Pace ‘paces (Negeri Cn: an Plosastng Wok Costa fast thatprtion stata om een esa a ere ee em zeit plc od rap te Tate of rar ot ka SED en mttmng age wr octane eet py ea ogee tas sa ee Syed i item on ee a he re ae ee “oe rage ma ce ena sea ay a ee ts usin Asi eee fat a Sculpt el yp eg tee ey le ree pga pet feel Bian ie er goa le a i ee ee ee eg ai ys ered bass rey Eh dat be tes sees renee te ten Sli eee eration eta Saicironanamenren icraecsiceamat area eee a es * 2 aerota aly Hoesen ite ean ee ey tn lara pm ch) ete iene eamnem rear tnal some ee cae oe Se a a ec onc again td ocr concer eat sat Sena be ean a i ring Cpt | ona wen ete nari ‘esata ey tn tg oe anna ote el cs sa mans ura sh en gis tne fr kept fated ee tee wl be myths ongFINANCIAL MANAGEMENT (A) Credit Policy (Terms of Sales and Purchases) : Credit terms granted by the tots eustomers as well weacse tence granted by its suppliers will rar ‘eo Working Pane If the concern has allowed very liberal credit terms to its customers erhs s adopted a slack collection procedures, more funds will be tied in book debts and ing Capital needs will also be high. Where suppliers have granted liberal credit terms to the concern, there will be less need for Working Capital. Not only this, the ratio of Cash and Credit sales or purchases will also affect the level of Working Capital. (5) Production Policy : Production policies followed by the management of the business | concern will have an important bearing pon the Working Capital requirements. For example, scheduling has much impact upon the level of inventory. Change in the production procedure like introducing automation sill also affect the investment patterns in favour of long-term fixed assets (6) Seasonal Fluctuations : Seasonal and cyclical fluctuations in demand for a product in which a concern is engaged will affect the level of Working Capital. There are certain industries whose production or sales are effected only in a particular season. The production of a product only during a particular season in a way to meet the demand for all seasons may require high j volume of Working Capital not only for the purchase of raw materials but also for keeping the inventory of finished goods. Sugar industry is an example. Cyclical fluctuations fe general Economy also will affect the level of working capital. An upward swing in the general economy may lead to increased sales resulting into increased investment in inventory and book debts anc: vice-versa too. (7) Operating Efficiency : It is also contended that a business concern can minimise its need for Working Capital by efficiently controlling its operating costs, ie., utilising the resources optimally. Such efficiency in operations will ensure improvement in the use of Working Capital ord also acceleration in the pace of cash cycle. Profitability will also improve which will help in relieving the pressure on Working Capital. (8) Growth and Expansion : Although the relationship between Growth and Working Capit needs is not well recognised, it is felt that growing concerns require more Working Capital than! those which are static. As a concern grows, larger amount of Working Capital will be required. (9) Price Level Changes and Adjustments thereto : When the prices are rising in gener higher investment in Working Capital is required, because the same level of current assets need increased investment due to rise in prices. But if the concern is able to revise the prices ifs product upward, it ay not be compelled to increase the level of Working Capital in the peri of Hsing price levels, But all the concerns may not feel the impact of price level changes 1 Working Capital level to the same extent and magnitude. ‘TECHNIQUES OF FORECASTING WORKING CAPITAL Generally the following techniques may be used in forecasting the Working Capital for future period : t 1. Operating Cycle Method 2. Estimating of Current Assets and Current Liabilities Method 3, Cash Forecasting Method 4, Projected Balance Sheet Method 5, Profit & Loss Adjustment Method 1. Operating Cycle Method ‘Gader this method Working Capital is determined by (a) total operating expenses for {b) No. of operating eycles during the year. Total operating expenses will include 4 ‘eciation) on raw materials, labour and overheads. .s in product-mix, introducti year, and c Zxpenses (excluding non-cash like depr ex enating these expenses, itis necessary to adjust for the change Gfnew product, changes in price-level ete,6 ) sc00n0 <2) rte Ong Sarat men rie de det (Ne f ping Cnn tem AB 48 ov wai cna) 3 See eoseaseaas oo esotae Maat “Aa: Reoerves for coaiagensis (120 Total Wages = 52,000x60 = 31,20,000 | = 31,20,000 x3 | Outstanding 62x2 (7) Outstanding Overheads (4 weeks) ‘Total Overheads = ¢ 52,000 x 120=% 62,40,000 Outstanding = $240,004 = 4,80,000 = 90,000 Tilustration 14 Compute the Working Capital needs of a borrower on the basis of the following information : al Expected level of production can, ¥ 22,000 Ton Raw Materials inventory ‘4 weeks Processing period 4 weeks Permanent materials in process 200 Ton j Finished goods in inventories 6 weeks Credit allowed to customers 8 weeks Expected ratio of () Materials to Sale price 12% (ii) Wages & Overheads to sale price 22% Selling Price per ton % 3,000. Solution (A) Total Current Assets to be maintained : G) Inventories of Raw Materials ' i) Inventories of work-in-process }) Finished goods inventories (iv) Trade receivables at Cost (B) Current Liabilities to be created ‘Trade payables Working Capital R. M. Inventories = 22,000 «2,160 x 5 = 36,55,384 000 x 2,820 x 4.x 1 52x2 WLP. % 23,896,154 Finished goods Inventories = 22,000 x 2,820 xh =% 71,58,462 ‘Trade Receivables at cost = 22,000 x 2,820 x 4 = 95,44,615 QUESTIONS Long Answer Type Questions plain in brief the gross and net concepts of Working Capital. Which of these concepts do you ‘prefer and why ? o Holain the operating cycle concept of working capital. Give suitable example. How a close study of operating cycle is helpful ? ‘ 3 Mefine Working Capital. Distinguish between permanent and temporary Working Capital. What is the significance of such distinction in Workimg Capital financing? i i ne ited ern 1215 50. at ee fpr order wach stn rene a cently £0 tn praevia enlarge de ‘pron designed chew «bles etren al sheteg ane oe "fc BOQ can ote ced an ial % “ch oe pepe t seis ampere Poeamargus sorter Sek evr eye op weTORT MACAO al tate! ees i ea i ee tg . et Se tat ter had be pon vel oortnet GSTS) owomy tn Masia Cutt Seurietns of OR cet a mae . ecient te trey leg etn ill rupee dom malt aes ‘area Heats mee Freon Feoeen dean at tee eee i rn mame ne lira EOS eh Sharad esata Reel se of sec ont esc a eee eee vu pr remen nt ete ey ee ec ed pen ofa enn node da para gaan tor ae a napraten cn POR oe) Be rhea roml ‘snenctson poe pears Thea ts ae aad trace BOG. sat Based pods ar vast wee Boia Peer ates te aap fap anemmmmmpnannnnee I) Viral i otc the inventory sens detercI ERANGIAL MA facility of financial resources may motivate to increase the size of order. If financial resources are to be arranged from external sources than the cost of borrowing is compared with the savings of large-sized order. i ; (4) Future Availability of Materials ; At the time of determination of order size it is also i considered that what is expected about future availability of materials. If there are expectations of short-supply or increased prices in future, there will be incentive to increase the size of order. On the contrary, if there are chances of increased supply or decreased prices, the size may be ailed © Kevumptions of Economic Order Quantity ‘The calculation of £.0.Q. is based on certain assumptions which are a8 follows : (1) Consumption at Constant Rate : The first assumption of .0.Q. is that the rate of material consumption is certain and constant. (2) Stability in Cost : The second assumption is that different costs of material will remain constant during a certain period. These costs include purchase price of material, ordering cost and carrying cost. (3) Certainty of lead time : It is assumed that lead time or procurement time, that is the time between placing an order and its delivery is known and fixed. " (4) Instantaneous Replenishment : It is also assumed that the inventory is replenished ; immediately as the stock level reaches exactly to minimum stock. i (5) Continuous Supply : It is also assumed in the calculation of E.0.Q. that supply of material is always available and whenever needed, the material can be procured immediately or on the basis of fixed lead time. Determination of Economic Order Quantity (£.0.Q.) It has been said that the placing of order of that quantity would be economic where the Carrying cost is equal to or almost equal to the Non-carrying cost. “The following information or data is necessary to calculate the Economic Order Quantity : @ Annual Usage in units, i.e., Total units to be purchased yearly. Gi) Cost of Placing per Order, ic., Non-carrying cost per order, eg., clerical costs, stationery, postage, telephone, transport, etc. Gii) Annual Carrying cost per unit, ie., Carrying cost percentage x Price of oie unit (to be applied on the average inventory). Methods of Determining E.0.Q. Economic order quantity can be calculated by any of the