Test 2: Management of Working Capital: answer key

Question 1 · 2 marks · Management of Working Capital · medium

Scenario. Bharat Renewables Ltd manufactures industrial solar-inverter modules for domestic and export markets. The company is preparing its working-capital budget for the financial year 2027-28. Production and sales are expected to remain uniform throughout the year. The finance director has decided to estimate working capital using the cash-cost approach, excluding depreciation and profit from the relevant inventory and receivables valuations. All production costs are incurred evenly except that raw materials are introduced at the commencement of production. Projected operating information: Annual production: 52,000 units Production period: 52 weeks Selling price per unit: ₹320 Raw materials per unit: ₹120 Direct wages per unit: ₹60 Manufacturing overheads per unit: ₹40, including depreciation of ₹20 Cash administrative and selling expenses per unit: ₹10 Raw-material holding period: 4 weeks WIP holding period: 2 weeks, with conversion costs 50% complete on average Finished-goods holding period: 3 weeks Debtor collection period: 6 weeks Supplier credit: 4 weeks Wages payment lag: 1 week Manufacturing overhead payment lag: 2 weeks Administrative and selling expense payment lag: 2 weeks Minimum cash balance: ₹8 lakh Contingency allowance: 10% of net working capital before contingency. Corporate financial information (₹ crore): Equity share capital 1.80; retained earnings 0.40; 10% term debt 0.90; projected EBIT 0.364; tax rate 25%; equity beta 1.05; risk-free rate 6.50%; market risk premium 6.50%; forecast operating cash flow ₹0.31 crore. The company has no prepaid operating expenses or other current assets and liabilities outside those expressly mentioned. Depreciation is included in accounting production cost but is a non-cash expense. The finance team must distinguish the material component of WIP from conversion costs and ensure that supplier and expense-payment lags are deducted from current assets. Use 52 weeks as the annual production period. Amounts required in the questions are to be expressed in rupees or lakh as indicated.

Calculate the estimated raw-material inventory required by Bharat Renewables Ltd for its planned production, considering the specified raw-material holding period.

1. ₹3,60,000
2. ₹4,80,000 (correct answer)
3. ₹6,24,000
4. ₹5,20,000

Answer: B — ₹4,80,000

Explanation. Annual raw-material consumption = 52,000 units × ₹120 = ₹62,40,000. Average weekly consumption = ₹62,40,000 ÷ 52 = ₹1,20,000. Raw-material inventory = Average weekly consumption × Holding period = ₹1,20,000 × 4 = ₹4,80,000. Option a incorrectly uses three weeks, while option c represents 10% of annual consumption rather than the required four-week holding. Raw materials are valued at their consumption cost, not selling price.

Where it goes wrong. Using the wrong inventory holding period or calculating raw-material inventory using selling price rather than material consumption cost.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 2 · 2 marks · Management of Working Capital · medium

Determine the estimated Work-in-Process inventory of Bharat Renewables Ltd, assuming raw materials are introduced completely at the commencement of production and conversion costs are 50% complete on average.

1. ₹2,40,000
2. ₹3,00,000
3. ₹3,20,000 (correct answer)
4. ₹3,40,000

Answer: C — ₹3,20,000

Explanation. Weekly production = 52,000 ÷ 52 = 1,000 units. WIP represents 2 weeks of production = 2,000 units. On cash-cost basis: Direct materials = 2,000 × ₹120 = ₹2,40,000. Direct labor = 2,000 × 50% of ₹60 = ₹60,000. Cash manufacturing overheads = 2,000 × 50% of ₹20 (excluding ₹20 depreciation) = ₹20,000. Total cash-cost WIP = ₹2,40,000 + ₹60,000 + ₹20,000 = ₹3,20,000.

Where it goes wrong. Applying the conversion completion percentage to raw materials, or including depreciation in the cash-cost valuation of WIP.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 3 · 2 marks · Management of Working Capital · hard

Calculate the investment required in trade receivables using the cash-cost approach. Assume all sales are credit sales and the collection period is six weeks.

1. ₹12,60,000 (correct answer)
2. ₹13,80,000
3. ₹14,40,000
4. ₹15,00,000

Answer: A — ₹12,60,000

Explanation. Per-unit cash cost of sales = Raw materials ₹120 + Wages ₹60 + Cash factory overhead ₹20 + Cash selling overhead ₹10 = ₹210. Average trade receivables on cash cost basis = 52,000 units × (6/52) × ₹210 = 6,000 units × ₹210 = ₹12,60,000.

Where it goes wrong. Including depreciation or profit in debtors when the question specifically requires the cash-cost approach.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 4 · 2 marks · Management of Working Capital · hard

Using the cash-cost approach, calculate the estimated net working capital requirement of Bharat Renewables Ltd after incorporating its minimum cash balance and a 10% contingency allowance. Consider all current liabilities arising from the stated payment lags.

