CHARTERED ACCOUNTANCY PROFESSIONAL III

(CAP-III)

Revision Test Paper

Group II

June 2023

The Institute of Chartered Accountants of Nepal

The Revision Test Papers are prepared by the institute with a view to assist the students in their study. The
suggested answers given here are indicative and not exhaustive. Students are expected to apply their
knowledge and write the answer in the examinations taking the suggested answers as guide. Due care has
been taken to prepare the revision test paper. In case students need any clarification, creative feedbacks or
suggestions for the further improvement on the material, or any error or omission on the material, they may
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Contents
Paper 5 - Management Information & Control System .................................................... 3
Paper 6 - Advanced Cost & Management Accounting .................................................... 22
Paper 7 - Advanced Taxation ............................................................................................. 75
Paper 8 - Strategic Management & Decision Making Analysis .................................... 111

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 Paper-5
Management Information & Control System

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Questions:
Organizational Management and Information System
1. What is the importance of Enterprise Governance of Information and Technology for
the regulatory-driven business entity like insurance and how does it ensure the
alignment of technology with their goals and objectives?
2. What responsibilities and authority does the IT Strategy and IT Steering Committee
have in making decisions and guiding the implementation of an organization's
technology initiatives? And who are typically the members of such a committee?

Types of Information System

3. What is an Expert Support System? Write about a Bank Reconciliation Software as an
Expert Support System.
4. Rocky Bank Limited has been using excel for recording overall human resource related
information, payroll calculation and other HR related data. Recently top management
of the Rocky Bank has decided to develop the Human Resource Information System
(HRIS). With respect to this, please explain,
a) What is the Human Resource Information System (HRIS) and how does it process
and manage data related to human resources, payroll?
b) What will be benefits and challenges of an HRIS?
5. Management of Kasthamandap Company Pvt. Ltd. is worried about their business
performance. You being an IT expert is called by the management to suggest a system
that would stores and retrieves knowledge, improves collaboration, locates knowledge
sources, mines repositories for hidden knowledge, captures and uses knowledge, or in
some other way enhances the knowledge management process. What would you
suggest?

Information Technology Strategy and Trends

6. As an Information Security expert, you have been requested by the Remittance
Company to prepare Information Security Policy. Highlight the high-level of point that
should be incorporated in Information Security Policy of the remittance company.
7. What is IT Risk Assessment? Describe about IT Risk assessment process.

System Development Life Cycle-Acquisition, Development, Implementation,

Maintenance and support
8. Define System Testing and Quality Assurance. Describe about the role of Chartered
Accountant as a Quality Assessor in development of Accounting Software.
9. A medium-sized retail company is facing a problem with its current inventory
management system. The system is outdated, slow, and does not provide real-time
information about stock levels, which has resulted in multiple stockouts and lost sales.
The company has decided to develop a new system to improve its inventory
management processes. What are the steps involved in the System Development Life

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 Cycle (SDLC) that the retail company should follow to develop its new inventory
management system and ensure its success?
10. One of the renowned banks of Nepal is planning to procure Customer Relationship
Management (CRM) Software. With regard to this you have been approached to consult
the bank in the following cases:
a) What are the important factors to consider when evaluating and acquiring software
for an organization?
b) How can you ensure that the chosen software meets the needs of the organization
and supports its goals?

System Analysis and Design

11. Describe about the ‘graphical user interface design for input’.
12. A company is planning to develop a new software system to store and manage their
financial data. They have hired you as a consultant to design a data flow diagram (DFD)
for their system. What are the four components of a DFD that you need to include in
the diagram you design for the company's financial data management system and how
would you represent each component in the DFD?

E-Commerce and Inter-Organizational Systems

13. Explain the role of IS Auditor in audit of ATMs.

E-Business Enabling Software Package

14. A large retail chain has been using an in-house legacy information system for the past
10 years. The system is not well integrated, causing difficulties in data sharing and
reporting. The management has decided to implement an ERP system to address these
issues and improve the overall efficiency of their operations. What are the key benefits
of ERP systems and why is it important for the retail chain to carefully consider their
ERP implementation process?

Protection of Information Assets

15. What is the difference between spoofing and sniffing in the context of hacking and
computer crime?
16. What are the minimum-security measures to be considered by the organization while
allowing work from home to its employees?

Disaster Recovery and Business Continuity Planning

17. A large multinational company is seeking to improve their IT DRP. You have been
approached by the company to support them to formulate the Disaster Recovery Policy.
Please highlight the contents of IT DRP that needs to be incorporated in DRP.

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Auditing and Information System
18. While conducting the Information Systems Audit (IS Audit) of the bank you noted the
following case:
Internal Audit has been conducted 3 months prior and during that audit bank has
provided access to its Core Banking Software for the audit purpose with edit and view
rights through the user name “AUDIT”. This “AUDIT” user is active even in the date
of IS Audit (i.e. after 3 months). Please express your view on the given scenario.

Ethics and legal Issues in Information Technology

19. Nepal Rastra Bank has issued NRB IT Guidelines 2012 for regulating and guiding IT
related activities in commercial banks with the objectives of strengthening the banks
for tackling with emerging cyber frauds, managing information technology prudently
and mitigating the risks aroused from implementation of information technology.
Please highlight the matters that are included in NRB IT Guidelines 2012.
20. As per the Payment System Directive issued by Nepal Rastra Bank, System Audit
should be conducted by the licensed organization. Mention the scope which should be
covered during the System Audit.

Electronic Transactions Act, 2063

21. Explain the Provision about Performance Audit of Certifying Authority as per
Electronic Transaction Act, 2063?

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Answers:
Organizational Management and Information System
1. Enterprise Governance of Information and Technology (EGIT) is critical for
regulatory-driven businesses such as insurance companies. In the insurance industry,
technology is a crucial tool for underwriting, claims processing, customer engagement,
and risk management. The importance of EGIT for insurance companies lies in its
ability to ensure that technology aligns with the company's goals and objectives and
supports the overall business strategy. EGIT helps insurance companies ensure that
technology is aligned with their business strategy and supports their overall goals and
objectives by developing and implementing policies, standards, and processes that
guide technology-related decision making and usage. It also helps to manage the risks
associated with technology, such as cybersecurity threats and data breaches, and
ensures compliance with regulations such as data privacy standards.
In addition, EGIT promotes transparency and accountability in the insurance company's
use of technology. This enables the company to make informed decisions about
technology investments, usage, and implementation. By fostering a culture of
responsible technology usage, EGIT helps insurance companies effectively manage
their technology resources and make the best use of their technology investments.
EGIT has become significant due to a number of factors such as:
• Business managers and boards demanding a better return from IT investments
• Concern over the generally increasing level of IT expenditure
• The need to meet regulatory requirements for IT Controls in areas such as
privacy and financial reporting (IT Guidelines for Insurer 2076 issued by Nepal
Insurance Authority in case of insurance companies in Nepal)
• The selection of service providers and the management of service outsourcing
and acquisition
• IT Governance initiatives that include adoption of control frameworks and good
practices to help monitor and improve critical IT activities to increase business
value and reduce business risk
In short, Enterprise Governance of IT (EGIT) is crucial for insurance companies as it
helps align technology with business goals, manage risks, and ensure regulatory
compliance, leading to improved efficiency and competitiveness.

2. For the implementation of appropriate IT Governance structure and activities there

should be IT Strategy and IT Steering Committee with following responsibilities,
authority and membership.
IT Strategy Committee
Responsibilities
Provide insight and advice to the board on topics such as:
• The relevance of developments in IT from a business perspective
• The alignment of IT with the business direction
• The achievement of strategic IT objectives

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 • The availability of suitable IT resources, skills and infrastructure to meet the
strategic objectives
• Optimization of IT costs, including the role and value delivery of external IT
sourcing
• Risk, return and competitive aspects of IT investments
• Progress on major IT projects
• The contribution of IT to the business (i.e., delivering the promised business value)
• Exposure of IT risk, including compliance risk
• Containment of IT risk
• Direction to management relating to IT strategy
• Drivers and catalysts for the board's IT
Authority
• Advise the board and management on IT Strategy
• Delegated by the board to provide input to the strategy and prepare its approval
• Focuses on current and future strategic IT issues
Membership
• Board members and specialist non-board members
IT Steering Committee
Responsibilities
• Decides the overall level of IT spending and how costs will be allocated
• Aligns and approves the enterprise’s IT architecture
• Approves project plans and budgets, setting priorities and milestones
• Acquires and assigns appropriate resources
• Ensures that projects continuously meet business requirements, including re-
evaluation of the business case
• Monitors project plans for delivery of expected value and desired outcomes, on time
and within budget
• Monitors resource and priority conflict between enterprise divisions and the IT
function as well as between projects
• Makes recommendations and requests for changes to strategic plans (priorities,
funding, technology approaches, resources, etc.)
• Communicates strategic goals to project teams and
• Is a major contributor to management's IT governance responsibilities and practices
Authority
• Assists the executive in the delivery of the IT strategy;
• Oversees day-to-day management of IT service delivery and IT projects; and

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 • Focuses on implementation.
Membership
• Sponsoring executive
• Business executives (key users)
• Chief information officer (CIO) and
• Key advisors as required (IT, audit, legal, finance).

Types of Information System

3. Expert Support System is the computer system that emulates the decision making
ability of a human expert by using artificial intelligence technologies. It provide advice
to the decision maker which is obtained from such expert system. It captures human
expertise in a limited domain of knowledge as a set of rules in a software that can be
used by others in the organization. These systems performs limited number of tasks that
can be performed by the professionals in a few minutes or hours such as determining
whether to grant loan or not, reconciliation of un-reconciled items etc.
Bank Reconciliation Software as an Expert Support System
Most of the companies in Nepal uses manual reconciliation process to reconcile their
account balances and it may not be free from human error. It involves repetitive task,
delay in overall reconciliation, etc. Bank reconciliation software is the rule-based
reconciliation software which automates account reconciliation process. It helps
companies to centralize their control functions, improve monitoring, reduce operational
costs, increase productivity and efficiency, improve accessibility, data security
improves and reduce audit risks and costs. It automatically fetches the data from the
source, reconciles the matched transactions and provides a recommendation on a
possible reconciliation for the unreconciled transactions. In the reconciliation software
workflow can be designed so that the end-users can prioritize the unreconciled items,
follow up based on priority and maintain the activity log of these activities by using
ticketing system.
Bank reconciliation software should have following major features:
• Automatic data fetching from different data sources like APIs, mailbox and
other digital channels.
• Automatic data extraction from the fetched data files. It should support
different data formats like Excel, Word, PDF, etc.
• Auto reconciliation
• Workflow / Ticketing system for un-reconciled items
• Reporting as per need basis
As bank reconciliation software is the data matching engine so in addition with
reconciliation there may be other use cases as well such as:
• Revenue Assurance
• Integration Audit
• Data Quality
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 • Data Migration
4.
a) Human Resource Information System (HRIS) is a comprehensive software that
helps organizations manage and automate their HR processes (recruitment,
performance management, learning & development) and data. The Human
Resource departments are responsible for maintaining employee information,
payroll and benefits, employee tax calculation and ensuring that the organization is
compliant with labour laws and regulations (Labour Act 274 and Rules 2075). The
HRIS automates these tasks and aggregates all HR data into a central location and
it can be accessed by one click through the user interface of the HRIS. The HRIS
processes and stores employee information which are relevant to the employer such
as personal data, job history, and education. This data can be easily entered into the
system by HR staff or by the employees themselves through self-service portals.
The HRIS also have payroll systems to calculate employee salaries (by integrating
with the attendance system or HRIS itself may have attendance system), employee
tax deductions, and other payroll-related information. This information can be used
to produce payroll reports, making the payroll process faster, more accurate, and
easier to manage.

b) As the HRIS automates the functions of the HR Department and centrally holds the
employee information which are accessible on click, there are many benefits of
HRIS. Some of the benefits and challenges are highlighted below:
Benefits
• Real time access to the HR related information
• Accuracy of HR related information
• Automation of generation of HR reports
• Continuous monitoring of the HR Compliances as per labour law, rules
and other labour practices
• Cost saving
Challenges
• Resistance to change by HR Department Employees
• Data entry errors
• Requirement of users training (to the HR Department employees and to
the other users)
• Chances of security breaches
• Regular update and maintenance of HRIS

5. I recommend adopting a knowledge management system that integrates various

technologies and techniques for organizing, storing, and accessing organizational
knowledge. Knowledge management has become one of the major use of information
technology. Many companies are building knowledge management systems (KMS) to
manage organizational learning and business know-how. The goal of such systems is
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 to help for the creation of knowledge workers, organize, and make available important
business knowledge, wherever and whenever it's needed in an organization.
This information includes processes, procedures, patents, reference works, formulas,
standards practices, forecasts, and fixes.
Knowledge management systems also facilitate organizational learning and knowledge
creation. They are designed to provide rapid feedback to knowledge workers, encourage
behaviour changes by employees, and significantly improve business performance. As
the organizational learning process continues and its knowledge base expands, the
knowledge-creating company works to integrate its knowledge into its business
processes, products, and services. This integration helps the company become a more
innovative and agile provider of high-quality products and customer services, as well
as a formidable competitor in the marketplace. Internet and intranet Web sites, group-
ware, data mining, knowledge bases, and online discussion groups are some of the key
technologies that may be used by a KMS.

Information Technology Strategy and Trends

6. An information security policy is a set of rules and/or statements developed by an
organization to protect its information and related technology. It helps to guide
behaviours and is s first step toward building the security infrastructure for technology
driven organizations. Security policies are living documents that are continuously
updated and changing as technologies, vulnerabilities and security requirements
change.
It is necessary to have information security policy in a remittance company to provide
management direction and support for information security in accordance with business
requirements and relevant laws and regulations. It should be reviewed at least annually.
Information Security Policy should include at least following high level of point:
i. Information securities roles and responsibilities
ii. Mobile devices and teleworking
iii. Human resource security (prior to employment, during employment and
termination & change of employment)
iv. IT Assets management
v. User access control
vi. Cryptography
vii. Physical and environmental security
viii. Operations security (operational procedures & responsibilities, protection from
malware, data backup, logging & monitoring, technical vulnerabilities
management)
ix. Network Security
x. Information security for system acquisition, development and maintenance
xi. Vendor management
xii. Information security incident management
xiii. Information security aspects of business continuity management

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 xiv. Compliance with legal, regulatory and other requirements

7. IT risk assessment is a process of identifying and evaluating potential risks to an

organization's information technology assets and data. It involves analysing the overall
IT Infrastructure and identifying potential threats, determining their likelihood and
impact, and developing risk treatment plan to mitigate the risks. The goal of IT risk
assessment is to ensure the security and availability of information and technology
assets.
Risk Assessment Process

Figure: Risk Assessment Process

1. Preparing for the Risk Assessment Process
The objective of this step is to establish a context for the risk assessment. Preparing for
a risk assessment includes the following tasks:
• Identify the purpose of the assessment;
• Identify the scope of the assessment;
• Identify the assumptions and constraints associated with the assessment;
• Identify the sources of information to be used as inputs to the assessment; and
• Identify the risk model and analytic approaches to be employed during the
assessment.
2. Conducting the Risk Assessment
The second step in the risk assessment process is to conduct the assessment. The
objective of this step is to produce a list of information security risks that can be
prioritized by risk level and used to inform risk response decisions. Conducting risk
assessments includes the following specific tasks:

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 • Identify threat sources that are relevant to organizations;
• Identify threat events that could be produced by those sources;
• Identify vulnerabilities within organizations that could be exploited by threat
sources through specific threat events and the predisposing conditions that
could affect successful exploitation;
• Determine the likelihood that the identified threat sources would initiate
specific threat events and the likelihood that the threat events would be
successful;
• Determine the adverse impacts to organizational operations and assets resulting
from the exploitation of vulnerabilities by threat sources (through specific
threat events); and
• Determine information security risks as a combination of likelihood of threat
exploitation of vulnerabilities and the impact of such exploitation, including
any uncertainties associated with the risk determinations.
3. Communicate and Share Risk Assessment Results
The third step in the risk assessment process is to communicate the assessment results
and share risk-related information. The objective of this step is to ensure that decision
makers across the organization have the appropriate risk-related information needed to
inform and guide risk decisions. Communicating and sharing information consists of
the following specific tasks:
• Communicate the risk assessment results; and
• Share information developed in the execution of the risk assessment, to support
other risk management activities.
4. Maintaining the Risk Assessment
a. Conduct ongoing monitoring of the risk factors that contribute to changes in risk to
organizational operations and assets, individuals, other organizations.
b. Update existing risk assessment using the results from ongoing monitoring of risk
factors.

System Development Life Cycle-Acquisition, Development, Implementation,

Maintenance and support
8. System testing is the process of verifying that a system meets its requirements and
functions properly for its intended purpose. It involves testing the system as a whole
and making sure that all of its components work together correctly. This involves
testing the system's user interface, functionality, performance, and security.
Additionally, system testing can involve testing the integration of the system with other
systems and databases, as well as testing the system's scalability and reliability.
The process of making sure a good or service complies with accepted standards of
quality is known as quality assurance. It entails assessing a product or service's quality
at each stage of development and production to ensure that it satisfies the organization's
requirements for quality. A more comprehensive way to assuring quality is quality
assurance which includes a number of tasks like establishing quality standards, creating
quality plans, checking the calibre of goods and services, and giving feedback to raise
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 the calibre.
Role of Chartered Accountant as a Quality Assessor in development of Accounting
Software
Chartered Accountants (CAs) can play a crucial role as quality assessors in the
development of accounting software. They can bring their expertise in accounting
principles and financial management to evaluate that the accounting software meets
accepted accounting standards and is capable of accurately producing financial
information. During the software development process, CAs can review the
requirements and specifications to ensure that they are in line with accounting standards
and regulations. They can also participate in the testing phase to ensure that the software
performs as intended and produces accurate results. CAs can assess the potential
dangers related to sensitive financial data and the software's security features. They can
check the reporting capabilities of the software to make sure that it offers the
information required for financial analysis and decision-making. After the completion
of development of certain features or module of accounting software, as a quality
assessor CA can assess the accuracy and reliability of that features and module and
provide feedback to the software development team to ensure that any issues are
addresses and the software is developed with the highest quality standards.
Hence, in order to verify that the software satisfies the highest standards of accuracy,
security, and compliance, CAs play the role of quality assessors in the creation of
accounting software. They do this by bringing their knowledge of financial
management and accounting. CAs can assist in the delivery of software that satisfies
the needs of the company and promotes the efficient use of its financial resources by
working with software developers and other stakeholders.

9. The System Development Life Cycle (SDLC) is a systematic and organized process for
building software that ensures quality and correctness of the software built. SDLC
process aims to produce high-quality software that meets end users/customer
expectations at lowest possible cost. The SDLC process is initiated when the need for
computerizing or improving a particular business process is identified. The following
are the general stages of the System Development Life Cycle:
a) Preliminary Investigation: This stage begins when the need for a new system
is identified. The analyst investigates to understand the user's problem and
explore various options to meet their requirements.
b) Feasibility Study: The analyst performs a feasibility study to evaluate the
cost/benefit of different alternatives and determine the most feasible and
desirable system for development.
c) System Analysis: The analyst conducts a detailed study of the requirements and
problems of the system in close collaboration with the relevant users and
managers. The analyst compares the proposed system with the existing system
and uses various fact-finding tools to better understand the requirements.
d) System Design: In this stage, the analyst designs the various procedures,
reports, inputs, file, and database structure to meet the identified needs and
requirements of the system. The specifications are then passed on to the
development team for programming and testing.

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 e) System Development: In this stage, the new system is physically developed or
acquired from external sources as per the user requirements.
f) System Testing: The developed or acquired system is tested in real-time to
ensure proper functioning. Various testing mechanisms can be used to verify
data, operations, and results.
g) System Implementation: The developed and tested system is deployed for real-
life use by the end-users. The working of the new system is evaluated to ensure
it meets the needs of the organization.
h) System Maintenance: Once the system is fully implemented, maintenance
begins. This includes monitoring, evaluating, and modifying the system to make
necessary improvements and ensure it is operating properly and meeting its
objectives. Maintenance also involves correcting errors, making modifications
due to changes in the business organization or environment, and performing
post-implementation reviews.

10.
a) As the procurement of Customer Relationship Management (CRM) Software is the
capital investment decision made by the organization, there are many factors that
needs to be consider while acquiring/procuring the software for an organization.
Below are the important factors that needs to be consider:
i. Cost [Initial capital investment (purchase cost, implementation and
training cost), Support/Maintenance cost, other hidden cost, etc.)
ii. Meeting the organization's specific needs
iii. Security of the software and data it stores
iv. Scalability of the software
v. Vendor support
vi. Vendor's reputation
vii. Compatibility with existing hardware and software
b) Following steps can be taken to ensure that the chosen software meets the needs of
the organization and support its goals:
i. Identify the actual needs of organization and compare it with the
software’s features and services
ii. Arrange for a trial or demo version of the software. Test it thoroughly and
involve relevant stakeholders to ensure that it meets their needs and can
be integrated into the existing processes.
iii. Obtain user feedback (Solicit feedback from users of the software to
ensure that it is meeting their needs and contributing to the goals of the
organization)
iv. Check the software's modification features to make sure they can be used
to tailor it to the unique requirements of the organization.
v. Check that the software is compliant with any relevant industry or
government regulations.

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 vi. Analyse the overall cost of ownership, taking into account any recurring
expenses like maintenance, support, and upgrades.
vii. Assess the hardware, manpower, and training needs for implementing and
supporting the software.
viii. Examine the software's reporting and analytics features to see if they can
handle the organization's monitoring, reporting, and decision-making
requirements.

System Analysis and Design

11. Graphical user interface (GUI) design for an input module requires careful
consideration of how the user will interact with the interface, and how the information
entered will be displayed and used. Some key aspects of GUI design for an input
module include:
i. Designing an intuitive interface that allows users to quickly and easily enter
data into the system.
ii. Ensuring that the data entered is validated, secure and accurate.
iii. Creating a visual feedback system to inform users of any errors or incorrect
data entry.
iv. Utilizing technologies such as autocomplete and auto-fill to reduce the
amount of data entry required by the user.
v. Utilizing drag-and-drop and other techniques to make data entry quick and
efficient.
vi. Providing a consistent design and navigation system that allows users to
easily navigate the interface.
vii. Incorporating features such as keyboard shortcuts and navigation elements to
make the data entry process more efficient and user-friendly.
The design should also take into consideration the overall look and feel of the interface,
including the colour scheme, font choices, and layout. The design should also be
responsive and adaptable to different screen sizes and devices. Overall, a well-designed
input GUI should make it simple for the user to input data, lowering the possibility of
errors and increasing the effectiveness of the process.

12. The four components of a DFD are Entity, Process, Data Store, and Data Flow.
Entity: An entity in a DFD represents the source or destination of data. It could be
either providing data to the system or receiving data from it. Entity is often represented
as rectangles with a diagonal line across the right-hand corner if it is represented
elsewhere in the DFD.
Process: A process in a DFD represents the manipulation or work that transforms data.
It performs computations, makes decisions, or directs data flows based on business
rules. A process receives input and generates output and is represented by circles or a
segmented rectangle in the DFD with a process name and number.

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 Data Store: A data store in a DFD represents where a process stores data between
processes for later retrieval by that same process or another process. A data store is
represented as a rectangle with the right-hand side missing and labelled by the name of
the data storage area it represents.
Data Flow: Data flow in a DFD represents the movement of data between entities,
processes, and data stores. It portrays the interface between the components of the DFD
and is represented by an arrow annotated with the data name.
In designing the DFD for the company's financial data management system, it's crucial
to accurately represent these components to ensure the system's design accurately
reflects the flow of data within the system.

E-Commerce and Inter Organizational Systems

13. To perform an audit if ATMs, an IS Auditor should undertake the following actions:
• Review physical security measures to ensure security of the ATM and the
money contained in the ATM
• Review the ATM card slot, keypad and enclosure to prevent skimming of card
data and capture of PIN during entry
• Review measures to establish proper customer identification and maintenance
of their confidentiality
• Review file maintenance and retention system to trace transactions
• Review exception reports to provide an audit trail
• Review daily reconciliation of ATM transactions
• Review encryption key change management procedures

E-Business Enabling Software Package

14. ERP (Enterprise Resource Planning) systems provide several key benefits to
organizations. Some of the key benefits include:
a. Integration: ERP systems integrate different business functions and processes,
allowing for better data sharing and improved decision-making.
b. Increased efficiency: ERP systems automate many manual processes, reducing
errors and improving overall efficiency.
c. Improved visibility: ERP systems provide a single source of truth for all data,
giving management improved visibility into all areas of the business.
d. Better decision-making: ERP systems provide real-time data and analytics,
allowing management to make informed decisions based on accurate and up-to-
date information.
It is important for the retail chain to carefully consider their ERP implementation
process because:
a. Complexity: Implementing an ERP system is a complex and time-consuming
process, and it is important to ensure that it is done correctly to avoid costly
mistakes.
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 b. Customization: Every organization is unique and has different needs, and it is
important to carefully consider what customization is needed to ensure that
the ERP system meets the specific needs of the retail chain.
c. Change management: ERP implementation involves significant changes to
the way the organization operates, and it is important to properly manage this
change to ensure the smooth and successful implementation of the ERP
system.
d. Cost: Implementing an ERP system can be expensive and it is important to
consider the total cost of ownership, including ongoing maintenance and
support, to ensure that the investment is justified

Protection of Information Assets

15. Spoofing and sniffing are two different techniques used by hackers to carry out
malicious activities on computer networks. Spoofing refers to the act of misrepresenting
oneself by using a fake email address or pretending to be someone else. In the context
of hacking, spoofing involves redirecting a web link to an address that is different from
the intended one, with the purpose of masquerading as the intended destination. This
can lead to the theft of sensitive customer information or business by tricking users into
entering their information into a fake website.
Sniffing, on the other hand, refers to the use of eavesdropping programs that monitor
information travelling over a network. Sniffers can be used both for legitimate
purposes, such as identifying potential network trouble-spots or criminal activity, or for
illegal purposes, such as stealing confidential information from a network, including
email messages, company files, and reports.
In conclusion, spoofing is a technique used to disguise a hacker's true identity or to
redirect users to a fake website, while sniffing is a method for monitoring network
traffic and stealing information from a network.

16. Following are the summary of controls that should be taken care of during work from
home environment:
i. Information Security Policy: Information security policy concerning the
mobile working or working from home should be formulated, considering who
are allowed to work from home, services (network and application) available to
staffs working from home, information restriction while working from home,
protection of remote connection, user awareness and others.
ii. Physical and environmental security: Securing work environment and
maintain clear desk and clear screen policy. Work laptop should be left
unattended.
iii. Access Control: Proper access control should be implemented. If it’s feasible,
Multi Factor Authentication should be enabled for all the employees. Sensitive
information such as credentials, access keys, and two factor authentication
devices should not be laying around bed, table, floor, ceiling, ground, air, wind.
iv. Information security incident management: The plan of action for
responding to an information security incident includes notifying the incident

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 response team as soon as possible, classifying the incident and determining its
severity, establishing roles and procedures for a successful response, disabling
login if authentication is compromised, notifying affected users via mobile and
email notifications, and using the incident as a learning opportunity to put
proper preventive measures into place.
v. Business Continuity management
vi. Compliance: Company should verify compliance to their policy through
various methods, including but not limited to, periodic walk-throughs, video
monitoring, business tool reports, internal and external audits, and inspection,
and will provide feedback to the policy owner and appropriate business unit
manager.
vii. Awareness: Employees should be aware of phishing attacks. Avoid clicking on
links in unsolicited emails and be aware of email attachments. Inspect links
before clicking by hovering over links to see the actual URL destination.

Disaster Recovery and Business Continuity Planning

17. An IT DRP is a well-structured collection of processes and procedures intended to make
the disaster response and recovery efforts swift, efficient and effective to achieve the
synergy between recovery teams. The plan should be documented and written in simple
language that is understandable to all. IT DRP contains the following:
i. Procedures for declaring a disaster (escalation procedures)
ii. Criteria for plan activation
iii. Linkage with the overarching plans (for instance, emergency response plan or
crisis management plan or BCPs for different lines of business)
iv. The person responsible for each function in plan execution
v. Recovery teams and their responsibilities
vi. Contact and notification lists
vii. The step by step explanation of the whole recovery process
viii. Recovery procedures
ix. Contacts for important vendors and supplies
x. The clear identification of the various resources required for recovery and
continued operation of the organization

Auditing and Information System

18. As per the access control policy, there should be a review mechanism of the user access
and user rights of employees, vendors, auditors and other stakeholders who have been
granted access to the bank’s system on a periodic basis to ensure that access is provided
on need to know basis and restricted to only those who need it. Guest user should be
disabled immediately after they remain no longer in use.
Here in the given case “AUDIT” user is in active stage over last 3 months which
increases the likelihood of unauthorized access to the bank’s core banking system. The

19
 "AUDIT" user account might still be able to alter the Core Banking Software even after
the internal audit is finished, this situation might pose a security concern. Unauthorized
changes to the system may have occurred if the account has not been adequately
regulated or monitored. Any temporary user accounts should be deactivated or deleted
once they are no longer required, and access should only be given to those who truly
need it that means on need to know basis.

Ethics and legal Issues in Information Technology

19. Following are the important matters which are included in NRB IT Guidelines 2012:
1) IT Governance
2) Information Security
3) Information Security Education
4) Information disclosure and grievance handling
5) Outsourcing management
6) IT Operations
7) Information systems acquisition, development and implementation
8) Business continuity and disaster recovery planning
9) Requirement of IS Audit
10) Fraud Management

20. System audit should be conducted covering the following scope:

i. User authentication
ii. Possible risk to the system from internal and external factors
iii. Information Security and System vulnerabilities
iv. Database and transaction security
v. Network and hardware security
vi. Disaster recovery policy and its implementation
vii. Unauthorized access to the systems and unauthorized attempts

Electronic Transactions Act, 2063

21. Performance Audit of Certifying Authority
i. The Controller may conduct or cause to be conducted performance audit of the
Certifying Authority in each year.
ii. The Controller may, for the purpose of the performance audit referred to in Sub-
section (1), appoint any recognized auditor, who has expertise in computer
security or any computer expert.
iii. The Controller shall publish the report of the performance audit in the electronic
form made under Sub-section (1) by maintaining in his/her computer database.

20
iv. The qualification of the performance auditor or remuneration and the
procedures of such audit shall be as prescribed.
v. The Controller shall fix the standard of the service of Certifying Authority and
publish a notice thereof publicly for the information to the public-in-general.

