Financial ManagementQuestion 5524 of 217
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2. What will be the total estimated finished goods inventory and total debtors on cash cost basis?

Options

A` 2,00,000, ` 4,25,000
B` 1,72,500, ` 3,40,000
C` 1,72,500, ` 3,31,500
D` 1,87,500, ` 3,31,500 (2 Marks)
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Correct Answer

✅ Option C — ` 1,72,500, ` 3,31,500

All Options:

  • A` 2,00,000, ` 4,25,000
  • B` 1,72,500, ` 3,40,000
  • C` 1,72,500, ` 3,31,500 ✓
  • D` 1,87,500, ` 3,31,500 (2 Marks)

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Detailed Solution & Explanation

To calculate the total estimated finished goods inventory and total debtors on a cash cost basis:

**1. Finished Goods Inventory:**
Finished goods inventory is maintained at one month's requirement and valued at manufacturing cost on a cash cost basis (` 20,70,000 p.a. from Question 1):
Finished Goods Inventory=Total Manufacturing Cost×112\text{Finished Goods Inventory} = \text{Total Manufacturing Cost} \times \frac{1}{12}
Finished Goods Inventory=‘20,70,000×112=‘1,72,500\text{Finished Goods Inventory} = ` 20,70,000 \times \frac{1}{12} = ` 1,72,500

**2. Total Debtors on Cash Cost Basis:**
Total estimated annual sales are ` 30,00,000. Under the cash cost basis, debtors are valued at the cash Cost of Sales (` 23,40,000 p.a. from Question 1) rather than the selling price. Let's split this cost between domestic and foreign sales:
- **Domestic Sales:** 80% of sales are domestic credit sales, with a credit period allowed of 2 months.
- **Foreign Sales:** 20% of sales are foreign credit sales, with a realization delay of 1/2 month.

First, we apportion the cash Cost of Sales to domestic and foreign credit sales:
Domestic Cost of Sales=80%ב23,40,000=‘18,72,000\text{Domestic Cost of Sales} = 80\% \times ` 23,40,000 = ` 18,72,000
Foreign Cost of Sales=20%ב23,40,000=‘4,68,000\text{Foreign Cost of Sales} = 20\% \times ` 23,40,000 = ` 4,68,000

Next, we compute the debtors for each segment using their respective credit periods:
Domestic Debtors=‘18,72,000×212=‘3,12,000\text{Domestic Debtors} = ` 18,72,000 \times \frac{2}{12} = ` 3,12,000
Foreign Debtors=‘4,68,000×0.512=‘19,500\text{Foreign Debtors} = ` 4,68,000 \times \frac{0.5}{12} = ` 19,500

Total Debtors is the sum of domestic and foreign debtors:
Total Debtors=Domestic Debtors+Foreign Debtors\text{Total Debtors} = \text{Domestic Debtors} + \text{Foreign Debtors}
Total Debtors=‘3,12,000+‘19,500=‘3,31,500\text{Total Debtors} = ` 3,12,000 + ` 19,500 = ` 3,31,500

Thus, finished goods inventory is ` 1,72,500 and total debtors on cash cost basis is ` 3,31,500.

Hence, **Option C** is the correct answer.

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