following methods : bular Method : Under this method, EOQ is determined by tabulating different the carrying cost, ordering cost and the total storage cost associated with these quantities. The EOQ is considered to be that quantity at which the annual total cost in the least \ ‘The following illustration would make the concept clear : Illustration 1 "AScooter Manufacturing Company purchases 1,000 steel parts @ % 70 per part, during the year ‘The costs per Purchase Order, ie., cost of placing an order works out to be ¢ 35. This includes the non-carrying costs, eg, clerical costs, postage, stationery, Rly. freight, ete. ‘ My "The Carrying Cost per unit durifg the year is & 7, calculated as follows : Return on investment @ 8% ont 70 = 5.60 Rent, taxes, insurance, handling charges, ete. = 140 +100 ‘The carrying cost works out to be 10% on inventory price per unit. Calculate the most economical order size, i., E.0.Q. from the above information.de noted at nt Tae theca rage greeny Even fall the 1900 unt ee beaded sageagero stint i ot stay ma th sore rm for the vdeo othe yea Sa the overage wan sar ext The aware is O00 he sana at rm nf One nad ST lenis nro Sa et the Hone Ore uy nh ier Doce Mec Sit 209 o-\EES Hodes azo || oe cia eae ern an nti ite Tea a re consective ere a) Tine between En wo Jet 8230 cu “antnun inept ens ead tt (erences et an neg et ee ag i de ena ert am me dona 09 ete am on bai and etait 12 = eR Zao LW) EOO ehoncnt perro 480 nog. Vigeoe . zai aa eatin oT ivory Gost tal Taventry Con CC) ais th lone tw es ‘eqarement of material wich rate mater pr eat Puce, 7 nema ae eee “ia ndering Cat 65 (9 hing nti eet ot synteny ou ag a ing at "G-Man ot al Ordering Cet Tl Hg Ct ‘steal tte a Gals tempat Thre TLC elegans Fn st fe FL. en hs bana finaly cunt sn ta a 23 ee tw or quay dco as be sep; ' : gl 2. pom 0 nt 25020 vires tt 265 Ou \iawce redo Tey the tery alt aap cae a een AE Pr tr a rt Sie Meaty | sast Se tap en bn Sahel aa etme 60 Fomor ty $i) Tal Carrying Cat « miso re TLC on tetas 0Q el Oring Cnt iy Tat Caryng Cat = tx Cn = BEKO = senna EES hie Seesce ee atl ta oxtent (0a Otc Om alorne ay oS Siva (i) Tal Caryg Cont TALC. on the bane bigaee orders at 2% dies acne ian i a eo aeTORY MANAGEMENT i) Cost of material = Rx P = 6,000 «5 = 2 30,000 (i) R 6,000 5 ii) Total ordering cost = Fx Gp = $:000 , 95 5 * z qo ~—«1,000 s $150 41.900 30 = 2150 (ii) Total carrying cost = 2 Gy = a % TLC. 730,300 Re-order point = Minimum inventory or Safety stock + rtp SiR atoo! Working days ~ 300 20 é ROP = 200 kg + (20 x 15) i 00 + 300 = 5 Maximum inventory = 200 + 1,000 = 1,200 kg Average inventory = Safety stock + af = 200 +2900 = 700 ke Where single order is given for 6,000 kg R = 6,000, qo= 6,000, P=5 -5 x 5% =5 0.25 = C= 25, C= 4.75 x 6% = 0.285 G) Cost of material = R x P = 6,000 x 4.75 Gi) Ordering cost = Gii) Carrying cost = 2 TLC A DETERMINATION OF INVENTORY OR MATERIAL LIMITS AND LEVELS When to Purchase ? The next important point after the determination of EOQ is to decide as to when the order for purchase should be placed. The answer is simple. The order for purchase should be placed when the stock is reduced by usage to the Order Point. The Order Point is one where the order should be placed for the economic order quantity. For deciding Order Point, two things, viz., (1) Lead Time, and (2) Usage during Lead Time, are the determining factors. Lead ‘Time is the supply time, or to be more specific, Lead Time is “the time interval between placing an order and having materials on the factory floor ready for production. .. . ”, Whereas Usage means the use of materials by consumption for production. ‘Sometimes purchases are made in large bulk in a season if the goods are seasonal, i.e., available in one season only, or at a time when it is feared that the goods may not be found available in the near future due to some reason. Special items for which no limit or order-points are fixed may be purchased as and when needed. Determination of Levels To avoid over-stocking and under-stocking each item of the inventory has the Maximum Level, Minimum Level and an Order Point.or ae Ny =: aration 13 tor pt rr Te ores xryiog cst ee fro a dye Compute My a Reorder Lee Material A=75~ (0x4) = uate ee aces ne rend at =i ewer a pera epee aat ae eee (©) Maxioum Level « Ro-ordar Level ~ Ossimum Usage Rate x Minima Leod Tine) + in i wecrnem hg A sas mcrae age ina peas ery Material A= 15 -(6x5)+60« 100i Material B=) = (83) +100 = 150 ite ay average Sack Level = Minis Level + of Reorder Que Material A= a5 12% 60 = 65 its Material B 2 9051453008 wits sees ere ncevery ay fra achne Assit Oper Ka 0 me are rel i Bou Ores 0 daria ncred a) atte Mision Lr +} Homie Qutty samt. ous -nsteing. ne, 100; IVENTORY MANAGEMENT QUESTIONS Long Answer Type Questions What is the meaning of inventory? What purpose is served by inventory? a ee ces the basic deterministic EOQ model? Derive BOQ formula, Ho: would you determine the optimal order size when quantity discounts are available? Illustrate your answer with’a suitable example. 