21
 Paper-6
Advanced Cost & Management Accounting

22
Questions:
Activity Based Costing
Question 1:
Rathi Lamp Company is noted for its full line of quality lamps. The company operates one of
its plants in Biratnagar. That plant produces two types of lamps: classical and modern. Emi
Martinez, president of the company, recently decided to change from a unit-based, traditional
costing system to an activity-based costing system. Before making the change companywide,
he wanted to assess the effect on the product costs of the plant. This plant was chosen because
it produces only two types of lamps; most other plants produce at least a dozen.
To assess the effect of the change, the following data have been gathered (for simplicity,
assume one process)
Machine Material
Lamp Quantity Prime Cost Setups
Hours Moves
Classic 400,000 800,000 81,250 300,000 100
Modern 100,000 150,000 43,750 100,000 50
Amount (Rs.) 950,000 *500,000 900,000 600,000
*Represents cost of operating the production equipment
Under the current system, the costs of operating equipment, materials handling, and setups are
assigned to the lamps on the basis of machine hours. Lamps are produced and moved in batches.
Required:
1. Compute the unit cost of each lamp using the current unit-based approach.
2. Compute the unit cost of each lamp using an activity-based costing approach.
3. Show how a reduced system using two cost pools and two drivers, moves and setups,
can be used to achieve the same cost assignments obtained in Requirement 2.

Just In Time
Question 2:
The AWM Corporation is an automotive supplier that uses automatic turning machines to
manufacture precision parts from steel bars. AWM’s inventory of raw steel averages Rs.
600,000. Harka, president of AWM, and Helen, AWM’s controller, are concerned about the
costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no
additional charge. Helen identifies the following effects of adopting a JIT inventory program
to virtually eliminate steel inventory:
➢ Without scheduling any overtime, lost sales due to stock outs would increase by 35,000
units per year. However, by incurring overtime premiums of Rs. 40,000 per year, the
increase in lost sales could be reduced to 20,000 units per year. This would be the
maximum amount of overtime that would be feasible for AWM.
➢ Two warehouses currently used for steel bar storage would no longer be needed. AWM
rents one warehouse from another company under a cancellable leasing arrangement at
an annual cost of Rs. 60,000. The other warehouse is owned by AWM and contains
12,000 square feet. Three-fourths of the space in the owned warehouse could be rented
for Rs. 1.50 per square foot per year. Insurance and property tax costs totalling Rs.
14,000 per year would be eliminated.

23
 AWM’s required rate of return on investment is 20% per year. AWM’s budgeted income
statement for the year ending December 31, 2011 (in thousands) is as follows:
Revenues (900,000 units) 10,800
Cost of goods sold
Variable costs 4,050
Fixed costs 1,450
Total costs of goods sold 5,500
Gross margin 5300
Marketing and distribution costs
Variable costs 900
Fixed costs 1500
Total marketing and distribution costs 2400
Operating income 2900
Required:
1. Calculate the estimated savings (loss) for the AWM Corporation that would result in
2011 from the adoption of JIT purchasing.
2. Give your points in favour and against the Just in time system.

Enterprise Resource Planning

Question 3:
THE FARM MART, a retailer of perishable agro products had been using multiple software’s
in the company like, email, tally, and separate HR software. Prior to upgrading to full-featured
ERP, the Jhapa-based business tracked its inventory in a spreadsheet and its financial data in
desktop accounting software. When the company began doubling sales year-over-year,
leadership felt its current processes weren’t keeping up. Spreadsheets couldn’t account for
changing inventory costs, and the accounting software didn’t have the workflows necessary to
record the cost of goods sold (COGS), an important financial metric. Increasing sales volume
and staff headcount tested the company’s current processes, which relied on Desktop based
accounting software, Excel and email. THE FARM MART’s multiple databases couldn’t
communicate with one another, making real-time data analysis impossible. The warehouse was
often struggling with closing stock, billed quantity, orders pending and vehicles schedule.
As a result, THE FARM MART team did double data entry — manually.
To centralize all work in one place, the company’s co-founders implemented ABC ERP. After
a three-week implementation process, changes were immediate, according to team members.
Finally, THE FARM MART team was able to:
• Catch and correct bookkeeping mistakes related to inventory.
• Stop working with external accountants who charged extra for their service.
• Increase sales roughly 30% year-over-year without increasing headcount.
• Get a more accurate picture of margins and inventory.
You are the strategic finance manager for ABC ERP, who is requested by the Board of the ERP
Company to write an article about ERP, to be published in companies website based on the
above case.

24
Required:
1. Give meaning of ERP.
2. Explain features of ERP.
3. List and explain benefits of ERP.
4. Reasons for the Implementation of ERP by Companies.

Costing of Service Sector

Question 4:
Same Ltd hires an air-conditioned theatre to stage plays on week-end evenings, one play is
staged per evening. The following are the seating arrangements:
(i) VIP Rows - the first 3 rows of 30 seats per row, priced at 350 per Seat.
(ii) Middle Level - the next 18 rows of 20 seats per row, priced at 250 per Seat.
(iii) Last Level - 6 rows of 30 seats per row, priced at 150 per Seat.
For each evening, a Drama Troupe has to be hired at 72,000, Rent has to be paid for the Theatre
at 15,000 per Evening and Air Conditioning and other Stage Arrangement Charges work out
to 7,000 per Evening. Every time a play is staged, the Drama Troupe’s friends and guests
occupy the first row of the VIP Class, free of charge, by virtue of passes granted to these guests.
The Troupe ensures that 50% of the remaining seats of the VIP Class and 50% of the seats of
the other two classes are sold to outsiders in advance, and the money is passed on to Samec
Ltd. The Troupe also finds for every evening, a sponsor who puts up his advertisement banner
near the stage and pays Samec Ltd. a sum of 11,500 per evening. Samec Ltd. supplies snacks
during the interval free of charge to all the guests in the hall, including the VIP Free Guests.
The Snacks Cost 50 per person. Samec Ltd. sells the remaining tickets and observes that for
every 1 seat demanded from the Last Level, there are 3 seats demanded from the Middle Level
and 1 seat demanded from the VIP Level. You may assume that in case any level is filled, the
Visitor buys the next higher or lower level, subject to availability.
Required:
(1) You are required to calculate the number of seats that Samec Ltd. has to sell in order to
breakeven and give the category-wise total seat occupancy at BEP.
(2) Instead of the given pattern of demand, if Samec Ltd. finds that the demand for VIP, Middle
and Last Level is in the ratio 2:2:5, how many seats in each category will Samec Ltd. have
to sell in order to break-even?

Theory of Constraints
Question 5:
Yam Co is involved in the processing of sheet metal into products A, B and C using three
processes, pressing, stretching and rolling. Like many businesses Yam faces tough price
competition in what is a mature world market. The factory has 50 production lines each of
which contain the three processes; Raw material for the sheet metal is first pressed then

25
stretched and finally rolled. The processing capacity varies for each process and the factory
manager has provided the following data:
Product A Product B Product C
Pressing 0.50 0.50 0.40
Stretching 0.25 0.40 0.25
Rolling 0.40 0.25 0.25
The factory operates for 18 hours each day for five days per week. It is closed for only two
weeks of the year for holidays when maintenance is carried out. On average one hour of labour
is needed for each of the 225 000 hours of factory time. Labour is paid $10 per hour.
The raw materials cost per meter is $3.00 for product A, $2.5O for product B and $1.80 for
product C. Other factory costs (excluding labour and raw materials) are $ 18 000 000 per year.
Selling prices per meter are $70 for product A, $60 for product B and $27 for product C. Yam
carries very little inventory.
Required:
1. Define three key measures used for application of Theory of constraints idea namely,
Throughput contribution, Investment and Other operational expenses.
2. Identity the bottleneck process and briefly explain why this process is described as a
‘bottleneck’.
3. Calculate the throughput accounting ratio (TPAR) for each product assuming that the
bottleneck process is fully utilized.
4. Assuming that the TPAR of product C is less than 1:
a. Explain how Yam could improve the TPAR of product C
b. Briefly discuss whether this supports the suggestion to cease the production of
product C and briefly outline three other factors that Yam should consider
before a cessation decision is taken.

Quality Cost Management

Question 6:
KP Co. has Rs. 8 million in sales and Rs. 1,600,000 in quality costs. The company is launching
a major quality improvement initiative. KP intends to attack failure costs over the next three
years by increasing its appraisal and prevention costs. The "right" prevention activities will be
chosen, and appraisal costs will be reduced based on the outcomes. Management is considering
six specific activities for the coming year: quality training, process control, product inspection,
supplier evaluation, prototype testing, and redesign of two major products. A bonus pool
relating to quality cost reduction is established to encourage managers to focus on reducing
non-value-added quality costs and selecting the right activities. The bonus pool is equal to 10%
of the total cost reduction in quality.
The following table shows the current quality costs as well as the costs of these six activities.
Quality Cost
Details
Control Failure
Existing quality costs 160,000.00 1,440,000.00
Proposed Activities
1. Quality training 320,000.00 1,040,000.00

26
 2. Process Control 520,000.00 720,000.00
3. Product inspection 600,000.00 656,000.00
4. Supplier evaluation 720,000.00 200,000.00
5. Prototype testing 960,000.00 120,000.00
6. Engineering redesign 1,000,000.00 40,000.00
Each activity is added sequentially in order to assess its impact on the cost categories. For
example, after adding quality training, the control costs rise to Rs. 320,000, while the failure
costs fall to Rs. 1,040,000. Even though the activities are presented in a sequential order, they
are completely independent of one another. As a result, only beneficial activities must be
chosen (obeying the sequence).
Required:
1. Identify the control activities that should be implemented, and calculate the total quality
costs associated with this selection. Assume that an activity is selected only if it
increases the bonus pool.
2. Given the activities selected in Requirement 1, calculate the following:
a. The reduction in total quality costs
b. The percentage distribution for control and failure costs
c. The amount for this year’s bonus pool
3. Let's say a quality engineer expressed dissatisfaction with the gainsharing incentive
structure. He essentially said that the bonus should only be based on decreased failure
and appraisal costs. Investment in preventative measures would be promoted in this
way, and failure and appraisal costs would gradually vanish. The level of preventative
costs might then get the emphasis after the non-value-added costs have been removed.
What tasks would be chosen if this strategy were to be used? Do you support or oppose
this strategy? Explain.

Life cycle costing

Question 7:
New Life Metal Recycling and Salvage was recently awarded the opportunity to salvage scrap
metal and other materials from an abandoned industrial site. The current owners will sign over
the site to New Life for free. New Life intends to extract scrap metal from the site for 24 months
before cleaning it up, restoring the land to usable condition, and selling it to a developer. The
project's projected costs are listed below.
Months Activities Fixed Variable
1 to 24 Metal extraction and processing 4000 pm 100 per ton
1 to 27 Rent on temporary buildings 2000 pm
Administration 5000 pm
25 to 27 Clean-up 30000 pm
Land restoration 475000 Total
Cost of selling land 150000 Total
You may ignore time value of money.

27
Required:
1. Assuming that New Life expects to salvage 50,000 tons of metal from the site, what is
the total project life cycle cost?
2. Suppose New Life can sell the metal for 150 per ton and wants to earn a profit (before
taxes) of 40 per ton. At what price must New Life sell the land at the end of the project
to achieve its target profit per ton?
3. Now suppose New Life can only sell the metal for 140 per ton and the land at 100,000
less than what you calculated in requirement 2. If New Life wanted to maintain the
same mark-up percentage on total project life-cycle cost as in requirement 2, by how
much would it have to reduce its total project life-cycle cost?

Pricing Decisions
Question 8:
The Madi Resort (MR), which is privately owned, is a world-famous luxury hotel and golf
complex. It has been chosen as the venue to stage ‘The Cup’, a golf tournament which is
contested by teams of golfers from across the globe, which is scheduled to take place during
July 2009. MR will offer accommodation for each of the five nights on which guests would
require accommodation. The following information is available regarding the period of the
tournament
1. Hotel data:
Total rooms 2400
Room mix:
Double rooms 75%
Single rooms 15%
Family rooms 10%
Fee per room per night (Rs.):
Double rooms 400
Single rooms 300
Family rooms 600
Number of guests per room:
Double rooms 2
Single rooms 1
Family rooms 4
When occupied, all rooms will contain the number of guests as above.
Costs: Variable cost per guest per night Rs. 100
Attributable fixed costs for the five-day period:
Double rooms Rs. 516 000
Single and family rooms (total) Rs. 300 000

28
 2. Accommodation for guests is provided on an all-inclusive basis (meals, drinks,
entertainment etc.).
3. The objective of the hotel management is to maximize profit.
4. The hotel management expect all single and family rooms to be ‘sold out’ for each of
the five nights of the tournament. However, they are unsure whether the fee in respect
of double rooms should be increased or decreased. At a price of Rs. 400 per room per
night they expect an occupancy rate of 80% of available double rooms. For each Rs. 10
increase/ decrease they expect the number of rooms to decrease/ increase by 40.
Required:
1. (i) Calculate the profit-maximizing fee per double room that MR should charge per night
during the Tournament;
(ii) Calculate how much profit would be earned from staging the tournament as a
consequence of charging that fee.
2. The management of the hotel are concerned by the level of variable costs per guest night
to be incurred in respect of the tournament, A recent review of proposed operational
activities has concluded that variable cost per guest per night in all rooms in the hotel would
be reduced by 20% if proposed changes in operational activities were made. However, this
would result in additional attributable fixed costs amounting to Rs. 200 000 in respect of
the five-day period. Advise management whether, on purely financial grounds, they should
make the proposed changes in operational activities.
3. Discuss TWO initiatives that management might consider in order to further improve the
profit from staging the golf tournament.

Cost concepts and objectives of Costing systems

Question 9:
Give short answers to the following questions:-
1. Why are indirect costs not directly traced to cost objects in the same way as direct costs?
2. Explain how cost information differs for profit measurement/inventory valuation
requirements compared with decision-making requirements
3. Describe two important features that distinguish between activity-based costing and
traditional costing systems
4. Why are budgeted overhead rates preferred to actual overhead rates?
5. Explain why the break-even point changes when there is a change in sales mix.
6. Define limiting factors.

Transfer Pricing
Question 10:
You are the management accountant of the BONE CARE Group which manufactures an
innovative range of products to provide support for injuries to various joints in the body. The
group has adopted a divisional structure. Each division is encouraged to maximize its reported
profit.

29
Division KTM, which is based in a country called Country N, manufactures joint-support
appliances which incorporate a ‘one size fits all people’ feature. A different appliance is
manufactured for each of knee, ankle, elbow and wrist joints.
Budget information, received from marketing department, in respect of Division KTM for the
year ended 31 December 2010 is as follows:
Support appliance Knee Ankle Elbow Wrist
Sales units (000’s) 20 50 20 60
Selling price per unit (Rs.) 24 15 18 9
Total variable cost of sales (Rs. 000) 200 350 160 240
Each of the four support products uses the same quantity of manufacturing capacity. This gives
Division KTM management the flexibility to alter the product mix as desired. During the year
to 31 December 2010, it is estimated that a maximum of 160 000 support products could be
manufactured.
The following information relates to Division DEL which is also part of the BONE CARE
group and is based in Country I:
1. Division DEL purchases products from various sources, including from other divisions
in BONE CARE group, for subsequent resale to customers.
2. The management of Division DEL has requested two alternative quotations from
Division KTM in respect of the year ended 31 December 2010 as follows:
Quotation 1 – Purchase of 10 000 ankle supports.
Quotation 2 – Purchase of 18 000 ankle supports.
The management of the BONE CARE Group has decided that a minimum of 50 000 ankle
supports must be reserved for customers in Country N in order to ensure that customer
demand can be satisfied and the product’s competitive position is maintained in the Country
N market.
The management of the BONE CARE Group is willing, if necessary, to reduce the
budgeted sales quantities of other types of joint support in order to satisfy the requirements
of Division DEL for ankle supports.
They wish, however, to minimize the loss of contribution to the Group.
The management of Division DEL is aware of another joint support product, which is
produced in Country I, that competes with the Division KTM version of the ankle support
and which could be purchased at a local currency price that is equivalent to Rs. 9 per
support. BONE CARE Group policy is that all divisions are allowed autonomy to set
transfer prices and purchase from whatever sources they choose. The management of
Division KTM intends to use market price less 30 per cent as the basis for each of
quotations 1 and 2.
Required:
1. The management of the BONE CARE Group have asked you to advise them regarding
the appropriateness of the decision by the management of Division KTM to use an
adjusted market price as the basis for the preparation of each quotation and the
implications of the likely sourcing decisions by the management of Division DEL. Your
answer should cite relevant quantitative data and incorporate your recommendation of
the prices that should be quoted by Division KTM for the ankle supports in respect of

30
 quotations 1 and 2, that will ensure that the profitability of BONE CARE Group as a
whole is not adversely affected by the decision of the management of Division DEL.
2. Advise the management of Divisions A and B regarding the basis of transfer pricing
which should be employed in order to ensure that the profit of the BONE CARE Group
is maximized.
3. After considerable internal discussion concerning Quotation 2 by the management of
BONE CARE Group, Division KTM is not prepared to supply 18 000 ankle supports
to Division DEL at any price lower than 30 per cent below market price. All profits in
Country I are subject to taxation at a rate of 20 per cent. Division KTM pays tax in
Country N at a rate of 40 per cent on all profit. Advise the management of BONE CARE
Group whether the management of Division DEL should be directed to purchase the
ankle supports from Division KTM, or to purchase a similar product from a local
supplier in Country I. Supporting calculations should be provided.

Marginal Costing and Decision-making problems

Question 11:
The Sweet Potato Co. is considering introducing a new franchised product, Jhol Momo.
Existing kitchens now used for making some of the present ‘Cooked’ range of products could
be used instead for cooking the Jhol Momo. However, new special batch mixing equipment
would be needed. This cannot be purchased, but can be hired from the franchiser in three
alternative specifications, for batch sizes of 200, 300 and 600 units respectively. The annual
cost of hiring the mixing equipment would be £5000, £15 000 and £21500 respectively. The
‘existing-Cooked’ product which would be dropped from the range currently earns a
contribution of £90,000 per annum, which it is confidently expected could be continued if the
product were retained in the range. The company’s marketing manager considers that, at the
market price for Jhol Momo of £0.40 per unit, it is equally probable that the demand for this
product would be 600000 or 1000000 units per annum. The company’s production manager
has estimated the variable costs per unit of making Jhol Momo and the probabilities of those
costs being incurred, as follows:
200 units 300 units 600 units 600 units
Probability if Probability if
Probability if Probability if
annual sales annual sales
annual sales are annual sales are
are are
Batch size: either 600,000 or either 600,000 or 1,000,000
600,000 units
Cost per unit 1,000,000 units 1,000,000 units units
0.20 0.1 0.2 0.3 0.5
0.25 0.1 0.5 0.1 0.2
0.30 0.8 0.3 0.6 0.3
Required:
1. Draw a decision tree setting out the problem faced by the company.
2. Show in each of the following three independent situations which size of mixing machine,
if any, the company should hire:
i. to satisfy a “maximin” (or “minimax” criterion)
ii. to maximize the expected value of contribution per annum and

31
 iii. to minimize the probability of earning an annual contribution of less than
£100000.
3. You are required to outline briefly the strengths and limitations of the methods of analysis
which you have used in part (1) above.

Marginal Costing and Decision-making problems

Question 12:
The Domestic Engines Co. produces the same power generators in two Illinois plants, a new
plant in Peoria and an older plant in Moline. The following data are available for the two plants:
Peoria Moline
Selling price 150.00 150.00
Variable manufacturing cost per unit 72.00 88.00
Fixed manufacturing cost per unit 30.00 15.00
Variable marketing and distribution cost per unit 14.00 14.00
Fixed marketing and distribution cost per unit 19.00 14.50
Total cost per unit 135.00 131.50
Operating income per unit 15.00 18.50
Production rate per day [Units] 400.00 320.00
Normal annual capacity usage [Days] 240.00 240.00
Maximum annual capacity [Days] 300.00 300.00
All fixed costs per unit are calculated based on a normal capacity usage consisting of 240
working days. When the number of working days exceeds 240, overtime charges raise the
variable manufacturing costs of additional units by $3.00 per unit in Peoria and $8.00 per unit
in Moline. Domestic Engines Co. is expected to produce and sell 192,000 power generators
during the coming year. Wanting to take advantage of the higher operating income per unit at
Moline, the company’s production manager has decided to manufacture 96,000 units at each
plant, resulting in a plan in which Moline operates at capacity (320 units per day 300 days) and
Peoria operates at its normal volume (400 units per day 240 days).
Required:
1. Calculate the breakeven point in units for the Peoria plant and for the Moline plant. Can
the company produce and sell those breakeven units before spending for overtime
allowances?
2. Calculate the operating income that would result from the production manager’s plan
to produce 96,000 units at each plant.
3. Determine how the production of 192,000 units should be allocated between the Peoria
and Moline plants to maximize operating income for Domestic Engines. Show your
calculations.
4. In CVP analysis, gross margin is a less-useful concept than contribution margin.” Do
you agree? Explain briefly.

Simulation
Question 13:
A Small retailer has studied the weekly receipts and payments over the past 200 weeks and
has developed the following set of information:
32
 Weekly
Weekly Receipts Probability Probability
Payments

(Rs.) (Rs.)

3,000 0.20 4,000 0.30

5,000 0.30 6,000 0.40

7,000 0.40 8,000 0.20

12,000 0.10 10,000 0.10

Using the following set of random numbers, simulate the weekly pattern of receipts and
payments for the 12 weeks of the next quarter, assuming further that the beginning bank
balance is Rs. 8000. What is the estimated balance at the end of the 12-weekly period? What
is the highest weekly balance during the quarter? What is the average weekly balance for the
quarter?
Random Numbers
For Receipts 03 91 38 55 17 46 32 43 69 72 24 22

For payments 61 96 30 32 03 88 48 28 88 18 71 99

Learning Curve Theory

Question 14:
Minumaya Co. builds aircrafts. Earlier this year the company accepted an order for 15
specialized ‘Jet’ aircrafts at a fixed price of £100,000 each. The contract allows 4 months for
building and delivery of all the aircrafts and stipulates a penalty of £10,000 for each aircraft
delivery late.
The aircrafts are built using purchased components and internally manufactured parts, all of
which are readily available. However, there is only a small team of specialized technicians and
yard space is limited, so that only one aircraft can be built at a time. Four aircrafts have now
been completed and as Minumaya Co. has no previous experience of this particular aircraft the
building times have been carefully monitored as follows:
Units Completion time
1 10
2 8.1
3 7.4
4 7.1
Minumaya co. has 23 normal working days in every month and the first four aircrafts were
completed with normal working. Management is now concerned about completing the contract
on time. The management accountant’s estimate of direct costs per aircraft, excluding labour
costs, is as follows:
Materials-40,000
Manufactured parts- 15,000

33
Other direct expenses- 5,000
Direct labour costs are £2,500 per day for the normal 23 working days per month. Additional
weekend working days at double the normal pay rates can be arranged up to a maximum of
seven days per month (making 30 possible working days per month in total). Overheads will
be allocated to the contract at a rate of £3,000 per normal working day and no overheads will
be allocated for overtime working.
Required:
1. Using the completion time information provided, calculate the learning rate using formula
for:-
a. Production up to 2nd unit
b. Production up to 4th unit
2. Is your answer in 1a and 1b same? If no then round down the learning rate for solving the
answer.
3. Discuss the limitations of the learning curve in this type of application.
4. Calculate whether it would be preferable for Minumaya co. to continue normal working or
to avoid penalties by working weekends.
Log of Values Log of Values Anti- log of Values
2 0.3010 15 1.1761 -0.0434 0.9050
10 1.0000 13 1.1139 -0.0444 0.9028
9.05 0.9566 14 1.1461 0.8212 6.6257
8.5 0.9294 90% -0.0458 0.8258 6.6956
8.15 0.9112 80% -0.0969 0.8307 6.7714

Marginal Costing and Decision-making problems

Question 15:
Golden Bird Airlines Ltd. operates its services under the brand 'Golden Bird'. The 'Golden
Bird' route network spans prominent business metropolis as well as key leisure destinations
across the Indian subcontinent. 'Golden Bird', a low-fare carrier launched with the objective of
commoditizing air travel, offers airline seats at marginal premium to train fares across India.
Profits of the 'Golden Bird' have been decreasing for several years. In an effort to improve the
company's performance, consideration is being given to dropping several flights that appear to
be unprofitable.
Income statement for one such flight from 'New Delhi' to 'Leh' (GB - 022) is given below:
(Per flight)
Ticket Revenue
(175 seats x 60% Occupancy x 7,000 ticket price) 7,35,000
Less: Variable Expenses (1,400 per person) 1,47,000
Contribution Margin 5,88,000
Less: Flight Expenses:
Salaries, Flight Crew 1,70,000
Salaries, Flight Assistants 31,500

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Baggage Loading and Flight Preparation 63,000
Overnight Costs for Flight Crew and Assistants at destination 12,600
Fuel for Aircraft 2,38,000
Depreciation on Aircraft 49,000*
Liability Insurance 1,47,000
Flight Promotion 28,000
Hanger Parking Fee for Aircraft at destination 7,000 7,46,100
Net Gain/(Loss) (1,58,100)
* Based on obsolescence
The following additional information is available about flight GB-022.
1. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are
paid by the flight.
2. The baggage loading and flight preparation expense is an allocation of ground crew's
salaries and depreciation of ground equipment.
3. One third of the liability insurance is a special charge assessed against flight GB-022
because in the opinion of insurance company, the destination of the flight is in a "high-
risk" area.
4. The hanger parking fee is a standard fee charged for aircraft at all airports.
5. If flight GB-022 is dropped, 'Golden Bird' Airlines has no authorization at present to
replace it with another flight.
Required:
Using the data available, prepare an analysis showing what impact dropping flight GB-022
would have on the airline's profit.

Cost concepts and objectives of Costing systems

Question 16:
A. Sweetum Candies manufactures jaw-breaker candies in a fully automated process. The
machine that produces candies was purchased recently and can make 4,100 per month. The
machine costs $9,000 and is depreciated using straight line depreciation over 10 years
assuming zero residual value. Rent for the factory space and warehouse, and other fixed
manufacturing overhead costs total $1,200 per month. Sweetum currently makes and sells
3,800 jaw-breakers per month. Sweetum buys just enough materials each month to make
the jaw-breakers it needs to sell. Materials cost 30 cents ($0.30) per jawbreaker. Next year
Sweetum expects demand to increase by 100%. At this volume of materials purchased, it
will get a 10% discount on price. Rent and other fixed manufacturing overhead costs will
remain the same.
Required:
1. What is Sweetum’s current annual relevant range of output?
2. What is Sweetum’s current annual fixed manufacturing cost within the relevant range?
What is the annual variable manufacturing cost?

35
 3. What will Sweetum’s relevant range of output be next year? How if at all, will total
annual fixed and variable manufacturing costs change next year? Assume that if it
needs to Sweetum could buy an identical machine at the same cost as the one it already
has.
B. The list of representative cost drivers in the right column of this table are randomized with
respect to the list of functions in the left column. That is, they do not match.
Function Representative Cost Driver
1. Accounting A. Number of invoices sent
2. Human resources B. Number of purchase orders
3. Data processing C. Number of research scientists
4. Research and development D. Hours of computer processing unit (CPU)
5. Purchasing E. Number of employees
6. Distribution F. Number of transactions processed
7. Billing G. Number of deliveries made
Required:
1. Match each function with its representative cost driver.
2. Give a second example of a cost driver for each function.

Transportation Problems
Question 17
A Company is spending 1,000 on transportation of its units from these to four warehouses the
supply and demand of units with the units cost of transportation are as:

What can be the maximum saving by optimum scheduling?

Quantitative Techniques - General concepts

Question 18:
Give answers to the following questions:-
1. State any 2 advantages of CPM.
2. Explain the terms ‘Resource Smoothing’ and ‘Resource Levelling’

36
3. How would you use the Monte Carlo Simulation method in inventory control?
4. Will the solution for a minimization problem obtained by Vogel's Approximation Method
and Least Cost Method be the same? Why?

Linear Programming
Question 19:
A furniture firm manufactures tables and chairs, a unit of table requires 30 sq. ft. wood and 5
labour hours, and a chair requires 20 sq. ft. wood and 10 labour hours. The total 300 sq. ft.
wood and 110 labour hours available, unit profit from table and chair is 6 and 8 respectively.
You are required to formulate the problem as a linear programming problem, and solve it by
using the graphical method.

Budget & Budgetary Control

Question 20:
The open-top, double-decker Iron Bus Tours Co. Ltd. (IMTCL) Bus Company is known for its
distinctive red and cream-colored vehicles. It started running in the small town of Pokhara in
June 2020 with 44 buses, and by 2023 it was running over 88 buses there. IMTCL has five
routes that make stops at tourist hotspots. The company runs hop-on, hop-off bus tours of
various hills, with one 24-hour ticket valid for unlimited journeys on the route.

Budget Process/ Incentive Plan

As a part of management performance control and incentive scheme it has been following
participative budgeting approach. In IMTCL, budgeting is a joint process in which functional
divisions develop their plans in conformity with corporate goals for the next financial year.
Based on these plans, divisions prepare functional budgets and send to the appropriate
management for review and approval. The budgets after the incorporation of the feedback and
suggestions received from the said management, are finalized for the implementation. Then,
finalized budgets are used as yardstick for performance measurement. Comparing the actual
performance with the yardstick, bonus and other performance related incentives are considered.
The higher management believe that this performance control and incentive scheme is very
helpful to measure the performance and fixing responsibilities for the responsibility centres.
Budgeted Income Statement (’000)
Revenue 1,13,800

Less:

Variable Costs

Direct Material (Fuel, Lubricants and Sundries) 13,600

Direct Labour 40,500

Variable Overheads 7,700

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 Fixed Costs

Operating Overheads (Buses, Garage, Salaries) 18,100

Marketing and Administration 10,700

Profit/ (Loss) before taxes 23,200

Current Year’s Income Statement (’000)

Revenue 93,500

Less:

Variable Costs:

Direct Material (Fuel, Lubricants, and Sundries) 19,600

Direct Labour 37,700

Variable Overheads 6,200

Fixed Costs:

Operating Overheads (Buses, Garage, Salaries) 20,150

Marketing and Administration 10,100

Profit/ (Loss) before taxes (250)

Other Information
Surprisingly above given current year’s actual results were not up to the mark. Actual results
were clearly showing adverse performance in comparison with budgeted figures.
Managers of IMTCL were upset because they did not receive the bonus. Ms. Bhunti, Tour
Manager of Route No. 3, said –
“We lost 2 month’s revenue and fuel prices are almost doubled. We did our best but these
circumstances were beyond our control and we should not penalize at all.”
In support of her statement, Ms. Bhunti provided following additional information –
(a) Rain is common in Pokhara Region. But the past year set a record in numbers. In July, the
expected average was 1,577 mm and received was 1,810 mm, In August the expected
average rain was 990 mm and actual received was 1,535 mm. Heavy rain in these two
months disrupted normal life of the region.
(b) The fuel prices have risen almost continuously since last year due to surge in global crude
prices.
(c) Additional operational expenses 22,00,000 also incurred to remove the milky appearance
and give the stainless a nice new look effected by heavy rain.
She claimed that –

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“Revised budget with consideration of the above factors would give different results and lead
to different conclusions”
Required:
ANALYSE the tour manager’s view.

