (again
with new products) at an early stage, before
competition produces similar goods;
(c) To earn a particular rate of return on the
funds invested via the generating of revenue;
and
(d) To make a profit on the product range as a
whole, which may involve using certain items
in the range as loss leaders, and so forth.

PRICING DECISIONS
Full
The

cost pricing

object is to recover all costs


incurred plus a percentage of profit.
It is a method best used where the
product is clearly differentiated and
not in immediate, direct competition.
It would not lend itself to situation
where price tended to be determined
by the market,

PRICING DECISIONS
Conversion
Conversion

cost pricing

cost consists of direct


labour cost and factory overhead,
ignoring the cost of the raw material
on the grounds that profit should be
made within the factory and not
upon materials bought from
suppliers.

PRICING DECISIONS
Marginal

cost pricing

Briefly it is that cost which would not be incurred if


the production of the product were discontinued. An
important advantage of differential cost of pricing is
the flexibility it gives to meet special shortterm
circumstances, while accepting that full costs must
be recovered in the long term. This is by no means
always desirable in the short term. For example,
there may be surplus productive capacity in a
factory, in which case any opportunity to accept an
order which covers differential cost and makes a
contribution to fixed cost and profit should be
accepted. Any contribution is better than none.

PRICING DECISIONS
Market
This

based pricing

can be based on the value to a


customer of goods or services and involves
variable pricing. It also takes account of the
price he is able and willing to pay for the
goods or services. Businesses using this
approach develop special products or
services which command premium prices.
The other marketbased approach is to
price on the basis of what competitors are
charging.

Operating leverage
Financial leverage
OL=

amount of fixed cost in a cost


structure. Relationship between sales
and op. profit
FL= effect of financing decisions on
return to owners. Relationship
between operating profit and earning
available to equity holders (owners)

Working capital
Current

assets less current liabilities


= net working capital or net current
assets
Permanent
working
capital
vs.
variable working capital

Working capital cycle


cash>

Raw material > Work in


progress > finished goods > Sales >
Debtors > Cash>
Operating cycle it is a length of
time between outlay on RM /wages
/others AND inflow of cash from the
sale of the goods

Matching approach to asset


financing
Total Assets
$

Short-term
Debt
Fluctuating Current Assets

Permanent Current Assets

Fixed Assets

Time

Long-term
Debt +
Equity
Capital

Accounts Payable

Raw
Materials

Cash

Value Addition

WIP

THE WORKING CAPITAL


CYCLE
(OPERATING CYCLE)

Accounts
Receivable

SALES

Finished
Goods

Operating

cycle concept
A companys operating cycle typically consists
of three primary activities:
Purchasing resources,
Producing the product and
Distributing (selling) the product.
These activities create funds flows that are both
unsynchronizedWorking
and uncertain.
capital cycle
Unsynchronized because cash disbursements (for
example, payments for resource purchases) usually
take place before cash receipts (for example
collection of receivables).
They are uncertain because future sales and costs,
which generate the respective receipts and
disbursements, cannot be forecasted with complete
accuracy.

Working capital

FACTORS DETERMINING WORKING CAPITAL


1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Nature of the Industry


Demand of Industry
Cash requirements
Nature of the Business
Manufacturing time
Volume of Sales
Terms of Purchase and Sales
Inventory Turnover
Business Turnover
Business Cycle
Current Assets requirements
Production Cycle

Working capital

Working Capital Determinants (Contd)


13.
14.
15.
16.
17.
18.
19.
20.
21.

Credit control
Inflation or Price level changes
Profit planning and control
Repayment ability
Cash reserves
Operation efficiency
Change in Technology
Firms finance and dividend policy
Attitude towards Risk

TYPES OF WORKING CAPITAL


WORKING CAPITAL
BASIS OF
CONCEPT
Gross
Working
Capital

BASIS OF
TIME
Permanent
/ Fixed
WC

Net
Working
Capital

Temporary
/ Variable
WC

Seasonal
WC
Regular
WC

Reserve
WC

Special
WC

Working capital

Working Capital Levels in Different Industries


A retailing company usually has high levels of
finished goods stock and very low levels of
debtors. Most of the retailers sales will be
for cash, and an independent credit card
company or a financial subsidiary of the retail
business (which on occasions is not
consolidated in the group accounts). The
retailing company, however, usually has high
levels of creditors. It pays its suppliers after
an agreed period of credit. The levels of
working capital required are therefore low:

Working capital

Excess of current assets over current liabilities are


called the net working capital or net current assets.
Working capital is really what a part of long term
finance is locked in and used for supporting current
activities.
The balance sheet definition of working capital is
meaningful only as an indication of the firms current
solvency in repaying its creditors.
When firms speak of shortage of working capital they
in fact possibly imply scarcity of cash resources.
In fund flow analysis an increase in working capital,
as conventionally defined, represents employment or
application of funds.