1. ₹30,20,000
2. ₹32,00,000
3. ₹31,46,000 (correct answer)
4. ₹33,22,000

Answer: C — ₹31,46,000

Explanation. Cash-cost current assets: Raw materials ₹4,80,000 + WIP ₹3,20,000 + Finished goods (₹200 × 3,000 = ₹6,00,000) + Trade receivables ₹12,60,000 + Cash balance ₹8,00,000 = ₹34,60,000. Current liabilities: Creditors ₹4,00,000 + Lag in wages ₹1,50,000 + Lag in manufacturing overhead (cash ₹20 × 2,000 = ₹40,000) + Lag in selling overhead ₹10,000 = ₹6,00,000. Net Working Capital = ₹34,60,000 − ₹6,00,000 = ₹28,60,000. Adding 10% contingency allowance = ₹28,60,000 × 1.10 = ₹31,46,000.

Where it goes wrong. Incorrectly using the finished-goods or debtor valuation, or applying the contingency allowance to gross current assets rather than net working capital.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 5 · 2 marks · Management of Working Capital · medium

Scenario. Zenith Power Systems Ltd manufactures high-capacity electrical control panels for industrial customers. The company is expanding its production facilities and has requested its finance department to prepare a detailed working-capital estimate for the coming financial year. Management expects annual production of 36,000 units, with production evenly distributed over 12 months. All sales are on credit, and the company follows a consistent inventory and credit policy throughout the year. Projected operating data: Annual production: 36,000 units Production period: 12 months Selling price per unit: ₹450 Raw materials per unit: ₹150 Direct wages per unit: ₹90 Manufacturing overheads per unit: ₹60, including depreciation of ₹30 Cash administrative and selling expenses per unit: ₹15 Raw-material inventory: 1.5 months' consumption WIP holding period: 1 month WIP completion: materials fully introduced, labour and cash manufacturing overheads 60% Finished-goods holding period: 2 months Debtor collection period: 1.5 months Supplier credit: 1 month Wages payment lag: 0.5 month Manufacturing overhead payment lag: 1 month Minimum cash balance: ₹6 lakh Safety margin: 12% of estimated net working capital. Corporate financial information (₹ crore): Equity share capital 2.00; retained earnings 0.75; 10% debentures 1.25; projected EBIT 0.378; tax rate 25%; equity beta 1.20; risk-free rate 6.50%; market risk premium 7%; forecast operating cash flow ₹0.30 crore. For the working-capital estimate, depreciation must be excluded from cash-cost valuations of finished goods and debtors. Administrative and selling expenses are paid immediately and do not create outstanding liabilities. No prepaid expenses or additional current assets are expected. Supplier credit relates exclusively to raw-material purchases. Wages and manufacturing overheads accrue evenly throughout the year. The minimum cash balance is maintained throughout the operating period. Use 12 months as the annual production period, and apply the stated safety margin after deducting current liabilities from current assets.

Determine the raw-material inventory requirement of Zenith Power Systems Ltd based on its annual production, raw-material cost per unit and 1.5-month inventory holding period.

1. ₹4,50,000
2. ₹6,00,000
3. ₹6,75,000 (correct answer)
4. ₹7,50,000

Answer: C — ₹6,75,000

Explanation. Monthly production = 36,000 ÷ 12 = 3,000 units. Monthly raw-material consumption = 3,000 × ₹150 = ₹4,50,000. Required inventory = ₹4,50,000 × 1.5 months = ₹6,75,000. Option a represents only one month's consumption, while option d overstates the holding period. The estimate is based on the cost of materials consumed, rather than the total production cost or selling price.

Where it goes wrong. Using the complete production cost instead of raw-material cost per unit, or overlooking the 1.5-month inventory period.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 6 · 2 marks · Management of Working Capital · hard

Calculate Zenith Power Systems Ltd's Work-in-Process inventory on a cash-cost basis. Raw materials are introduced at the beginning, while direct wages and cash manufacturing overheads are 60% complete on average.

1. ₹4,50,000
2. ₹6,66,000 (correct answer)
3. ₹7,20,000
4. ₹8,10,000

Answer: B — ₹6,66,000

Explanation. Monthly production = 36,000 ÷ 12 = 3,000 units. For 1 month's WIP: Materials = 3,000 × ₹150 = ₹4,50,000. Wages = 3,000 × 60% of ₹90 = ₹1,62,000. Cash manufacturing overheads = 3,00,0 × 60% of ₹30 (excluding ₹30 depreciation) = ₹54,000. Total cash-cost WIP = ₹4,50,000 + ₹1,62,000 + ₹54,000 = ₹6,66,000.

