Current Assets, Current Liabilities Homework Help & Tutoring
Current Liabilities, Current Assets Assignment Help, Tutor Help:
Calculating Working Capital Needs
The calculation of working capital requirements involves the estimation of current
assets and current liabilities. This process includes estimation of working capital
and its components by taking into account the period for which the various items
remain as stock or as outstanding, the cost structure of production and annual production.
Computation of working capital requirement essentially involves
- Estimation of current assets
- Estimation of current liabilities.
- Estimation of Current Assets
Current assets estimation includes:
- Raw materials Requirement cost
This is computed by multiplying the daily requirement by the age of raw materials. Suppose if the raw material cost is $5 per unit and the company expects to produce and sell 36000 units in the coming year and the age of raw materials is 45, the raw materials requirement cost would be = Daily requirement x Age of raw materials.
Raw Materials requirement cost = 36000 x $5 x 45 =
365$22,192
- Work-in-Progress stock requirement cost
This is computed by multiplying the daily requirement of various sub-components of WIP by the age of WIP. Suppose if the Raw material cost is $5 per unit, wages is $4 per unit and production overhead is $4 per unit and the age of WIP is 30 days, the WIP stock requirement cost would be: (36000 units per year)
Raw material component = 36,000 x $5 x 30 =
365$14,795 Wages (Direct labor) Component = 36,000 x $4 x 30 =
365$11,836 Production overhead component = 36,000 x $4 x 30 =
365$11,836 Total WIP requirement cost = $38,467
- Finished goods – Inventory requirement cost
This is computed by multiplying the daily requirement of various sub-components of finished goods by the age of finished goods. Suppose if the Raw material cost is $5 per unit, wages is $4 per unit, production overhead is $4 per unit and selling overhead is $2 per unit, and the age of finished goods is 60 days, the finished goods inventory requirement cost would be: (36000 units per year)
Raw material component = 36,000 x $5 x 60 =
365$29,589 Wages component = 36,000 x $4 x 60 =
365$23,671 Production overhead component = 36,000 x $4 x 60 =
365$23,671 Selling overhead component = 36,000 x $2 x 60 =
365$11,836 Total Finished goods inventory requirement cost = $88,767
- Debtors – Value of outstanding debtors
This is computed by multiplying the daily requirement of various components of selling price by the age of debtors. Suppose if the Raw material cost is $5 per unit, wages is $4 per unit, production overhead is $4 per unit, selling overhead is $2 per unit, profit is $10 per unit and the age of debtors or accounts receivables is 50 days, the investment in debtors would be: (36000 units)
Raw material component = 36,000 x $5 x 50 =
365$24,658 Wages component = 36,000 x $4 x 50 =
365$19,726 Production overhead component = 36,000 x $4 x 50 =
365$19,726 Selling overhead component = 36,000 x $2 x 50 =
365$9,863 Profit component = 36,000 x $10 x 50 =
365$49,315 Total cost required for debtors = $123,288
- Raw materials Requirement cost
- Estimation of Current Liabilities
Current liabilities estimation includes
- Value of outstanding creditors
This is computed by multiplying the daily requirement of raw materials by the age of creditors. Suppose if the raw material cost is $5 per unit and the age of creditors is 30 days, the creditor liability estimation would be: (36000 units)
Value of outstanding creditors = 36,000 x $5 x 30 =
365$14,795
- Outstanding Wages
This is computed by multiplying the daily wages by the age of wages or outstanding period of wages in days. Suppose if the wages per unit is $4 and the age of expense creditors is 15 days, (36000 units per year)
Value of outstanding wage creditors = 36,000 x $4 x 15 =
365$5,918
- Outstanding Production overheads
This is computed by multiplying the daily production overhead expenses by the age of expense creditors. Suppose if the production overhead per unit is $4 and the age of expense creditors is 15 days, (36000 units per year)
Value of outstanding production overhead creditors = 36,000 x $4 x 15 =
365$5,918
- Outstanding selling overheads
This is computed by multiplying the daily selling overhead expenses by the age of expense creditors. Suppose if the selling overhead per unit is $2 and the age of expense creditors is 15 days, (36000 units per year)
Value of outstanding selling overhead creditors = 36,000 x $2 x 15 =
3652,959
- Value of outstanding creditors
Now that we have estimated the various current assets and current liabilities, we
can compute the working capital requirements.
Computation of Working Capital
Question: Current assets and current liabilities are as given above. Cash requirement
is $20,000. Compute the net working capital required.
Current Assets:
| Raw material stock | $22,192 | |
| Work-in-Progress stock | $38,467 | |
| Finished goods stock | $88,767 | |
| Debtors | $123,288 | |
| Cash | $20,000 | |
| Total current assets | $292,714 |
Less: Current Liabilities
| Outstanding creditors | $14,795 | |
| Outstanding wages | $5,918 | |
| Outstanding production overheads | $5,918 | |
| Outstanding selling overheads | $2,959 | |
| Total current liabilities | $29,590 | |
| Net working capital | $263,124 |
Some companies may add some percentage of amounts to meet contingencies. In those
cases, the working capital estimated above can be adjusted for contingencies. If
the above company would like to allow 10% for contingencies, the net working capital
required would be:
| $263,124 | ||
| Add: 10% for contingencies | $26,312 | |
| Net working capital required | $289,436 |
Though, the above way of calculation of working capital is justified from the opportunity
cost point of view, some authors have certain variations in respect of 1) WIP –
the production overhead sub-component may be taken not at the full value as in the
above computation, but say 70% or 80% of the same. Some may even exclude the whole
of the production overheads regarding stock of WIP. 2) In respect of finished goods
stock, the selling overhead sub-component may be deleted or taken at say 50% or
60% of the level, as the whole of selling expenditure might not have been expended
but only a part, like distribution to regional depots etc. have been spent. 3) In
respect of debtors, the profits sub-component may be deleted entirely for there
is no out-of-pocket cost involved. But from the opportunity cost point of view the
above inclusions are justified.
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