39
Answers:
Activity Based Costing
Solution 1:
1. Total overhead is Rs. 2,000,000. The plant wide rate is Rs. 16 per machine hour
(Rs. 2,000,000/125,000). Overhead is assigned as follows:
Classical lamps: Rs. 16 x 100,000 = Rs. 1,600,000
Modern lamps: Rs. 16 x 25,000 = Rs. 400,000
The unit costs for the two products are as follows:
Classical lamps: (Rs. 800,000 + Rs. 1,600,000)/400,000 = Rs. 6.00
Modern lamps: (Rs. 150,000 + Rs. 400,000)/100,000 = Rs. 5.50
2. In the activity-based approach, a rate is calculated for each activity:
Machining: Rs. 500,000/125,000 = Rs. 4.00 per machine hour
Moving materials: Rs. 900,000/400,000 = Rs. 2.25 per move
Setting up: Rs. 600,000/150 = Rs. 4,000 per setup
Overhead is assigned as follows:
Classical lamps:
Rs. 4.00 x 81,250 325,000
Rs. 2.25 x 300,000 675,000
Rs. 4,000 x 100 400,000
Total Rs. 1,400,000
Modern lamps:
Rs. 4.00 x 43,750 175,000
Rs. 2.25 x 100,000 225,000
Rs. 4,000 x 50 200,000
Total Rs. 600,000
This produces the following unit costs:
Classical lamps:
Prime costs 800,000
Overhead costs 1,400,000
Total costs Rs. 2,200,000
Units produced ÷ 400,000
Unit cost Rs. 5.50
Modern lamps:
Prime costs 150,000
Overhead costs 600,000

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 Total costs 750,000
Units produced ÷ 100,000
Unit cost Rs. 7.50
3. First, calculate the activity consumption ratios:
Moving Setups
Classical 300,000/400,000 3/4 100/150 2/3
Modern 100,000/400,000 1/4 50/150 1/3
Second, calculate the consumption ratios (information from Requirement 2 is needed):
ABC Assignments Ratios
Classical 1,400,000 1,400,000/2,000,000 = 0.70
Modern 600,000 600,000/2,000,000 = 0.30
Total Rs. 2,000,000
Third, set up and solve the consumption ratio equations:
(3/4)w1 + (2/3)w2 = 0.70
(1/4)w1 + (1/3)w2 = 0.30
Solving, we have the allocation ratios: w1 = 0.40 and w2 = 0.60. Thus, the cost pools for
the two activities are:
Moving: 0.40 x Rs. 2,000,000 = Rs. 800,000
Setups: 0.60 x Rs. 2,000,000 = Rs. 1,200,000
The activity rates for the reduced system would be:
Moving: Rs. 800,000/400,000 = Rs. 2.00 per move
Setups: Rs. 1,200,000/150 = Rs. 8,000 per setup
Overhead cost assignments:
Classical lamps:
Rs. 2.00 x 300,000 600,000
Rs. 8,000 x 100 800,000
Total 1,400,000
Modern lamps:
Rs. 2.00 x 100,000 200,000
Rs. 8,000 x 50 400,000
Total 600,000

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Just In Time
Solution 2:
1. Annual Relevant Costs of Current Purchasing Policy and JIT Purchasing Policy for AWM
Corporation
Relevant Costs Relevant Costs
under Current under JIT
Purchasing Purchasing
Policy Policy
Required return on investment
20% per year 600,000 of average inventory p.a. 120,000
20% per year 0 inventory p.a. 0
Annual insurance and property tax costs 14,000 0
Warehouse rent 60,000 (13,500) *
Overtime costs 40,000
6.50** contribution margin per unit 20,000 units 130,000
Total incremental costs 194,000 156,500
Difference in favour of JIT purchasing 37,500
*(Rs. 13,500) = Warehouse rental revenues, [(75% x 12,000) x Rs. 1.50]
** Calculation of unit contribution margin
Selling price (Rs. 10,800,000 ÷ 900,000 units) Rs. 12.00
Variable costs per unit:
Variable manufacturing cost per unit
(Rs. 4,050,000 ÷ 900,000 units) Rs. 4.50
Variable marketing and distribution cost per unit
(Rs. 900,000 ÷ 900,000 units) 1.00
Total variable costs per unit Rs. 5.50
Contribution margin per unit Rs. 6.50
Note that the incremental costs of Rs. 40,000 in overtime premiums to make the additional
15,000 units are less than the contribution margin from losing these sales equal to Rs. 97,500
(Rs. 6.50 x 15,000). AWM would rather incur overtime than lose 15,000 units of sales.
Points in favour and against JIT:-
In favour
1. Just-in-time approach keeps stock holding costs to a minimum level. The released
capacity results in better utilization of space and bears a favourable impact on the
insurance premiums and rent that would otherwise be needed to be made.
2. The just-in-time approach helps to eliminate waste. Chances of expired or out of date
products; do not arise at all.
3. As under this management method, only essential stocks which are required for to
manufacturing are obtained, thus less working capital is required.
4. As low level of stocks are held, the ROI (Return on Investment) of the organizations
will be high in general.

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Against JIT
1. JIT approach states ZERO tolerance for mistakes, making re-work difficult in practice,
as inventory is kept to a minimum level.
2. A successful application of JIT requires a high reliance on suppliers, whose
performance is outside the purview of the manufacturer.
3. Due to no buffers in JIT, production line idling and downtime can occur which would
have an unfavourable effect on the production process and also on the finances.
4. Chances are quite high of not meeting an unexpected increase in orders as there will be
no excess inventory of finished goods.

Enterprise Resource Planning

Solution 3:
1. Meaning of Enterprise Resource Planning
➢ The ERP solution seek to streamline and integrate operation process and information
flows in the company to synergies the resources of an organization namely men,
material, money and machine though information.
➢ ERP combines all computerized departments together with the help of a single integrate
software program that runs off as single database so that various department can more
easily share information and commission with each other.
➢ Enterprise resource planning software or ERP attempts to integrate all departments and
functions across a company into a single computer system that can serve all those
different departments' particular needs.
➢ To enable the easy handling of the system, ERP can be divided into the following core
subsystems, sales and marketing, master scheduling, materials requirements planning,
capacity requirement planning, bill of materials, purchasing, accounts
payable/receivable, logistic, assets management and financial accounting.
2. Features of Enterprise Resource Planning
➢ ERP perform core activities and increases customer service, thereby augmenting the
corporate image.
➢ ERP facilitates company—wide Integrated Information System covering all functional
areas like manufacturing, selling and distribution, payables, receivables, inventory,
accounts, human resources, purchases etc.
➢ ERP bridge the information gap across organizations. ERP is the solution for better
project management.
➢ ERP provides complete integration of system not only across departments but also
across companies under the same management.
➢ ERP allows automatic introduction of the latest technologies like Electronic Fund
Transfer (EFT). Electronic Data Interchange (EDI), Internet, Intranet, Video
conferencing, E-commerce etc.
➢ ERP eliminates most business problems like materials shortages, productivity
enhancements, customer service, cash management, inventory problems, quality
problems, prompt delivery etc.

43
 ➢ ERP not only addresses the current requirement of the company but also provide the
opportunity of continually improving and refining business Processes.
➢ ERP provides business intelligence tools like Decision Support Systems (DSS),
Executive Information System (EIS), Reporting, Data Mining and Early warning
systems (Robots) for enabling people to make better decisions and thus improve their
business processes.

3. Benefits of Enterprise Resource Planning

In an industry which is sensitive to dynamic market forces, cost fluctuations and
manufacturing responsiveness, there are many benefits to be gained from investing in ERP.
ERP application have shifted from assisting after-the-fact monitoring to real-time analysis,
control and forecasting and from facilitating standardization, economies to scale and cost
reduction in product, to enabling fast, flexible and accurate response and customization.
The benefits accruing to any business enterprise by implementing an ERP package are
listed below:-
➢ Product Costing: Determination of cost of products correctly, is quite critical for every
industry. ERP supports advance costing methods, including standard costing, actual
costing and activity –based costing. Additionally, all costing methods and information
can be fully integrated with finance. This provides the company with essential financial
information for monitoring controlling costs.
➢ Inventory Management: Enterprise and managing the basis data required to
effectively run one’s business is an important start for effective warehouse
management. The basis data includes warehouse, locations, items containers, lot and
serial number, units of measures (including conversion), alias numbers, replacement
and substitute items, expiry dates, in date and out dates and more. Inventory reporting
supports all reporting of specific and general types of stock transaction such as various
types of stock transfers, re-classification, ID changes and physical inventory results.
Additionally, functions are available for managing different stock and purchase
requisitions as well as supporting the selection of appropriate locations for receipts.
Inventory valuation involves both warehouse management and cost accounting. ERP
supports several valuation methods including standard cost, average cost, FIFO and
batch-specific prices.
➢ Distribution & Delivery: Delivery and distribution in ERP lets one to define logistics
processes, flexibly and efficiently to deliver the right product from the right warehouse
to the right customer at the right time-every time. To the customer, the most important
element of quality is one-time delivery. It doesn’t matter how well a product is made if
arrives late. Processing distribution or acquisition orders, involves several closely
related activities.
➢ E – Commerce: Internet enables ERP offers Internet, Intranet and extranet solutions
for business, business to consumer, employee self-service and more.
➢ Automatic Control: It ensure automatic quality control procedure.
➢ After Sales Service: It ensures better after sales service.
➢ Improvement in Production Planning: It improved production planning.
➢ Quick response: It enables quick response to change in business operations & market
conditions.

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 ➢ Cumulative Edge’s: It helps to achieve competitive advantages by improving business
process.

4. Reasons for the Implementation of ERP by Companies

➢ Improve a company’s business performance: ERP automates the tasks involved in
performing a business process – such as order fulfilment which involves taking an order
from a customer, shipping it and billing for it. With ERP, when a customer service
representative takes an order from a customer, he or she has all the information
necessary to complete the order (the customer’s credit rating and order history, the
company’s inventory levels and the shipping dock’s trucking schedule). Everyone else
in the company sees the same computer screen and has access to the single database
that holds the customer’s new order. When one department finishes with the order it
automatically routed via the ERP system to the next department. To find out where the
order is at any point, one need only to log into the ERP system and track it down. With
luck, the order process moves like a bolt of lightning through the organization, and
customers get their orders faster and with fewer errors than before. ERP can apply that
same magic to the other major business processes, such as employee benefits or
financial reporting.
➢ Standardize manufacturing processes: Manufacturing companies - especially those
with an appetite for mergers and acquisitions - often find that multiple business units
across the company make the same widget using different methods and computer
systems, standardizing those processes and using a single, integrated computer system
can save time, increase productivity & reduce headcount.
➢ Integrate financial data: As the CEO tries to understand the company’s overall
performance, he or she may find many different versions of the truth. Finance has its
own set of revenue numbers, sales has another version, and the different business units
may each have their own versions of how much they contributed to revenues. ERP
creates a single version of the truth that cannot be questioned because everyone is using
the same system.
➢ To standardize HR information: Especially in companies with multiple business
units, HR may not have a unified, simple method for tracking employee time and
communicating with them about benefits and services. ERP can fix that.
➢ Reduction in cycle time: Cycle time is the time between receipt of the order and
delivery of the product. ERP systems are helpful in both make-to -order and make-to-
stock situations. In both cases, cycle time can be reduced by the ERP systems, but the
reduction will be more in the case of make-to-order systems. ERP packages go a long
way in reducing the cycle times due to automation achieved in material procurement,
production planning and the efficiency achieved through the plant maintenance and
production systems of the ERP packages.
➢ Improved Resource Utilization: As manufacturing processes become more
sophisticated and as the philosophies of elimination of waste and constraint
management achieve broader acceptance, manufacturer place increased emphasis upon
planning and controlling capacity. The capacity planning feature of ERP systems offer
both rough-cut and detailed capacity planning. The system loads each resource with
production requirements from Master Production Scheduling, Materials Requirements
Planning and Shop-floor Control. The ERP systems have simulation capabilities that
help the capacity and resource planners to simulate the various capacity and resource
45
 utilization scenarios and choose the best option. The ERP systems help the organization
in drastically improving the capacity and resource utilization.
➢ Better Customer Satisfaction: Customer satisfaction means meeting or exceeding
customer’s requirements for a product or service. The customer could get technical
support by either accessing the company’s technical support knowledge base (help
desk) or by calling the technical support. Since all the details of the product and the
customer are available to the person at the technical support department, the company
will be able to better support the customer. All this is possible because of use of latest
developments in information technology by the ERP systems.
➢ Improved Supplier Performance: The quality of the raw materials or components
and the capability of the vendor to deliver them on time are of critical importance for
the success of any organization. For this reason, an organization chooses its suppliers
or vendors very carefully and monitor their activities very closely. To realize these
benefits, corporations rely heavily on supplier management and control systems to
help, plan, manage and control the complex processes associated with global supplier
partnerships.

Costing of Service Sector

Solution 4:
Particulars VIP Middle Last
1. The number of seats that Samec Ltd. has to sell in order to breakeven are:-
BEP Number of Seats (refer WN C) 30 90 30
2. If Samec Ltd. finds, demand for VIP, Middle and Last Level is in the ratio 2:2:5, then
the seats required to be sold for BEP will be
BEP Number of Seats (refer WN C) 40 40 100
Basic Computations / working notes (WN)
A. Total contribution from firm booking
Particulars VIP Middle Last
Gross Seats 3 x 30 = 90 18 x 20 = 360 6 x 30 = 180

Less: Free Seats 1 x 30 = 30 Nil Nil

Net Saleable Seats 60 360 180

50% of 60 = 50% of 360 = 50% of 180 =
Less: Firm Booking by Troupe
30 180 90
Seats available for sale (self) 30 180 90

Net Contribution per person 350 - 50 = 300 250 - 50 = 200 150 - 50 = 100

Contribution earned from Firm 30 x 300 = 180 x 200 = 90x 100=

Booking 9,000 36,000 9,000
Total contribution from firm booking = 54,000

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B. Fixed Costs to be recovered for BEP

(a) Drama Troupe Hire 72,000

(b) Rent for the Theatre 15,000

(c) Air Conditioning and other Stage Arrangement Charges 7,000

(d) Snacks for VIP Free Guests (not charged) = 30 persons x 50 1,500 95,500

Less: Recovery by way of Sponsor 11,500

Contribution from Firm Booking (WN A above) 54,000 65,500

Net Fixed Costs to be recovered 30,000

C. BEP at different levels
Particulars VIP Middle Last Total
(a) Contribution per person 300 200 100
(b) Given Demand Ratio 1 3 1
(c) Overall Contribution Ratio (a x b) 300 600 100
(d) Apportionment of 30,000 as per above
9,000 18,000 3,000 30,000
ratio
(e) BEP Number of Seats (d ÷ a) 30 90 30 150
This is compared with WN A Seats available for sale by Samec Ltd., and found feasible.
Hence, it is a valid BEP.
(f) Revised Demand Ratio 2 2 5
(g) Revised Overall Contribution Ratio (a x f) 600 400 500
(h) Apportionment of 30,000 as per revised
12,000 8,000 10,000 30,000
ratio
(i) Required BEP Number of Seats (h ÷ a) 40 40 100
(j) Seats available for sale by Samec Ltd. 30 180 90
(k) Balance seats not available for sale (i - j) 10 NA 10
(l) Contribution lost on above seats (a x k) 3,000 1,000 4,000
4,000
(m) Additional Seats to make good above
200
Contribution Lost
=20
(n) Revised BEP (however not in 2:2:5 Ratio) 30 40+20=60 90 180

Theory of Constraints
Solution 5:
1) Three key measures, used for application of Theory of constraints idea are:-
• Throughput contribution, which is the rate at which the system generates profit through
sales. It is defined as sales less direct materials.

47
• Investments (inventory), which is the sum of inventories, research and development costs
and the costs of equipment and buildings.
• Other operational expenses, which include all operating costs (other than direct materials)
incurred to earn throughput contribution.
2) The total processing hours of the factory is 225,000 hours (18 hours $ 5 days $ 50 weeks $
50 production lines). The production capacity for all processes is as follows:

Product A Product B Product C

Pressing 450,000 450,000 562,500
Stretching 900,000 562,500 900,000
Rolling 562,500 900,000 900,000
Note that the above are derived from dividing 225000 hours by the processing time per
meter (e.g., Pressing for product A = 225,000/0.5 hours). The bottleneck is the pressing
process which has a lower capacity for each product. The other processes will probably be
slowed to ensure smooth processing.
3) TPAR for each product:-
Product A Product B Product C
Selling price 70.0 60.0 27.0
Raw materials 3.0 2.5 1.8
Throughput 67.0 57.5 25.2
Throughput per bottleneck hour (W1) 134.0 115.0 63.0
Fixed costs per hour (W2) 90.0 90.0 90.0
TPAR 1.49 1.28 0.7
W1 (67/0.5 = 134) (57.5/0.5 = 115) (25.2/0.4 = 63)
W2 Total fixed costs ($18m) + Labour costs ($2.25m) = $20.25m Fixed cost per
bottleneck hour = $90 ($20.25m/225000)
4)
a. The TPAR of product C could be improved in the following ways:
• Reducing material prices to increase the net throughput rate. Negotiating a long-
term contract with a supplier or suppliers may enable Yam to reduce the
purchase price in return for commitments with suppliers for large quantities of
materials at regular intervals.
• Increasing selling prices but this depends on the price/demand relationships.
The company also operates in a competitive market but the company is selling
all it can produce so an increase in selling price may be possible.
• Seeking to reduce fixed costs using the cost management techniques. e.g.,
activity-based cost management. Alternative suppliers should also be
investigated with a view to reducing the purchase cost of fixed resources
• Increasing the speed of the bottleneck process will generate a greater rate of
income provided that the extra production can be sold. Investment in automated
machinery may speed up the process but the additional cost of the investment
must be taken into account.

48
 b. A TPAR of less than 1 indicates that the rate at which product C generates
throughput (i.e., sales less material costs) is less than the rate at which it incurs fixed
costs so production of product C is not justifiable in purely financial terms.
However, the following factors should be considered prior to ceasing production of
product C:
• Possible product interactions. Does the company need to offer a full production
range? Will sales of other products decline if production of product C ceases?
• The alternative use of the spare capacity arising from ceasing production of
product C.
• Throughput accounting assumes that all costs, apart from materials, are fixed.
Some of the fixed costs are likely to be avoidable if production of product C is
ceased. A detailed special study should be undertaken based on relevant cost
principles, which examines the alternative use of the released capacity, to
ascertain whether product C will yield a long-term contribution to fixed costs.

Quality Cost Management

Solution 6:
1. Control activities that should be implemented, and the total quality costs associated with
those selections, assuming that an activity is selected only if it increases the bonus pool
are:-
Current quality control ................ 160,000
4 ota implemented
Quality training ........................... 160,000
Process control ........................... 200,000
Supplier evaluation..................... 120,000
Engineering redesign ................. 40,000
Failure costs............................... 184,0001
Total 864,000
2. Based on calculations of WN 1 we have:-
a. The reduction in total quality costs = Rs. 736,000
(1,600,000-864,000)
b. The percentage distribution for control and failure costs is 79% & 21% respectively.
c. Bonus pool = 0.10 × Rs. 736,000 = Rs. 73,600
3. In addition to activities adopted above, prototype testing will also be adopted. Of the
activities adopted, quality training, supplier evaluation, engineering redesign, and
prototype testing are all prevention activities and so would not be counted in the cost
reduction calculation. Failure costs would now be Rs. 104,000 (prototype addition reduces
failure costs by an additional Rs. 80,000). The initial failure and appraisal costs are Rs.
1,600,000 (Rs. 1,440,000 + Rs. 160,000). The ending failure and appraisal costs are the
sum of the current appraisal costs, ending failure costs, and the cost of adding process
control: Rs. 160,000 + Rs. 104,000 + Rs. 200,000 = Rs. 464,000. Thus, the cost reductions
counted for the bonus pool would be Rs. 1,136,000 (Rs. 1,600,000 – Rs. 464,000), and the

49
 bonus would be Rs. 113,600 (0.10 × Rs. 1,136,000). This approach has some merit as it
encourages managers to invest in value-added activities and avoid the temptation of
reducing prevention costs prematurely. It is possible, however, that some prevention
activities are not really worth doing, and this approach may lead to an overinvestment in
this category.
Working notes (WN)
1. Computation of net savings
Control Failure
Costing Savings Net savings
Costs Costs
Current quality 160,000 1,440,000 160,000 1,440,000
costs
Proposed Activities
Quality training 320,000 1,040,000 160,000 (400,000) (240,000)
Process Control 520,000 720,000 200,000 (320,000) (120,000)
600,000 656,000 80,000 (64,000) Not
Product inspection
implemented
Supplier evaluation 720,000 200,000 120,000 (456,000) (336,000)
960,000 120,000 240,000 (80,000) Not
Prototype testing
implemented
Engineering 1,000,000 40,0002 40,000 (80,000) (40,000)
redesign
1= 40,000 + savings not achieved as 2 activities were not implemented
2= Failure cost that will remain even if all activities are implemented

Life cycle costing

Solution 7:
1. Assuming that New Life expects to salvage 50,000 tons of metal from the site, the total
project life cycle cost will be:-
Total Project Life-Cycle Costs
Variable costs:
Metal extraction and processing (100 per ton × 50,000 tons) 5,000,000
Fixed costs:
Metal extraction and processing (4,000 × 24 months) 96,000
Rent on temporary buildings (2,000 × 27 months) 54,000
Administration (5,000 × 27 months) 135,000
Clean-up (30,000 × 3 months) 90,000
Land restoration 475,000
Selling land 150,000
Total life-cycle cost 6,000,000
2. If New Life can sell the metal for 150 per ton and wants to earn a profit (before taxes)
of 40 per ton the price at which it must sell the land at the end of the project to achieve
its target profit per ton is:-
Projected Life Cycle Income Statement
Revenue (150 per ton 50,000 tons) 7,500,000

50
 Sale of land 500,000
Total life-cycle cost (6,000,000)
Life-cycle operating income (40 per ton × 50,000 tons) 2,000,000
Life cycle operating income
Mark-up percentage on project life-cycle cost
Total live-cycle cost

2,000,000
6,000,000 =33.33%
3. If New Life can only sell the metal for 140 per ton and the land at 100,000 less than
what we calculated in requirement 2 and if New Life wanted to maintain the same mark-
up percentage on total project life-cycle cost as in requirement 2, it should reduce its
total project life-cycle cost by:-
Revenue (140 per ton 50,000 tons) 7,000,000
Sale of land 400,000
Total revenue 7,400,000
Total life-cycle cost at mark-up of 33.33%
(7,400,000 ÷ 1.333333) 5,550,000
New Life would need to reduce total life-cycle costs by
(6,000,000 – 5,550,000) 450,000
In such case the profit status will be as follows:-
Revenue 7,000,000
Sale of land 400,000
Total life-cycle cost (5,550,000)
Life-cycle operating income 1,850,000
The margin will be 1,850,000/ 5,550,000 = 33.33%.

Pricing Decisions
Solution 8:
1.
1. The profit maximizing fee can be derived using either calculus or a tabulation
approach. At a price of Rs. 400 per room demand is 1440 rooms (2 400 rooms x 0.75
x 0.8). Each increase or decrease in price of Rs. 10 results in a corresponding decrease
or increase in demand by 40 rooms. Therefore, if the selling price were increased to
Rs. 760, demand would be zero. To increase demand by one unit, selling price must
be reduced by Rs. 0.25 (Rs. 10/40 units). Thus, the maximum selling price (P) for an
output of x units is:
P = Rs. 760 - Rs. 0.25X
Therefore, total revenue for a demand of X units is:
TR = 760X - 0.25X²

51
 MR = 760 - 0.5X
MC = 200 (2 persons X Rs. 100).
Maximum profit is achieved where MR = MC
Therefore 760 - 0.5X = 200
So, X = (760 - 200)/0.5 = 1120 units
Therefore, the selling price per double room at the profit-maximizing level (P):
= 760 - 0.25 x 1 120
= 760 - 280
= Rs. 480
Alternatively, the following tabular approach can be used to find the profit maximizing
combination of selling price per room and quantity of double rooms demanded.
Selling price per room Quantity Variable costs per Contribution
per night (Rs.) demanded room per night (Rs.) per night (Rs.)
380 1,520 200 273,600
390 1,480 200 281,200
400 1,440 200 288,000
410 1,400 200 294,000
420 1,360 200 299,200
430 1,320 200 303,600
440 1,280 200 307,200
450 1,240 200 310,000
460 1,200 200 312,000
470 1,160 200 313,200
480 1,120 200 313,600
490 1,080 200 313,200
500 1,040 200 312,000
510 1,000 200 310,000
520 960 200 307,200

2. The profit attributable to the tournament is as follows:

Sales Total
Rooms Fee/room Nights
revenue: '000
Double 1120 480 5 2688
Single 15% 360 300 5 540
Family 10% 240 600 5 720
Total revenue 3948
Variable Costs (w1):
Double 2x 1120 x 100 x 5 1120
Single 1x 360 x 100 x 5 180
Family 4x 240x 100x 5 480
Total variable cost: 1780
Incremental fixed costs:

52
 >Double 516
>Single and family rooms 300
Profits 1352
W1 Number of guests per room x number of rooms x variable cost per guest
night x number of nights.
2. Marginal cost will decline from Rs. 200 to Rs. 160 profits maximized where:
760 - 0.5X = 160
So, X = (760 - 160)/0.5 = 1 200 units (double rooms)
Therefore, the selling price per double room at the profit maximizing level (P):
= 760 - 0.25 x 1200
= 760 - 300
= Rs. 460
Alternatively, the tabular approach illustrated in (a) above can be used to find the profit
maximizing combination of selling price per room and quantity of double rooms
demanded. The revised profit attributable to staging the Robyn Cup is as follows:
Sales Total
Rooms Fee/room Nights
revenue: '000

Double 1200 460 5 2760

Single 15% 360 300 5 540
Family 10% 240 600 5 720
Total revenue 1800 4020
Variable Costs (w1):
Double 2x 1200 x 80 x 5 960
Single 1x 360 x 80 x 5 144
Family 4x 240 x 80 x 5 384
Total variable cost: 1488
Incremental fixed costs:
>Double 516
>Single and family rooms 300
Additional fixed cost 200
Profits 1516
Management would be advised to undertake changes in proposed operational activities
on purely financial grounds as this would result in an increased profit of (Rs. 1516000
- Rs. 1352000) = Rs. 164 000.
3. The following actions might be considered:
• Management could sell a range of souvenirs etc. to visitors to the golf tournament.
• Management could offer guests a price reduction for staying extra nights at the hotel
either before or after the golf tournament.

53
Cost concepts and objectives of Costing systems
Solution 9:
1. Costs that are assigned to cost objects can be divided into two categories:- direct costs and
indirect costs. Sometimes the term overheads is used instead of indirect costs. Direct costs
can be accurately traced to cost objects because they can be specifically and exclusively
traced to a particular cost object whereas indirect costs cannot. Where a cost can be directly
assigned to a cost object the term direct cost tracing is used. In contrast, direct cost tracing
cannot be applied to indirect costs because they are usually common to several cost objects.
This is why, indirect costs cannot be directly traced to cost objects in the same way as direct
costs.
2. In order to meet financial accounting requirements, it may not be necessary to accurately
trace costs to individual products. Consider a situation where a firm produces 1000 different
products and the costs incurred during a period are Rs. 10 million. A well-designed product
costing system should accurately analyse the Rs. 10 million costs incurred between cost of
sales and inventories. Let us assume the true figures are Rs. 7 million and Rs. 3 million.
Approximate but inaccurate individual product costs may provide a reasonable
approximation of how much of the Rs. 10 million should be attributed to cost of sales and
inventories. In such situation, some product costs may be overstated and others may be
understated, but this would not matter for financial accounting purposes as long as the total
of the individual product costs assigned to cost of sales and inventories was approximately
Rs. 7 million and Rs. 3 million.
Likewise for taxation purpose individual product pricing aren’t that much important. The
costs relating to depreciation, repairs and maintenance cannot be accounted to inventory or
even cost of goods sold for taxation purpose.
For decision-making purposes, however, more accurate product costs are required so that
we can distinguish between profitable and unprofitable products. By more accurately
measuring the resources consumed by products, or other cost objects, a firm can identify
its sources of profits and losses.
3. Two important features that distinguish between activity-based costing and traditional
costing systems are:-
1) ABC systems differ from traditional systems by having a greater number of cost
centres in the first stage and a greater number, and variety, of cost drivers or
allocation bases in the second stage. Traditional costing systems tend to use a
small number of second stage allocation bases, typically direct labour hours or
machine hours. In most situations, increasing the number of cost centres
(activities) increases the accuracy of measuring the indirect costs consumed by
cost objects. The choice of the number of cost centres should be based on cost-
benefit criteria.
2) Traditional costing systems are simpler and easier to implement than ABC
systems. However, traditional costing systems are not as accurate as ABC
systems. Traditional costing systems can also result in significant under-costing
and over-costing.
4. An average, annualized rate based on the relationship of total annual overhead to total
annual activity is more representative of typical relationships between total costs and
volume than a monthly rate. What is required is a normal product cost, based on average
long-term production rather than an actual product cost, which is affected by month-to-

54
 month fluctuations in production volume. Taking these factors into consideration, it is
preferable to establish a budgeted overhead rate based on annual estimated overhead
expenditure and activity.
Budgeted overhead rates are preferred to actual overhead rates, because the product cost
calculations have to be delayed until the end of the accounting period, since the overhead
rate calculations cannot be obtained before this date. However, information on product
costs is required more quickly if it is to be used for monthly profit calculations and
inventory valuations or as a basis for setting selling prices. One may argue that the timing
problem can be resolved by calculating actual overhead rates at more frequent intervals,
say on a monthly basis, but the difficulty here is that a large amount of overhead
expenditure is fixed in the short term whereas activity will vary from month to month,
giving large fluctuations in the overhead rates. Management has committed itself to a
specific level of fixed costs in the light of foreseeable needs for beyond one month. Thus,
where production fluctuates, monthly overhead rates may be volatile. Furthermore, some
costs such as repairs, maintenance and heating are not incurred evenly throughout the year.
Therefore, if monthly overhead rates are used, these costs will not be allocated fairly to
units of output. For example, heating costs would be charged only to winter production so
that products produced in winter would be more expensive than those produced in summer.
5. The break-even point (or the sales volumes required to achieve a target profit) is not a
unique number: it varies depending upon the composition of the sales mix. Generally, an
increase in the proportion of sales of higher contribution margin products will decrease the
break-even point whereas increases in sales of the lower margin products will increase the
breakeven point.
6. Scarce resources that constrain the level of output. In the short-term sales demand may be
in excess of current productive capacity. For example, output may be restricted by a
shortage of skilled labour, materials, equipment or space. When sales demand is in excess
of a company’s productive capacity, the resources responsible for limiting the output should
be identified. These scarce resources are known as limiting factors. Within a short-term
time period it is unlikely that constraints can be removed and additional resources acquired.
Where limiting factors apply, profit is maximized when the greatest possible contribution
to profit is obtained each time the scarce or limiting factor is used.