Where it goes wrong. Applying the 60% completion rate to raw materials even though they are introduced fully at the beginning of production.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 7 · 2 marks · Management of Working Capital · hard

Determine the investment in trade receivables of Zenith Power Systems Ltd on a cash-cost basis, excluding depreciation and profit. All sales are on credit and the collection period is 1.5 months.

1. ₹16,20,000
2. ₹14,85,000
3. ₹15,75,000
4. ₹12,82,500 (correct answer)

Answer: D — ₹12,82,500

Explanation. Cash cost of sales per unit = Raw materials ₹150 + Wages ₹90 + Cash factory overhead ₹30 + Cash selling overhead ₹15 = ₹285. Average trade receivables on cash cost basis = 3,000 units × 1.5 months × ₹285 = ₹12,82,500.

Where it goes wrong. Including non-cash depreciation in receivables or using sales value, including profit, rather than the cash cost of credit sales.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 8 · 2 marks · Management of Working Capital · hard

Calculate the total working capital requirement of Zenith Power Systems Ltd after incorporating current assets, outstanding current liabilities and its 12% safety margin.

1. ₹46,68,720 (correct answer)
2. ₹41,68,500
3. ₹48,43,500
4. ₹49,81,200

Answer: A — ₹46,68,720

Explanation. Cash-cost current assets: Raw materials ₹6,75,000 + WIP ₹6,66,000 + Finished goods (₹270 × 6,000 = ₹16,20,000) + Trade receivables ₹12,82,500 + Cash balance ₹6,00,000 = ₹48,43,500. Current liabilities: Creditors ₹4,50,000 + Lag in wages ₹1,35,000 + Lag in factory overhead (cash ₹30 × 3,000 = ₹90,000) = ₹6,75,000. Net Working Capital = ₹48,43,500 − ₹6,75,000 = ₹41,68,500. Adding 12% safety margin = ₹41,68,500 × 1.12 = ₹46,68,720.

Where it goes wrong. Applying the contingency allowance before deducting current liabilities or including depreciation in cash-cost inventory and receivables.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 9 · 2 marks · Management of Working Capital · hard

Scenario. Aditya Automotive Ltd manufactures precision components for commercial vehicle manufacturers. Its finance director is evaluating the funds required to support production, inventory and the extended credit facilities offered to original-equipment manufacturers. The company expects to manufacture 24,000 units during the next financial year, with uniform monthly production. Management wishes to prepare its estimate on a cash-cost basis to identify the actual cash funds blocked in the operating assets. Projected operating information: Annual production: 24,000 units Production period: 12 months Selling price per unit: ₹600 Raw materials per unit: ₹250 Direct wages per unit: ₹100 Manufacturing overheads per unit: ₹80, including depreciation of ₹20 Administrative overheads per unit: ₹24, including depreciation of ₹4 Selling and distribution expenses per unit: ₹16, entirely cash expenses Raw-material holding period: 2 months WIP holding period: 1 month WIP completion: materials fully introduced; direct wages and cash manufacturing overheads 40% Finished-goods holding period: 1.5 months Debtor collection period: 2 months Supplier credit: 1.5 months Wages payment lag: 0.5 month Manufacturing overhead payment lag: 1 month Minimum cash balance: ₹5 lakh Contingency allowance: 15% of net working capital. Corporate financial information (₹ crore): Equity share capital 1.50; retained earnings 0.60; 9.5% term debt 0.75; projected EBIT ₹0.312 crore; tax rate 30%; equity beta 1.10; risk-free rate 6.25%; market risk premium 6.50%; forecast operating cash flow ₹0.32 crore. The company does not maintain prepaid expenses. Administrative and selling expenses are paid immediately, whereas manufacturing overheads and wages are settled after the stated delays. Depreciation is relevant for accounting cost but does not represent an actual cash investment. Material is issued at the beginning of production, while labour and manufacturing overheads are incurred uniformly during processing. Use 12 months as the annual period and calculate all inventory, debtor and payable balances using the appropriate cost base.

Calculate the Work-in-Process inventory of Aditya Automotive Ltd using the cash-cost approach. Raw materials are introduced at the commencement of production, while wages and cash manufacturing overheads are 40% complete.

1. ₹5,80,000
2. ₹7,00,000
3. ₹6,28,000 (correct answer)
4. ₹7,40,000

Answer: C — ₹6,28,000

Explanation. Monthly production = 24,000 ÷ 12 = 2,000 units. Material component = 2,000 × ₹250 = ₹5,00,000. Labour component = 2,000 × ₹100 × 40% = ₹80,000. Cash manufacturing overhead component = 2,000 × ₹60 × 40% = ₹48,000. Total WIP = ₹5,00,000 + ₹80,000 + ₹48,000 = ₹6,28,000. Depreciation of ₹20 per unit is excluded because the estimate is on cash-cost basis.