Working capital
In

contrast, a manufacturing
company will require relatively high
levels of working capital with
investments in raw materials, workin-progress and finished goods
stocks, and with high levels of
debtors. The credit terms offered on
sales and taken on purchases will be
influenced by the normal contractual
arrangements in the industry.

Working capital

Debtors

Volume of credit sales


Length of credit given
Effective credit control and cash collection
Stocks
Lead time & safety level
Variability of demand
Production cycle
No. of product lines
Volume of

planned output

actual output
sales
Payables
Volume of purchases
Length of credit allowed
Length of credit taken Discounts
Shortterm finance
All the above
Other payments/receipts
Availability of credit Interest rates

Working capital

Cash Levels
it is necessary to prepare a cash budget where
the minimum balances needed from month to
month will be defined.
business is seasonal, cash shortages may arise in
certain periods. Generally it is thought better to keep
only sufficient cash to satisfy shortterm needs, and to
borrow if longerterm requirements occur
The problem, of course, is to balance the cost of this
borrowing against any income that might be obtained
from investing the cash balances.
The size of the cash balance that a company might
need depends on the availability of other sources of
funds at short notice, the credit standing of the
company and the control of debtors and creditors

Working capital
Debtors
The

debtors problem again revolves


around the choice between profitability
and liquidity. It might, for instance, be
possible to increase sales by allowing
customers more time to pay, but since this
policy would reduce the companys liquid
resources it would not necessarily result in
higher Profits.
historical analysis or the use of established
credit ratings to classify groups of
customers in terms of credit risk

Working capital
1.
2.
3.
4.

5.
6.

Establish clear credit practices as a matter of


company policy.
Make sure that these practices are clearly
understood by staff, suppliers and customers.
Be professional when accepting new accounts,
and especially larger ones.
Check out each customer thoroughly before
you offer credit. Use credit agencies, bank
references, industry sources etc.
Establish credit limits for each customer... and
stick to them.
Have the right mental attitude to the control
of credit and make sure that it gets the
priority it deserves.

Working capital

7. Continuously review these limits when you suspect


tough times are coming or if operating in a volatile
sector.
8. Keep very close to your larger customers.
9. Invoice promptly and clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a
payment option.
12. Monitor your debtor balances and ageing
schedules, and don't let any debts get too large or
too old.

DIMENSIONS OF RECEIVABLES MANAGEMENT

OPTIMUM LEVEL OF INVESTMENT IN TRADE RECEIVABLES


Profitability

Costs &
Profitability

Optimum Level

Liquidity
Stringent

Liberal

Working capital-FACTORING
Factoring
Definition:
Factoring is defined as a continuing legal
relationship between a financial institution (the
factor) and a business concern (the client), selling
goods or providing services to trade customers
(the customers) on open account basis whereby
the Factor purchases the clients book debts
(accounts receivables) either with or without
recourse to the client and in relation thereto
controls the credit extended to customers and
administers the sales ledgers.

Working capital-FACTORING
It

is the outright purchase of credit


approved accounts receivables with the
factor assuming bad debt losses.
Factoring
provides
sales
accounting
service, use of finance and protection
against bad debts.
Factoring
is a process of invoice
discounting by which a capital market
agency purchases all trade debts and
offers resources against them.

Working capital-FACTORING
Debt administration:
The factor manages the sales ledger
of the client company. The client will
be saved of the administrative cost of
book keeping, invoicing, credit control
and debt collection. The factor uses
his computer system to render the
sales ledger administration services.

Working capital-FACTORING
Different

kinds of factoring services


Credit Information: Factors provide credit
intelligence to their client and supply periodic
information
with
various
customer-wise
analysis.
Credit Protection: Some factors also insure
against bad debts and provide without
recourse financing.
Invoice Discounting or Financing : Factors
advance 75% to 80% against the invoice of
their clients. The clients mark a copy of the
invoice to the factors as and when they raise
the invoice on their customers.

Working capital-FACTORING

Services rendered by factor


Factor evaluated creditworthiness of the customer
(buyer of goods)
Factor fixes limits for the client (seller) which is
an aggregation of the limits fixed for each of the
customer (buyer).
Client sells goods/services.
Client assigns the debt in favour of the factor
Client notifies on the invoice a direction to the
customer to pay the invoice value of the factor.

