MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTINGWORKING CAPITAL CONCEPT

1Group No. 7MembersName Roll no.Madhavi Dalvi5705Karuna Guttedar5718Hemal Mhatre5725Aishwariya Patil5733Minal Patil5735Ashwini Rai5742Indira Salian5746

IntroductionThe capital used for performing day to day activities i.e. purchases of raw material, making payment of direct and indirect expenses , investment in stocks, etc is called working capital.

Definition :Hoagland has defined Working Capital as the difference between the book value of the Current Assets and the Current Liabilities.

The Accounting Principles Board of the American Institute of Certified Public Accountants has defined Working Capital as the excess of Current Assets over Current Liabilities.

TYPES OF WORKING CAPITALa) Gross and net working capitalb) Permanent and temporary working capitalc) Balance sheet capital and cash working capital d) Positive and negative working capital

GROSS AND NET WORKING CAPITALGross working capital : Gross working capital means the total current assets without deducting the Current LiabilitiesGross Working Capital = Current Asstes(2) Net Working Capital : Net working capital means Current Assets Current Liabilities This is most common type of working capital It is also known as Net current assets.

Net Working Capital = Current Assets - Current LiabilitiesPERMANENT AND TEMPORARYPermanent working capital : The minimum amount of working capital is required to enable the concern to operate at the lowest level of activity Such minimum amount of working capital is called Permanent working capital

Temporary working capital : If the increase in the level of activity is temporary or seasonal the additional amount of working capital required is called Temporary Working CapitalBALANCESHEET WORKING CAPITAL AND CASH WORKING CAPITALBalance sheet working capital : Such working capital computed on the basis of book value of current asset and current liabilities is called Balance sheet working capital

Cash working capital : The concept of cash working capital makes proper adjustment in balance sheet working capital for the (a) Debtors include profit margins, and (b) depreciation to arrive at the cash working capitalPOSITIVE AND NEGATIVE WORKING CAPITALPositive working capital : When the current asset exceed current liabilities the Net current asset is a positive figure and hence is called positive working capital

Negative working capital : When the current asset less than current liabilities the Net current asset is negative figure and hence is called Negative working capitalESTIMATING WORKING CAPITALManufacturing Concern ( Units )The following items are taken into consideration at the time of ascertaining the requirement of working capital for a manufacturing concern :Total quantity of units to be produced throughout the yearTotal cost incurred on materials , wages and overheadsInformation about the length of time for which raw material are to remain in store before they are issue for productionInformation about the length of production cycle Manufacturing Concern(5) Information about the length of sales cycle That is period during which finished goods will remain in the warehouse(6) Information about the average of credit allowed to debtors(7) Information about the average of credit allowed by the suppliers(8) Information about the lag in payment of wages and overheadTRADING CONCERNS (Budgets) In case of trading concerns, details regarding units produced, production cycle, raw material/ work in progress etc. are inapplicable normally the details estimates are given in term of budgeting amount rather then unitsESTIMATING CURRENT LIABILITIESCurrent liabilities are deducted from Current Assets to calculate Working Capital. Higher the Current Liabilities lower will be the Working Capital and vice-versa.

Creditors Credit allowed by suppliers on purchases of raw materials gives rise to a current liability.Creditors for materials are estimated as follows :Creditors =[units *purchase price per unit]*[credit period obtained] Outstanding ExpensesTime lag in payment of expenses like wages, salaries or other overheads gives rise to a Current Liability i.e. outstanding expenses.Outstanding Expenses are estimated as follows:

Outstanding expenses =[total units*Expenses per unit]*[period of late payment]Advance from customersSome companies take advance from customers before executing their sales order. These are the funds available with the company and are refundable only if sales order is cancelled. Illustration 1From the following data provided by M/s. Alpha ltd. Estimate working capital requirements for the year ended 31st March, 2014.(a) Estimated activity/operations for the year 2,60,000 units (52 weeks).(b) Raw material remains in stock for 2 weeks and production cycle takes 2 weeks(c) Finished Goods remaining in stock for 2 weeks.(d) 2 weeks credit is allowed by suppliers.(e) 4 weeks credit is allowed to debtors.(f) Time lag in payment of wages and overheads is 2 weeks each.(g) Cash & bank balance to be maintained Rs. 25000.(h) Selling price per unit is Rs. 15. (i) Analysis of cost per unit as follows: (1) Raw material 33 1/3 % of sales. (2) Labour and overheads in the ratio of 6 :4 per unit. (3) Profit is at Rs. 5 per unit.Assume that operations are evenly spread throughout the year; Wages and Overheads accrue similarly. Manufacturing process required feeding of material at the beginning. Degree of work-in-progress is 50%. Debtors are to be estimated at selling price.

Solutions:ParticularsWorking (Units * Rate * Period)AmountAmount(A)1.(a)(b)

(c)2.3.

(B)1.2.3.

(C)Current AssetsStockRaw materialWork-in-progressMaterialsLabourOverheadFinished Goods @ COPDebtorsCash And Bank BalanceTotal Current AssetsLess : Current LiabilitiesCreditorsOutstanding WagesOutstanding OverheadsTotal Current LiabilitiesEstimated Working Capital (A-B)(5000*Rs. 5*2 weeks)

(5000*Rs. 5*2 weeks)(5000*Rs. 3*1 weeks)(5000*Rs. 2*1 weeks)(5000*Rs. 10*2 weeks)(5000*Rs. 15*4 weeks)(Given)

(5000*Rs. 5*2 weeks)(5000*Rs. 3*2 weeks)(5000*Rs. 2*2 weeks)

50,00015,00010,000

50,00030,00020,000

50,000

75,0001,00,0003,00,00025,0005,50,000

1,00,0004,50,000

Note : In absence of specific instruction, margin of safety is not added.Working Notes: (1) Units : Yearly Production 2,60,000 Units = Weekly Production 2,60,000/52 = 5,000 Units

(2) Cost structure

Labour & Overheads = Total Cost Raw Materials = 10 5 = 5Labour = 5 * 6/10 = 3Overheads = 5 * 4/10 = 2

ParticularsPer UnitRaw Material (1/3 of sales)Add : Labour OverheadsTotal CostAdd : ProfitSales5.003.002.0010.005.0015.00Illustration 2:From the following figures, prepare an estimate of the working capital ;Production30,000 unitsSelling price per unitRs. 10Raw Material60%Direct wages1/6th of raw materialOverheadsTwice the direct wagesMaterial in hand2 months requirementProduction time1 monthFinished goods in stores3 monthsCredit for material2 MonthsCredit allowed to customers3 monthsAverage cash balanceRs. 40,000Wages and overheads are paid in the beginning of next month. In Production all the material are charged in the initial stage and wages and overheads accrue evenly.Solution:Cost statement

Element of CostWorking (Amount * Period)Rs.Total Rs.1.2.

3.Raw-MaterialsWagesOverheads

Total CostProfit

Sales(10 * 60%)(1/6 * 6)(2*1)

Balancing Figure

Given612

91

101,80,00030,00060,000

2,70,00030,000

3,00,000Working capital estimate 2013-14ParticularsUnit P.M.RateMonthsRs.Rs.Rs.(A)1.(a)(b)

(c) 2.3.

(B)1.2.3.

(C)Current AssetsStockRaw MaterialWork-in-progressMaterialsLabourOverheadsFinished Goods @ COPDebtorsCash (Given)Total Current AssetsCurrent LiabilitiesCreditorsOutstanding WagesOutstanding OverheadsTotal Current LiabilitiesWorking Capital (A-B)

2,500

2,5002,5002,5002,5002,500

2,5002,5002,5006.00

6.001.002.009.0010.00

6.001.002.00

2

133

21115,0001,2502,500

30,0002,5005,00030,000

18,75067,5001,16,25075,00040,0002,31,000

37,5001,93,750

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