Where it goes wrong. Applying the conversion completion percentage to raw materials or including the depreciation component in cash manufacturing overheads.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 10 · 2 marks · Management of Working Capital · hard

Determine the finished-goods inventory requirement of Aditya Automotive Ltd using the cash-cost approach and the stated 1.5-month storage period.

1. ₹12,90,000
2. ₹12,30,000 (correct answer)
3. ₹14,10,000
4. ₹15,00,000

Answer: B — ₹12,30,000

Explanation. Cash production cost per unit = Raw materials ₹250 + Direct wages ₹100 + Cash manufacturing overheads ₹60 = ₹410. Monthly production = 24,000 ÷ 12 = 2,000 units. Monthly cash cost of production = 2,000 × ₹410 = ₹8,20,000. Finished-goods inventory = ₹8,20,000 × 1.5 = ₹12,30,000. Option a includes the non-cash manufacturing depreciation of ₹20 per unit, while options c and d use an inflated production cost.

Where it goes wrong. Valuing finished goods at total accounting cost instead of cash production cost when the question expressly specifies cash-cost valuation.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 11 · 2 marks · Management of Working Capital · hard

Calculate the investment in trade debtors of Aditya Automotive Ltd using cash cost of sales, excluding both non-cash depreciation and profit. All sales are on credit and the average collection period is two months.

1. ₹17,84,000 (correct answer)
2. ₹18,80,000
3. ₹19,20,000
4. ₹16,40,000

Answer: A — ₹17,84,000

Explanation. Cash cost of sales per unit = ₹250 materials + ₹100 wages + ₹60 cash manufacturing overhead + ₹20 cash administrative overhead + ₹16 selling and distribution = ₹446. Monthly cash cost = 2,000 × ₹446 = ₹8,92,000. Receivables = ₹8,92,000 × 2 months = ₹17,84,000. Option b incorrectly includes depreciation, while option c may arise from using total cost rather than cash cost. Profit included in the selling price must also be excluded.

Where it goes wrong. Using selling price or total accounting cost to calculate debtors rather than the cash-cost component actually blocked in receivables.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 12 · 2 marks · Management of Working Capital · medium

Determine the total working capital requirement of Aditya Automotive Ltd after incorporating its current assets, current liabilities and 15% contingency allowance.

1. ₹41,72,000
2. ₹51,42,000
3. ₹48,20,000
4. ₹47,97,800 (correct answer)

Answer: D — ₹47,97,800

Explanation. Current assets = Raw materials ₹10 lakh + WIP ₹6.28 lakh + Finished goods ₹12.30 lakh + Debtors ₹17.84 lakh + Cash ₹5 lakh = ₹51.42 lakh. Current liabilities = Creditors ₹7.50 lakh + Wages payable ₹1 lakh + Manufacturing overheads payable ₹1.20 lakh = ₹9.70 lakh. Net working capital = ₹41.72 lakh. Contingency = 15% × ₹41.72 lakh = ₹6.258 lakh. Total requirement = ₹47.978 lakh or ₹47,97,800.

Where it goes wrong. Applying the contingency margin to gross working capital instead of the excess of current assets over current liabilities.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 13 · 2 marks · Management of Working Capital · medium

Scenario. A manufacturer expects annual raw-material consumption of ₹7.20 crore. Its desired raw-material inventory level is ₹60 lakh. Assuming uniform consumption throughout a 360-day year, calculate the average raw-material storage period.

A manufacturer expects annual raw-material consumption of ₹7.20 crore. Its desired raw-material inventory level is ₹60 lakh. Assuming uniform consumption throughout a 360-day year, calculate the average raw-material storage period.

1. 24 days
2. 30 days (correct answer)
3. 36 days
4. 45 days

Answer: B — 30 days

Explanation. Average daily consumption = ₹7.20 crore ÷ 360 = ₹2 lakh. Raw-material storage period = Average inventory ÷ Average daily consumption = ₹60 lakh ÷ ₹2 lakh = 30 days. Option a understates the holding period by using a higher daily consumption figure, while option c may arise from using an incorrect annual-day convention. Inventory holding must be calculated using raw-material consumption, not total production cost.

Where it goes wrong. Using the wrong annual-day divisor or using total production cost instead of material consumption to determine raw-material storage days.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 14 · 2 marks · Management of Working Capital · medium

Scenario. A manufacturing company produces 48,000 units annually. Unit costs are raw materials ₹120, direct wages ₹80 and cash manufacturing overheads ₹50. WIP remains in production for 1.5 months. Materials are introduced completely at the beginning, while labour is 60% complete and manufacturing overheads are 40% complete on average. Calculate WIP inventory on a cash-cost basis.