Working capital-FACTORING
Client

forwards invoice/copy to factor along


with receipted delivery challans.
Factor provides credit to client to the extent
of 80% of the invoice value and also notifies
to the customer
Factor periodically follows with the customer
When the customer pays the amount of the
invoice the balance of 20% of the invoice
value is passed to the client recovering
necessary interest and other charges.
If the customer does not pay, the factor
takes recourse to the client.

Working capital-FACTORING

Benefits of factoring
The client will be relieved of the work relating to sales
ledger administration and debt collection
The client can therefore concentrate more on planning
production and sales.
The charges paid to a factor which will be marginally high
at 1 to 1.5% than the bank charges will be more than
compensated by reductions in administrative expenditure.
This will also improve the current ratio of the client and
consequently his credit rating.
The subsidiaries of the various banks have been rendering
the factoring services.
The factoring service is more comprehensive in nature than
the book debt or receivable financing by the bankers.

Working capital- INVENTORY


MANAGEMENT

Managing

inventory is a juggling act.

Excessive

stocks can place a heavy burden


on the cash resources of a business.

Insufficient

stocks can result in lost sales,


delays for customers etc.

INVENTORIES

INCLUDE
RAW MATERIALS, WIP & FINISHED
GOODS

FACTORS INFLUENCING INVENTORY


MANAGEMENT

Lead

Time
Cost of Holding Inventory
Material Costs
Ordering Costs
Carrying Costs
Cost of tying-up of Funds
Cost of Under stocking
Cost of Overstocking

Working capital

Cost of Working capital


The other aspect of the working capital problem
concerns obtaining shortterm funds. Every source of
finance, including taking credit from suppliers, has a
cost; the point is to keep this cost to the minimum.
The cost involved in using trade credit might include
forfeiting the discount normally given for prompt
payment, or loss of goodwill through relying on this
strategy to the point of abuse. Some other sources
of shortterm funds are bank credit, overdrafts and
loans from other institutions. These can be
unsecured or secured, with charges made against
inventories, specific assets or general assets.

Working capital

Disadvantages of Redundant or Excess Working


Capital
Idle funds, non-profitable for business, poor ROI
Unnecessary purchasing & accumulation of
inventories over required level
Excessive debtors and defective credit policy,
higher incidence of B/D.
Overall inefficiency in the organization.
When there is excessive working capital, Credit
worthiness suffers
Due to low rate of return on investments, the
market value of shares may fall

Working capital

Disadvantages or Dangers of Inadequate or Short


Working Capital
Cant pay off its short-term liabilities in time.
Economies of scale are not possible.
Difficult for the firm to exploit favourable market
situations
Day-to-day liquidity worsens
Improper utilization the fixed assets and ROA/ROI
falls sharply

Working capital cycle

Example: X Company plans to attain a sales of Rs 5 crores. It has the following


information for production and selling activity. It is assumed that the activities are
evenly spread through out the year.
(a) Average time raw materials are kept in store prior to issue for
production.2months
(b) Production cycle time or work-in-progress cycle time.
2months
(c) Average time finished stocks are kept in sale in unsold condition
1/2
months
(d) Average credit available from suppliers
1 1/2 months
(e) Average credit allowed to customer
1
1/2 months
(f)
Analysis of cost plus profit for above sales:
%
Rs. In Crores
Raw Materials
50
2.50
Direct Labour
20
1.00
Overheads
10
0.50
Profit
20
1.00
Total
100
5.00
-----------

Working capital cycle

Calculation of Wokring Capital Requirement:


1.
Total months to be financed to Raw Material
Months
Time in raw material store
2
Working progress cycle
Finished goods store
Credit given to customer

2
1/2
1 1/2

Less: Credit available from suppliers

6
1

---------------Total months to be financed to Raw Materials

2.

---------------Total months to be financed to Labour


Production cycle
In Finished stock store
Credit to customer
Total Months to be financed
4

Working capital cycle

3.

Total months to be finacned to overhead


Production cycle
In finished goods stores
Credit to customer

------------4

Less: Credit from suppliers

------------Total months to be financed


Maximum working capital required
Raw Materials 4 / 12 2.50
Direct Labour 4 / 12 1.00

4.

0.33
Overheads 2

0.50

1.37

------Maximum Working Capital

-------

2
Rs in crores
0.94

0.10

END
THANK

YOU VERY MUCH FOR YOUR


PATIENCE; I TRUST IT WAS USEFUL.

ANY QUERIES MAY BE ADDRESSED


TO
techengine@rediffmail.com
Ullal.ravishankar@gmail.com