WORKING CAPITAL VS FIXED CAPITAL
A brief note to calculate the working capital for the sake of Industrial Project report preparation is explained below.
What is working capital? How it is different from fixed capital?
Working capital is that part of of capital required for the day-to-day operation of the business. This day-to-day operation includes manufacturing and administrative process. Hence working capital expenditure is recurring in nature. Manufacturing and administrative process is continuous in nature and expenses related to this activities are also continuous. Working capital expenditure becomes part of the cost of production.
Elements of working capital
1. Raw material
2. work-in-progress(partly finished goods, or semi finished goods)
3. Stock of finished goods
4. Debtors
these above 4 elements constitutes CURRENT ASSETS
1. sundry creditors (CURRENT LIABILITY)
EQUATION : WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITY
Sundry creditors occur when raw material is purchased on credit..Hence sundry creditors are suppliers from whom we have purchased raw material on credit.
Examples for recurring expenses:
All direct expenses including raw material and all overhead expenses.
Important to NOTE: Glass bottles used in soft drinks are not a part of working capital if it is taken back. It is not the part of cost of production. It is part of capital expenditure since it remains with the business for a longer time.Only Disposable bottles are part of working capital expenditure since it is repeated in every operation.
If bottles are treated as working capital the cost of bottles should be included in the selling price of the soft drink which is not practical and it is not possible since the bottles are not sold.
Direct expenses: Direct expenses are those expenses incurred to make product in a salable condition.
Direct expenses vary in accordance with the changes in production in proportion to the volume of production.
Examples for Direct expenses:
1. raw material
2. Wages/manpower
3. Carriage inward
4. Freight
5. Power/electricity/fuel
6. Packing expenses(disposable)
FIXED CAPITAL is that part of capital which is invested in acquiring fixed assets. The expenditure related to fixed capital is capital expenditure . Capital expenditure is not recurring expenditure. It remains more less same by the passage of time irrespective of the production. Expenditure for acquiring land and building, machinery, furniture and fittings, electrical fittings are examples for capital expenditure. Pre-operative expenses are also taken as capital expenditure since they are not recurring in nature.
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