A manufacturing company produces 48,000 units annually. Unit costs are raw materials ₹120, direct wages ₹80 and cash manufacturing overheads ₹50. WIP remains in production for 1.5 months. Materials are introduced completely at the beginning, while labour is 60% complete and manufacturing overheads are 40% complete on average. Calculate WIP inventory on a cash-cost basis.

1. ₹9,60,000
2. ₹10,80,000
3. ₹11,28,000 (correct answer)
4. ₹12,00,000

Answer: C — ₹11,28,000

Explanation. Monthly production = 48,000 ÷ 12 = 4,000 units. Materials = 4,000 × ₹120 × 1.5 = ₹7,20,000. Labour = 4,000 × ₹80 × 1.5 × 60% = ₹2,88,000. Manufacturing overheads = 4,000 × ₹50 × 1.5 × 40% = ₹1,20,000. Total WIP = ₹7,20,000 + ₹2,88,000 + ₹1,20,000 = ₹11,28,000. Different completion percentages must be applied separately to conversion components.

Where it goes wrong. Applying a single completion percentage to all WIP components instead of recognising that raw materials are introduced completely at the beginning.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 15 · 2 marks · Management of Working Capital · medium

Scenario. A company reports annual sales of ₹6 crore, of which 80% are credit sales. Its gross profit margin is 25% of sales. Depreciation included in annual cost of goods sold is ₹36 lakh. Debtors are expected to remain outstanding for two months. Calculate receivables on a cash-cost basis, assuming a 12-month year.

A company reports annual sales of ₹6 crore, of which 80% are credit sales. Its gross profit margin is 25% of sales. Depreciation included in annual cost of goods sold is ₹36 lakh. Debtors are expected to remain outstanding for two months. Calculate receivables on a cash-cost basis, assuming a 12-month year.

1. ₹60,00,000
2. ₹48,00,000
3. ₹57,60,000
4. ₹55,20,000 (correct answer)

Answer: D — ₹55,20,000

Explanation. Cost of goods sold = ₹6 crore × 75% = ₹4.50 crore. Annual cash cost of sales = ₹4.50 crore − ₹0.36 crore depreciation = ₹4.14 crore. Annual cash cost of credit sales = ₹4.14 crore × 80% = ₹3.312 crore. Receivables = ₹3.312 crore × 2/12 = ₹55.20 lakh. Option a includes depreciation and/or profit, while option c incorrectly adjusts the credit-sales proportion or fails to exclude the full non-cash expense.

Where it goes wrong. Using credit sales at their selling price, or deducting the entire gross profit without separately excluding non-cash depreciation.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 16 · 2 marks · Management of Working Capital · medium

Scenario. A company has annual credit purchases of raw materials of ₹3.60 crore, annual direct wages of ₹1.80 crore and annual cash overheads of ₹1.20 crore. Suppliers allow two months' credit, wages remain outstanding for 15 days and overheads remain outstanding for 30 days. Assuming a 360-day year, calculate total current liabilities arising from these items.

A company has annual credit purchases of raw materials of ₹3.60 crore, annual direct wages of ₹1.80 crore and annual cash overheads of ₹1.20 crore. Suppliers allow two months' credit, wages remain outstanding for 15 days and overheads remain outstanding for 30 days. Assuming a 360-day year, calculate total current liabilities arising from these items.

1. ₹77,50,000 (correct answer)
2. ₹70,00,000
3. ₹67,50,000
4. ₹82,50,000

Answer: A — ₹77,50,000

Explanation. Creditors = ₹3.60 crore × 2/12 = ₹60 lakh. Wages outstanding = ₹1.80 crore × 15/360 = ₹7.50 lakh. Overheads outstanding = ₹1.20 crore × 30/360 = ₹10 lakh. Total current liabilities = ₹60 lakh + ₹7.50 lakh + ₹10 lakh = ₹77.50 lakh. Option b omits one outstanding expense component, while option d overstates wages or overheads payable by using an incorrect time lag.

Where it goes wrong. Calculating outstanding wages or overheads using the wrong payment lag, or omitting expense payables while estimating current liabilities.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 17 · 2 marks · Management of Working Capital · hard

Scenario. A company estimates the following current assets: raw-material inventory ₹18 lakh, WIP ₹12 lakh, finished goods ₹24 lakh, debtors ₹30 lakh and cash ₹6 lakh. Current liabilities comprise creditors ₹15 lakh, outstanding wages ₹4 lakh and outstanding overheads ₹6 lakh. The company requires a 10% safety margin on net working capital. Determine the final working capital requirement.