Transfer Pricing
Solution 10:
1. With Quotation 1 the proposed internal transfer price is Rs. 10.50 (Rs. 15 less 30%) and
the locally available price is Rs. 9. Division DEL would therefore purchase ankle supports
from a local supplier in order to increase its profitability. Division KTM has spare
production capacity of 10 000 units (the maximum capacity is 160,000 units and total
demand is 150,000 units). Division KTM could, therefore, supply 10,000 units of ankle
supports at its variable cost of Rs. 7 per unit (Rs. 350,000/50,000) giving a total cost of Rs.
70,000. The cost of purchasing 10 000 units from the local supplier is Rs. 90 000. In order
to maximize group profits, Division KTM should quote its variable cost of Rs. 7 per unit
for each of the 10 000 units required by Division DEL and group profit will increase by Rs.
20 000.
As regards Quotation 2 Division DEL would again wish to purchase from a local supplier
in order to increase its reported profits Division KTM quotes a transfer price of Rs. 10.50.
Division KTM could potentially supply 18,000 ankle supports by using its spare capacity
55
 for 10,000 units and switching production of 8,000 units from sales of the type of support
that earns the lowest contribution per unit. The 10,000 units of spare capacity can be
supplied at a variable cost of Rs. 7 per unit and the additional 8,000 units would have to be
diverted from the type of existing support that yields the lowest contribution per unit. The
calculations are as follows:
Knee Ankle Elbow Wrist
Product support support support support
Selling price per unit (Rs.) 24 15 18 9
Variable cost per unit (Rs.) 10 7 8 4
Contribution per unit (Rs.) 14 8 10 5
Division KTM should offer to transfer the additional 8,000 ankle supports at Rs. 12 per
unit [variable cost (Rs. 7) + contribution foregone (Rs. 5)]. Division DEL would reject the
offer and buy externally at Rs. 9 per unit. This would ensure that the profit of the group is
not adversely affected by any transfer decision.
2. The answer should draw attention to the general rule for transfer pricing, which is that the
transfer price should be set at the variable cost per unit of the supplying division plus the
opportunity cost per unit of the supplying division.
3. Because the two divisions operate in different countries that are subject to different tax
rates it is necessary to work out the impact on profits and taxes arising from the decision
whether Division DEL buys from Division KTM or buys locally. If Division DEL buys
locally the implications for BONE CARE group are as follows:
Division KTM sales: Rs.
60,000 wrist supports at a contribution of Rs. 5 per unit 300,000
Taxation at 40% 120,000
After tax benefit of sales 180,000
Division DEL purchases:
18,000 ankle supports at a cost of Rs. 9 per unit 162,000
Taxation benefit at 20% 32,400
After tax cost of purchases 129,600
Net benefit to BONE CARE Group [180000-129600] Rs. 50,400
If Division DEL buys internally from Division KTM the financial implications for BONE
CARE group are as follows:
Division KTM sales: Rs.
External:
52,000 wrist supports at a contribution of Rs. 5 per unit 260,000
18,000 ankle supports to Division DEL at a contribution of
(Rs. 15 x 70%) - Rs. 7 = Rs. 3.5 per unit 63,000
Total 323,000
Taxation at 40% 129,200
After tax benefit of sales 193,800
Division DEL purchases:
18,000 ankle supports at cost of Rs. 10.50 per unit 189,000
Taxation benefit at 20% 37,800
After tax cost of purchases 151,200
Net benefit to BONE CARE Group Rs. 42,600
Therefore, BONE CARE group will be Rs. 7800 worse off (Rs. 50 400 – Rs. 42 600) if Division
DEL purchases the ankle supports from Division KTM instead of the local supplier.

56
Marginal Costing and Decision-making problems
Solution 11:
1. Decision tree:-

57
58
2.
i. The assumption underlying the maximin technique is that the worst outcome will
occur. The decision-maker should select the outcome with the largest possible
payoff assuming the worst possible outcome occurs, from amongst the outcomes.
From the decision tree we can see that the payoffs for the worst possible outcomes
are as follows:
Payoffs “000”
Hire of machine 200 55
Hire of machine 300 45
Hire of machine 600 38.5
Do not franchise 90
The decision is not to franchise using this criterion.
ii. The expected values for each alternative (see Figure above) are as follows:
Payoffs “000”
Hire of machine 200 87.0
Hire of machine 300 101.0
Hire of machine 600 99.0
Do not franchise 90.0
The company will maximize the expected value of the contributions if it hires the
300-batch machine.
iii. The probability of a contribution of less than £100 000 for each alternative can
be found by adding the joint probabilities from payoffs of less than £100 000.
The probabilities are as follows:
Hire of machine 200 = 0.85
Hire of machine 300 = 0.55
Hire of machine 600 = 0.65
Do not franchise = 1.00
The company should hire the 300-machine adopting this decision criterion.
3. The approaches in part (1) enable uncertainty to be incorporated into the analysis and for
decisions to be based on range of outcomes rather than a single outcome. This approach
should produce better decisions in the long run. The main problem with this approach is
that only a few selected outcomes with related probabilities are chosen as being
representative of the entire distribution of possible outcomes. The approach also gives the
impression of accuracy, which is not justified. Comments on the specific methods used in
(1) are as follows:
i. Maximin: Enables an approach to be adopted which minimizes risk. The main
disadvantage is that such a risk-averse approach will not result in decisions that will
maximize long-run profits.
ii. Expected value: This method takes uncertainty into account by considering the
probability of each possible outcome and using this information to calculate an

59
 expected value. The information is reduced to a single number resulting in easier
decisions. The weaknesses of expected value are as follows:
a. It ignores risk. Decisions should not be made on expected value alone. It should
be used in conjunction with measures of dispersion.
b. It is a long-run average payoff. Therefore, it is best suited to repetitive
decisions.
c. Because it is an average, it is unlikely that the expected value will occur.
iii. Probability of earning an annual contribution of less than £100 000: This method
enables decision-makers to specify their attitude towards risk and return and choose the
alternative that meets the decision-makers risk–return preference. It is unlikely that this
approach will be profit-maximizing or result in expected value being maximized.

Marginal Costing and Decision-making problems

Solution 12:
1. Calculation of Breakeven Points:-
Peoria Moline
Selling price 150 150
Less: Variable Costs
Variable manufacturing cost per unit 72 88
Variable marketing and distribution cost per unit 14 14
Contribution per unit 64 48
Less: Fixed Costs
Fixed manufacturing cost per unit 30 15
Fixed marketing and distribution cost per unit 19 14.5
Operating income per unit 15 18.5

Total Fixed Costs

[320 units per day 240 days x (15+14.5)] 2,265,600
[400 units per day 240 days x (30+19)] 4,704,000

Break-Even Units
(Fixed cost / contribution per unit) 73500 47,200
Yes, the company can produce and sell those breakeven units before spending for
overtime allowances.
2. Operating income that would result from the production manager’s plan to produce
96,000 units at each plant:-
Peoria Moline
Contribution analysis
Selling price 150 150
Less: Variable Costs
Variable manufacturing cost per unit 72 88
Variable marketing and distribution cost per unit 14 14
Contribution per unit 64 48

60
 Contribution per unit after overtime allowance 61 40
Demand / Production analysis
Demand / Required production 96,000 96,000
Normal productions possible 128,000 76,800
Additional production with overtime allowance - 19,200
Computation of total operating income
Contribution amount:-
Contribution on Normal production 6,144,000 3,686,400
Contribution on production with overtime allowance 768000
Total Contribution amount 6,144,000 4,454,400
Less: Total Fixed Costs
[320 units per day 240 days x (15+14.5)] 2,265,600
[400 units per day 240 days x (30+19)] 4,704,000
Total fixed costs 4,704,000 2,265,600

Net operating income 1,440,000 2,188,800

Thus, total operating income to the company is 3,628,800.
3. The optimal production plan is to produce 120,000 units at the Peoria plant and
72,000 units at the Moline plant. The full capacity of the Peoria plant, 120,000 units
(400 units × 300 days), should be used because the contribution from these units is
higher at all levels of production than is the contribution from units produced at the
Moline plant.
Contribution margin per plant:
Peoria, 96,000 × $64 $ 6,144,000
Peoria 24,000 × ($64 – $3) 1,464,000
Moline, 72,000 × $48 3,456,000
Total contribution margin 11,064,000
Deduct total fixed costs 6,969,600
Operating income $ 4,094,400
The contribution margin is higher when 120,000 units are produced at the Peoria
plant and 72,000 units at the Moline plant. As a result, operating income will also
be higher in this case since total fixed costs for the division remain unchanged
regardless of the quantity produced at each plant.
4. Yes, gross margin calculations emphasize the distinction between manufacturing
and non-manufacturing costs (gross margins are calculated after subtracting
variable and fixed manufacturing costs). Contribution margin calculations
emphasize the distinction between fixed and variable costs. Hence, contribution
margin is a more useful concept than gross margin in CVP analysis.

61
Simulation
Solution 13:
Range of random numbers

Receipt Cumulative Payments Cumulative

Probability Range Probability Range
(Rs.) probability (Rs.) probability

3000 0.20 0.20 0-19 4000 0.30 0.30 0-29

5000 0.30 0.50 20-49 6000 0.40 0.70 30-69

7000 0.40 0.90 50-89 8000 0.20 0.90 70-89

12000 0.10 1.00 90-99 10000 0.10 1.00 90-99

Simulation of Data for a period of 12 weeks

Random Expected Random Expected

Week end
Week No. for Receipt No. for Payment
Balance (Rs.)
receipt (Rs.) payment (Rs.)

Opening Balance 8,000

5,000
1 03 3,000 61 6,000 (8,000 + 3,000 –
6,000)

2 91 12,000 96 10,000 7,000

3 38 5,000 30 6,000 6,000

4 55 7,000 32 6,000 7,000

5 17 3,000 03 4,000 6,000

6 46 5,000 88 8,000 3,000

7 32 5,000 48 6,000 2,000

8 43 5,000 28 4,000 3,000

9 69 7,000 88 8,000 2,000

10 72 7,000 18 4,000 5,000

11 24 5,000 71 8,000 2,000

12 22 5,000 99 10,000 (3,000)

Estimated balance at the end of 12th week = Rs. (3,000)

62
Highest balance = Rs. 7,000
Average balance during the quarter = 45,000/12 = Rs. 3,750

Learning Curve Theory

Solution 14:
1. Calculation of learning rate using formula for:-
a. Production up to 2nd unit
Units Completion time Cumulative Average
1 10 10 10
2 8.1 18.1 9.05
3 7.4 25.5 8.5
4 7.1 32.6 8.15
Using formula, the usual learning curve model is y = axb
Where,
y = Average time per unit (hours) for x units
a = Time required for first unit (hours)
x = Cumulative number of units produced
b = Learning coefficient i.e., Log (r)/Log (2)
r = Learning rate
The Cumulative Average Time per unit for the first 2 unit
y = 10 × (2) Log (r)/Log (2)
9.05 = 10 × (2) Log (r)/Log (2)
log(9.05) = log(10) + [log(r)/log(2) x log(2)]
0.9566 = 1 + log(r)
log (r) = (0.0434)
r = antilog (-0.0434)
= 90.5%
b. Production up to 4th unit
y = 10 × (4) Log (r)/Log (2)
8.15 = 10 × (4) Log (r)/Log (2)
log(8.15) = log(10) + [{log(r)/log(2)} x {log(2) + log(2)]
log(8.15) = log(10) + [{log(r)/log(2)} x 2{log(2)}]
0.9112 = 1 + [log(r) x 2]
log ( r ) = -0.0888 /2 = -0.0444
r = antilog (-0.0444)

63
 = 90.28%
2. No, the learning rate are slightly different and further we have no information regarding
continuance of the learning process. Let’s assume the learning rate to be 90% which will
continue till production of 15th units.
3. Following are the limitations:-
a. Only four observations have been used, and this might be insufficient to establish an
average learning rate for the production of 15 aircrafts.
b. It is assumed that working methods, equipment and staff will remain constant.
Improvements in working procedures, staff changes or absenteeism might affect the
learning rate.
c. Uncertainty as to when the learning process will stop. If the learning process stops
before the steady-state phase is reached then the assumption that the learning rate will
continue might result in inaccurate estimates.
d. The learning rate may not be constant throughout the process, and the use of an
average learning rate might result in inaccurate estimates for different output levels.
4. Materials, other direct expenses and overheads will remain unchanged irrespective of
whether the aircrafts are completed in normal time (possibly involving penalties) or
working weekends. Overheads appear to be fixed since they are allocated on the basis of
normal working days. Our decision will depend on penalties and overtime costs.
The total time required for 15 units, assuming a 90 per cent learning rate, are as follows:
y = 10 × (15) Log (0.90)/Log (2)
y = 10 × (15) -0.0458/0.3010
y = 10 × (15) -0.1520
log y = log 10 – (0.1520 x log 15) Note: with given log and anti-log values
these steps has to be applied for unit levels
log y = 0.8212
of 14 and 13 as wee.
y = antilog 0.8212
= 6.63
So, total time required for 15 units are (15 x 6.63) = 99.4
Likewise, for 14 units = 14 x [Antilog {log 10 – (0.1520 x log 14)} = 93.7
Likewise, for 13 units = 13 x [Antilog {log 10 – (0.1520 x log 13)} = 88
The contract is for 4 months (therefore 92 working days are available without overtime or
120 days with overtime) and penalties are charged at £10 000 per aircraft late. Thirteen
aircrafts can be delivered within the contract period. To complete 15 aircrafts within the
contract period, it will be necessary to work 7.4 days (99.4 days – 92 days) overtime. If
overtime is not worked, two aircrafts will incur a penalty. Without overtime, the total
labour cost plus penalties will be:
(99.4 days x £2 500 = £248 500) + (2 x £10 000) = £268 500
With overtime, the total labour cost will be:
(92 days x £2 500 = £230 000) + (7.4 days x 5 000) = £267 000

64
 It is assumed that payments can be made for part days only. It is slightly cheaper to work
overtime and avoid the penalty cost. Another possibility is to complete 14 aircrafts using
overtime and deliver 1 aircraft late:
Cost for 14 aircrafts
= (92 days x £2 500) + (1.7 days x £5 000) = £238 500
Cost for 15th aircraft
= (5.7 days x £2 500) + (1 x £10 000) = £ 24 250
Total 262,750
The most profitable alternative is to deliver one aircraft late.

Marginal Costing and Decision-making problems

Solution 15:
Statement Showing Impact on Airline's Profit if Flight GB-022 is discontinued
Contribution Margin lost if the flight is discontinued (588,000)
Less: Flight Costs which can be avoided if the flight is discontinued:
Flight Promotion 28,000
Fuel for Aircraft 238,000
Liability Insurance (1/3 x 1,47,000) 49,000
Salaries, Flight Assistants 31,500
Overnight Costs for Flight Crew and Assistants 12,600 359,100
(228,900)
If Golden Bird Airlines Ltd. goes for discontinuation of flight GB-022, its profit will go down
by 2,28,900.
Following costs are not relevant to the decision:
• Salaries, flight crew - Fixed annual salaries which will not change
• Baggage loading and flight preparation- This is an allocated cost, which will
continue even if the flight is discontinued.

Cost concepts and objectives of Costing systems

Solution 16:
A.
1. The production capacity is 4,100 jaw breakers per month. Therefore, the current
annual relevant range of output is 0 to 4,100 jaw breakers × 12 months = 0 to
49,200 jaw breakers.
2. Current annual fixed manufacturing costs within the relevant range are $1,200 ×
12 = $14,400 for rent and other overhead costs, plus $9,000 ÷ 10 = $900 for
depreciation, totalling $15,300.

65
 The variable costs, the materials, are 30 cents per jaw breaker, or $13,680 ($0.30 per
jaw breaker × 3,800 jaw breakers per month × 12 months) for the year.
3. If demand changes from 3,800 to 7,600 jaw breakers per month, or from 3,800 ×
12 = 45,600 to 7,600 × 12 = 91,200 jaw breakers per year, Sweetum will need a
second machine. Assuming Sweetum buys a second machine identical to the first
machine, it will increase capacity from 4,100 jaw breakers per month to 8,200. The
annual relevant range will be between 4,100 × 12 = 49,200 and 8,200 × 12 =
98,400 jaw breakers.
Assume the second machine costs $9,000 and is depreciated using straight-line
depreciation over 10 years and zero residual value, just like the first machine. This
will add $900 of depreciation per year.
Fixed costs for next year will increase to $16,200 from $15,300 for the current year
+ $900 (because rent and other fixed overhead costs will remain the same at
$14,400). That is, total fixed costs for next year equal $900 (depreciation on first
machine) + $900 (depreciation on second machine) + $14,400 (rent and other fixed
overhead costs).
The variable cost per jaw breaker next year will be 90% × $0.30 = $0.27. Total
variable costs equal $0.27 per jaw breaker × 91,200 jaw breakers = $24,624.
If Sweetum decides to not increase capacity and meet only that amount of demand for
which it has available capacity (4,100 jaw breakers per month or 4,100 × 12 = 49,200
jaw breakers per year), the variable cost per unit will be the same at $0.30 per jaw
breaker. Annual total variable manufacturing costs will increase to $0.30 × 4,100 jaw
breakers per month × 12 months = $14,760. Annual total fixed manufacturing costs
will remain the same, $15,300.
B.
1. Matching each function with its representative cost driver:-
Function Representative Cost Driver
1. Accounting Number of transactions processed
2. Human resources Number of employees
3. Data processing Hours of computer processing unit (CPU)
4. Research and development Number of research scientists
5. Purchasing Number of purchase orders
6. Distribution Number of deliveries made
7. Billing Number of invoices sent
2. Second example of a cost driver for each function
Function Representative Cost Driver
1. Accounting Number of journal entries made
2. Human resources Salaries and wages of employees
3. Data processing Number of computer transactions
4. Research and development Number of new products being developed
5. Purchasing Number of different types of materials purchased
6. Distribution Distance travelled to make deliveries
7. Billing Number of credit sales transactions

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Transportation Problems
Solution 17:
Using VAM and determine the initial basic feasible solution as shown in the Table 1 below:

The transportation cost, according to the above solution is

=5 x 19 + 2 x 12 + 7 x 40 + 3 x 60 + 8 x 10 + 10 x 20 = Rs. 859.
Further, the solution is the basic feasible solution as there are (m+n-1) i.e., 4+3-1 = 6 allocations
in the independent positions.
Now we determine the set of values for each row and each column, the row and column
numbers are computed by means of the unit cost of in the respective occupied cell. We select
U2 and assign a zero value to it. With U = 0, we can identify the values of the remaining
variables in the next relationship as given below:

After the row and column, numbers have been computed the next step is to evaluate the
opportunity cost for each of the unoccupied cells by using the relationship

67
Cost change Cij-(Ui+Vj) as follows: -

Since the opportunity cost in P2 W2 is negative, the current basic feasible solution is not
optimal and can be further improved towards optimality.

Since the unoccupied cell P2 W2 has the largest improvement potential, we trace a close path
or loop that begins with and ends at cell.
Since one of the assigned cells will now be converted into unoccupied cell, we examine the
assigned cell having (-) sign select the one with the least number of units (3 units) here will be
transferred to the new cell & cell P2 W2 will be treated as the occupied cell and the cell P2 W4

68
will be treated as unoccupied cell. The improved feasible solution is given in Table III

The transportation cost, according to the above solution is = 5 x 19 + 2 x 12 + 3 x 30 + 7 x 40

+ 5 x 10 + 13 x 20 = 799, which is less than the initial solution.
To test this solution for further improvement, we recalculate the values of U and V, Thus, first
using occupied cells we have the following equations

New row and column number with second solution is given in table IV.

Now we use the relationship Cost change = Cij – (Ui+Vj) as for the unoccupied cells as follows:
69
From the above analysis, we can see that there is no negative value in the unoccupied cell
therefore the solution given in the table IV is the optimum solution with the transportation cost
of 799.
Thus, saving by optimal scheduling = Rs. 1,000 – Rs. 799 = Rs. 201.

Quantitative Techniques - General concepts

Solution 18:
1. There are a number of advantages in using critical path analysis-
i. It allows for a comprehensive view of the entire project. Because of the sequential and
concurrent relationships, time scheduling becomes very effective. Identifying the
critical activities keeps the executive alert and in a state of preparedness, with
alternative plans ready in case these are needed. Breaking down the project into smaller
components permits better and closer control;
ii. Critical path analysis offers economical and effective system of control based on the
principle of management by exception i.e., need for corrective action arises only in
exceptional situations and in most of other cases, performance is in conformity with the
plans;
iii. It is a dynamic tool of management which calls for constant review, a reformulation of
the network, and finding the current path of relevance and optimum resources
allocation.
2.
Resource Smoothing
It is a network technique used for smoothening peak resource requirement during different
periods of the project network. Under this technique the total project duration is maintained
at the minimum level. For example, if the duration of a project is 15 days, then the project
duration is maintained, but the resources required for completing different activities of a
project are smoothened by utilising floats available on non-critical activities. These non-
critical activities having floats are rescheduled or shifted so that a uniform demand on
resources is achieved. In other words, the constraint in the case of resource smoothing
operation would be on the project duration time. Resource smoothing is a useful technique
or business managers to estimate the total resource requirements for various project
activities.
In resources smoothing, the time-scaled diagram of various activities and their floats (if
any), along with resource requirements are used. The periods of maximum demand for

70
 resources are identified and non-critical activities during these periods are staggered by
rescheduling them according to their floats for balancing the resource requirements.
Resource Levelling
It is also a network technique which is used for reducing the requirement of a particular
resource due to its paucity. The process of resource levelling utilizes the large floats
available on non-critical activities of the project and thus cuts down the demand on the
resource. In resource levelling, the maximum demand of a resource should not exceed the
available limit at any point of time. In order to achieve this, non-critical activities are
rescheduled by utilising their floats. Sometimes, the use of resource levelling may lead to
enlarging the completion time of the project. In other words, in resource levelling,
constraint is on the limit of the resource availability.
3. Steps involved in carrying out Monte Carlo simulation are:
i. Define the problem and select the measure of effectiveness of the problem that might
be inventory shortages per period.
ii. Identify the variables which influence the measure of effectiveness significantly for
example, number of units in inventory.
iii. Determine the proper cumulative probability distribution of each variable selected with
the probability on vertical axis and the values of variables on horizontal axis.
iv. Get a set of random numbers.
v. Consider each random number as a decimal value of the cumulative probability
distribution with the decimal enter the cumulative distribution plot from the vertical
axis. Project this point horizontally, until it intersects cumulative probability
distribution curve. Then project the point of intersection down into the vertical axis.
vi. Then record the value generated into the formula derived from the chosen measure of
effectiveness. Solve and record the value. This value is the measure of effectiveness for
that simulated value. Repeat above steps until sample is large enough for the
satisfaction of the decision maker.
4. The initial solution need not be the same under both methods.
Vogel's Approximation Method (VAM) uses the differences between the minimum and the
next minimum costs for each row and column. This is the penalty or opportunity cost of
not utilising the next best alternative. The highest penalty is given the 1st preference. This
need not be the lowest cost.
For example, if a row has minimum cost as 2 and the next minimum as 3 penalty is 1;
whereas if another row has minimum 4 and next minimum 6, penalty is 2, and this row is
given preference. But Least Cost Method gives preference to the lowest cost cell,
irrespective of the next cost. Solution obtained using Vogel's Approximation Method is
more optimal than Least Cost Method.
Initial solution will be the same only when the maximum penalty and the minimum cost
coincide.

71
Linear Programming
Solution 19:
Unit requirements
Resources Available
Table Chair
Wood (sq. ft.) 30 20 300
Labour (hours) 5 10 110
Unit profit (Rs.) 6 8
Let X1 and X2 be the number of tables and chairs to be manufactured respectively, then the LP
model is given by:
Maximize:
Z = 6X1+ 8X₂
Subject to:
30X1 + 20X2 ≤ 300 - (wood constraint)
5X1 +10 X2 ≤ 110 - (labour hour constraint)
X1≥ 0, X2≥0
Next, we construct the graph by drawing a horizontal and vertical axis, which are represented,
by the x-axis and y-axis, after that, we plot a line for each of the two constraints and the two
non-negativity restrictions. This plotting suggests that the graphical method always starts with
the first quadrant of the graph.
Now the inequalities are graphed taking them as equalities i.e.
30X1 + 20X2 = 300
5X1 +10X2 = 110
Calculate values for equation 30X1 + 20X2 = 300
If X1 0 10
Then X2 15 0
Calculate values for equation 5X1 + 10X2 = 110
If X1 0 22
Then X2 11 0
Thereafter, calculated values are plotted on the graph for both the equations.

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Any combination of values of X1 and X2 which satisfies the given constraints, is called a
'feasible solution’. The area OABC figure satisfied by the constraints is shown as feasible
solution region or space. The coordinates of the points on the corners of the region OABC can
be obtained by solving equations intersecting on these points.
The OABC region (shaded) may contain an infinite number of points, which satisfy the
constraints of the given LP problem. However, it can be proved that the optimal solution of
any LP problem corresponds to the one of the corner points (also called the extreme points) of
the feasible solution region to get an optimal value of the objective function of the given LP
problem.
In our case, value of the objective function on the corner points can be evaluated as follows:-
Coordinates of corner point Objective function Z = 6X1+ 8X₂ Value of Z
O (0,0) 6 (0) + 8 (0) 0
A (10,0) 6 (10) + 8 (0) 60
B (4,9) 6 (4) + 8 (9) 96
C (0,11) 6 (0) + 8 (11) 88
The maximum profit of 96 is obtained at the corner point B (4,9) i.e., X1 = 4 and X2 = 9 which
also satisfy the given constraints. Hence, to maximize profit the company has to produce 4
tables and 9 chairs.

Budget & Budgetary Control

Solution 20:
It appears that IMTCL has been badly hit by the weather – high rain in July and August have led
to a slump in business. Revenue have seen a fall of 18% over the budgeted figure.
Direct Material (most of the fuel) is 21% of the Sales (compared to 12% of budgeted level)
because of hike in fuel price. Variable Overheads are almost same. However, interestingly,
there is a saving of 1,50,000 in Operating Overheads as compared to the budgeted figure
after catering additional Operational Expenses of 22,00,000 (for removal of milky
appearance etc.). Furthermore, there is reduction in Marketing & Administration Cost. The
ratio of Salary to Sales rose to 40% in 2023 from 36% (as budgeted). This appears to be
atypical. Instead, there should be a cut in this ratio due to slump in business.

73
Award of bonus in case of losses is not justified and managers should be held accountable for
their operations. However, they should not be held accountable for the events beyond their
control. A manager cannot control movements in fuel price, yet he/ she is supposed to have the
most information and he/ she is expected to correctly forecast movements in the prices of fuel.
Managers shouldn't be penalized for the uncontrollable events.
Accordingly, in IMTCL, there should be revision in the budget to account
uncontrollable events. Refer Table below
Revised Budgeted Income Statement (’000)
Revenue* 94,833

Less:

Variable Costs-

Direct Material** (Fuel, Lubricants, and Sundries) [19,600/93,500 ×

19,879
94,833]

Direct Labour 33,750

Variable Overheads 6,417

Fixed Costs-

Operating Overheads (Buses, Garage, Salaries) 20,300

Marketing and Administration 10,700

Profit/ (Loss) before taxes 3,787

*10 months revenue; ** at actual price levels

The Revised Profit Margin has come down to 4% as against the Target Profit Margin of 20%.
This clearly indicates that the performance was benchmarked against the higher target. If
original budget figure is used to measure the performance, it will punish employees for the
reason which are beyond their control.
IMTCL is not too far away from Revised Profit Margin. Therefore, at least some bonus may
be considered to be awarded to the employees which may create more employee loyalty and
may be beneficial for long term.
Further, continuous monitoring of Budget Performance (achievement/ failure) in IMTCL is
essential to overcome this situation. This helps to identify where revisions are required in the
budget to account changing conditions, errors, modification to company’s plan etc. Monitoring
of Budget Performance should be the responsibility of the managers in IMTCL. The essence
of the effective monitoring of Budget Performance is that the managers should provide
accurate, relevant, actionable information on time to the appropriate management level so that
budget can give a realistic target to measure the performance.
It is also important to note that at the time of revising the budget, the primary budget as well
as past information should not be ignored as they are the basis for preparing all budgets.

74
 Paper 7
Advanced Taxation

75
Questions
Income Tax
Question No. 1
Suman Jyoti Ltd. deals in the production of the various cosmetic products. F ollowing
information are given for Income Year 2078/79:
Particulars Amount (Rs.)
Sales 2,84,00,000
Other Income 20,00,000
Dividend Income from unlisted non-resident company 5,00,000
Opening Stock 20,00,000
Purchase of Raw Material 1,70,00,000
Closing Stock of Raw Material 15,00,000
Carriage Inward 500,000
Custom Duty Refund (Under Drawback) 200,000
Repair and Maintenance (Allowable) 259,700
Bad Debts Written Off 1,00,000
Loss on Sale of Fixed Assets 1,00,000
Direct Labour 20,00,000
General Overhead cost relating to production 15,00,000
Administrative expenses 25,00,000
Interest on Bank OD 5,00,000
Donation 6,00,000
Depreciation (As per Income Tax Act) 923,000
Fine and penalties for late income tax deposit of FY 2077/78 3,00,000
Additional information:
i) Opening stock consists of damaged goods of Rs. 3,00,000 which was sold for Rs. 1,50,000
inclusive of VAT which in not included in above income. For this Purpose, company has
already obtained the prior approval from respective Tax office for claiming the VAT input.
ii) Market value of closing stock was Rs.12,60,000 only.
iii) Accountant of the company found that some debtors are pending since 2 years and he had
written off that part of debt.
iv) Custom Duty refund relates to duty drawback which is a refund of custom duty through
one window policy. It was included in raw material cost in previous year.
v) Administrative expense includes Rs. 2,00,000 paid to the foreign hotel against the invoice
issued in the name of company which was for foreign family trip of director.
Administrative expenses also include the expenses of Rs. 150,000 having the Invoice date
of 2078/03/31 received by the company on 2078/04/02.
vi) The donation includes Rs. 3,00,000 directly paid to the PM Relief Fund, Rs.100,000 paid
to non-tax-exempt organization and the remaining amount was paid to tax exempt
organization.
vii) Company has collected Rs. 60,000,000 from 500,000 shares at the rate of Rs. 120 each
through initial public offering (IPO). Rs.120 includes share premium of Rs.20 each.

76
viii) The industry is operated in industrial village since 5 years and has employees of total 350
Nepalese of which 210 are female.
ix) Suman Jyoti Ltd. has not submitted any estimated tax returns and has not paid the
instalment Tax. Annual tax return was submitted on end of Ashwin 2079, and Tax were
deposited accordingly on that date.
You are required to ascertain:
a) Taxable income and tax liability of Suman Jyoti Ltd. for Income Year 2078/79.
b) Instalments of tax to be paid by the company in Income Year 2078/79.
c) Fees and Interest as per Income Tax Act, 2058.

Question 2
Nepal Consortium Pvt. Ltd. has the following assets as on Shrawan 1, 2078:
1. Building- 20,000,000,
2. Office Equipment- 500,000,
3. Car Vehicle- 4,200,000 and
4. Plant and Machinery- 2,500,000.
Following additions have been made during income year 2078/79:
SN Assets Acquisition date Purchase price
1. Building 2078/06/04 3,000,000
2. Office Equipment 2078/09/25 300,000
3. Car Vehicle 2078/12/01 5,400,000
4. Plant and Machinery 2079/03/29 1,700,000
The following repair & maintenance expenses have been incurred during income year 2078/79:
SN Assets Expense Expenses Amount
Incurred on
1. Building 2078/09/01 1,234,567
2. Office Equipment 2078/09/01 231,000
3. Car Vehicle 2078/12/01 400,000
4. Plant and Machinery 2079/01/15 700,000
The company sold the following assets during income year 2078/79:
SN Assets Date of selling Amount received
1. Office Equipment 2078/09/01 450,000
2. Plant and Machinery 2079/01/15 320,000
Determine the amount of depreciation, repair, and maintenance expenses allowable under
Income Tax Act, 2058 for the Income year 2078/79.

Question 3
a) Ashirvad Enterprises has earned the following Taxable Income from various countries and
paid the Tax in respective countries as follow:
Sales in India (South Indian) Sale centre 15,00,000 (Tax Paid @ 40%)

77
 Sales In UAE (Abudhabi) Sale centre 20,00,000 (Tax Paid @ 17%)
Further, Ashirvad Enterprises has earned the Taxable income of Rs. 60,00,000 in Nepal.
Ashirvad Enterprises opted couple for Tax Purpose and deposited Rs. 400,000 in CIT.
Calculate the allowable deduction of Tax paid in foreign countries and calculate the total
tax payable in Nepal.
b) Laligurans Micro Finance Ltd. and Kamal Micro Finance Ltd. held their Special Annual
general meeting for merging with each other on 10 Ashadh 2079 and submitting the letter
of intent for merger to IRD on 29 Ashadh 2079. For merge process, Merger committee has
been formed and this merger committee is studying various aspect of merger related issues
present and future, including the impact of tax as per Income Tax Act 2058. As tax adviser,
give your opinion to merger committee on tax implication that may arises due to the merger
of Laligurans Micro Finance Ltd. and Kamal Micro Finance Ltd including implication of
tax on the shareholders and employees of merging company.

Question No.4
a) Inland Revenue Department has assessed the tax of SRS Pvt. Ltd. for the Income Year
2078/79 of Rs. 2,50,00,000. The management of the Company is unable to pay the assessed
tax and asks for your opinion regarding various actions that Inland Revenue Department
can take against them for recovery of the tax amount. Further, management of the company
is also seeking your opinion regarding the provision to pay such tax on instalment basis.
b) Kathmandu Khanepani Ltd. has awarded contract of Management of Water Network of
Kathmandu Valley, contract value Rs.300 million on 2079 Baishakh to International Water
Management, Germany. As per the agreement, the contractor has to deploy its employees
in Kathmandu Valley throughout the contract period of two years. The contractor has no
branch registered in Nepal and Kathmandu Khanepani Ltd. is required to pay to
contractor’s bank account maintained in Germany as per the contract payment terms. What
are the tax implications in this case?

Question 5
SODESH Nepal is registered with Lalitpur District and has taken approval from Inland
Revenue Department as tax exempt entity. The entity has earned following income for the
income year 2078/79.
Please mention the provision of Exempt income of the organization and calculate the Tax
Liabilities as per Income Tax Act, 2058.
SN Particulars Amounts (Rs.)
1. Grant Received from Government 15,00,000
2. Rent Received from Let out the vacant rooms of building 6,00,000
3. Laptop from an Individual person received as gift to the Market Value of
organization the Laptop- Rs.
120000
4. Amount received from the canteen operated in ground floor of the 4,50,000
building
5. Membership Fee Received from members of the organization 3,00,000
6. Interest on deposit received from ABC Bank Ltd. 5,00,000
7. Interest received from other person than Bank 5,00,000

78
Question No.6
Forbix Ltd. was operating a Retirement Fund for its employees obtaining the approval from
Inland Revenue Department on 2077 Shrawan 01. On Ashadh End 2079 IRD informed to
Forbix Ltd. that the approval given for the retirement fund has been withdrawn. Based on the
provision of Income Tax Act, 2058, please calculate the Taxable Income and Tax Liabilities of
Forbix Ltd retirement fund while withdrawing the approval considering the following
information:
SN Particulars Amount (Rs.)
1. Contribution Received in 2077/78 50,00,000
2. Contribution Received in 2078/79 60,00,000
3. Interest Received on Investment in 2077/78 3,00,000
4. Interest Received on Investment in 2078/79 8,00,000
5. Retirement Payment in 2077/78 28,00,000
6. Retirement Payment in 2078/79 30,00,000
7. Operating Expenses of Retirement fund for 2077/78 2,00,000
8. Operating Expenses of Retirement fund for 2078/79 2,20,000

Question No. 7
Explain the followings with relevant provision of Income Tax Act, 2058 and relevant Finance
Act.
i. Deemed disposal of property or liability.
ii. Tax assessment notice
iii. Punishment for submitting false or misleading statement to the Department.
iv. Dividend distributed by controlled foreign entity.

Question No. 8
Answer the following with relevance to the provisions of Income Tax Act.
a) Mrs. Mayuri, a housewife received payment in foreign currency equivalent to Rs.100,000
in her bank account in Baishakh 2079 from YouTube for uploading a dance video in her
personal YouTube Channel. Does this payment attract tax withholding? What is the tax
rate applicable in this kind of income? Does she need to file income tax return for FY
2078/79 if she has only this income in that year?
b) Mr. A, resident individual sold 1000 units of shares of M/S Bigbazaar Company to Mr. B
for Rs.150 per share in FY 2078/79. The cost of those shares to Mr. A was Rs. 100 per
share. M/S Bigbazaar Company is not listed in Securities Board of Nepal. On tax
assessment for FY 2078/79, the tax officer found that the company did not collect the
advance tax on such disposal of shares. The tax officer collected the advance tax along with
the interest to the final order. The company in turn demanded the whole advance tax amount
along with interest with Mr. A. He refuses to pay the amount contending that it was not his
mistake and only the company is liable to pay such amount. Comment.

79
Question No. 9
Mr Bikash Pandit is working in Hamro Telecom since last 10 years and he has the following
income for Income Year 2078/79:
SN Particulars Amount
Rs.
1 Basic Salary p.m. 105,000
2 Grade p.m. 10,000
3 Dashain Allowances (One Month’s Salary)
4 Medical Allowances (One Month’s Salary)
5 Leave Encashment (Two Months’ Salary)
6 PF (10% of Salary) (Employer deducted the same amount from the
employee and deposited in Provident Fund)
7 Uniform Allowances 25,000
8 Gratuity (Employer deposited 8.83% of Monthly Salary in Provident
Fund opening the account of Bikash Pandit)
9 Tiffin Allowances 115,000
10 Special Allowances 300,000
11 Internet Allowances 24,000
Additional Information:
1) Employer has arranged a Cook facility with maximum salary of Rs. 20,000 P.M. The
same has been paid to Mr. Bikash Pandit and Mr. Bikash Pandit has paid 15,000 P.M.
salary to the Cook.
2) Employer has provided a Housing Facility to Mr. Bikash Pandit.
3) Employer has purchased a Vehicle worth Rs. 40,00,000 in the name of Mr. Bikash
Pandit and Shown the amount as Receivable from him. Employer deducted Rs. 88,000
monthly from receivable balances without deducting his Salary receivable.
4) Employer has the policy to buy Life Insurance Policy of Rs. 10,00,000 per Employee
and Paid Rs. 50,000 Premium on behalf of Employee.
5) He has earned Rs. 100,000 from TU for Checking the Paper of bachelor’s level.
6) Rental income from his house Rs. 25,000 P.M.
7) He has earned the Dividend of Rs. 100,000 from public companies on which he has
Invested Rs. 10,00,000 and Rs. 50,000 from Mutual Fund on which he has invested Rs.
5,00,000.
8) He has sold the Share of GSN Bank ltd for Rs. 3,00,000 on 2079/03/12 which he has
purchased on 2079/02/15 for Rs. 1,50,000. Further he has sold the Share of Laxmi
Hydropower Co. Ltd for Rs. 7,00,000 on 2079/03/10 which he has purchased on
2078/01/10 for Rs. 4,00,000. Both the shares were purchased from the NEPSE market.
9) He has operated a Proprietorship Trading business and suffered a Los of Rs. 5,00,000
during the year.
Calculate:
a) Assessable Income of Mr. Bikash Pandit,
b) Tax Labilities if he opted couple. and

80
Question No. 10
Ms. Aditi Wasti was working as an accountant in Famous Company Ltd. till 2079 Ashwin end.
She joined Himalayan Insurance Ltd. from 1st Kartik 2079. She received following salary and
benefits from the Famous Company are:
Basic Salary Rs. 30,000 per month
Communication Allowance Rs. 2,000 per month
Tiffin Allowance Rs. 6,000 per month
Outstation Allowance Rs. 5,000 per month
Dashain Allowance Rs. 25,000
Leave Encashment Rs. 20,000
The Salary & benefits from Himalayan Insurance Ltd. are as follows:
Basic Salary Rs. 60,000 per month
Retention Allowance Rs.10,000 per month
Accommodation was provided to her in company quarter.
Company has purchased Group Accidental Insurance Policy for all its employees. The
insurance premium paid per employee is Rs.5,000.
Insurance Company has given insurance policy of Rs. 1,500,000 as per company’s policy. The
premium paid for that year is Rs.45,000.
Company also has policy of providing interest free loan of Rs. 800,000 to its employees after
six months of joining office. She will also avail the loan.
Company contributes 10% of basic salary to Provident Fund out of 20% deposited. She had
started to deposit Rs.10,000 each month to CIT from Mangsir 2079.
The withholding tax deducted and deposited by Famous Company was Rs.1,600. You are
required to calculate the tax to be deducted by Himalayan Insurance Company for the income
year 2079/80. Also suggest if she needs to file income tax return for this Income Year as per
Income Tax Act 2058.

Ethics and professional conduct in providing taxation services

Question No. 11
You have been approached by one of your audit clients for providing assistance in resolving
the tax disputes pending at IRD under administrative review. What are the threats that may
affect you as an auditor and safeguarding measures can be applied? Explain according to the
relevant provisions of ICAN's Handbook of the Code of Ethics for Professional Accountants,
2018.

Double tax avoidance agreement (DTAA) and international taxation

Question No.12
Global Tech Ltd., Singapore holds 40% equity in Trident Pvt. Ltd., Nepal. Trident Pvt. Ltd.
develops software and provides related support services. During FY 2078/79, Trident Pvt. Ltd.
issued invoice of 300-man hours at the rate of 800 per man hour for the software and support

81
services provided to Global Tech Ltd. The total direct and indirect cost incurred for the services
amounted to Rs.200,000. For the similar level of manpower, Trident Pvt. Ltd. issued invoice
to Nepal Distribution Ltd., Nepal at the rate of 1200 per man hour and earned gross profit of
50% on its cost.
The transactions of Global Tech Ltd. and Nepal Distribution Ltd. are comparable subject to the
following differences:
i. While Trident Pvt. Ltd. also derives technological support from Global Tech Ltd.,
there is no such support from the Nepal Distribution Ltd. The value of such
technological support received may be put at 10% of normal gross profits.
ii. Global Tech Ltd. gives business in large volumes. Trident Pvt. Ltd. offered quantity
discount to Global Tech Ltd. of 10% of the normal gross profits.
iii. In case of rendering services to Global Tech Ltd., Trident Pvt. Ltd. neither runs any
risk nor incurs marketing costs. While in case of services to Nepal Distribution Ltd.,
Trident Pvt. Ltd. has to take all the risks and costs associated with marketing which
is 15% of the normal gross profits.
iv. Trident Pvt. Ltd. gives one month credit to Global Tech Ltd. not to Nepal
Distribution Ltd. The cost of providing such credit may be valued at 3% of the
normal gross profits.
Compute the arm length price under cost plus method.

Value Added Tax Act, 2052 and Rules 2053

Question No. 13
a) Tax officer found the information from the income tax return that a company is dealing in
taxable goods without getting registered in VAT. Explain the provisions regarding powers
of inspection and audit in such case as per VAT Act and Rules.
b) For what offences, tax officer may impose cent percent fine of the amount of tax payable
as provided in VAT Act?

Question No. 14
a) Saraswoti Spinning Mills imports the Yarns as raw material from different countries and
produces various synthetic threads with value addition of 15%. The company has sales in
domestic market as well as international market. The total sales and export details are as
follows:
Particulars Period Amount (Rs.)
Total Sales 2078 Magh to 2079 Ashadh 50 million
2079 Shrawan to Poush 80 million
Export 2078 Magh to 2079 Ashadh 20 million
2079 Shrawan to Poush 35 million
The company seeks your opinion based on Value Added Tax Act, 2052 whether the
Company gets bank guarantee facility for importing raw materials in Magh 2079? Is that
facility available in import of raw materials for production for domestic sales?

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b) Kalika Pvt. Ltd. and Bhadrakali Pvt. Ltd entered into a joint venture agreement for carrying
a project of Nepal Electricity Authority. Kalika-Bhadrakali JV formed as such got registered
in VAT for the period of 5 years. However, the JV did not submit the VAT return and VAT
payable amount since a year. The tax officer sent the notice to both the JV partners to deposit
the outstanding VAT. The JV partners contended that they are not responsible to pay the
VAT as the JV is separate entity. Give your opinion considering the provisions of Value
Added Tax Act, 2052.

Question No. 15
Tax officer conducted assessment of Shikhar Industries for F.Y.2076/77 and issued the notice
to deposit the additional VAT and interest thereon on various five cases as below:
Cases VAT amount demanded
1 200,000
2 500,000
3 300,000
4 650,000
5 150,000
Shikhar Industries accepted cases 1 and 5 but was dissatisfied with cases 2, 3 and 4. So the
company filed for administrative review against such decision of tax officer. The Director
General decided in favour of the company regarding case 3 but decided against regarding
case 2 and 5. The company has now decided to appeal to Revenue Tribunal for case 2 and
5.
i. Calculate the deposit amount kept for Administrative Review.
ii. Explain provision for application to Revenue tribunal and calculate deposit amount
required for it.

Question No. 16
M/S Bhanumati Traders deals with both taxable & non-taxable goods. The transactions of
company for the month of Poush, Magh and Falgun 2079 are as follows:
Particulars Poush Magh Falgun
Total sales 6,000,000 6,500,000 7,000,000
Non- taxable sales (%) 15% 10% 15%
Total Purchase of trading goods 5,000,000 6,000,000 6,000,000
Non-taxable purchase (%) 10% 12% 10%
Purchase of office equipment 904,000
Purchase of Delivery Van 1,243,000
Petrol Expenses for office car 10,000 15,000 20,000
Diesel Expenses for delivery Van 5,000
Office picnic expenses 85000
Consultancy fee from India 650,000
Salary Expenses 400,000 500,000 500,000
Wages 50,000 70,000 80,000
Purchase of Land for godown 2,500,000
Figures except purchase of office equipment and Delivery Van are exclusive of VAT. There is
opening VAT credit of Rs.25,000 since Kartik 2079.

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Required:
i. Compute VAT Receivable/(Payable) for each month as per the provision of VAT, Act
2052.
ii. How much refund ABC limited can claim while of filling vat return of Falgun, 2079.

Excise Act, 2058 and Excise Rules 2059

Question No. 17
a) What can be set off from the excise duty collected on sales of excisable goods and under
what conditions per Excise Act and Rules?
b) What are the remedies available to taxpayer unsatisfied with order of excise officer
imposing excise duty on assessment? Discuss the process under excise act and rules.

Question No. 18
a) A distillery producing 25 UP, 30 UP and 70 UP liquors lost 60 quintals of molasses due to
negligence of distillery in arrangement for protection of molasses. What shall the Excise
officer do in such case? Assume 1 quintal of molasses produce 19 litres of ENA.
b) Mention whether excise duty is leviable in following cases:
i. UNDP had imported two motor vehicles (produced in 2015 AD) in the name of an ABC
project under full tariff facility. Now the project has been completed and it wants to
transfer those vehicles to a community school with the approval of Ministry of Finance.
Whether excise duty is levied in such transfer?
ii. An ambassador had imported a luxury car for personal use under partial customs tariff
facility in 2016 AD. After the death of ambassador in 2022, his wife sold the car to a
businessman. Whether excise duty is levied in such transfer?
iii. A government organization has obtained approval from Ministry of Finance to scrap
and cancel the registration of all the vehicles which are more than 20 years old from the
year of production such that it cannot be re-used. Whether excise duty is levied on those
vehicles?
iv. XYZ Industry produces excise taxable products using 95% of local scrap materials.
Whether excise duty is levied on such products?

Customs Duty
Question No. 19
a) Mention applicability of custom duty in following cases:
i. ABC contractor registered in Nepal wants to take machinery and equipment to India
for execution of an international contract awarded to it in India.
ii. Mr. Som wants to take chassis which has been imported a month ago to India for the
purpose of building the body of bus.
b) Explain the provision of partial clearance as per custom act and rules?

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Question No. 20
a) AK Industries imported a major raw material for its new product from China. On arrival of
goods at Customs office, the Customs officer examined the declaration form and also
carried out the physical inspection. However, the customs officer declared that the goods
had not been classified correctly as per the recent fiscal act and reclassified the goods under
another Harmonic group. Due to this, the importer had to pay higher rate of custom duty.
But the importer is not satisfied with the reclassification as the importer contends that the
classification is based on international practice. Can the Custom Officer reclassify the
category of imported goods? What remedy does the importer have under custom act?
b) Arunima Trade Concern imported various food items from Bangladesh worth Rs.30 million
after making payment through LC. However, after release of goods from customs office,
the proprietor found that the items were date expired items. The proprietor complained the
exporter regarding the consignment, on reply the exporter committed to send the new
consignment as replacement or else refund the whole money and to return the goods. The
proprietor is confused regarding following matters:
i. Does the proprietor need to pay custom duty to resend the goods? Is there any time limit
to send back the consignment?
ii. If the replacement could not be sent, within what time the payment should be refunded?
iii. If the exporter sends the replacement consignment before resending of earlier
consignment by the proprietor, can the proprietor get the refund of custom duty paid on
earlier consignment?
c) Haathi Cements, a cement manufacturing industry, has sales of Rs. 100 crores in last fiscal
year. Out of this, 60 crores of sales are in Indian market and rest in local market. The
industry is intending to apply for bonded warehouse facility. Can the industry avail such
facility? Is yes, how can the industry get the license and what are the facilities granted to
the licensee of the bonded warehouse under custom act and rule?

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ANSWERS
Income Tax
Answer No. 1
a) Calculation of Taxable Income and Tax Liabilities of Suman Jyoti Ltd. for Income Year
2078/79:
Particulars Note Section Amount
Inclusions:
Sales 1 7(2) 28,532,743.36
Other Income 7(2) 200,000.00
Dividend income 2 7(3) & 92 500,000.00
Custom Duty Refund (Under Drawback) 7 7(2) 200,000.00
Share Premium 8 -
Total Inclusion 29,232,743.36

Deductions:
Interest expense 14 500,000.00
Cost of Trading Stock 3 15 21,707,256.64
Repairs and improvement 16 259,700.00
Depreciation 19 923,000.00
Administrative expenses 4 13 2,150,000.00
Bad Debts written off 5 21 -
Penalties for late Income Tax deposit 6 21 -
Total Deduction 25,439,956.64
Assessable Income from Business 3,792,786.72

Calculation of Taxable Income

Particulars Note Section Amount
Assessable Income from Business 3,792,786.72
Less: Allowable Reductions
Donation to PM Relief Fund 9 12kha (300,000.00)
Donation to tax exempt entities 9 12 (100,000.00)
Lower of:
Actual amount-200000
5% of Adjusted Taxable
Income*5%=189639.34
Limit-1,00,000
Taxable Income 3,392,786.72
Calculation of Taxable Liability
Particulars Amount
Taxable income 3,392,786.72

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 Tax Rate (Note 10) 14.4%
Tax 488,561.29
b) Calculation of Instalments to be paid by Suman Jyoti Ltd:
First Instalment Second Third Instalment
Particulars 40% Instalment 70% 100%

Instalment amount 195,424.52 341,993 488,561

Amount to be deposited 195,424.52 146,568.39 146,568.39
c) Calculation of Fees and Interest as per Income Tax Act, 2058
First Second Third
Instalment Instalment Instalment
Particulars 40% 70% 100%
Instalment amount 195,424.52 341,993 488,561
Minimum Instalment to be paid (90%) 175,882.06 307,793.61 439,705.16
Instalment paid - - -
Amount subject to interest 175,882.06 307,793.61 439,705.16
Interest applicable month 3 3 3
Interest amount 6,595.58 11,542.26 16,488.94
Total Interest as per sec 118 34,626.78
Fees As per Sec 117 for not submitting
estimated tax return 5,000.00
Working Notes
1. Sales
Particulars Amount Remarks
Sales 28,400,000.00
Add: Sales of damaged goods (excluding VAT) 132,743.36 =150000/1.13
Total Sales 28,532,743.36
VAT are refundable duties; it does not form part of sales income. Additionally, the sales figure
does not include sales of scrap which needs to be included in sales income.
2. Dividend received either from listed or unlisted non-resident company are taxable income.
Hence, such incomes are included while ascertaining taxable income.
3. Calculation of cost of goods sold:
Particulars Amount
Opening Stock (less damaged goods of 200,000) 1,700,000.00
Add: Loss on Sale (300000-132743.4) 167,256.64
Add: Purchase of Raw Material 17,000,000.00
Add: Carriage Inward 500,000.00
Add: Overhead Cost 1,500,000.00
Add: Direct Labor 2,000,000.00
Less: Closing Stock* (1,260,000.00)
Cost of Trading Stock 21,607,256.64
*Closing stock is valued at cost or market value whichever is lower.
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4. Administrative Expenses
Particulars Amount Note
Administrative expense 2,500,000.00
Less: Personal expenses (200,000.00) 4.1
Less: Prior Period Expenses. (150,000.00) 4.2
Allowable administrative expense 2,150,000.00
4.1. Even if the invoice is issued in the name of company, personal nature expenses are
disallowed under section 21 of Income Tax Act, 2058.
4.2 Expenses not pertaining to the Income Year is not allowed for deduction in that year as
per section 13.
5. Bad debts written off is not allowed for deduction assuming that the necessary procedures
for the collection of debt is not followed sufficiently.
6. Fine and penalties in connection with tax are not allowed for deduction under section 21 of
Income Tax act, 2058.
7. As Duty paid was included in Raw Material Cost Earlier, it has to be included in Income
now.
8. Share Premium shall be transferred to Capital Reserve and thus it is not an income.
Question has not provided the information about share issue expenses but if the same would
have been provided such expenses would have been adjusted with premium amount.
9. As per the section 12Kha of Income Tax Act, 2058, donation made to the PM Relief fund
are allowed for reduction. As per section 12, Actual amount, 5% of Assessable Income or
Rs. 1,00,000 whichever is lower is allowed for deduction for donation made to tax exempt
organization.
10. Calculation of Tax Rate
Option-I option-II
Corporate Tax Rate 25% Corporate Tax Rate 25%

Sec 11 (2Kha) @ 20% 5% Sec 11 (2 Kha) @ 20% 5%

Applicable Tax Rate 20% Applicable Tax Rate 20%
Sec 11(3) (ka) @ 80%
Sec 11(3da) concession @25% 5% 5.6%
applicable & 10% rebate
Tax Rate 15% 14.40%
As per section 11(5): The person availing two or more than two concession option has select
any one from amongst the option. In this regard, as the tax rate is lower in option II, company
selects option II.
Relevant Provisions
1. As per section 11 (2kha) (kha): Special Industries operated throughout the year are entitled
for concession of 20% on applicable tax rate.
2. As per section 11 (3) (Ka): Special Industries employing 300 or more than 300 Nepalese
Citizens are allowed to pay only 80 percent of tax liability. Additional 10% rebate is
provided in tax liability if such industry has employed more than 100 Nepalese Citizens
including 1/3rd of such staffs amongst Women, Dalit & Disabled persons.

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 3. As per section 11 (3Da): Special industry established and operated on industrial region or
industrial village shall have concession of 50% in applicable tax rate for 3 years and
concession of 25 percent in applicable tax rate upto next five years from the date of
commencement.

Answer No. 2
Calculation of Allowable Depreciation and Repair and Maintenance expenses of Nepal
Consortium Pvt. Ltd. for Income Year 2078/79
Office Plant &
Particulars Building Equipment Car Vehicle Machinery Total
Pool A B C D
Rate of Dep 5% 25% 20% 15%
Opening
Balance 20,000,000.00 500,000.00 4,200,000.00 2,500,000.00 27,200,000.00
Purchase
(2078 Shrawan
to Poush end) 3,000,000.00 300,000.00 - - 3,300,000.00
Purchase (2078
Magh to
Chaitra End) - - 5,400,000.00 - 5,400,000.00
Purchase (2079
Baishakh to
Ashadh) - - - 1,700,000.00 1,700,000.00
Total
Absorbed
Addition 3,000,000.00 300,000.00 3,600,000.00 566,666.67 7,466,666.67
Total
Unabsorbed
Addition - - 1,800,000.00 1,133,333.33 2,933,333.33
Disposal of
Assets - (450,000.00) (320,000.00)
Depreciation
base 23,000,000.00 350,000.00 7,800,000.00 2,746,666.67 33,896,666.67

Depreciation 1,150,000.00 87,500.00 1,560,000.00 412,000.00 3,209,500.00

WDV 21,850,000.00 262,500.00 8,040,000.00 3,468,000.00 33,620,500.00

Allowable
Repair &
Maintenance 1,234,567.00 24,500.00 400,000.00 192,266.67 1,851,333.67
Lower of: -
Actual 1,234,567.00 231,000.00 400,000.00 700,000.00 2,565,567.00
7 % of
Depreciation
base 1,610,000.00 24,500.00 546,000.00 192,266.67 2,372,766.67

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Answer No. 3
a)
SN Particulars Amounts
1. Income from the activities in Nepal 60,00,000
2. Income from the India Sale Centre 15,00,000
3. Income from UAE Sale Centre 20,00,000
4. Assessable Income 95,00,000
Less: Contribution in Approved retirement fund (3,00,000)
Higher of:
i) Actual-4,00,000
ii) 1/3 of Income-3,166,667 or
iii) 3,00,000
5. Taxable Income 92,00,000
6. Calculation of Tax (Before Foreign Tax Credit)
1st 4,50,000- 0%=0 29,97,000
Next 1,00,000- 10%=10,000
Next 2,00,000- 20%=20,000
Next 12,50,000- 30%=375000
Remaining 72,00,000- 36%=25,92,000
7. Less: Foreign Tax Credit:
Paid in India (488,550)
(Carried forward for next year-111450)
Paid In UAE (3,40,000)
8 Net Tax Liabilities for the year 21,68,450
Calculation of Foreign Tax Credit:
Average rate of Tax= Total Tax before Foreign Tax Credit/Taxable Income
= 29,97,000/92,00,000=32.57%
Foreign Tax Credit for India = 15,00,000*32.57%=488550 (Actual-6,00,000)
Foreign Tax Credit for UAE = 20,00,000*32.57%=651400 (Actual-3,40,000)
b) As per Income Tax Act 2058, sections 39, 40, 47 and 47Ka of the act need to referred for
tax implication in merger of Laligurans Micro Finance Ltd. and Kamal Micro Finance Ltd
As per section 40(1) of Income Tax Act 2058, when the asset of merging company is
transferred to New Company, the merging company is said to have disposed-off its assets
Similarly when the liabilities of merging company are transferred to New Company, the
merging company is said to have disposed-off its liabilities as per Section 40(2) of the Act.
In the process of merger, the assets and liabilities of the merging company will be
transferred to the New Company.
According to Section 47Ka, in the case of merger or acquisition of entities of the same
nature carrying on banking and financial business or insurance business, the provisions of
clauses (a), (b), (d), (e), (f) and (g) of sub-section (2) of Section 57 and sub-section (3) of
the same Section shall not apply. This implies the New Company formed after merger of
Laligurans Micro Finance Ltd. and Kamal Micro Finance Ltd being financial institution of
the same nature is allowed to:

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 • deduct interest incurred by that entity prior to the change in ownership and carried
forward pursuant to sub-section (3) of Section 14,
• deduct the loss suffered by that entity prior to the change in ownership, pursuant to
Section 20,
• To make adjustment pursuant to sub-section (4) of Section 24, if it has been
calculated for any amount or expenses pursuant to clause (a) of sub-section ( 4) of
Section 24 prior to the change in ownership, and correction has been made on that
amount or expenses pursuant to sub-section (4) of Section 24 after the change in
ownership,
• To make adjustment pursuant to sub-section (1) of Section 25, if any amount has
been calculated pursuant to clause (b) of sub-section (1) of Section 25 prior to the
change in ownership and the right to receive that amount has been relinquished or
in the event of that being a debt claim, such person has written off such amount as
a bad debt, after the change in ownership,
• To subtract, pursuant to Section 36, the loss suffered in disposing any property or
liability prior to the change in ownership from the income earned from the disposal
of the property or liability after the change in ownership,
Provided that if there remains any loss of the entity not in existence due to merger which
could not be deducted, such loss shall be deducted on pro rata in the upcoming seven years.
If the entity so deducting the loss in equal instalment is re-apportioned prior to the
deduction of the whole loss, tax shall be paid in amount deducted for such loss at the rate
of tax prevailing in the fiscal year in which merger or acquisition took place.
If the property and liability are disposed upon the merger of the entities pursuant to sub-
section (1), it shall be as follows:
(a) In the case of stock-in-trade and business assets, -
(1) Amount equal to net expenses for property immediately before the disposal shall be
deemed to have been received by such person for such disposal, and
(2) Amount equal to that mentioned in sub-clause (1) shall be deemed to have been
spent by the person acquiring property,
(b) In case of disposal of depreciable property, -
(1) Amount equal to the remaining value of the group of descending system pursuant
to Section 4 of Schedule-4 at the time of disposal shall be deemed to have been
received for such disposal, and
(2) Amount equal to that mentioned in sub-clause (1) shall be deemed to have been
spent by the person acquiring property.
(c) In case of disposal of liability, -
(1) Amount equal to the market value immediately before the disposal or to the net
income of liability, whichever is lesser, shall be deemed to have been spent by that
person for such disposal, and
(2) Amount equal to that mentioned in sub-clause (1) shall be deemed to have been
received by the person bearing liability as result of bearing such liability.
The entity amalgamating the business, or the entity being amalgamated shall, in computing
the cost of property and liability, compute only the cost of the property and liability

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 maintained at the time of operating such amalgamated business (before merger or
acquisition) by the amalgamated entity pursuant to above clauses.

Regarding tax implication to shareholders, the shareholders of the new company on

disposing the shares received in exchange for the shares held in the merging companies,
within two years of such merger, no capital gain tax shall be levied in the gain earned from
such disposed shares. If the merged company is able to declare a dividend for two years
from the date of merger to the shareholders who were the shareholders of the merging
companies at the time of merger, no dividend tax is payable on the same.
Regarding tax implication on employees, in the case of additional lump sum payment to be
made for the purpose of granting retirement in a group to the employees working in the
entity disposed upon being amalgamated or the new company post the merger, tax
deduction shall be made from the payment by giving exemption of fifty percent of the rate
by which tax has to be deducted from the retirement payment (except the payment to be
made through retirement fund or as mentioned in the terms of conditions of the employee).
Both the companies need to complete the merger process within Ashadh end 2080.

Answer No. 4
a) Income tax Act, 2058 has mentioned various provisions related to collection of taxes due
to pay the Government. Some of the actions that Income Tax Department can take against
SRS Pvt. Ltd. is as below:
a) Lien over property of the taxpayer u/s 104: Section 104 of the Income Tax Act, 2058
provides that Government of Nepal will have lien over the property of the person who
has not paid tax within the stipulated time to pay tax. To claim lien on such property,
IRD should issue the notice mentioning the following details to the Tax defaulter.
i) Details of the claimed assets,
ii) Claimed amount,
iii) Tax related with such assets, and
iv) Other matters, if any.
b) Auction of property of the taxpayer u/s 105: Section 105 of the Income Tax Act, 2058
provides that Government of Nepal can auction the lien property of taxpayer who has
not paid tax. IRD should issue the notice of auction of assets to the Tax defaulter. The
notice as per section 105 can also be issued with the notice as per section 104.
c) Travel ban to foreign countries u/s 106: Section 106 of the Income Tax Act, 2058
provides that IRD, giving the information to the respective authorities, can impose
travel ban on the taxpayer who has not paid tax to restrict him/her from leaving the
country.
d) Recovery from receiver (like liquidator) u/s 108: Section 108 of the Income Tax Act,
2058 provides that Government of Nepal can recover tax amount from the Receiver
(like: liquidator) of the Person.
e) Recovery from a person who has to pay to the Taxpayer u/s 109: Section 109 of the
Income Tax Act, 2058 provides that Government of Nepal can recover tax amount from
a person who is liable to pay to taxpayer who has not paid tax.

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 f) Recovery of tax from the agent of non-resident person u/s 110: Section 110 of the
Income Tax Act, 2058 provides that the Government of Nepal can recover the amount
of tax from the agent of non-resident person, if a non-resident person in arrear of tax
does not pay tax within the due date.

Section 110A of the Income Tax Act, 2058 provides the facility of paying tax amount on
instalment basis. However, for availing the facility of paying tax on instalment basis, the
taxpayer has to make an application prior to the institution of the case pursuant to Section
111. In that case, tax officer can allow payment of tax on instalment, giving a reasonable
time-limit.
b) Section 2(KaNga) defines the resident person that also includes a foreign permanent
establishment of a non-resident person situated in Nepal. Further, section 2(Kada) defines
permanent establishment that also including the place: "one or more than one place in any
country where any person has delivered technical, professional or consultancy service
through an employee or in any other manner for more than ninety days at one or several
times in a period of any twelve months". As per this definition, since the period of service
according to contract in Nepal is more than 183 days, there is Permanent Establishment of
the contractor International Water Management in Nepal. Even if the contractor has not
registered branch in Nepal, it shall register PE in Nepal and the PE shall issue the invoice.
The payer Kathmandu Khanepani Ltd shall withhold tax @1.5% of payment. The PE shall
compute corporate tax on its income and pay tax @25%.
In case any foreign permanent establishment repatriates its income to its head office or
home office or similar unit, then the repatriated income is to be taxed at 5% as tax on
distribution by a resident company. PE shall pay 5% repatriation tax while repatriating
income from Nepal.

Answer No. 5
As per section 10 (Chha) of Income Tax Act, 2058, following incomes of the exempted
organization are entitled to tax exemption:
1. Donation, gift,
2. Other contributions directly related with an organization entitled to exemption as
referred to in clause (d) of Section 2 without having consideration or without hoping
for such contribution.
Based on the above provision, following Incomes of SODESH Nepal are exempted from
Income tax:
SN Particulars Amounts (Rs.)
1. Grant Received from Government 15,00,000
2. Membership Fee Received from members of the organization 3,00,000
3. Laptop from an Individual person received as gift to the Market Value of
organization the Laptop- Rs.
120000
Further, followings are the Assessable Income and Tax Liabilities of SODESH Nepal:
SN Particulars Amounts (Rs.)
1. Rent Received from Let out the vacant rooms of building 6,00,000

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 2. Amount received from the canteen operated in ground floor of the 4,50,000
building
3. Interest on deposit received from ABC Bank Ltd. (Note 1) -
4. Interest received from other person than Bank 5,00,000
Total Assessable Income 15,50,000
Rate of Income Tax 25%
Income Tax Liabilities 3,87,500
Note 1: As per section 92(1)(Nga) of Income Tax Act, 2058, the Interest received by exempted
entities from the Bank, Financial Institution or other Entities issuing Debenture or Listed
entities as per the prevailing Laws will be final withholding Income. Hence, Interest received
by SODESH Nepal from ABC Bank Ltd has not been included in assessable income. Further,
Interest received from other person than bank is assumed to be received from the person except
mentioned in section 92(1)(Nga) of Income Tax Act, 2058.

Answer No. 6
As per section 64(3) of income tax Act, 2058, assessable income and tax liabilities of Forbix
Ltd. has been calculated as follows:
SN Particulars Amount (Rs.)
A. Inclusions
1. Contribution Received in 2077/78 50,00,000
2. Contribution Received in 2078/79 60,00,000
3. Interest Received on Investment in 2077/78 3,00,000
4. Interest Received on Investment in 2078/79 8,00,000
Total 1,21,00,000
B. Deductions
5. Retirement Payment in 2077/78 28,00,000
6. Retirement Payment in 2078/79 30,00,000
7. Operating Expenses of Retirement fund for 2077/78 2,00,000
8. Operating Expenses of Retirement fund for 2078/79 2,20,000
Total 62,20,000
Total Taxable Income 58,80,000
Income Tax Rate 25%
Income Tax Liabilities 14,70,000

Answer No. 7
i. As per Section 40 of the Income Tax Act, if the ownership of any person over any property
ceases, he shall be deemed to have disposed that property. If the burden of liability of any
person ceases, he shall be deemed to have disposed that liability. However, any person shall
be deemed to have disposed any property or liability in the following circumstances:
(a) In respect of an individual, immediately before the death of that person,
(b) In respect of any property, if the sum of the incomings for that property exceeds the
sum of the outgoings for that property,
(c) In respect of any property subject to debt claim, -

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 (1) If it has become a bad debt as per the standards as prescribed in respect of a debt
claim of a bank or financial institution, and
(2) If, in any other circumstance, that person has reasonably believed the debt claim as
non-recoverable.
Provided that the person has to have already pursued all proper measures to recover that
debt claim.
(d) If any person has started using business assets, non-business taxable assets, depreciable
property or stock in-trade in a manner to alter the type thereof, immediately before the
use of the altered form of that property,
(e) In the circumstances referred to in Section 57 in respect of any entity, and
(f) Immediately before that person has become a non-resident person, except the land or
building situated in Nepal.
ii. Section 102 of the income tax act provides for tax assessment notice. Accordingly, the
Department shall give the person, whose tax is assessed, a written notice of tax assessment
made pursuant to sub-section (2) of Section 100 i.e. jeopardy assessment or Section 101
i.e. amended tax assessment setting out the following matters:
(a) The assessed tax to be paid and due and payable by the person mentioned in clauses (a)
and (b) of Section 3 for the income year or period related with assessment of tax, (b)
The method of computation of tax in the tax assessment as mentioned in clause (a),
(c) The reason why the Department has to assess the tax,
(d) The time for payment of the assessed tax due and payable, and
(e) The time, place and mode for making a petition if one is not satisfied with the assessment
of tax.
iii. Section 124 of the Income Tax Act has made provision of punishment to one who submits
false or misleading statement. According to its explanation part, any information or
statement submitted to the Department means any statement/details submitted to the
Department or the officer authorized by the Department in the course of complying with
the obligation under this Act in writing and the statement/details submitted as follows:
(a) Application, notice, details, complaint, statement, or other documents deposited,
prepared, provided or submitted in accordance with this Act,
(b) Document submitted to the Department or any officer of the Department,
(c) Answers to the questions asked by the department or any officer to any person, or
(d) Information provided by any person, having reasonable information of the details to be
provided, to the Department or any officer through any other person.
According the provision of the Act, if any information or statement submitted by any person
to the Department is false or misleading because of submission with intention or
recklessness or that information becomes misleading since such person has not mentioned
information of any particular matter or thing in the statement in respect of such subject,
such person shall be punished with a fine of a sum from forty thousand rupees to one
hundred sixty thousand rupees or with imprisonment for a term from six months to two
years or with both punishments.
iv. According to section 67 (1) of the Income Tax Act, if any entity distributes dividends of
the associated income earned in any income year as a controlled foreign entity at the end

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 of the income year, it shall be deemed to have distributed dividends on proportion to its
beneficiaries, as follows:
(a) As per the rights of the beneficiaries to the income in distributing dividends, or
(b) If the rights are not certain in a reasonable manner, as per the method which the
Department thinks proper according to the circumstance.
According to section 67 (2), Tax shall not be levied on the dividends distributed by an entity
as a controlled foreign entity at the end of any income year except those distributed pursuant
to subsection (1).
According to section 67 (3), following shall be deemed to have occurred in respect of the
dividends distributed by a controlled foreign entity pursuant to sub-section (1) to the
beneficiaries associated with that entity at the time of distribution of dividends:
(a) Having the characteristic equivalent to the type and source of the associate income of
that entity, and
(b) Having distributed proportionately out of each type and source the associate income of
that entity.
The dividends distributed to the beneficiary enjoying tax exemption pursuant to sub-section
(2) at the time of distribution has to be included in the income for any property or liability
of the recipient beneficiary as an interest in the entity making such distribution.

Answer No.8
a) As per the provision of sub-section (6Gha) of section 95Ka, any individual resident not
involved in the operation of business receiving payment in foreign currency for uploading
audio- visual material in social network, the concerned bank, financial institution, or money
transfer institution shall collect advance tax at the rate of one percent of the amount received
at the time of payment of such amount.
As per the provision of subsection (1)(Ga1) of section 97 of the act, individual resident
person having income as mentioned in sub- section (6Gha) of section 95Ka only for an
income year need not file income tax return for that income year.
As per the provision of Schedule 1 (4ka), the tax shall be levied at the rate of one percent
in the income of individual resident person not involved in operation of business received
according to the sub-section (6Gha) of section 95Ka.
In the given case, Mrs. Mayuri is housewife is assumed resident natural person not involved
in operation of business, and the concerned bank shall collect and deposit advance tax at
the rate of one percent of the amount received. The tax rate on this kind income is one
percent. Since she has no other income, she does not need to file income tax return for the
FY 2078/79.
b) As per provisions of section 95Ka in the case of benefit acquired from the disposal of
interest of an entity not listed in the Securities Board of Nepal, advance tax at the rate of
ten percent of the profit for a resident individual, fifteen percent of the profit for a resident
entity and twenty-five percent of the profit for others shall be collected by the entity whose
interest has been disposed and shall be paid to IRD within time limit.
Even though the person or entity responsible for collection of advance tax as above does
not collect it, the tax shall be deemed to have been collected at the time required for such
collection.
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 The person responsible to deposit advance tax and the person responsible to collect tax
shall be, jointly and individually, responsible for depositing such amount in the Department
in the following circumstances: (a) If the person required to collect advance tax does not
collect the tax, and (b) If the person required to collect advance tax does not deposit amount
collected.
If the person required to deposit advance tax has deposited advance tax in the Department
pursuant to sub-section (10) without collecting the advance tax, the amount equal to such
deposited tax, he or she shall collect recover such amount from the person required to
deposit such tax.
However, as per section 119 (3), the person responsible for withholding tax shall not be
allowed to recover the interest payable by him or her, because of his or her failure to collect
advance tax in disposal of interest of an entity pursuant to subsection (2) of Section 95A.
Thus, in the given case, M/S BigBazaar Company can recover the advance tax from Mr. A
but not the interest part.

Answer No. 9
a) Calculation of Assessable Income of Mr Bikash Pandit
Particulars Note Amount Remarks
Basic Salary (105000*12) 1,260,000
Grade (10000*12) 120,000
Contribution to PF by employer (1260000+120000)*10% 138,000
Leave Encashment (105000+10000)*2 230,000
Medical Allowances 115,000 Basic + Grade
Gratuity (1260000+120000)*8.83% 121,854
Special Allowance 300,000
Festival Allowance 115,000 Basic + Grade
Tiffin Allowance 115,000 Basic + Grade
Internet Allowance 24,000
Salary of Cook 1 240,000
Uniform Allowance 25,000
Housing Facility 2 27,600
Allowances for Vehicle 3 1,056,000
Reimbursement of Insurance Premium 50,000.00
Assessable Income from Employment 3,937,454
Income earned for checking copy 4 -
Rental Income 5 -
Dividend Income 6 -
Assessable Income from Investment 7 450,000
Assessable Income from Business (500,000)
Total Assessable Income 38,87,454

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b) Calculation of Taxable Liabilities of Mr. Bikash Pandit
Particulars Note Amount Remarks
Assessable Income from Employment 3,937,454
Assessable Income from Investment 7 450,000
Assessable Income from Business (500,000)
Total Assessable Income 38,87,454
Less:
Contribution in ARF lower of following 300,000
1/3 rd of assessable income -3,887,454 1,295,818
- Actual deposit 397,854.00 =138000*2+121854
- Maximum up to 300,000
Taxable Income 3,587,454
Less:
Life insurance premium (actual or 25,000
25,000
whichever is lower)
Net Taxable Income 3,562,454
Slab Rate Amount
Slab rates are
First 450,000 1% 4,500 different for FY
2079/80
Next 100,000 10% 10,000
Next 2,00,000 20% 40,000
Next 12,50,000 30% 250,000
Remaining Income of Rs. 19,52,454 36% 702,883.44 Note 8
Total Tax Liabilities 1,007,383.44
Notes:
1) Salary of Cook: The employer has provided the salary of Cook to Mr. Bikash Pandit
as allowance. Such amount should be included in taxable income of employee
irrespective of payment he has made to the Cook.
2) Housing Facility: 2% of Basic plus grade salary is included in the taxable income of
Mr. Bikash Pandit for the housing facility.
3) Vehicle Facility: Employer has provided the allowances of Rs. 88,000 per month as
vehicle facility. Hence such amount has been included in taxable income.
4) Income earned for checking copy: This income is subject to final withholding tax; so,
not included in taxable income.
5) Rental Income: This income is subject to final withholding tax; so, not included in
taxable income.
6) Dividend Income: This income is subject to final withholding tax; so, not included in
taxable income.
7) Assessable income from Investment: This includes the profit on sale of GSN bank
Ltd of Rs. 150,000 and profit on sale of share of Laxmi Hydropower Company Ltd of
Rs. 300,000. NEPSE should deduct the tax at source on such income as per section
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 95Ka. The withholding tax rates: For the gain on sale of share of GSN Bank Ltd-7.5%
and of Laxmi Hydropower Co. Ltd-5%.
8) Loss Set-off: As per section 20 of Income Tax Act, 2058, Loss from business can be
set off from the income from Investment. In this regard, the Loss from proprietorship
business of Mr. Bikash Pandit of Rs. 50,000 (Remaining after set off with income from
investment) will be carried forward for next year/s.

Answer No.10
Calculation of taxable income for 2079/80

Particulars Note Amount Remarks

Basic Salary (30000*3+60000*9) 630,000

For 3
6,000
Communication Allowance (2000*3) months
Tiffin Allowance (6000*3) 18,000
Outstation Allowance (5000*3) 15,000
Dashain Allowance 25,000
Leave Encashment 20,000
For 9
Contribution to PF (60000*9)*10% 54,000
months
Retention Allowance (10000*9) 90,000
Accommodation Facility (60000*9*2%) 1 10,800
Concession of interest on loan (800000*15%*3/12) 2 30,000.00
Insurance Premium Paid by employer 45,000.00
Assessable Income from Employment 898,800
Less:
Contribution in ARF lower of following 188,000
1/3rd of assessable income -299,600 299,600.00
- Actual deposit (54,000*2+10,000*8) =188,000
- Maximum up to 300,000
Taxable Income 710,800
Less:
Life insurance premium (max 40,000) 3 40,000
Net Taxable Income 670,800

Calculation of Tax Liability Rate Amount

If opted single
First Rs. 5,00,000 1% 5,000.00
Remaining 170,800 10% 17,080
Total 22,080
Less: 10% Female Rebate 2,208

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 Net Tax Liability 19,872
Deducted by 1,600.00
To be deducted by Insurance Company 18,272.00
According to section 97 (1) (ga), Any resident individual to which sub-section (3) of Section 4
applies in that income year does not need to submit income tax return for that year. She has
all resident employer and one employer at a time. The conditions in sub-section (3) of Section
(4) are:
(a) Only the income of any employment having source in Nepal is included in the income of
that income year,
(b) All employers are resident persons in that income year and there is only one employer at
one time, and
(c) The employer has made a claim for the adjustment of tax for medical expenses and
retirement contribution paid by employer and has not made claim of the expenses for
donation under Section 12.
Here, Ms. Aditi Wasti has one employer at one time and both employer is resident. So if Ms.
Aditi Wasti has no other income other than employment income mentioned in the question and
if she claims for medical expenses and retirement contribution paid by employer only and does
not claim for donation expenses in Income Year 2079/80, then she need not file the income
return for that income year.
Notes
1. Accommodation facility is quantified at 2% of salary.
2. 15% interest considered on lack of information about market interest rate.
3. Insurance premium is deducted to the maximum of 40,000 as per finance act 2079.

Ethics and professional conduct in providing taxation services

Answer No.11
According to subsection 604 of ICAN's Handbook of the Code of Ethics for Professional
Accountants 2018, providing assistance in the resolution of tax disputes to an audit client might
create a self-review or advocacy threat. In general, factors that are relevant in evaluating the
level of threats created by providing any tax service include:
• The particular characteristics of the engagement.
• The level of tax expertise of the client’s employees.
• The system by which the tax authorities assess and administer the tax in question and
the role of the firm or network firm in that process.
• The complexity of the relevant tax regime and the degree of judgment necessary in
applying it.
In addition to above, the factors that are relevant in evaluating the level of self-review or
advocacy threats created by assisting an audit client in the resolution of tax disputes include:
The role management plays in the resolution of the dispute.
• The extent to which the outcome of the dispute will have a material effect on the
financial statements on which the firm will express an opinion.
• Whether the advice that was provided is the subject of the tax dispute.
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 • The extent to which the matter is supported by tax law or regulation, other precedent,
or established practice.
• Whether the proceedings are conducted in public.
Examples of actions that might be safeguards to address threats include:
• Using professionals who are not audit team members to perform the service might
address self- review or advocacy threats.
• Having an appropriate reviewer who was not involved in providing the service review
the audit work or the service performed might address a self-review threat.
However, a firm or a network firm shall not provide tax services that involve assisting in the
resolution of tax disputes to an audit client if:
(a) The services involve acting as an advocate for the audit client before a public tribunal or
court in the resolution of a tax matter; and
(b) The amounts involved are material to the financial statements on which the firm will express
an opinion.

Double tax avoidance agreement (DTAA) and international taxation

Answer No. 12
In the given case, Global Tech Ltd., Singapore and Trident Pvt. Ltd., Nepal is associated
enterprises. Since the transaction of developing software and providing the support services by
Trident Pvt. Ltd. to Global Tech Ltd. is an international transaction between the associated
enterprises, the provisions of transfer pricing would be attracted in this case.
Computation of Arm’s Length Price as per Cost-Plus Method
Particulars %
Gross profit mark up in the case of Nepal Distribution Ltd. 50%
(unrelated party)
Less: Adjustments
Value of technological support (Global Tech Ltd. provides 5%
technological support but Nepal Distribution Ltd. does not provide.
So, this shall be adjusted) (10% of gross profit)
Quantity discount to Global Tech Ltd. (Quantity discount allowed 5%
to Global Tech Ltd. but not to Nepal Distribution Ltd. So, it shall
be adjusted) (10% of gross profit)
Risk and cost associated with marketing (Trident Pvt. Ltd. has to 7.5% 17.5%
take risk and costs associated with marketing in case of Nepal
Distribution Ltd. not in case of Global Tech Ltd.) (15% of gross
profit)
32.5%
Add: Cost of one month’s credit (Credit provided to Global Tech 1.5%
Ltd. not to Nepal Distribution Ltd.) (3% of gross profit)
Arm’s Length Gross profit mark up to cost 34%
Cost incurred by Trident Ltd. for executing Global Tech Ltd.’s 200,000
work
Add: Adjusted Gross profit (200,000*34%) 68,000
Arm’s Length invoice value 268,000

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 Value Added Tax Act, 2052 and Rules 2053
Answer No. 13
a) According to the section 23 of the VAT act, if there is a reasonable ground to believe that
a taxpayer required to be registered under this Act has been involved in a taxable transaction
without being registered, Tax Officer may inspect.
For the purpose of inspection as such and assessment of the tax pursuant to Section 20, Tax
Officer shall have the following powers:
(a) To inspect goods, premises, documents, accounts and records relating to the tax
liability,
(b) To search the place of transaction of the taxpayer or other places where the evidence
related to an offence under this Act may be found,
(c) To require information from a person who prepares any records, books, ledger or other
documents or makes entry therein in the course of performing their duty,
(d) To remove, take possession of or transfer any documents, books and records from the
taxpayer's place of transaction or any other places related to it,
(e) To perform tax audits at the taxpayer's place of transaction or the Tax Office, or at any
other appropriate place.
If a Tax Officer requests any person, including a bank or financial institution for access to
any information about taxpayer's transactions, it shall be the duty of such person to furnish
such information to the Tax Officer.
b) Section 29(2) provides that, If a person commits any of the following offences, the Tax
Officer may impose a fine of cent percent of the amount of tax payable or an imprisonment
up to six months or both:
(a) Preparing false accounts, invoices or other documents,
(b) Committing an evasion of tax by fraud,
(c) If an unregistered person acts as if he or she were a registered person,
(d) Selling by under-invoicing,
(e) Carrying out a transaction in breach of Section 30 under which Tax Officer may
suspend the place of transaction of that person up to Seven days such that s/he is unable
to carry out any transaction for committing the offences under section 29 twice or more.

Answer No.14
a) Provisions under Section 8Ka of the VAT Act, 2052 allows an industry that exports more
than forty percent of the total sale of the last twelve months after the operation of the
industry may make import by furnishing a bank guarantee with the concerned Customs
Office in consideration for tax leviable while importing the raw materials required to
produce the goods in the quantity of export, and on goods to be imported for a duty free
shop through a bonded warehouse. Provided that, except for the import by a duty-free shop
through a bonded warehouse, in order for the other exporters to avail such a facility, the
exporter shall make finished goods from the raw materials, with Ten percent value addition
during the export. The bank guarantee maintained shall be released from the respective
customs office as per the prescribed procedure by the Department.

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 In the given case, the export is more than 40% (55/130*100=42.31%) of total sales in the
just previous 12 months and there is value addition of more than 10%. So, the company can
get bank guarantee facility in import of raw materials in Magh 2079. The facility is available
while importing the quantity of raw materials required to produce the goods for export not
for domestic sales.
b) According to the provision of section 10Kha, two or more than two persons establishing a
joint venture for operating taxable transaction for a certain period, should register the joint
venture to the Tax Officer of one of the Tax Office among the Tax Offices wherein such
persons establishing the joint venture are registered. The Joint venture registered as such
shall have to deregister the registration upon expiry of the time prescribed in the agreement
entered into for establishing the joint venture. Persons who are parties in the joint venture
shall be jointly or severally liable for the purpose of payment of tax liability of the joint
venture they are party to.
Thus, the tax officer is correct and JV partners Kalika Pvt. Ltd. and Bhadrakali Pvt. Ltd.
are jointly or severally liable for the payment of tax liability of the Kalika-Bhadrakali joint
venture.

Answer No.15
i. Calculation of the Amount to be deposited for Administrative Review:
As per Section 31 Ka (6) of VAT act, the taxpayer applying for administrative review shall
pay entire of the undisputed tax amount out of the assessed tax amount, and deposit one
fourth of the amount of the disputed tax amount.
Particulars % to be deposited Amount deposited
Undisputed Amount (Case 1 and 5) 100% 200,000+150,000= 350,000
Disputed Amount (Case 2, 3 and 4) 25% (500,000+300,000+650,000/
4= 362,500
Total 712,500
Thus, total Rs.712,500 has been deposited at IRD for Administrative Review.
ii. As per section 32 of the VAT Act, a person who is not satisfied with an order of
suspension made by the Director General pursuant to Section 30 or a decision made by
the Director General pursuant to Sub-section (4) of Section 31A, may file an appeal in
the Revenue Tribunal. The person filing an appeal pursuant to Sub-section (1) shall
make a written notification to the Department along with a copy of the appeal within
fifteen days from the date of filing appeal.
Section 33 of the VAT act provisions that while making an appeal to the Revenue
Tribunal, entire of the undisputed amount of tax has to be paid out of the amount of tax
assessed, and a deposit equivalent to fifty percent of the disputed amount of tax and fine
or a bank guarantee for such amount has to be furnished.
Calculation of Amount for deposit or bank guarantee for Revenue Tribunal:
Particulars % to be
deposited Amount deposited
Undisputed Amount (Case 1 and 5) 100% 200,000+150,000= 350,000
Case 3 was decided in favour of the
taxpayer so need not pay any
additional security for case 3.

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 Disputed Amount (Case 2 and 4) 50% (500,000+650,000)/2 =
575,000
Total 925,000
Less: Deposited during 712,500
administrative review
Additional Amount to be deposited 212,500
Thus, Rs. 212,500 should be deposited additionally for making appeal to Revenue Tribunal.

Answer No. 16
i. Computation of monthly VAT Receivable/(Payable)
Particulars Poush Magh Falgun
Opening Vat Credit 5,000.00 35,400.00 37,350.00
Add: Full credit on purchase of
taxable trading goods {Working
Note: 1 (a)} 585,000.00 686,400.00 702,000.00
Add: Partial/Proportionate credit on
purchases & expenses {Working
Note: 1 (b)} 88,400.00 76,050.00 122,102.50
Less: Output VAT on sales (Working
Note: 2) 663,000.00 760,500.00 773,500.00
Net VAT Receivables/(Payable) 35,400.00 37,350.00 87,952.50
Working Note: 1 Input VAT:
a. Full Credit
Particulars Poush Magh Falgun

Purchases of trading goods 5,000,000.00 6,000,000.00 6,000,000.00

% of Non-taxable purchase of trading 10% 12% 10%
goods
Non-taxable purchase of trading goods 500,000.00 720,000.00 600,000.00
Vatable purchase of trading goods (1-2) 4,500,000.00 5,280,000.00 5,400,000.00
Input tax on purchase of trading goods 585,000.00 686,400.00 702,000.00
b. Partial/Proportionate Credit
Particulars Poush Magh Falgun Remarks
Purchase of office
equipment
(904000/113*13) 104,000.00
Purchase of Delivery
Van (1243000/113*13) 143,000.00
No credit allowed
Petrol Expenses
- - - as per Rule 41
Diesel Expenses 650.00 Allowed
No credit allowed
Picnic Expenses
- as per Rule 41

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 Assumed that
Consultancy fee from
reverse VAT has
India
84,500.00 been paid
Not VAT
Salary Expenses
- - - attractive
Not VAT
Wages
- - - attractive
Purchase of Land for Not VAT
godown - - - attractive
Total 104,000.00 84,500.00 143,650.00
% of taxable sales 85% 90% 85%
Available input VAT
credit 88,400.00 76,050.00 122,102.50
Working Note 2: Output Vat
Particulars Poush Magh Falgun
Sales 6,000,000.00 6,500,000.00 7,000,000.00
% of Non-taxable purchase of trading 15% 10% 15%
goods
Non-taxable Sales 900,000.00 650,000.00 1,050,000.00
Vatable sales of trading goods (1-2) 5,100,000.00 5,850,000.00 5,950,000.00
Output VAT 663,000.00 760,500.00 773,500.00
ii. As per Section 24(3) of VAT, Act, 2052 for normal person who does not export more than
40% of total sales during the tax period may file refund application, if excess of VAT
cannot be set off within subsequent four months from the month of such excess. Hence
Bhanumati Traders can file refund application because VAT credit not continuously lying
more than prescribed period of four months.

Excise Act, 2058 and Excise Rules 2059

Answer No. 17
a) Under the following conditions as per section 3ka, excise duty paid on purchases or import
of the excisable good shall be allowed for set off from the excise duty collected on sales:
• In case of physical control system, excise duty paid on raw materials consumed by
producer is allowed as credit with the excise duty payable on the issuance of finished
goods. However, excise duty paid on the raw materials purchased or imported by the
by an industry other than an industry producing tobacco products is allowed as credit
with excise duty payable on self-issuance system.
• The excise duty paid in goods which is damaged as a result of fire, theft, accident,
destructive activity, or expiration of the date for use of such goods may be deducted
as specified by the Department.
• No excise duty paid on the importation of subsidiary raw materials, packing materials,
and raw materials and spare parts exempted from custom duty is deductible when
making deducting excise duty pursuant to this Section 3ka.

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 • If excise duty could not be set off, application for refund can be given to Excise Officer
in accordance with section 3kha and excise officer shall refund within 60 days from
the date of application, if deemed refundable upon inquiry and verification.
b) Section 19 of the Excise Act, 2058 has the provision regarding administrative review and
appeal. Under this provision, if a person is not satisfied with a decision made by the excise
duty officer in respect of the assessment and recovery of excise duty, the person may apply
to the Director General for administrative review within thirty days of the date of receipt
of such notice. Provided that an appeal may be made to the Revenue Tribunal against a
decision made by the excise duty officer imposing imprisonment for any of the offences
under sub-sections (1), (2), (3) and (4) of Section 16 within thirty-five days.
If the time-limit for making application as above expires, an application, accompanied by
the reason therefor, may be made to the Director General for the extension of the time-limit
within seven days of the date that the time-limit expires, and the Director General may
extend the time-limit of thirty days from the date that the time-limit expires if the reason
mentioned in the application appears to be reasonable. If the applicant’s claim appears to
be reasonable upon investigation of the application made, the Director General may void
the tax assessment order by recording the explicit reason and executing a memorandum and
order the concerned excise duty officer or any other Officer to re-assess tax. The Director
General shall decide the application within sixty days of the date that such application is
made.
A person making application for administrative review shall pay the undisputed amount of
excise duty and the total amount of fine, and one fourth of the disputed amount of excise
duty and fine, out of the amount of excise duty assessed.
The concerned person may appeal to the Revenue Tribunal after the expiration of the
specified time-limit if the Director General fails to make decision within the time-limit of
sixty days or within thirty-five days of the date of receipt of notice of such decision if he
or she is not satisfied with the decision made. The concerned person shall pay undisputed
excise amount from the assessed excise amount and submit fifty percent of the disputed
excise amount and fine amount as a deposit or provide same amount of bank guarantee on
filing the appeal to the Revenue Tribunal. In calculation of such deposit or bank guarantee
pursuant, it shall be calculated including also the twenty five percent of excise amount
submitted to the Inland Revenue Department for administrative review.
A person who applies for administrative review or appeals pursuant to this Section shall
register one copy of such application or appeal with the concerned office within fifteen
days.

Answer No. 18
a) As per Rule 17 of Excise Rule, the Licensee who produces Liquors shall make appropriate
arrangement for proper protection of the raw materials including molasses and spirit. In
cases where any loss and damage are resulted from the failure to arrange for proper
protection of such raw materials, the revenue chargeable as per the highest rate of the
Liquors produced by the Licensee shall be recovered from such Licensee.
In the given case, the molasses of 60 quintals was lost due to failure to make appropriate
arrangements for the protection of molasses by the distillery. The excise officer, after
verification of stock, shall consider that the 60 quintals of molasses would have produced

106
 1140 litres of ENA and from that ENA, liquor of 25 UP having the highest excise rate is
assumed to be produced and sold and accordingly excise duty on such shall be assessed.
b) According to the section 4 Ga (2) of the excise act, excise duty shall be exempted in the
following circumstances:
(a) If diplomatic mission or donor agency transfers the motor vehicles, not older than ten
years since the year of its first production, that they imported with diplomatic facility
or tariff facility to any project as per the approved annual program of such project and
converts the number plate into governmental plates; or if the motor vehicle, not older
than ten years since the year of its first production, imported in the name of any project
under full or partial tariff facility (except those imported on inventory or bank
guarantee) is transferred to local body, community school, community hospital or
governmental body with the approval of Ministry of Finance, Government of Nepal
upon the completion of the project, the excise duty shall not be levied on such transfer;
(b) If any diplomatic agency, project, person and other body (governmental or non-
governmental organization) intends to scrap and cancel the registration of any motor
vehicle imported by them under tariff facility, which is older than fifteen years from
the year of its production, with the approval of Ministry of Finance such that it cannot
be re-used, the excise duty shall not be levied on such motor vehicle.
(c) If the owner of a motor vehicle imported for personal use with the enjoyment of partial
customs tariff facility dies and the motor vehicle has to be transferred to the husband or
wife of such owner of motor vehicle, the excise duty shall not be levied on such transfer.
Similarly, as per section 4 Ga (3) of the excise act, an industry producing goods by
using ninety percent or more of local scrap (Jhutra or Patru) goods, excise duty levied
on such products shall be exempted.
According to the above provision, the answers would be:
i. Such transfer is exempted from the excise duty.
ii. Excise duty is levied on such transfer.
iii. Such transfer is exempted on those vehicles.
iv. Excise duty is exempted on such products.

Customs Duty
Answer No. 19
a) i. According to sub section (21) and (22) of Rule 8, Any Nepali contractor who get contract
to work in foreign country would like to take motor vehicle, machinery, equipment and
parts thereof for the purpose of such work should apply to the chief of the customs office
along with the required evidence. Upon receiving of application, chief of the customs office
may examine the case, and if found justifiable, shall allow to export such goods to the
foreign country without charging any duty. No duty shall levy on the goods exported under
this provision while return back after completion of the work.
ii. According to sub section (17), (18), (19) and (20) of Rule 8, any importer or the local
purchaser of the chassis for the bus or truck would like to export such chassis for the
purpose of building the body should apply to the Customs officer enclosing the copy of
import declaration form or Invoice of local purchase within the three months from the date
of import or local purchase. In such case, the Customs officer may permit the export of
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 chassis on the condition that five percent of the value of the chassis is deposited in cash or
bank guarantee equivalent to the amount is furnished and the chassis with body is imported
within six months. If the chassis with body is imported within that period, the Customs
officer should collect chargeable Customs duty on the expenditure made on the making of
the body and refund the cash deposit or release the bank guarantee whatever the case may
be. If not, Customs officer should transfer the deposited cash amount in the revenue account
or forfeit the bank guarantee from the bank or the financial institutions.
b) As per Rule 66A of Custom Rules, if the importer wishes to make partial clearance of goods
imported with a single invoice and stored in the customs warehouse may submit an
application to the Customs Officer. If an application received as such, the customs officer
shall make clearance of goods which is wished to be cleared, by charging the duty only on
the quantity of goods to be cleared, provided no any reason that obstructs making partial
clearance. If any goods, out of the imported goods listed in a single invoice, are found
restricted by laboratory test, the customs officer shall, except such restricted goods, make
clearance of rest of the goods by charging the duty only on the goods to be cleared.

Answer No. 20
a) As per section 22 of the Custom Act, the Customs Officer should examine that whether
declared goods has been classified or not pursuant to Sub-heading under prevailing Fiscal
Act. While examining by the same way, the Customs Officer shall confirm by taking base
the subject mentioned in Sub-section 61A that whether classification is right or not. If it is
found correct while examining classification of goods, the Customs Officer shall determine
duty to be imposed on such goods. If it is found incorrect while examining classification of
goods, the Customs Officer shall inform the declarant and amend classification sub-heading
and determine the duty accordingly. Thus, in the given case, the custom officer can
reclassify the goods if found incorrect.
Similarly, according to the section 22, an importer who is dissatisfied with an amendment
made by the Customs Officer shall make application before Director General for the review
pursuant to Section 61a. Before making such application, the goods should be released by
paying duty determined by the Customs Officer. While paying duty as such by the importer,
he/she may make application before Customs Officer to keep a deposit, fully or partially
subject to be as decided while making final decision in relation to goods classification. In
such a situation, the Customs Officer may make clearance of goods by keeping a deposit
as per the same.
As per section 61 A, the person who doesn’t satisfy upon the classification of goods done
pursuant to Section 22 by the Customs Officer may make application before the Director
General for the review within thirty days of the date of making clearance of such goods.
Specimen of such goods and necessary documents to clarify content of the application
should be submitted along with the application. While reviewing upon the decision of
classification of goods, the Director General may take bases the prevailing Fiscal Act,
Harmonized Commodity Description and Coding System formulated by World Customs
Organization, General Rules for the Interpretation of that system, explanatory notes,
decisions on goods classification taken by the World Customs Organization and opinions
given by the Harmonized System Committee of World Customs Organization. (4) Before
taking decision on classification of any goods, the Director General shall test from
laboratory of department or other government body and take opinion of specialist thereof
or take opinion of concerned specialist or national or international body in regard to any

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 goods. The Director General should take decision within sixty days upon the application of
review on classification submitted. Provided that, on the condition if the decision is made
after taking opinion with the international body, the time period shall not be adopted.
b) According to Rule 8 of the Custom Regulation, if the purpose for which the goods have
been imported, did not achieve the purpose or found to be sub-standard quality upon the
laboratory test the chief of Customs office may release duty free such goods for re -export
within a period of ninety days from the date of import or from the date of arrival at the
Customs office on the condition that the similar goods are imported as replacement or the
remittance of foreign exchange in Nepal in case payment in foreign exchange is already
made on the import of such goods.
If the goods have been re-exported as per sub-rule (1), and the goods for replacement have
not been imported or the foreign exchange paid for the goods have not been remitted within
six months from the date of re-export of goods, the concerned Customs officer should write
to the concerned office to take action in accordance with prevailing law of the land.
i. Here, the expired items are of sub-standard quality, and it should be proved upon the
laboratory test. In such case, the Customs office may allow the proprietor to release the
goods without collecting custom duty for re-export within a period of ninety days from
the date of import or from the date of arrival at the Customs office on the condition that
the similar goods are imported as replacement or the remittance of foreign exchange in
Nepal in case payment in foreign exchange is already made on the import of such goods.
ii. If the replacement is not sent, the foreign exchange paid for the goods shall be remitted
within six months from the date of re-export of goods.
iii. In case the goods have been received as replacement before re-exporting the goods
within time limit, the goods to be re-exported shall not attract the Customs duty or if
the Customs duty was paid before, such Customs duty shall be refunded. But, in case
the goods are re-exported after the lapse of the time limit, the Customs duty paid before
shall not be refunded.
c) According to the rule 9 of the custom rule, following Industry or person intending to avail
of the facilities of bonded warehouse should apply at the Department for the license:
(a) Industry exporting garment to foreign country,
(b) Industry exporting its product to third country,
(c) Except the Industry mentioned in clause (a), other industries exporting at least fifty
percent of its production to India,
(d) Person who is importing goods to sale through the government licensed duty-free shop.
In the given case, Haathi Cements exports % of its production to India, so it can avail the
facilities of bonded warehouse and should apply at the department for the license. The
industry applying should submit certificate stating that the industry qualifies as above. In
case the industry, which is not operating for more than a year, intends to get license for the
bonded warehouse should not need to submit certificate if it submits conditional contract
paper with the export plan and conformity of its export to third country or exports to India
of its production at least fifty percent. If the application is found to be justified to issue the
license, the Department may issue licensee to the industry by charging Rs. six thousand as
a license fee. The time period for the license will be valid for one year. The licensee can
get the license renewed from the Department by paying renewal fee of Rs. Three thousand
before the next fiscal year starts, if licensee intends to renew the license for the next fiscal

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year. The licensee is deprived of the bonded warehouse facilities accorded to the licensee
for the period failing to renew the license.
As per Rule 10 of the custom rule, he licensee of the bonded warehouse, may import
necessary raw materials and the auxiliary raw materials (including the packaging materials
not produced in Nepal) with the furnishing of the bank guarantee equivalent to the
chargeable Customs duty for the purpose of producing goods for export or sale in Nepal in
convertible foreign currency. The Bank Guarantee should be furnished to the amount
equivalent to the total of chargeable Customs duty in addition to 15 percent on such
Customs duty. The time period of the bank guarantee should be from six months to twelve
months. In case of six months bank guarantee, if the extension is required beyond 6 months,
it can be extended from 6 months to 12 months. In case of packing materials not produced
in Nepal, the Department will provide bonded warehouse facilities on the recommendation
of the Department of Industry stating that the packing materials are not produced in Nepal
and bonded warehouse facility be extended.

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 Paper-8
Strategic Management & Decision Making Analysis

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Questions
Concept of Strategy
1. The presence of strategic management cannot counter all hindrances and always achieve
success for an organization. What are the limitations attached to strategic management?
2. Explain with example the terms Mission, the Vision, and the Strategic Intent Statements.
Why and when is there likely to be conflict between them?

Strategic Management
3. State and explain the relevance of strategic management for professional accountants.
4. “Business may need to develop rather than grow in order to adapt to change” Explain.

Environmental Analysis
5. “The organization and environment are in reality more unpredictable, uncertain and non-
linear and the threat of competition makes it more complicated to deal with it." Explain
how would you analyse Competitive Environment?
6. Strategists, in the Nepalese context, do not seem to be fully aware of the impact of the
socio-cultural environment on business. Do you agree? Describe the element of socio
cultural factor of environment.

Internal Analysis
7. “Companies that fail to develop new products are putting themselves at risk. At the same
time, new product developments are risky.”
(a) List the reasons for failure of new products.
(b) List and briefly explain the factors that hinder the progress of new product development.
8. What is internal analysis? Explain the process of internal analysis.

Strategic Option
9. Can cost leadership strategy allow a firm to earn above-average returns despite strong
competitive forces? Discuss.
10. Examine the degree to which the three concepts: positioning, product differentiation and
market segmentation relate with each other.
11. Explain the Porter’s alternative business strategies and their implications.

Strategy Formulation and Strategic Choice

12. Describe the construction of BCG matrix and discuss its utility in strategic management.
13. For better strategy implementation how will you make a choice for strategy which will best
meet the enterprises’ objectives?

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Strategy Implementation
14. Define strategic control system. Explain the various strategic control useful in strategic
management.
15. A technically imperfect plan that is implemented well will achieve more than the perfect
plan that never gets off the paper on which it is typed. Discuss in terms of strategic
implementation and describe its process.

Strategy Evaluation
16. Describe various types of strategy evaluation after explaining its concept.

Role of Chief Executive in Strategy

17. The role of CEO in strategy formulation and implementation is vital. In light of this
statement, briefly discuss the role of CEO in strategy formulation and implementation.

Decision Making Process and Techniques

18. What is the significance of strategic decisions in strategic management? Discuss the stages
in rational decision-making process.

Strategic Management and Decision Making Practices in Nepal

19. Nepalese organizations should develop long-term vision and strategies in every sector to
withstand the challenges posed by globalization and due to the demands to it, Nepalese
managers have to make several strategic decision makings in their managerial functions but
the rational decision for the strategy making as well as strategy implementation is not
effective. Do you agree? Explain with the reason.

Case Study
20. NGOs in Nepal seem to be influenced by the strategic management practices of the western
world, primarily through their headquarters and international linkages. Yet, their strategic
management practice seems to be confined to setting long term goals and direction,
continuous execution of the plan, and periodic monitoring and evaluation. Most of the
sample organizations prepared the strategic plans following the guidelines of their parent
organizations in Western countries. NGOs prepare strategic plans and evaluate them every
two to five years. There is no notion of uniqueness and differentiation in non-government
organizations for gaining competitive advantages. They emphasized more on
differentiating from their past practices by improving the methods of delivery of services.
They have more formalized strategic planning process. However, they have varied degree
of staff involvement in strategic planning process in the country level NGO. For example,
smaller organizations follow the strategy prepared by their headquarters and others prepare
strategic plans on their own.
Contrary to private firms, NGOs involve external experts in facilitating strategic planning
exercise. The strategic plans are prepared in a participatory manner in which staffs and
stakeholders are involved and sufficient information are gathered through surveys,

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 workshops and meetings. A significant amount of time is spent for situation analysis and
strategic planning. The strategic plan help them in increasing funds supports from donors,
expanding programs, increasing cooperation with stakeholders, informing staff, satisfying
donors and beneficiaries. These differences in process and focus of strategic management
between private firms and NGO indicate that the exact duplication of the private sector
strategic planning process is not possible as suggested by Chlala et al (1995). It is obvious
that Western style of strategic management has strong influence on NGO strategic
management apparently because they are guided by their head-quarters in the west.
Similar to private firms, however, NGOs are weak in strategic implementation as they face
constant threats from the external environment for example on going conflict in the country.
In contrast with private firms they are less reactive, more proactive. Other obstacles include
staff who are not confident to implement new strategies.
Overall, strategic management in Nepal appears to be confined to long term planning, goal
setting, and the development of action plans to achieve their goals. Private firms consider
strategic management as a tool for gaining competitive advantages and customer
satisfaction but NGOs consider it merely as a tool to attract more funds and to expand their
programs. NGOs have more formal strategic planning processes and adopt proactive
approaches than do private firms. But neither sector has strong strategic implementation
apparently due to the volatile external environment and insufficient alignment of the
strategies with their organization management systems, structures, and cultures.
Questions
1. How will you interpret above case study in your understanding for being proactive rather
than reactive in the context of Nepalese environment?
2. What recommendation will you give to Nepalese manager to cope with this turbulent
environment of Nepal and gaining strategic advantage over its competitors?

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Answers
Answer No. 1
The presence of strategic management cannot counter all hindrances and always achieve
success as there are limitations attached to strategic management. The limitations can be
explained in the following lines:
• Environment is highly complex and turbulent. It is difficult to understand the complex
environment and exactly pinpoint how it will shape-up in future.The organizational
estimate about its future shape may awfully go wrong and jeopardies all strategic plans.
The environment affects as the organization has to deal with suppliers, customers,
governments and other external factors.
• Strategic Management is a time-consuming process. Organizations spend a lot of time in
preparing, communicating the strategies that may impede daily operations and
negatively impact the routine business.
• Strategic Management is a costly process. Strategic management adds a lot of expenses
to an organization. Expert strategic planners need to be engaged, efforts are made for
analysis of external and internal environments devise strategies and properly implement.
These can be really costly for organizations with limited resources particularly when small
and medium organization create strategies to compete.
• In a competitive scenario, where all organizations are trying to move strategically, it is
difficult to clearly estimate the competitive responses to the strategies.

Answer No. 2
Mission
The strategy school views mission primarily as a strategic tool, an intellectual discipline which
defines the business’s commercial rationale and target market. It is perceived as the first step
in strategic management; it exists to answer two fundamental Questions: what is our business
and what should it be?
On the other hand, it is sometimes argued that a mission is the cultural glue that enables an
organization to function as a collective unity. In this case, it is a statement of values rather than
description of ultimate commercial objectives. It is possible, however, to reach a more
expanded definition of mission to include four elements: purpose; strategies; policies &
standards of behaviour; and values. For there to be a strong sense of mission, the four elements
must be mutually reinforcing.
Vision
A vision, which is our preference for how it should be identified, provides an organization with
a forward looking, idealized image of itself and its uniqueness. Vision can appear to be soft and
non-managerial. Because of this, having a dream or vision for an organization sometimes can
bring discomfort both to the visionary or visionaries and those vision impacts. Nevertheless,
regardless of what it is called - a purpose, a goal, a personal agenda, a legacy, or a vision or
dream - the positive consequences of having one is clear. It provides members of the
organization with a view of the future that can be shared, a clear sense of direction, a
mobilization of energy, and a sense of being engages in something important.

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Strategic Intent
Strategic intent has a shorter perspective with an emotional content. Sometimes strategic intent
of an organization forms the major slogan of an organization. Since such slogans are mission
based, if and when environment compulsions make a company change its set mission, its slogan
should similarly be changed. Accordingly, mission is a statement of fact; vision is the
aspiration; and strategic intent is a vision with an emotional context, ego; will help one to
achieve desired mission state faster. Conflicts between them are likely to arise: internally - of
leadership and externally for product life cycle.

Answer No. 3
Strategic management− the formulation and implementation of long-term plans and carrying
out the activities may be expected to yield several benefits. It is important for organizational
adoption and success to its environment. Various authors and executive create a number of
reasons as to why an organization engages in strategic management. Some of the points of
importance are discussed as follows:
Full Exploitation of Opportunities
Strategic management allows an organization’s top executives to anticipate change and
provides direction and control for the organization. It allows the organization to innovate in
time to take advantages of new opportunities in the environment and reduce the risk because
the future was anticipated. Therefore, it helps ensure full exploitation of opportunities. The
strategic management process stimulates thinking about the future. It allows the organization
to take action at an early stage of new trend and consider the lead-time of effective
management.
Clarity in Objective and Directions
Strategic management provides clear objectives and directions for the employees. It indicates
the way for the employees to follow. Strategic management provides a strong incentive for
employees and management to achieve company objectives. It serves as a basis for
management evaluation and control because top executives have a unified opinion on
strategic issues and actions. When the objectives are clearly spelled out, these provide clear
direction to persons in the organization who are responsible for implementing the various
course of actions.
Strategic Alignment
The emphasis of strategic management lies on making a good fit alignment between business
strategy and management practices to make an organization more competitive in the market.
Effective implementation of strategies depend on how far they can be aligned with the
organizational structure, managerial activities and policies. Strategic management has an
inherent qualities to maintain horizontal as well as vertical alignment among the strategies,
structures, programs, resources, managerial activities and policies.
Efficiency, Effectiveness and Success
Strategic management teaches to put the resources in a way, which ensures their maximum
contribution to organizational objectives. It also teaches to CEOs to become better decision
makers, which is helpful to achieve effectiveness. It also improves corporate communication,
the coordination, allocation of resources and budgeting etc. Strategic management focuses on
business problems, not only in the sector of functional areas, but also on business areas, such

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as marketing, finance etc. Because of all these reasons efficiency can be accelerated, the degree
of effectiveness can be increased and corporate success can be assured of an organization.
Others
i. Strategic management focuses on the research which is essential for growth and
diversification. It helps to carry out many researches which are definitely fruitful to the
success of business.
ii. Strategic management helps better understanding of the authorities and
responsibilities of individual and groups which reduces the gap and overlap the activities.
iii. Strategic management helps to cope up with changes.

Answer No. 4
An industry’s economic features and competitive structure reveal a lot about its fundamental
character but little about the ways in which its environment may be changing. All industries
are characterized by trends and new developments that gradually produce changes important
enough to require a strategic response from participating firms. Change is a permanent feature
of business as well as environment. If there is some vital change in environmental
circumstances, it can challenge the survival of the business. In that situation the organization
must revisit the questions of what business are they in and why are they in business. Right
from the definition of their business the organization has to adopt new mission and
objectives to get benefit from the changed situation or to avoid the risk of failure. One
of the major targets of the business is to grow. But it is not possible to grow all the time
at the same basic structure and functional activities because of change. It has to develop
product market and functions in order to adopt to change. Managing strategic change is a basic
element in process of strategic management.
There is no one right formula for managing change. The success of any attempt at
managing change will also be dependent on the wider context in which that change is taking
place. The fact is that the change is there and the business needs to develop. There are four
generic methods for developing the business: stability, expansion, retrenchment and
combination. The business may decide to change its function, markets or products under its
current generic position or it may decide to change the effort it is putting into its generic
position. Drop out old products or old customers while adding new ones too can be a good
strategy as per the situation. The development of new strategy manage the new administrative
problem, decline in profitability change to a more appropriate organization structure and
recovery is the sequence that could be repeated several times during the life time of the
organization.
The approaches to manage change are structure-based, people-based and technology-based.
Besides change in structure, organizational routines and control system can be changed.
Strategy should be reviewed continuously to adapt to environmental changes. It should develop
in such a way that competitors cannot duplicate it.

Answer No. 5
With growing industrialisation, expanding size of business operation and rapid advancement of
technology, degree of competition within the industry and across the industry has increased
tremendously. There is neck-to-neck competition among the business organizations who are
investing massive funds on research and development to innovate new methods of production

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or new uses of existing products or adopting new marketing devices in their market share. Under
these circumstances managers must be fully aware of the competitive environment and
formulate strategy to cope with the competition.
The competitive environment should be analysed from the viewpoint of all such factors which
affect the ferocity of competitive behaviour. These factors are market share of the participants
in the industry, growth, rate of the industry, general level of profits, cost of entry into and exit
from an industry, degree of differentiation, and economies of scale and nature of product.
Analysis of market share of different firms at a point of time and over a period of time provides
an insight into the competitive strength of the organization. Such analysis should be undertaken
to discern the factors responsible for differential market share of firms. These factors could be
product differentiation, pricing, high corporate competence, wide distribution network,
customer service, dispensation of discount facilities, etc. The management must keep these
factors in view while formulating strategy.
Furthermore, analysis of the competitive environment presents a picture of dominance of the
industry by a few firms. An industry dominated by one firm having a significant market share
tends to be less fiercely competitive than the one having no firm with dominant market share.
In studying the competitive environment it should also be the prime concern of the management
to find out if there is a minimum critical mass for the product. Critical mass is the market share
which a firm must obtain so as to become fully competitive on price and cost. Growth rate of
the industry decisively affects the competitive behaviour. Where growth rate of the industry is
relatively high and demand of industrial products tends to expand, competitive behaviour will
be less aggressive because each firm can increase its sales without necessarily increasing its
market share. But in an industry with falling growth rate, competition will tend to be intense. In
such a situation the management should diversify the product line. High level of profits in one
industry is likely to provide a measure of tolerance for competitors. A change to lower profits
may trigger off more aggressive behaviour.
Cost of entry and exit is another vital factor which needs comprehensive appraisal. If market
shares in the industry are widely diffused and small investment is needed to enter the business
and if the government does not foreclose entry to the industry, there will be great mobility of
firms in and out. In such a case, a firm in the industry lacks security of its position because any
entrepreneur with a small capital and small operation can enter the market. Such a tendency
poses a serious threat of entry particularly to large established organizations which lack the
flexibility and quick response possessed by small firms. Small organizations will, however,
consider such an environment as an opportunity to them. Where investment is large, highly
specialized and fixed costs are a relatively high proportion of total costs; competition will not
be aggressive because the scope of new entrants will be very limited.
High degree of product differentiation creates a barrier to entry of new firms since they might
have to spend a great deal on advertising and sales promotion in order to overcome the loyalty
of consumers to the existing brand. But the competition is likely to be fiercest when all firms
are offering products of commodity status.
Competitive behaviour is likely to be more aggressive when there exist marked economies of
scale in the industry. This may happen when cost levels depend on large volumes. The
competitive behaviour will tend to be fiercer in a growth market with elastic demand and product
subject to mass production. However, new firms will have to be very large so as to avoid cost
disadvantages. Nature of the product is another factor to be considered while studying the
competitive environment-A durable product is likely to be less vulnerable to random price
cutting than one which cannot be preserved easily and cheaply. The management must also try
to study the possibility of availability of substitutes of the product in the market because the

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industry’s prospects depend on it. With the emergence of a new substitute, a number of new
firms with different cost structures may come into existence in the competitive arena. A
substitute will often increase the buying power of the buyer and decrease the power of the seller.

Answer No. 6
Yes, I do agree that Strategists in the Nepalese context, do not seem to be fully aware of the
impact of the socio-cultural environment on business or they are so preoccupied with other
environmental influences that they do not give a high priority to socio-cultural factors. One
reason for such a lack of interest could be the nature of socio-cultural influences.
The socio-cultural changes take place very slowly and do not seem to have an immediate and
direct impact on short-term strategic decisions. Nevertheless, some socio-cultural changes are
too prominent to be ignored. One such change in the Nepalese context is the emergence of the
mass media as a powerful socio-economic force.
The socio-cultural environment consists of factors related to human relationships within the
society, the development, forms, and functions of such a relationship and learned and shared
behaviour of groups of human beings having a bearing on the business of an organization.
Important elements in the social environment consist of: demographics, social institutions,
pressure groups, and social change
1. Demographics: Demography is concerned with human population and its distribution.
Demographic forces consist of:
◼ Size, distribution and growth of population
◼ Age mix of population
◼ Urbanization of population
◼ Migration of population: Geographical shifts in population
2. Social Institutions: They consist of family, reference groups and social class.
◼ Family: Two or more persons related by blood, marriage or adoption who reside together
constitute a family.
◼ Reference Groups: They consist of groups that have a direct or indirect influence on the
attitudes and behaviour of consumers. They can be sports, musical and cinema personalities.
They can be professionally successful people. They influence product and brand choices.
They:
- exposure to new behaviour and life style;
- influence values and attitudes;
- provide norms for behaviour.
▪ Social Class: It is the rank within a society determined by its members. It can be classified
into upper, middle and lower.
3. SocialChange: Change is making things different. Social change implies modification in
relationships and behaviour patterns in a society. Life style and social values promote social
change. They have profound impact on strategic management

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Answer No. 7
a) The reasons for failure of new products are:
(i) Product is perhaps not well designed.
(ii) Improper or inadequate advertisement for the product.
(iii) Initial high price of the product for most of the customers.
(iv) Inadequate distribution channel used for the product.
(v) The idea is good but there is an over estimation of market size of the product.
(vi) Development costs are higher than expected.
(vii) The product is incorrectly positioned in the market.
(viii) Competing firms fight back harder than expected.
(ix) In spite of an unfavourable market research findings, yet the idea of a new product
had been pushed through by the top management of the firm.
b) There are several factors that tend to hinder new product development. Some of them are
as follows :
(i) Lack of innovative ideas to develop new product. There is very little scope to improve
some of basic products such as steel, detergents etc.
(ii) Fragmented markets: Initially a company has to aim its new products at smaller
market segment. This can mean lower sales and lower profit for the product
(iii) Social /Government restrictions: New products have to satisfy consumer safety and
environmental norms.
(iv) R&D Costs: A company typically has to generate/compare/evaluate many ideas to
find one worthy of development and this leads to high costs.
(v) Production/Marketing costs: The basic factors, similar to R&D efforts, often lead to
high costs on them.
(vi) Shortage of funds: Some companies with good ideas cannot raise funds that are
necessary for its R&D activities, pilot production activities, test marketing, etc.
(vii) Development time: Time span for new product’s development and its marketing
should be brief. Most companies do not know how to shorten this time by advance
planning in the areas of techniques, processes and strategic partnership etc.
(viii) Shorter product life cycle if rival firms are quick to imitate, when a new product is
successful. There are plenty of crafty imitators

Answer No. 8
Internal analysis is the process by which the strategists examine the firm’s marketing and
distribution, research and development, production and development, production and
operation, corporate resources and personnel, and finance and accounting factors to
determine where the firm has significant strengths and weaknesses. Internal diagnosis is the
process by which strategists determine how to exploit the opportunities and meet the threads
the environment is presenting by using strengths and repairing weaknesses in order to build

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sustainable competitive advantages. Internal analysis is the process through which managers
analyse the various factors of their organization to evaluate their relative strengths and
weaknesses so as to meet the opportunities and threats of environment.
The process of internal analysis goes through certain sequence of activities. This process is
undertaken so that the organization reaches at a point at which it can undertake strategic actions
in the lights of its strengths and weaknesses. For this purpose, the relevant information is
collected both from internal as well as external sources.
Identification of key factors
Internal analysis process starts with the identification of key factors that can be evaluated for
determining corporate strengths and weaknesses. The analysis should cover all aspects of the
organization. The factors may be in the area of organization structure and management
pattern, personnel, finance and accounting, marketing, manufacturing, research and
development, etc.
Identification of strategic importance of factors
All the factors identified for this purpose of corporate analysis may not have equal strategic
importance; some are more important, some are less important. The relative importance of
the factors depends on the nature of organization and its environment. Their relative importance
can be determined by finding out the contributions of each factor in the achievement of certain
key results.
Assessing strengths and weaknesses on key factors
Identification of key strategic factors may lead to the assessment of organizational strengths
and weaknesses in respect of these factors. Organizational strength on any factor can be defined
as the contribution made by the factor towards the achievement of organizational objectives.
An organizational weakness on a factor can be defined as the negative contribution on
the factor in achieving the organizational objectives.
Preparing strategic advantage profile
On the basis of the assessment of organizational strengths and weaknesses, a strategic
advantage profile is prepared which shows the various strong areas of the organization. This
profile can show the strengths or weaknesses in terms of degree, either in quantity like 1 to 5
for various factors or definition very strong to average.

Answer No. 9
Cost leadership strategy will allow a firm to earn above average returns despite strong
competitive forces. A glaring example is that of Nano Venture of Tata Company of India. The
following factors facilitates a firm under ‘Cost leadership strategy’ to earn above average
returns despite strong competitive forces:
1. Rivalry: Having the low cost position serves as a valuable defence against rivals. Because
of the cost leader’s advantageous position, especially in logistics, rivals cannot reduce
their costs lower than the cost leaders and so they cannot claim above average returns.
2. Buyers: The cost leadership strategy also protects against the power of customers.
Powerful customers can drive prices lower but they are not likely to be driven below that
of the next most efficient industry competitor. Prices below this would cause the next most
efficient competitor to leave the market, leaving the cost leader in a stronger position
relative to the buyer.

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3. Suppliers: The cost leadership strategy also allows a firm to better absorb any cost
increases forced on it by powerful suppliers because the cost leader has greater margins
than its competitors. In fact, a cost leader may be able to force its suppliers to keep prices
low for them.
4. Entrants: The cost leadership strategy also discourages new entrants because the new
entrant must be willing to accept no better than average returns until they gain the
experience and core competencies required to approach the efficiency of the cost leader.
5. Substitutes: For substitutes to be used, they must not only perform a similar function but
also be cheaper than the cost leader’s product. When faced with substitutes products, the
cost leader can reduce its price.

Answer No. 10
Product positioning starts by segmenting the market based on different benefits that each
customer group seeks from the product. This can be used to identify opportunities and specify
the current and desired positioning of the product or service.
Product differentiation is the act of distinguishing a product from that of its competitors on one
or more basic performance or image features-like design, quality, etc.,
Market segmentation is ‘the act of dividing a market into distinct groups of buyers who might
require separate products and/or marketing mixes.’
The relationship among these three concepts can possibly be expressed as under-
• The goal of product positioning is to develop a differential product (product
differentiation) that creates a unique mind share, particularly in the target market
segment.
• When designing the product, quality assurance is incorporated into the features that most
affect the desired competitive positioning (market segment) of the product.
• Setting the price for the positioned product, by estimating how much extra quality the
product will possess over and above the competition and how much the target markets’
consumers are prepared to pay for this extra quality-over and above the competitor’s
actual selling price.
To sum up, product positioning is the art of “designing the company’s product and marketing
mix to fit a given place in the consumers’ mind.”

Answer No. 11
Following are the alternative business strategies as devised by M.E. Porter’s.
1) Cost leadership strategy
Cost leadership strategy aims at broad mass market sets out to become the low (i.e. lowest cost
producer in the industry). The SBU must exploit all resources optimally and has to have all
sources of cost advantage, reap scale of economy, efficient scale facilities, and cost reduction
from experience. Such SBU typically sells a standard quality product. The SBU has to drive
down cost throughout the value chain. This strategy allows profit even during heavy
competition. For example: Wal-Mart, Almo Rent-A-Car, Southwest Airlines, Timex, Gateway
2000 have been found to have followed cost leadership strategy time and again.
2) Differentiation Strategy

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Differentiation strategy aims at broad mass market sets out to become the unique or different
in the industry. The SBU’s products are assumed as different in the whole industry. This is the
mass marketing approach as there is no market segmentation in this strategy. It seeks to be
unique in the industry on some dimensions & attributes that are widely valued by buyers, i.e.
providing unique & superior value to the buyer in terms of product quality, special features or
after sale service. Broad scope differentiator bases its strategy on “widely valued attributes”
E.g., Walt Disney productions, Maytag Appliance, Nike athletic shoes, Apple computer,
Mercedes Benz automobiles, IBM all have adopted this strategy. Differentiation based strategy
is rewarded for its uniqueness with a premium price compared with that of competitors.
3) Focus Strategy
Contrary to broad target strategy, in focus strategy, a particular segment is selected to be served.
There are 2 sub strategies: cost focus strategy and differentiation focus strategy.
(3a) Cost Focus Strategy
Cost focus strategy focuses on a particular segment or niche, i.e. buyer group or geographical
market, and in this segment, the SBU is the lowest cost producer, i.e. not in the whole industry.
The firm seeks cost advantage in its target segment and becomes the lowest cost producer in
the particular segment. For example - Fadal Engineering (that deals in machine tools to small
manufacturers). This strategy is more possible alternative as compared to cost leadership, i.e.
in one industry there may be as many cost focusers as there are segments.
(3b) Differentiation Focus Strategy
The SBU seeks differentiation action in its target segment, i.e. the SBU differentiates to meet
the particular requirements of the segment in a way that allows the firm to charge premium price.
In contrast to broad scope differentiator, focus differentiator looks for segments with special
needs and meets them better. For example, Apple computers’ customized computers, Casey’s
General Stores, Morgan Stores, and Inner City Entertainment: (the company that builds hi
quality movie theatres in inner-city locations for Afro American esp. South side of Chicago).

Answer No. 12
It was developed by Boston Consulting Group. It focuses on balance of the portfolio. It uses
relationship between market share and market growth to balance the portfolio. Market share
is the share in relation to the largest competitor. Market growth is the annual market growth
rate. It is based on the observation that a company's business units can be classified into
four categories based on combinations of market growth and market share relative to the
largest competitor, hence the name "growth-share". Market growth serves as a proxy for
industry attractiveness, and relative market share serves as a proxy for competitive
advantage. The growth-share matrix thus maps the business unit positions within these two
important determinants of profitability
The BCG matrix method is based on the product life cycle theory that can be used to
determine what priorities should be given in the product portfolio of a business unit. To ensure
long-term value creation, a company should have a portfolio of products that contains both
high-growth products in need of cash inputs and low-growth products that generate a lot of
cash. The basic idea behind it is that the bigger the market share a product has or the faster
the product's market grows, the better it is for the company.
The BCG matrix can be used to determine what priorities should be given in the product
portfolio of a business unit. Using the BCG approach, a company classifiesits different

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businesses on a two-dimensional growth share matrix. Two dimensions are market share
and market growth rate. In the matrix:
 The vertical axis represents market growth rate and provides a measure of market
attractiveness.
 The horizontal axis represents relative market share and serves as a measure of
company’s strength in the market.
Thus, the BCG matrix depicts quadrants as shown in the following table:
Relative Market Share
High Low
High Stars Question Marks
Market
Growth Rate Low Cash Cows Dogs

BCG Matrix
Different types of business represented by either products or SBUs can be classified for
portfolio analyses through BCG matrix. They have been depicted by meaningful
metaphors, namely:
(a) Stars are products or SBUs that are growing rapidly. They also need heavy investment
to maintain their position and finance their rapid growth potential. They represent best
opportunities for expansion.
(b) Cash Cows are low-growth, high market share businesses or products. They generate
cash and have low costs. They are established, successful, and need less investment to
maintain their market share. In long run when the growth rate slows down, stars
become cash cows.
(c) Question Marks, sometimes called problem children or wildcats, are low market
share business in high-growth markets. They require a lot of cash to hold their share.
They need heavy investments with low potential to generate cash. Question marks if
left unattended are capable of becoming cash traps. Since growth rate is high,
increasing it should be relatively easier. It is for business organizations to turn them
stars and then to cash cows when the growth rate reduces.
(d) Dogs are low-growth, low-share businesses and products. They may generate enough
cash to maintain themselves, but do not have much future. Sometimes they may need
cash to survive. Dogs should be minimized by means of divestment or liquidation.
Organizations use market share and market growth rate to build-up portfolio. The aim is to
achieve balance. The strategic options for building portfolio of SBUs can be:
◼ Build: Allocate more resources to Stars and Question Marks to gain and sustain market
share.
◼ Hold: Allocate present level of resources to Cash Cows to defend market share and
generate cash flows.
◼ Harvest: Allocate less resources to weak cash cows. Eventually withdraw them from
business.
◼ Divest: Do not allocate resources to Dogs. Liquidate them.

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Answer No. 13
The process of strategic choice is essentially a decision-making process. The decision making
process consists of setting objectives, generating alternatives, choosing one or more alternatives
that will help the organization achieve its objectives in the best possible manner and finally,
implementing the chosen alternative. Strategic Choice is the decision for selection of the best
strategic option. It helps achieve the organization’s objectives. Strategic options are evaluated
to assess their suitability, acceptability and feasibility.
In order to qualify for strategic choice, the evaluated strategic option should meet the
following criteria:
a) Mutually Exclusive: The strategic option should be mutually exclusive. It must stand on
its own.
b) Success: The strategic option should have a good probability of success. It should be
implementable. It should have sustainable competitive advantage.
c) Completeness: The strategic option should take into account all the key strategic issues.
It should be complete.
d) Internal Consistency: The strategic option should not contradict vision, mission and
objectives of the organization.
e) Strategic Gap: Strategic gap is the gap between current and future desired performance. The
strategic option should help fulfil this gap.
f) Flexible: The strategic option should provide flexibility.
To make choice from among the alternatives, a decision maker has to set certain criteria on
which to accept or reject alternatives. The process of strategic choice consists of the following
steps
a) Focusing on strategic alternatives
b) Analyzing the strategic alternatives
c) Evaluating the strategic alternatives
d) Choosing from among the strategic alternatives
The major strategic choice process can be given as follows:
a) Rank attractive strategic options
b) Make strategic choice
1. Rank feasible Strategic Options: Attractive strategic options, evaluated in terms of
suitability, acceptability and feasibility are ranked. The ranking is done on the basis of
their potential for objective achievement.
2. Make strategic choice: The best options are selected as strategies. Good judgement of
the strategist managers is the essence of strategic choice.
◼ Cultural and political factors of the organization influence strategic choice.
◼ Strategic choice should be consistent with or build on past strategies that have worked
well.

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Answer No. 14
Strategic control systems are the formal target, measurement, and feedback systems that allow
strategic managers to evaluate whether a company is achieving superior efficiency, quality,
innovation, and customer responsiveness or not while implementing its strategy. The strategic
control identifies the key assumptions and keeps track of any change in them so as to assess
their impact on the strategy and its implementation. Further, strategic control monitors the
progress of various activities undertaken while implementing the strategy and if deviation
exists, starts the corrective actions. There are four areas in which strategic control involves.
• Premise control
• Implementation control
• Strategic surveillance and
• Special alert control
i. Premise control: A strategy may be based on certain premises related to environment and
industry factors. The environmental factors are beyond the control of a company and they
exercise considerable influence over the success of the strategy. These factors differ among
industries. The premise control is designed to check systematically and continuously
whether or not the premises set during the planning and implementation process are still
valid.
The premise control enables the strategist to take corrective action at the right time rather
than continuing with a strategy based on invalid assumptions. The responsibility for
premise control can be assigned to the corporate planning staff that can identify key
assumption and keep a regular check on their validity.
ii. Implementation control: The implementation of a strategy results in a series of steps,
plans programs, projects, investment, and moves undertaken over a period of time and the
resources are allocated for implementing these. Strategic control continually evaluates the
performance of implemented strategy and identifies the gap of actual performance
comparing with objectives. It evaluates whether the plans, programs, and projects are
actually guiding the organization towards its predetermined objectives or not. If it is felt to
revise, they have to be revised. In this manner, strategic control leads to strategic
rethinking.
iii. Strategic surveillance: Strategic surveillance aims at a more generalized and overarching
control. It is designed to monitor a broad range of events inside and outside the company
that are likely to threaten the course of the company’s strategy. After the examination of
assumptions and evaluation of implemented strategy, the strategic control adjusts the
strategies according to new requirements. This is done because of the dynamic
environments and gap identified while implementing strategy, likely to threaten the course
of the firm's strategy.
iv. Special alert control: Special alert control is a mechanism for a quick response and urgent
reassessment of the strategy in the light of sudden and unexpected events. It can be
exercised through the formulation of contingency plans and assigning the responsibility of
handling unforeseen events to teams constituted for the purpose of unexpected product
lunch. Industrial disaster, natural catastrophe are the examples of such unforeseen events.

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Answer No. 15
Strategic management process doesn’t end when the firm decides what strategies to
pursue. There must be a translation of strategic thought into strategic action. This
requires support of all managers and employees of the business. Implementing strategy
affects an organization from top to bottom; it affects all the functional and divisional areas
of a business. Strategy implementation requires introduction of change in the organization
to make organizational member adapt to the new environment.
Strategic implementation is concerned with translating a strategic decision into action,
which presupposes that the decision itself (i.e., the strategic choice) was made with some
thought being given to feasibility and acceptability. The most technically perfect strategic
plan will serve little purpose if it is not implemented effectively. Many organizations
tend to spend an inordinate amount of time, money, and effort on developing the strategic
plan, treating the means and circumstances under which it will be implemented as after
thoughts. Change comes through implementation and evaluation, not through the plan. A
technically imperfect plan that is implemented well will achieve more than the perfect
plan that never gets off the paper on which it is typed.
Thus, Strategy formulation without this phase of strategic management is absolutely a ‘day-
dream’. Strategy formulation and implementation are viewed as the two sides of the same
coin. Strategy implementation involves the following steps:
- Operationalization of strategy
- Managing conflict
- Matching strategy with structure
- Restructuring and reengineering
- Linking performance and pay to strategies
- Managing resistance to change
- Creating a strategy supportive culture
- Strategy evaluation and control
• Operationalization of strategy: Operationalization of strategy begins with the
development of annual objectives; functional planning; programs, budget and procedures;
policies, and communication of above documents to key employees.
• Managing conflict: Occurrence of conflict in the organization is common and inevitable.
Functional conflicts should be allowed as they work as change agent, but the dysfunctional
conflicts need to be managed. Management of conflict includes the activities such as
identification of conflicts, their sources, their probable impacts on the organization, selection
of appropriate tools and techniques to settle the undesirable conflicts, and execution of
conflict resolution technique.
• Matching strategy with structure: Successful implementation of strategy essentially
requires the appropriate organizational structure. Among the several types of structures, the
business firm should choose the one that can best address the thrust and essence of strategy.
Mismatch between the strategy and structure may result into a nightmare.
• Restructuring and reengineering: Strategy implementation may call for reengineering
in which critical problems are identified and fixed through process management, process

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innovation, or process redesign. It involves reconfiguring or redesigning work, jobs, and
process to improve cost, quality, service and speed.
• Linking performance and pay to strategies: Successful implementation of strategy
entails linking performance and pay to strategy. Performance based pay may be suggested
in order to induce the employees in enhance the productivity. In addition, several other
schemes and plans may be considered.
• Managing resistance to change: Strategy implementation may require change which
often create fear among the employees. Resistance may appear during the implementation
which needs to be addressed and overcome in time. Change resistance management includes
the activities such as identification of nature of resistance, causes and selection and
execution of change strategy. Widely considered change strategies include ‘Force change
strategy’, ‘Educative change strategy’, and ‘Rational or self-interest change strategy’.
• Creating a strategy supportive culture: Implementation of new strategy may demand
different culture. Incompatible aspects of existing culture to proposed strategy should be
identified and changed.
• Strategy evaluation and control: Finally, implementation requires evaluation and control
to ensure that the direction of strategy implementation is in the right way. Deviations found
should be corrected in time. Corrections may be required in inputs, process, or output.

Answer No. 16
Strategy evaluation continually assesses the changing environment to uncover events that
significantly affect the course of the strategy. Top management exercises strategy evaluation.
It is long term oriented. It focuses on external environment. It is proactive and provides early
warning about the performance of the strategy. Strategy evaluation involves re-examination of
assumptions, measuring performance and appropriate corrective measures. Assumptions made
while formulating a strategy may no longer be valid and relevant as the environment is
dynamic. So the strategy evaluation takes into account the changing assumptions. Strategy
evaluation continually evaluates the implementation performance of a strategy and gaps are
identified. Appropriate measures are taken to adjust the strategy with due consideration to
changing assumptions and implementation gaps. Strategy evaluation can be strategic and
operational.
Strategic evaluation can be of four types: premise evaluation, implementation evaluation,
strategic surveillance evaluation and special alert evaluation. Premise evaluation involves re-
examination of the validity of premises to make necessary changes at the right time. It is
concerned with keeping track of changes in premises and assessing their impact on strategy
implementation. Implementation evaluation evaluates whether the plans, program, projects and
budget are guiding the organization towards objective achievement. It involves strategic
rethinking. Strategic surveillance monitors a broad range of events inside and outside the
organization, which threaten the course of action. It can be selective surveillance or
organizational surveillance. Special alert control is triggered by detection of a crisis. It provides
rapid response through immediate reassessment of strategy during crisis situation.
Operating evaluation controls the allocation and use of resources through performance
evaluation of strategic business units. It is a cyclical process of four steps: setting standards of
performance, measure actual performance, evaluate performance and taking corrective actions.
Standards in the form of planned or budgeted performance are set for implementation. Then

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actual performance is measured and compared against performance standards. Corrective
actions are taken to bring performance in line with the standards.

Answer No. 17
Chief executive is a person whose responsibility is to make major decisions for the organization
and implementation of that decisions to secure the ends. In most of the Nepalese companies,
the chief executive is referred as the chief executive officer; managing director, chairman,
president, general manger etc. The CEO of the firm has to perform the roles of strategists,
organizational builder, and a leader. Though, the board of director and members of top
management play an important role, the strategic responsibility still lies with the CEO.
According to Mintzberg the chief executive officer, as a top management, has to perform three
sets of behavioural roles: interpersonal, informational and decisional. The interpersonal roles
are ceremonial duties to be performed as a figurehead, directional roles as a leader, and liaison
for outside contacts. Informational role consists of monitoring (information), and disseminating
(inside the organization), and spokesman (external world). The decisional roles are those
calling for entrepreneurial action, sorting out problems, allocation resources, and acting as a
negotiator.
According to Reilly the chief executive officer as the top management has to perform the
following functions:
▪ Setting the objectives for the management
▪ Establishing policies
▪ Assigning responsibilities
▪ Selecting and developing key personnel
▪ Integrating people’s efforts in achieving company objectives.
▪ Stimulating creative thinking
Role of chief executive in strategy implementation
i. CEO is the chief leading office in the whole strategy implementation process.
ii. He is the overall direction setter in this process.
iii. Since CEO is directly and actively involved in goal formation and strategy making, no
other person but him has the full understanding of the sentiment about it and so he should
be directly and closely associated in the implementation to realize them.
iv. Since the CEO is the most active agent in strategic planning so he has full understanding
of it and hence will be effective in strategy implementation phase also.
v. He is the chief implementer of strategies because he links the organizational members with
the BOD of the company.
In Nepalese context, we find that many of the CEOs get involved in internal functioning as
day-to-day operations. It results that they have less time for strategic issues. It had to be
recognized that too much involvement in routine matters reduces one’s creativity. This is in
sharp contrast to the CEOs in the US, where they are able to allocate a large part of their time
for long-range planning and policy issues.
The role of chief executive, as perceived by Andrews Kenneth R is the variety of aspects
grouped into three:

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1. CEO as an architect of strategy. The requirements of this role are: analytical ability,
creativity, self-awareness and sensitivity to society’s expectations regarding the
businessman’s broader social responsibilities.
2. CEO must have the sense of personal purpose and awareness of personal needs.
Similarly, awareness of society’s expectation requires the CEO as innovator and
organization leader. CEO must be the defender to strategy. Like other administrators, the
CEO has to find himself in the role of mediator and negotiator. He must deal the conflict
emerged among organizational employees. He is also responsible to make climate. Here
the term climate is used to designate the quality of cooperation, the development of
individuals, the extent of member’s commitment to organizational purpose, and the
efficiency with which that purpose becomes translated into results.
3. CEO as a personal leader. Personal leadership of a CEO can be characterized in various
ways, such as behaviour from self-oriented to organization oriented to people oriented or
from task centred to relationship centred or from autocratic to democratic or laissez faire
and approaches from classical to human relations to revisionist. The business leaders must
have such qualities as drive, intellectual ability, initiative, creativeness, social ability and
flexibility. Therefore, the CEO must examine his own characteristic behaviour to try to see
whether it meets or complicates the needs of his own organization or it directs or distracts
the attention given by his followers to organizational goals.

Answer No. 18
Decision making is an indispensable as well as pervasive function of management. Strategic
management as believed to be set of decisions actions which have long-run effect on
organizational effectiveness obviously requires sound and proper decisions. Decisions having
long-run effect are called strategic decisions which are essential in strategic management. The
significance of strategic decisions is pervasive as they
• Provide long-run direction to an organization as its focus is far-reaching,
• Help in strategy formulation,
• Facilitate availability and allocation of resources,
• Help to recognize organization’s own position and identify opportunities of
competitive advantage,
• Help to boost managerial effectiveness, and
• Aid to devise appropriate and sound control mechanism.
Followings are the stages in rational decision-making process.
1) Recognize and Define the Problem: First, the manager should recognize and define
decision situation i.e. problem or opportunity. Recognize symptoms and causes leading
to problem or opportunity clearly and precisely, i.e. its causes & relationship to other
factors. Understand the situation clearly and accurately, i.e. falling profit, lagging sales,
rising cost, customer complaint, machine failure, losing market share. Pinpoint the gap
between what we want to happen & what is likely to occur if no action is taken. Let’s take
an example; buying a company car is the identified problem there are three common
stumbling blocks for those attempting to identify the problems:
a. Defining the problem according to a possible solution.

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 b. Focusing on narrow, low priority areas.
c. Diagnosing problems in terms of their symptoms.
2) Identify Appropriate Alternatives: After the problem and its most probable cause have
been identified, attention turns to generating alternative solutions. This is the creative step
in problem solving. It takes time, patience, and practice to become a good generator of
alternative solutions. Managers should have to identify the appropriate alternatives for the
further decision making process in the organizations. Almost all problems have alternatives
for solution. Appropriate alternative courses of actions to solve the problem should be
identified.
3) Evaluate Selected Alternatives: Alternatives solutions should be screened for the most
appealing balance of effectiveness and efficiency in view of relevant constraints and
intangibles. After developing the various alternatives, the managers evaluate the available
alternatives to select the best one. Each selected alternative should be evaluated in terms of
decision criteria. Key considerations are:
a) Feasibility of the alternative in terms for costs, time, legal constraints, human and
other resources.
b) Satisfactoriness of the alternative for solving the problem.
c) Affordability of the alternative
The evaluated alternatives are ranked according to their benefit/cost ratios.
4) Choose the Best Alternative
Decision making is the process of selecting the best alternative to be implemented in the
organizations. This is the choice phase for choosing the best alternative. The approaches
for making the choice can be:
a) Experience: Experience is the best teacher. Decision making is not only a rational
process but also a judgmental process. Experience can be a useful basis for choosing
a course of action. The judgement of the decision maker is important in selecting the
best alternative.
b) Experimentation: It is pre-testing the alternative. Market testing of new products is
an example. Best decision can be chosen on the basis of experimentation.
c) Research and Analysis: A model is built to simulate the problem. Research is very
important dimension to select the best alternative decision to be implemented in the
organization.

Answer No. 19
Strategic decision makings and Nepalese managers cannot be separated. They go inline
together. Moreover with the organization’s concern on the firm performance, strategic decision
makings are considered crucial to managers that manage the organization. They have to make
sound decisions in order to ensure the organization that they work with will manage the
turbulences of business. Moreover due to the demands of globalization, managers have to make
several strategic decision makings in their managerial functions. Nepalese managers are
affected with several factors in their strategic decision makings for organization. These factors
will directly and indirectly affect their well-being of the organization.

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 Decision making is number one job of managers. All levels of managers must make
decisions. All functions of manager involve decision making and such decisions influence
organizational performance which directly and indirectly impact the country economy.
Rational decision making in Nepal is not effective. The reasons are:
• Efforts are not made to clearly identify and understand the problem. Symptoms are taken
as problems. Information collection about the problem is inadequate.
• Nepalese managers tend to decide before properly understanding the problem. They lack
listening skills and well-ordered sense of priorities.
• Nepalese managers identify few alternatives for problem solving. File search is the main
source. The tradition of discussing alternatives with subordinates is non-existent. Creative
methods like Brainstorming and Delphi Technique are missing. Participative decision
making is lacking.
• The evaluation of alternatives is generally based on judgment of the superiors. Quantitative
techniques are not effectively used for evaluation purposes.
• The choice of the course of action is based on the manager's experience, hunch and intuition.
The best alternatives are not chosen in terms of feasibility, satisfactoriness and affordability
to organization.
• Decisions in Nepal are not effectively implemented unless the parties benefiting from
decisions put pressures for implementation. Employees remain unwilling partners in
implementation of decisions.
• Decisions in Nepal generally lack effective monitoring, evaluation and follow-up. Feedback
is poor.

Answer No. 20
1. Based on the above case study, it appears that strategic management in private firms in Nepal
is reactive and ad-hoc. The rapidly changing environment and increased competition requires
managers and strategic decision makers to be more analytical and foresighted rather than
intuitive and reactive. While the political and economic uncertainty in Nepal makes it difficult
for organizations to forecast trends and make long term plans, it is imperative that they become
more proactive, develop and leverage key resources and capabilities, and discern unique ways
to compete and create advantages over their competitors. In order to effectively face their
domestic and global competitors, it is important that managers realize the need to have
superior resources and capabilities, to base strategies on such capabilities (to be different than
competitors), and to aggressively pursue unique strategies that separate themselves apart from
competitors. For effective result a company’s strategy needs to be based on what is going on
in the environment, to exploit internal resources and capabilities, to be different from the
competitors, and should be implemented with proficiency. While the implementation of the
core ideas of strategic management should be based on the unique conditions of Nepal, we
believe that companies in Nepal could benefit from being more analytical, proactive, and
holistic in their approach to strategic management.
2. Some of the key recommendations to managers are:
First, it is important that managers think of strategic management as a holistic and on-going
process. It involves analysis of both external environment and internal resources and
opportunities; determining who you are, what you want to pursue, and how you get there,

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identifying unique opportunities and developing strategies to pursue them; focusing on
developing internal resources and capabilities that will make you better than your competitors,
and so on. It should not be seen as just a planning process. While planning is a good start,
managers must take their organizations to the next level.
Second, as environmental changes become increasingly rapid and competition becomes more
intense, managers must find ways to deal with them and create advantages for their company
to outperform their competitors. So, it is important that managers understand the notion of
competitive advantage and devise ways to create and sustain advantages. Competitive
advantage comes from having a unique strategy (or position) in the industry, developing
company resources and capabilities that are valuable (provide advantages to you and your
customers), rare (other competitors do not have it or have difficulty getting it), non-imitable
(competitors cannot duplicate what you have), and non-substitutable (competitors cannot use
something else as a replacement for what you have). Companies could create and sustain
advantages when they combine a unique strategy with valuable, rare, non-imitable, and non-
substitutable resources they have.
Finally, since a key aspect of an organization’s resource is its employees, organizations need
to pay special attention to recruit the best (most qualified, talented, and motivated) people,
train and develop them, and pay well in order to keep their motivation high. Research has
shown that to create competitive advantage, companies need to recruit and retain knowledge
based employees and have them share knowledge throughout the organization. Knowledge is
a valuable resource that cannot be easily copied by the competitors. So, organizations that
have a strong knowledge base and use the knowledge are likely to outperform their
competitors in any sort of difficult environment.

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