4. Discuss the selective inventory management techniques. 5. What is Re-order Point of inventory? How is it determined? 6. What is ordering cost? How is it different from carrying cost? Explain the relationship between the two, 7. What is inventory? Discuss the various types of inveritory, 8. What ia meant by Inventory” Discuss as to why Inventory Management is important explaining the items of stock kept by a manufacturing company. 9. ain in brief the various techniques of Inventory Management. 10. What do you mean by ABC analysis? Describe its advantages. 11. Write short notes on (a) Ordering Cost, (b) Carrying Cost, (c) Safety Stock. 12. “The main problem of Inventory Management is the problem of when and how much to purchase goods.” Explain it and show which techniques can be used in solving both these problems. Short Answer Type Questions 1. What are included in inventories? . What are the various types of inventory in a business concern? ‘3. What are the purposes of holding inventory? 4. Discuss the importance of inventory. 5. Explain the meaning of inventory management, 6. Why is inventory management needed? 7. What are the dangers of maintaining excessive inventory? 8. What is ordering cost? 9. What is carrying cost? 10, What is called safety stocks? 11. Explain the economic order quantity technique. . 12, What is Re-order point? 13. Explain the ABC Analysis. 14. What are the benefits of ABC analysis? Maltiple Choice Type Questions Choose the correct option : ven tel goat ensued 0000 tn tle par Led is re aE et oT crs, Hones tal ocdartag ots wil Fe (a) 3,000 (b) 2 180 (o® 1450 (@) None of these 2. P is the formula for computing (a) Total ordering costs (b) Opportunity costs (6) Total earrying costs ; (q) All the above _& Piven: hancalsnaspinoaerels 2600 st ering cart par nec £30 Aalto carrying one unit ¥ 3. Beonomic order quantity is : (a) 150 units () 200 unite (6) 100 anita (d) None of theseFINANCIAL ? manufeturiag one unit of a product 10 units of raw materials are jecded. Company manuiac ‘tures 18,000 units of the product p.a. It costs 7 400 eae der is placed for caw material Carrying costs are ¢ 16 per unit of raw materials per year. What is E.0.Q? (a) 2,000 Units (b) 2,500 Unita (©) 3,000 Units (a) None of these 5. In the question 4 above what will be total carrying costs for .0.Q. evel? (a) ¢ 24,000 (by 18,000 (©)? 16,000 (4) None of these 6. What will be total ordering costs in question 4 above : (a) 16,000 (b)z 18,000 (©) ® 20,000 (a) z 24,000 7. Which of the following is not the purpose of holding inventory? (a) Reduction in ordering costs” (b) Benefits of quantity discount (©) Benefits of cash discount (@) All the above | 8. Given : Annual demand 19,000 units, lead time 6 weeks, safety stocks 500 units. What will be | Re-order point assuming sales are even? | (a) 1,500 units (b) 2,000 units j (¢) 800 units (a) None of these 4 Ans. 1. (b), 2. (©), 3. (0), 4 (0), 5. (as. (d), 7.(€),8.(b)) 4 NUMERICAL QUESTIONS Short Numerical Questions 1, Aalculate Economic order quantity and numbers of orders ‘Annual consumption 3,600 units Ordering cost per order aa ‘Material cost per unit a1 Carrying cost 8% on average inventory (Ans. 600 units; 6 order] 2. Calculate EOQ and total ordering cost : . ise ee ‘Annual requirement 10,800 unit fOidetieg Gtk 6,000 for 2 orders Purchase price 600 per unit Holding cost © 30 + 5% of average inventory [Ans. 1,039 units; z 91,184) 8. Calculate annual requirement from the following information : E0Q 2,800 units Purchase price per unit t24 Ordering cost per unit 120 Carrying cost per unit 10% {Ans. 62,500 units) 4. Calcalate ordering cost per order from the following information : ‘Annual requirement ° 10,000 units Purchase price per unit 22 Carrying cost per unit 8% Economic order quantity 2,500 units [Ans. ¢ 50} 5, Calculate carrying cost per unit per month from the following information : ‘ Annual requirement 16,875 units Purchase price per unit 2125 Ordering cost per unit = 100 ‘Total cost of carrying inventory and ordering per annum = 9,000 I tAns. z 24, 19.2%; 1.6%) | 6. Ifavorage stock level is 40,500 units and minimum stock level is 18,000 units of raw material then ‘| find out its re-order quantity. 7 [Ans. 45,000 units)