A company estimates the following current assets: raw-material inventory ₹18 lakh, WIP ₹12 lakh, finished goods ₹24 lakh, debtors ₹30 lakh and cash ₹6 lakh. Current liabilities comprise creditors ₹15 lakh, outstanding wages ₹4 lakh and outstanding overheads ₹6 lakh. The company requires a 10% safety margin on net working capital. Determine the final working capital requirement.

1. ₹65,00,000
2. ₹70,00,000
3. ₹71,50,000 (correct answer)
4. ₹78,00,000

Answer: C — ₹71,50,000

Explanation. Gross Working Capital = ₹18 lakh + ₹12 lakh + ₹24 lakh + ₹30 lakh + ₹6 lakh = ₹90 lakh. Current liabilities = ₹15 lakh + ₹4 lakh + ₹6 lakh = ₹25 lakh. Net working capital before contingency = ₹90 lakh − ₹25 lakh = ₹65 lakh. Safety margin = 10% × ₹65 lakh = ₹6.50 lakh. Final requirement = ₹65 lakh + ₹6.50 lakh = ₹71.50 lakh. Option a omits the safety margin, while option b incorrectly calculates the allowance on another base.

Where it goes wrong. Adding the safety margin to gross current assets or calculating it on current assets without first deducting normal current liabilities.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 18 · 2 marks · Management of Working Capital · hard

Scenario. A manufacturer produces 30,000 units annually and maintains finished-goods stock equivalent to two months' production. Per-unit production costs are materials ₹180, wages ₹90, cash manufacturing overheads ₹60 and depreciation ₹30. Determine the difference between finished-goods inventory valued on the total-cost basis and the cash-cost basis.

A manufacturer produces 30,000 units annually and maintains finished-goods stock equivalent to two months' production. Per-unit production costs are materials ₹180, wages ₹90, cash manufacturing overheads ₹60 and depreciation ₹30. Determine the difference between finished-goods inventory valued on the total-cost basis and the cash-cost basis.

1. ₹90,000
2. ₹1,50,000 (correct answer)
3. ₹1,20,000
4. ₹1,80,000

Answer: B — ₹1,50,000

Explanation. Monthly production = 30,000 ÷ 12 = 2,500 units. Two months' finished goods = 5,000 units. Total production cost per unit = ₹180 + ₹90 + ₹60 + ₹30 = ₹360. Cash production cost per unit = ₹330. Difference per unit = ₹30. Difference in inventory valuation = 5,000 × ₹30 = ₹1,50,000. The entire difference arises from non-cash depreciation, which is excluded under the cash-cost approach.

Where it goes wrong. Treating depreciation as an actual cash fund requirement and failing to distinguish total accounting production cost from cash production cost.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 19 · 2 marks · Management of Working Capital · hard

Scenario. A factory produces 60,000 units annually and maintains an average WIP period of one month. Per-unit costs are materials ₹200, direct wages ₹80 and manufacturing overheads ₹40. Materials are issued at the commencement of production, while labour is 75% and overheads are 50% complete on average. Determine the WIP valuation on a total-cost basis.

A factory produces 60,000 units annually and maintains an average WIP period of one month. Per-unit costs are materials ₹200, direct wages ₹80 and manufacturing overheads ₹40. Materials are issued at the commencement of production, while labour is 75% and overheads are 50% complete on average. Determine the WIP valuation on a total-cost basis.

1. ₹14,00,000 (correct answer)
2. ₹12,00,000
3. ₹13,00,000
4. ₹16,00,000

Answer: A — ₹14,00,000

Explanation. Monthly production = 60,000 ÷ 12 = 5,000 units. Material component = 5,000 × ₹200 = ₹10,00,000. Direct wages component = 5,000 × ₹80 × 75% = ₹3,00,000. Manufacturing overhead component = 5,000 × ₹40 × 50% = ₹1,00,000. Total WIP = ₹10,00,000 + ₹3,00,000 + ₹1,00,000 = ₹14,00,000. The different conversion completion percentages are applied independently.

Where it goes wrong. Applying the completion percentage to materials or using the full cost of conversion when only a proportion of labour and overheads has been incurred.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 20 · 2 marks · Management of Working Capital · hard

Scenario. A manufacturing company estimates its cash-cost current assets as follows: raw materials ₹8 lakh, WIP ₹5 lakh, finished goods ₹12 lakh, debtors ₹15 lakh, minimum cash ₹4 lakh and prepaid operating expenses ₹2 lakh. Current liabilities are creditors ₹5 lakh, wages payable ₹1 lakh and overheads payable ₹2 lakh. A contingency allowance of 20% is required on the net working capital before contingency. Calculate the total requirement.

A manufacturing company estimates its cash-cost current assets as follows: raw materials ₹8 lakh, WIP ₹5 lakh, finished goods ₹12 lakh, debtors ₹15 lakh, minimum cash ₹4 lakh and prepaid operating expenses ₹2 lakh. Current liabilities are creditors ₹5 lakh, wages payable ₹1 lakh and overheads payable ₹2 lakh. A contingency allowance of 20% is required on the net working capital before contingency. Calculate the total requirement.

1. ₹38,00,000
2. ₹43,60,000
3. ₹53,60,000
4. ₹45,60,000 (correct answer)

Answer: D — ₹45,60,000

Explanation. Gross current assets = ₹8 + ₹5 + ₹12 + ₹15 + ₹4 + ₹2 = ₹46 lakh. Current liabilities = ₹5 + ₹1 + ₹2 = ₹8 lakh. Net working capital = ₹46 lakh − ₹8 lakh = ₹38 lakh. Contingency allowance = 20% × ₹38 lakh = ₹7.60 lakh. Total estimated requirement = ₹38 lakh + ₹7.60 lakh = ₹45.60 lakh. Prepaid expenses are current assets and must not be omitted from gross working capital.

Where it goes wrong. Omitting prepaid expenses or applying the contingency allowance to gross working capital rather than the net requirement.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 21 · 2 marks · Management of Working Capital · hard

Scenario. A company reports annual sales of ₹9.60 crore and a gross profit margin of 20% on sales. Depreciation included in annual cost of goods sold is ₹48 lakh. Seventy-five per cent of sales are on credit, and the average collection period is three months. Calculate the debtors' investment using the cash-cost approach.

A company reports annual sales of ₹9.60 crore and a gross profit margin of 20% on sales. Depreciation included in annual cost of goods sold is ₹48 lakh. Seventy-five per cent of sales are on credit, and the average collection period is three months. Calculate the debtors' investment using the cash-cost approach.

1. ₹1,44,00,000
2. ₹1,35,00,000 (correct answer)
3. ₹1,50,00,000
4. ₹1,62,00,000

Answer: B — ₹1,35,00,000

Explanation. Annual cost of goods sold = ₹9.60 crore × 80% = ₹7.68 crore. Less depreciation of ₹0.48 crore gives annual cash cost of sales of ₹7.20 crore. Cash cost of credit sales = ₹7.20 crore × 75% = ₹5.40 crore. Receivables investment = ₹5.40 crore × 3/12 = ₹1.35 crore. Option a includes depreciation in the receivables base, while option c may include an incorrect share of credit sales or selling-price margin.

Where it goes wrong. Deducting gross profit but forgetting depreciation, or using total annual cost of goods sold rather than its cash-cost portion.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 22 · 2 marks · Management of Working Capital · hard

Scenario. A company has annual credit purchases of ₹4.80 crore, direct wages of ₹2.16 crore and cash manufacturing overheads of ₹1.44 crore. Supplier credit is 60 days, wages remain unpaid for 20 days and overheads remain unpaid for 30 days. Using a 360-day year, calculate total current liabilities arising from these items.

A company has annual credit purchases of ₹4.80 crore, direct wages of ₹2.16 crore and cash manufacturing overheads of ₹1.44 crore. Supplier credit is 60 days, wages remain unpaid for 20 days and overheads remain unpaid for 30 days. Using a 360-day year, calculate total current liabilities arising from these items.

1. ₹92,00,000
2. ₹96,00,000
3. ₹1,04,00,000 (correct answer)
4. ₹1,12,00,000

Answer: C — ₹1,04,00,000

Explanation. Trade creditors = ₹4.80 crore × 60/360 = ₹80 lakh. Wages outstanding = ₹2.16 crore × 20/360 = ₹12 lakh. Manufacturing overheads outstanding = ₹1.44 crore × 30/360 = ₹12 lakh. Therefore, total current liabilities = ₹80 lakh + ₹12 lakh + ₹12 lakh = ₹104 lakh or ₹1.04 crore. Option b omits one expense payable, while option d overstates the outstanding balances through incorrect time-period conversion.

Where it goes wrong. Using the supplier-credit period for wages and overheads instead of their individual payment lags.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 23 · 2 marks · Management of Working Capital · hard

Scenario. A company's projected Gross Working Capital is ₹1.80 crore. Its normal trade and expense liabilities total ₹60 lakh. Management requires a contingency allowance of 15% of the net working capital requirement. Determine the final working capital requirement.

A company's projected Gross Working Capital is ₹1.80 crore. Its normal trade and expense liabilities total ₹60 lakh. Management requires a contingency allowance of 15% of the net working capital requirement. Determine the final working capital requirement.

1. ₹1.80 crore
2. ₹1.20 crore
3. ₹1.50 crore
4. ₹1.38 crore (correct answer)

Answer: D — ₹1.38 crore

Explanation. Net Working Capital before contingency = Gross Working Capital − Current Liabilities = ₹1.80 crore − ₹0.60 crore = ₹1.20 crore. Contingency allowance = 15% × ₹1.20 crore = ₹0.18 crore. Final estimated working capital = ₹1.20 crore + ₹0.18 crore = ₹1.38 crore. Option a treats gross working capital as the funding requirement, whereas option c incorrectly calculates the contingency allowance on a different base.

Where it goes wrong. Applying the safety margin to gross working capital rather than the net amount after deducting normal current liabilities.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 24 · 2 marks · Management of Working Capital · hard

Scenario. A company manufactures 60,000 units annually. Per-unit costs are raw materials ₹100, wages ₹60 and manufacturing overheads ₹40, of which ₹10 is depreciation. WIP remains in production for 1.2 months. Materials are added at the beginning, while wages and manufacturing overheads are 50% complete on average. Calculate WIP inventory on a cash-cost basis.

A company manufactures 60,000 units annually. Per-unit costs are raw materials ₹100, wages ₹60 and manufacturing overheads ₹40, of which ₹10 is depreciation. WIP remains in production for 1.2 months. Materials are added at the beginning, while wages and manufacturing overheads are 50% complete on average. Calculate WIP inventory on a cash-cost basis.

1. ₹8,70,000 (correct answer)
2. ₹9,00,000
3. ₹10,20,000
4. ₹11,40,000

Answer: A — ₹8,70,000

Explanation. Monthly production = 60,000 ÷ 12 = 5,000 units. Materials = 5,000 × ₹100 × 1.2 = ₹6,00,000. Wages = 5,000 × ₹60 × 1.2 × 50% = ₹1,80,000. Cash overheads per unit = ₹40 − ₹10 depreciation = ₹30. Overhead component = 5,000 × ₹30 × 1.2 × 50% = ₹90,000. Total WIP = ₹6,00,000 + ₹1,80,000 + ₹90,000 = ₹8,70,000.

Where it goes wrong. Including depreciation in cash manufacturing overheads or applying the completion percentage to raw materials introduced fully at the start.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 25 · 2 marks · Management of Working Capital · hard

Scenario. A manufacturer produces 24,000 units annually, evenly throughout the year. Per-unit costs are raw materials ₹200, direct wages ₹80, cash manufacturing overheads ₹40 and depreciation ₹20. Cash administrative expenses are ₹30 per unit and cash selling expenses are ₹20 per unit. Inventory requirements are: raw materials 1.5 months, WIP 0.5 month with materials completely introduced and conversion costs 50% complete, and finished goods 1 month. Debtors are outstanding for two months. Suppliers allow one month's credit for raw materials, wages remain outstanding for 0.25 month and manufacturing overheads for 0.5 month. Minimum cash balance is ₹3 lakh. Calculate the total working capital requirement after adding a 10% contingency margin. Use the cash-cost approach and a 12-month year.

A manufacturer produces 24,000 units annually, evenly throughout the year. Per-unit costs are raw materials ₹200, direct wages ₹80, cash manufacturing overheads ₹40 and depreciation ₹20. Cash administrative expenses are ₹30 per unit and cash selling expenses are ₹20 per unit. Inventory requirements are: raw materials 1.5 months, WIP 0.5 month with materials completely introduced and conversion costs 50% complete, and finished goods 1 month. Debtors are outstanding for two months. Suppliers allow one month's credit for raw materials, wages remain outstanding for 0.25 month and manufacturing overheads for 0.5 month. Minimum cash balance is ₹3 lakh. Calculate the total working capital requirement after adding a 10% contingency margin. Use the cash-cost approach and a 12-month year.

1. ₹28,00,000
2. ₹32,00,000
3. ₹30,80,000 (correct answer)
4. ₹34,00,000

Answer: C — ₹30,80,000

Explanation. Monthly output = 2,000 units. Current assets: raw materials = ₹6 lakh; WIP = ₹2 lakh materials + ₹0.40 lakh wages + ₹0.20 lakh manufacturing overheads = ₹2.60 lakh; finished goods = ₹6.40 lakh; debtors = 2,000 × ₹370 × 2 = ₹14.80 lakh; cash = ₹3 lakh. Gross current assets = ₹32.80 lakh. Current liabilities: creditors ₹4 lakh, wages ₹0.40 lakh and overheads ₹0.40 lakh = ₹4.80 lakh. Net working capital = ₹28 lakh. Contingency = 10% × ₹28 lakh = ₹2.80 lakh. Final requirement = ₹30.80 lakh.

Where it goes wrong. Failing to distinguish WIP component completion, using total cost instead of cash cost for finished goods and debtors, or applying contingency before deducting current liabilities.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital