SUGGESTED ANSWERS TO

THE QUESTIONS SET AT

CHARTERED ACCOUNTANCY PROFESSIONAL (CAP)-III LEVEL (Group-II)

DECEMEBER 2020 EXAMINATIONS

The Institute of Chartered Accountants of Nepal (ICAN)

Satdobato, Lalitpur
© The Institute of Chartered Accountants of Nepal
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Year and month of Publication: 2021 March

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the students' answers in the examination. The answers are prepared by the concerned
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 Table of Contents
Paper-5: Management Information and Control System ...................................................................... 4
Paper-6: Advanced Taxation............................................................................................................... 17
Paper-7: Advanced Cost and Management Accounting ..................................................................... 37
Paper-8: Strategic Management & Decision Making Analysis .......................................................... 52
Paper-5: Management Information and Control System
Attempt all questions.
Use separate answer book for each question.

1. Assume that you are working as a project manager to develop an information system for a
company and you chose Joint Application Development (JAD) approach to determine
requirements for the system from users and managers of the company. Based on this
scenario, answer the following questions.
a) Explain JAD session along with its participants. What are the benefits of using JAD?
(7+3=10 marks)
b) What is information system audit? Explain phases you use to audit the information
system used in the company. (2+8=10 marks)
Answer
a) First Part: Joint Application Development (JAD) started in the late 1970s at IBM, and
since then the practice of JAD has spread throughout many companies and industries.
The main idea behind JAD is to bring together the key users, managers, and systems
analysts involved in the analysis of a current system. The primary purpose of using JAD
is to collect systems requirements simultaneously from the key people involved with the
system. As with a group interview, having all the key people together in one place at one
time allows analysts to see where there are areas of agreement and where there are
conflicts. Meeting with all of these important people for over a week of intense sessions
allows you the opportunity to resolve conflicts, or at least to understand why a conflict
may not be simple to resolve.
JAD sessions are usually conducted at a location other than the place where the people
involved normally work. The idea behind such a practice is to keep participants away
from as many distractions as possible so that they can concentrate on systems analysis. A
JAD may last anywhere from four hours to an entire week and may consist of several
sessions. A JAD employs large amount of corporate resources, the most expensive of
which is the time of the people involved. Other expenses include the costs associated
with flying people to a remote site and putting them up in hotels and feeding them for
several days. The typical participants in a JAD are listed below:
 JAD session leader – The JAD session leader organizes and runs the JAD. The JAD
leader sets the agenda and sees that it is met; he or she remains neutral on issues and
does not contribute ideas or opinions, but rather concentrates on keeping the group on
the agenda, resolving conflicts and disagreements, and soliciting all ideas.
 Users – The key users of the system under consideration are vital participants in a
JAD. They are the only ones who have a clear understanding of what it means to use
the system on a daily basis.
 Managers – Managers of the work groups who use the system in question provide
insight into new organizational directions, motivations for and organizational impacts
of systems, and support for requirements determined during the JAD.
 Sponsor – JAD must be sponsored by someone at a relatively high level in the
company. If the sponsor attends any sessions, it is usually only at the very beginning
or the end.
 Systems analysts – Members of the systems analysis team attend the JAD, although
their actual participation may be limited. Analysts are there to learn from users and
managers, not to run or dominate the process.
  Scribe – The scribe takes notes during the JAD sessions usually using laptop, word
processor. Notes and diagrams may be entered directly into a CASE tool.
 IS staff – Besides systems analysts, other information systems (IS) staff may attend to
learn from the discussion and possibly contribute their ideas on the technical
feasibility of proposed ideas or the technical limitations of current systems.
JAD sessions are usually held in special-purpose rooms where participants sit around
tables. These rooms are typically equipped with whiteboards. Other audiovisual tools
may be used, flip charts, and computer-generated displays. Computers may be used to
create and display form or report designs, diagram existing or replacement systems, or
create prototypes.
When a JAD is completed, the end result is a set of documents that detail the workings of
the current system related to the study of a replacement system.
Second Part: The benefits of using JAD are as follows:
 Offers a great communication among all the users of the system
 JAD allows you to resolve difficulties more simply and produce better, error-free
software
 The joint collaboration between the company and the clients lowers all risks
 JAD reduces costs and time needed for project development
 Well-defined requirements improve system quality
 Due to the close communication, progress is faster
 JAD encourages the team to push each other to work faster and deliver on time
b) First Part: The effectiveness of an information system’s controls is evaluated through an
information systems audit. An audit aims to establish whether information systems are
safeguarding corporate assets, maintaining the integrity of stored and communicated data,
supporting corporate objectives effectively, and operating efficiently. These reviews may
be performed in conjunction with a financial statement audit, internal audit, or other form
of attestation engagement. These audits are also known as "automated data processing
(ADP) audits" and "computer audits". They were formerly called "electronic data
processing (EDP) audits". The purposes of an IT audit are to evaluate the system's
internal control design and effectiveness.
Second Part: There are four phases in information systems audit: audit planning, risk
assessment and business process analysis, performance of audit work, and reporting.
 Audit Planning: In this phase we plan the information system coverage to comply
with the audit objectives specified by the Client and ensure compliance to all Laws
and Professional Standards. The first thing is to obtain an Audit Charter from the
Client detailing the purpose of the audit, the management responsibility, authority and
accountability of the Information Systems Audit function as follows:
1. Responsibility: The Audit Charter should define the mission, aims, goals and
objectives of the Information System Audit. At this stage we also define the Key
Performance Indicators and an Audit Evaluation process;
2. Authority: The Audit Charter should clearly specify the Authority assigned to the
Information Systems Auditors with relation to the Risk Assessment work that will
be carried out, right to access the Client’s information, the scope and/or
limitations to the scope, the Client’s functions to be audited and the auditee
expectations; and
 3. Accountability: The Audit Charter should clearly define reporting lines,
appraisals, assessment of compliance and agreed actions.
The Audit Charter should be approved and agreed upon by an appropriate level within the
Client’s Organization.
In addition to the Audit Charter, we should be able to obtain a written representation
(“Letter of Representation”) from the Client’s Management acknowledging:
1. Their responsibility for the design and implementation of the Internal Control
Systems affecting the IT Systems and processes
2. Their willingness to disclose to the Information Systems Auditor their knowledge
of irregularities and/or illegal acts affecting their organization pertaining to
management and employees with significant roles within the internal audit
department.
3. Their willingness to disclose to the IS Auditor the results of any risk assessment
that a material misstatement may have occurred
 Risk Assessment and Business Process Analysis: Risk is the possibility of an act or
event occurring that would have an adverse effect on the organization and its
information systems. Risk can also be the potential that a given threat will exploit
vulnerabilities of an asset or group of assets to cause loss of, or damage to, the assets.
It is ordinarily measured by a combination of effect and likelihood of occurrence.
More and more organizations are moving to a risk-based audit approach that can be
adapted to develop and improve the continuous audit process. This approach is used
to assess risk and to assist an IS auditor’s decision to do either compliance testing or
substantive testing. In a risk based audit approach, IS auditors are not just relying on
risk. They are also relying on internal and operational controls as well as knowledge
of the organization. This type of risk assessment decision can help relate the
cost/benefit analysis of the control to the known risk, allowing practical choices.
The process of quantifying risk is called Risk Assessment. Risk Assessment is useful
in making decisions such as:
1. The area/business function to be audited
2. The nature, extent and timing of audit procedures
3. The amount of resources to be allocated to an audit
 Performance of Audit Work: In the performance of Audit Work the Information
Systems Audit Standards require us to provide supervision, gather audit evidence and
document our audit work. We achieve this objective through:
1. Establishing an Internal Review Process where the work of one person is
reviewed by another, preferably a more senior person.
2. We obtain sufficient, reliable and relevant evidence to be obtained through
Inspection, Observation, Inquiry, Confirmation and recomputation of calculations
3. We document our work by describing audit work done and audit evidence
gathered to support the auditors’ findings.
Based on our risk assessment and upon the identification of the risky areas, we move
ahead to develop an Audit Plan and Audit Program. The Audit Plan will detail the
nature, objectives, timing and the extent of the resources required in the audit.
 Based on the compliance testing carried out in the prior phase, we develop an audit
program detailing the nature, timing and extent of the audit procedures. In the Audit
Plan various Control Tests and Reviews can be done. They are sub-divided into:
1. General/ Pervasive Controls
2. Specific Controls
 Reporting: Upon the performance of the audit test, the Information Systems Auditor
is required to produce and appropriate report communicating the results of the IS
Audit. An IS Audit report should:
1. Identify an organization, intended recipients and any restrictions on circulation
2. State the scope, objectives, period of coverage, nature, timing and the extend of
the audit work
3. State findings, conclusions, recommendations and any reservations, qualifications
and limitations
4. Provide audit evidence
2. The core banking system of NPB Bank was developed in 2005 by an IT company. Same
system has been in operation since last 15 years. Now two departments of the Bank:
operation and IT want to upgrade the Core Banking System. In this situation, answer the
following question:
a) What are the parameters/criteria that have to be analyzed while recommending the
upgradation of the system to Board? 7 marks
b) What are the possible hurdles for the upgradation? 7 marks
c) What will be the plan to ensure the business continuity? 6 marks
Answer
a) Yes, it is very true that no system is forever, same also applies with the above-mentioned
case of NPB Bank. Either it has to be upgraded or modified or changed during the course
of implementation based upon various conditions. Before making the decision of the
change or upgrade or modification of the system, following points
(parameters/conditions) have to be analyzed properly by the Operation and IT
Department together:
 The operational outcome of the system: As the bank has been using same system
since last 15 years there is many congestions and insufficiency in the system from
today's prospects. Some of them can be listed as: the number of simultaneous client
request handling, volume and speed of data processing and need of incorporation of
new types of services and new types of features.
 Technology saturation or need of new technology: The programing language,
frameworks and architecture of the development of the system might be outdated so
there needs the upgradation of the new system. Sometimes the system should be
upgraded due to changing need of hardware as well. As the programing concept is
older, chances of technical support are decreasing.
 The technical support from the vendor: Sometimes, the system would be so old that
the vendor would be unable to provide the technical support to keep it running. So, in
this case there arises the need of upgrading the existing system.
 The existing capacity of the database may become insufficient to hold the growing
needs of the data. So, in order to hold the increased demand of the capacity of the
database sometimes the upgrading of the system is recommended.
  The system needs to be upgraded to eradicate the errors and bugs and vulnerability in
the existing system.
 Recommendation from the ICT System Audit: Bank might have been carrying
periodical ICT system Audit. There must be recommendation from the audit
regarding the upgradation or amendment of the system.
 Compatibility with the new devices: When current system was developed on 2005,
the mobile banking was limited to the text-based services. However now the banking
is fully on mobile Apps. So, for the compatibility with the mobile system it also needs
to be upgraded.
 Interconnection with others: The banking system now cannot operate in isolation. It
has to be interconnected with other banks, mobile Apps, payment gateway service
providers and client’s system as well. But with the continuation of the older system
there might be difficulties in the interconnection.
b) The upgradation of the existing system to new system which might be completely
different, or integration of new modules to the existing system will surely have certain
challenges. These challenges might be technical and financial, and some might be related
with the human behaviors. The possible hurdles in the context of NPB Bank can be listed
as:
Technical Issues and Infrastructure:
Here the technical issues and infrastructure is relating with the hardware, software and
networking all. The proposed hardware and networking equipment are available in the
market or not, the cost associated with them, replacement of the existing system or
parallel operation are some of the concerns associated. How the integration of software
will be handled and how the changeover will be managed are few concerns associated
with it.
Economical and financial:
There should be clear evaluation of the financial benefit of the new system. The outcome
of the proposed system should surpass the short-term investment. This will be a
challenging issue to convince the top-level management to persuade for the upgradation.
Change Management Leadership:
If the Change Management is under the good leadership, the process will be easier
otherwise it will be a herculean task. The good leader can drive the process by bringing
all people together with proper communication of strategic objective. However, this
cannot be expected from the hand of poor leaders. The good leadership guides every
process effectively. These processes might be communication among all the staffs and
top-level management, determination of the strategic direction of upgradation, breaking
of the human resistance and cultural barrier.
Human Resistance and Cultural Barrier:
By nature, the human workforce prefers status quo. They feel comfortable with the
existing system and when new system is suggested they feel overwhelmed. So, the
human resistance and cultural barrier of the Bank will also be the big challenge. The
onboarding of the staffs from the beginning of the upgradation process, training and
orientation and continuous carrier upgrading plan can reduce these hurdles.
c) Business continuity is all about ensuring of the normal operation of the system in a set of
predefined time even in case of huge disaster thereby minimizing the losses to the
organization. The continuity of the business of NPB can be ensured with the following
process:
  Backup Plan
 Emergency Plan
 Proper Recovery Plan
Backup Plan:
The backup plan will outline the way to restore the same data on different locations of the
Bank. Backup plan describe the process and timing of replicating the same data in
different media in redundant location. The redundancy of location is done to ensure the
recovery of data even in the failure of some location. Backup plan describe following
points:
 Making copy of data regularly
 Automation of data backup process
 Saving of backed-up data on different medium
 Saving of backed-up data on different location
Emergency Plan:
Emergency plan is all about the immediate action to be taken in case of catastrophe. This
part of the disaster recovery plan outlines the actions to be undertaken immediately after
a disaster occurs. Following points clarify the emergency plan:
 Personnel to be notified in case of disaster
 Equipment to be operated or shutdown
 Procedures to be followed
Proper Recovery Plan:
Recovery plan mainly focuses on how the full capabilities of the system will be restored
and service will be resumed. Following points clarify the recovery plans:
 Formation of recovery committee
 Prioritizing the applications and systems to be recovered
 Replacement of hardware and network

3.
a) Why do we need knowledge of business for developing and using IT system? What is IT
governance? (5+3=8 marks)
b) Explain finance and accounting information system, and human resources information
system that support organization and management. (3.5+3.5=7 marks)
Answer
a) First Part: We cannot successfully design and use IT system without having knowledge
of the business. An IT System can have a major impact on corporate strategy and
organizational success. The involvement of managers and decision makers in all aspects
of information systems is a major factor for organizational success, including higher
profits and lower costs. Some of the benefits business organization seek to achieve
through information systems include: better safety, competitive advantage, fewer errors,
greater accuracy, higher quality products, improved communications, increased
efficiency and productivity, more efficient administration, superior financial and
managerial decision making.
 IT system should be designed to support different organizational business processes and
management decision making. IT systems can also be used to communicate with
suppliers, business partners, distributors, retailers, and even customers. To design and use
IT system that support efficiently and effectively, we should have knowledge of each and
every activity within the organization including its structure, management style, business
processes etc. The IT system designed without having detail knowledge of the
organization may not support the activities of the organization properly. Furthermore, the
system may not fulfill the needs of different stakeholders that are affected by the IT
system. The IT system designed without having detail knowledge of business may not
 achieve the business goals articulated by the user department
 operate at an acceptable cost, commensurate with the value produced for the firm
 meet carefully defined performance standards (such as response time and system
availability)
 produce accurate, reliable output
 be easy to learn and use
 be flexible
Second Part: Information technology governance (IT governance) is the collective tools,
processes and methodologies that enable an organization to align business strategy and
goals with IT services, infrastructure or the environment.
IT governance uses, manages and optimizes IT in such a way that it supports,
complements or enables an organization to achieve its goals and objectives.
IT governance is a broad concept that is centered on the IT department or environment
delivering business value to the enterprise. It is a set of rules, regulations and policies that
define and ensure the effective, controlled and valuable operation of an IT department. It
also provides methods to identify and evaluate the performance of IT and how it relates
to business growth. Moreover, by following and implementing an IT governance
framework such as CoBIT, an organization can comply with regulatory requirements and
reduce IT costs while attaining measurable business benefits.
b) The finance function is responsible for managing the firm’s financial assets, such as cash,
stocks, bonds, and other investments in order to maximize the return on these financial
assets. It also manages the capitalization of the firm like finding new financial assets in
stocks, bonds, or other forms of debt. The finance function must also obtain a
considerable amount of information from sources external to the firm in order to
determine whether the firm is getting the best return on investments. The account
function is responsible for maintaining and managing the firm’s financial records such as
receipts, disbursement, depreciation, payroll to account for the flow of funds in the firm.
Finance and accounting information systems support finance and accounting activities.
These information systems are also arranged by organizational level. At the strategic
level, these systems establish long-term investment goals for the firm and provide long-
range forecasts of the firm’s financial performance. At the management level, these
systems help managers oversee and control the firm’s financial resources. At the
knowledge level, these systems support finance and accounting by providing analytical
tools and workstations for designing the right mix of investments to maximize returns for
the firm. At the operational level, these systems track the flow of funds in the firm
through transactions.
The human resource function is responsible for attracting, developing, and maintaining
the firm’s work force. This function support activities such as identifying potential
 employees, maintaining complete record on existing employees, and creating programs to
develop employees’ talent and skills. Human resources information systems support
these activities. These information systems are also arranged by organizational level. At
the strategic level, these systems identify the manpower requirements like skills,
educational level, types of position, number of positions, and cost for meeting the firm’s
long-term business plans. At the management level, these systems help managers monitor
and analyze the recruitment, allocation, and compensation of employees. At the
knowledge level, these systems support analysis activities related to job design, training,
and the modeling of employee career paths and reporting relationships. At the operational
level, these systems track the recruitment and placement of the firm’s employees.
4.
a) How is manufacturing industry benefitted with the use of Supply Chain Management
System? 8 marks
b) What is digital signature? How do you authenticate digitized information? (2+5=7 marks)
Answer
a) Manufacturing industry nowadays is all about the production of the quality goods with
the efficient utilization of all its resources like material, machine and man and time and
cost. Because of the cost of the warehouse, nowadays manufacturing is more concerned
towards the just in time production and delivery. The computer-based information system
helps manufacturing industry to achieve this just-in-time production and delivery with the
increment of efficiency of production system.
Supply Chain Management (SCM) is one system that helps the manufacturing system to
access the relevant information of the raw materials and intermediate product at the right
time needed for the production. Beside this SCM also helps to provide the information
regarding the delivery of the finished product from industry to the customer end.
Supply Chain Management (SCM) is a cross-functional inter-enterprises system that uses
information technology to support and manage the links between some of a company’s
key business processes and those of its suppliers, customers and business partners. The
goal of SCM is to create a fast, efficient and low-cost network of business relationships
or supply chain to get a company’s products from concept to market. Thus, a SCM is
interconnected information system of business organizations that helps in easy flow and
tracking of the raw materials, intermediate products and finished goods. It minimizes the
material warehousing cost and product delivery cost.
SCM includes the information about the movement of raw materials, work in progress
inventory and finish goods from the point to origin to the point of consumption. Thus,
SCM is the design, planning, execution, monitoring and control of supply chain activities
with the objective of creating net value, building a competitive infrastructure, leveraging
worldwide logistics and synchronizing supply with demand. Thus, manufacturing
industry get highly benefited with the use of SCM by establishing efficient supply
networks among raw materials supplier to the end users with the just in time delivery of
raw material, intermediate product and finished product. To be specific, SCM reduces the
cost of delivery; warehouse and storage cost and reduces the production time from
concept to finished product at customer end.
b) First Part: A digital signature is a mathematical technique used to validate the
authenticity and integrity of a message, software or digital document.
The digital equivalent of a handwritten signature or stamped seal, but offering far more
inherent security, a digital signature is intended to solve the problem of tampering and
impersonation in digital communications. Digital signatures can provide the added
assurances of evidence to origin, identity and status of an electronic document,
 transaction or message, as well as acknowledging informed consent by the signer. In
many countries, digital signatures have the same legal significance as the more traditional
forms of signed documents.
Second Part: The term authentication refers to an electronic process that allows for the
electronic identification of a natural or legal person. Additionally, authentication may
also confirm the origin and integrity of data in electronic form. The terms digital
authentication or electronic authentication (e-authentication) synonymously refer to the
process where the confidence in user identities is established and presented electronically
to an information system.
When authenticating an online user, there are three factor categories that may be used to
assure that the user is who he or she makes a claim to be. These factor categories are:
 Knowledge factors – these would include a user’s password, passphrase, personal
identification number (pin) or a challenge response where the user would be required
to answer a pre-selected security question.
 Ownership factors – these would include something that the user has possession of,
such as a bank card, a hardware or software one time password (OTP) token or a cell
phone.
 Inherence factors – these factors relate to something that a user is or does and
includes biometric identifiers such as facial, fingerprint or retinal pattern recognition
along with other personal trait identifiers.
The most frequently used types of online user authentication sorted based on increasing
levels of security are as follows:
 Single-factor authentication - only one component out of one of the 3 factor
categories is used to authenticate a person’s identity. Experience shows that one
single factor does not provide sufficient protection against malicious intrusion and
misuse. Therefore, as soon as financially or personally relevant transactions are
involved, a higher level of security is preferable.
 Two-factor authentication – often referred to as 2FA, the user’s identity is
confirmed by using a combination of two independent components from two different
factor categories. For example, where a user has logged on to their online bank
account, with their username and password, and wishes to complete an online
transaction, he or she would need to enter an authentication factor in addition to the
knowledge factor (username and password) that was used to log on. The additional
factor must also be from a different factor category than the username and password.
An online banking user would typically use an authentication mechanism from the
ownership category such as an OTP device or mobile phone to receive an OTP in a
text message. OTPs are dynamic passwords which can only be used once and thereby
provide a strong level of protection against a range of attacks.
 Multi-factor authentication is similar to 2FA, but it can combine more than 2
authentication factors for enhanced security, whereas 2FA only uses two different
factors.
 Strong authentication – this type is often used as synonym for multi-factor
authentication or 2FA. However, unlike multi-factor authentication and 2FA, strong
authentication mandatorily requires non replicable factors or the use of digital
certificates to provide a higher level of authentication for users. If those criteria are
fulfilled, multi-factor authentication and 2FA are able to provide strong
authentication.
5.
 a) Explain risks and opportunities related with the use of Information Technology in
businesses. (4+4=8 marks)
b) What are the major aspects of quality of an information system? Why is vendor participation
necessary to ensure system quality? (4+3=7 marks)
Answer
a) Information technology (IT) plays a critical role in many businesses. If you own or
manage a business that makes use of IT, it is important to identify risks to your IT
systems and data, to reduce or manage those risks, and to develop a response plan in the
event of an IT crisis. Some of the common risks of using IT are:
 Unemployment and lack of job security – Implementing information technology
can save a great deal of time during the completion of tasks and some labor mechanic
works. Most paperwork’s can be processed immediately and financial transactions are
automatically calculated. As technology improves, tasks that were formerly
performed by human employees are now carried out by computer systems. Industry
experts believe that the internet has made job security a big issue as technology keeps
on changing each day. This means that one has to be in a constant learning mode, if
he or she wishes for their job to be secure.
 Dominant culture – While information technology may have made the world a
global village, it has also contributed to one culture dominating another weaker one.
 Security issues – Thieves and hackers get access to identities and corporate saboteurs
target sensitive company data. Such data can include vendor information, bank
records, intellectual property and personal data on company management. The
hackers distribute the information over the Internet, sell it to rival companies or use it
to damage the company’s image.
 Implementation expenses – To integrate the information system it requires pretty
good amount of money for software, hardware and people. Software, hardware and
some other services should be rented, bought and supported. Employees need to be
trained with unfamiliar information technology and software.
Information technology contributes to the efficient running of organizations. Information
systems are showing the exponential growth in each decade. Some of the common
opportunities are:
 Communication – With help of information technologies the instant messaging,
emails, voice and video calls becomes quicker, cheaper and much efficient.
 Globalization and cultural gap – By implementing information systems we can
bring down the linguistic, geographical and some cultural boundaries. Sharing the
information, knowledge, communication and relationships between different
countries, languages and cultures becomes much easier.
 Availability – Information systems has made it possible for businesses to be open
24×7 all over the globe. This means that a business can be open anytime anywhere,
making purchases from different countries easier and more convenient. It also means
that you can have your goods delivered right to your doorstep without having to move
a single muscle.
 Creation of new types of jobs – One of the best advantages of information systems
is the creation of new and interesting jobs. Computer programmers, Systems
analyzers, Hardware and Software developers and Web designers are just some of the
many new employment opportunities created with the help of IT.
  Cost effectiveness and productivity – IT applications promote more efficient
operation of the company and also improve the supply of information to decision-
makers. These systems also help companies to gain a competitive advantage. It has a
positive impact on productivity.
b) An information system is a combination of hardware, software and the data it manages.
Hence, the quality of the system is affected by all these components as well as the quality
of the deployment, connectivity, and also the operational practices of its users. However,
the major aspect of system quality are guided by the system resources and the quality of
the data it manages. The major aspects of quality of system resources can be enlisted as
follows:
i. State (age, spares, vendor support availability) of the hardware.
ii. State (age, patches, upgrades, licenses, vendor support availability) of the software
iii. Deployment architecture and high availability provisions (power, air-conditioning,
network redundancy, geographical redundancy)
Similarly, the major aspects of system quality in terms of data and operations are:
i. Accuracy of the data being input
ii. Mechanism to verify, audit and correct mistakes to ensure quality of data
iii. Operational practices of users (passwords, privileges, login-logout practices)
iv. Regular data cleaning, backup, restoration drills
v. Protection mechanism from external threats such as viruses, hacking, data theft
vi. Security and control mechanism enforces for websites and other resources accessible
over network from outside.
vii. User training and knowhow.
Vendor support and involvement is critical in maintaining good system quality and
health. The modern IT systems are combination of complex hardware and software
components which cannot be modified, repaired or customized by the end user alone. For
such activities, vendor support is essential. Similarly, to ensure bug fixes, patches and
upgrades also vendor engagement is necessary. This is applicable for all major
components such as the application, database system and other software components.
Vendor support may seem less important for hardware but that is not so. Since modern
hardware systems are also very compact, complex and non-repairable at the end-user
level, vendor engagement is essential to ensure optimum performance, quick support and
spares guarantee as and when needed. Hence, for ensuring quality operation of modern
information systems, vendor support is essential.
6. Write short notes on: (5 3=15 marks)
a) Vulnerability Assessment
b) Capability Maturity Model Integration (CMMI)
c) Virtual Organization.
d) Software as a Service (SaaS)
e) Neural Network
Answer
a) A vulnerability assessment is the process of defining, identifying, classifying and
prioritizing (or ranking) vulnerabilities in computer systems, applications and network
infrastructures and providing the organization doing the assessment with the necessary
 knowledge, awareness and risk background to understand the threats to its environment
and react appropriately.
A vulnerability assessment provides an organization with information on the security
weaknesses in its environment and provides direction on how to assess the
risks associated with those weaknesses and evolving threats. This process offers the
organization a better understanding of its assets, security flaws and overall risk, reducing
the likelihood that a cybercriminal will breach its systems and catch the business off
guard.
b) The Capability Maturity Model Integration (CMMI) method, is a process improvement
approach that contains 22 process areas. It is divided into appraisal, evaluation and
structure. CMMI defines the five maturity levels for processes: Initial, Managed,
Defined, Quantitatively Managed, and Optimizing. CMMI is particularly well-suited to
organizations that need help with application development, lifecycle issues and
improving the delivery of products throughout the lifecycle.
c) Virtual organization is referred to the formation of networks of independent firms or
professionals who join together often temporarily to achieve a common objective or to
produce common product or to provide a service to the customer removing the
conventional concept of an organization. Here the customer is normally unaware of the
structure of the organization. The use of computer-based software and communication
network are the backbone of the formation of such organization. They might be
geographically located at any part of the globe however they can work together for the
common mission. The legal existence of such organization sometimes is clear or some
time it is blurry too.
d) Software as a Service or SaaS is a cloud deployment model in which the cloud provider
provides an off-the-shelf application for the end user without the end user having to
purchase or arrange any platform, hardware or software. For example, if a client needs an
ERP, the cloud provider would provide the ready-to-use ERP function to the end user
without the end user having to purchase or arrange anything else other than buy the
sufficient license from the cloud service provider and, of course, a good Internet
connection. The end user can directly start using the ERP function while paying the cloud
provider for the service in terms of user licenses, application licenses or any metering
parameter set by the service provider. SaaS is the most easy and quick option for the
client as it can be deployed with minimal effort and time. However, since the whole
software, data and hardware is based on the cloud platform and operated by the cloud
provider, the end user has little control. Meanwhile, since the client can always ask for
more licenses and features, possibly at additional cost, feature enhancement and
scalability is also very easy and quick.
e) A neural network or an artificial neural network in the parlance of computer technology
is a chain of computer algorithms or process that try to mimic the way human brain
works. Since they try to emulate the biological neural network of human grain and
cognitive system, they are called neural networks.
The most important capability of the artificial neural networks is their capability to learn
and adapt to different inputs. This means, they need not be re-programmed for each type
of input scenario. They have certain capability to be trained so that they develop a
cognitive capability of their own. The basic neural networks are pattern recognition
algorithms that can recognize various input patterns based on the training they receive.
For example, an image recognition algorithm may be trained with thousands of pictures
of different human faces so that it can analyze the inherent features of a human face and
build its knowledgebase. Based on that knowledgebase, the system can subsequently be
used to recognize faces.
In a neural network, the accuracy depends upon the actual neural network design as well
as the level of training it receives. The more training with wider variety of data, the
higher the accuracy may become.
Paper-6: Advanced Taxation
Attempt all questions. Working notes should form part of the answer.
Use separate answer book for each question.

1. Future Industries P. Ltd., special industry as per Industrial Enterprise act 2076, is a resident
Nepalese company. Management of the company has provided you the following extracts related to
income and expenditure for income year 2075/76:

Particulars Amount (Rs.) Particulars Amount (Rs.)

Opening Stock 15,000 Sales 1,200,000

Head Office Expenses 500,000 Closing stock 10,000

Purchase of raw materials 650,000 Gain on sale of business 60,000

assets
Freight Inwards 40,000 Prize from display 25,000
competition
Direct wages 80,000 Miscellaneous Income 10,000

Manufacturing Expenses 150,000 Income from natural 120,000

resources
Administration Expenses 260,000 Bad debts recovered 28,000

Interest Expenses 500,000 Interest received 5,000

Repair Expenses 42,000

Depreciation 212,000

Entertainment Expenses 12,000

Miscellaneous Expenses 49,000

Audit Fee 40,000

Pollution control cost 280,000

Advertisement 13,000

Donation 145,000

Research and Development Cost 200,000

Additional Information:
1. Sales include a consignment sold to an related person amounting to Rs. 100,000. The transaction
is worth Rs. 450,000 in an arms’ length dealing. IRD has sent a notification to the company
treating it as transfer pricing arrangement and has instructed to book at arm's length price.
2. Management claims Head Office Expenses as expenses made by the Parent on its behalf.
However the expenses could not be substantiated.
3. Purchase includes Rs. 60,000 incurred for purchase of office equipment in Chaitra 2075.
4. Administration expenses include a cash payment of Rs. 75,000 to a constitutional body.
 5. Opening WDV of assets are : Building Rs. 15,00,000 : Plant & Machinery Rs. 350,000 : Office
Equipment Rs. 80,000.
6. Repair expenses include Rs. 20,000 of building and Rs. 22,000 of office equipment.
7. Donation was made for conservation and promotion of religious heritage in Nepal with the prior
approval of IRD.
8. Out of bad debts recovered, 20% was not allowed previously.
9. Interest expenses relate to interest paid to owner entity. The company’s ownership lies with Non -
resident persons - 20 percent and associated persons of non - resident persons – 10 percent.
10. Expenses related to natural resource Rs. 2,000 was not recorded in above statement.
11. No advance tax has been deposited during the year and advance tax return was not also
deposited.
12. Extension for filing IT return has been taken upto Poush 2076 but the return is filed on Magh 09
2076. Number of days in a month is 30.
13. Ignore interest under section 118 of the act.
You are required to calculate the following with relevant working notes and relevant provisions and
explanations: 20 marks
a) Taxable Income, Tax Liability, Fines and Interest.
b) Explain with reference to provision of the Income Tax Act on transfer pricing arrangements and
authority of the Income Tax Department on the same.
c) If Future Industries P. Ltd. is based in highly undeveloped (Ati Avikasit) area, is there any
additional concession available as per Income tax act?
Answer:
a)
Rs. Rs.
Income from Business
Sales (W.N.1) 15,50,000
Net gain on sale of business assets 60,000
Prize from display competition 25,000
Miscellaneous Income 10,000
Bad debts recovered (80%) 22,400 16,67,400
Less: Allowable Deductions
Cost of stock (W.N.2) 865,000
Administration expenses 260,000
Depreciation (W.N. 3) 210,000
Repair expenses (W.N. 3) 28,400
Entertainment expenses 12,000
Miscellaneous expenses 9,000
Audit Fee 40,000
Advertisement 13,000 (14,77,400)
Assessable Income from business before PCC, R&D cost and Interest expenses 190,000
Less:Interest Expenses (W.N. 4) 159,000
Assessable Income before PCC, R&D cost 31,000
Less: Pollution control cost 95,000
Less: R & D Cost (W.N.5) 95,000
Assessable Income from Business (159,000)
Income from Investment:
Interest received 5,000
Income from natural resource 120,000 125,000
Less: Expenses related to natural resource (2,000)
Assessable Income from Investment 123,000
Total assessable income (36,000)
Less: Donation (W.N. 6) -
Taxable Income (36,000)
Tax Liability @20% -
Calculation of Fines as per section 117
1. Fines for not filing of advance tax return 5000
(5000 or 0.01% of 17,92,400, i.e.,179)
2. Fines for late filing of tax return 481
(16,67,400 Plus 125,000 i.e. Rs. 17,92,400 *0.1%*98/365 or Rs. 100 per Month whichever is
higher)
3. Interest as per section 119 (22,140 * 15% *4/12) Rs. 1107
Working Notes:
1. Sales has to be shown at arms length price by adjusting the sales given. Hence, figure of sales
shall be increased by 350,000. Now adjusted sales shall be 12,00,000 plus 350,000 i.e.
15,50,000.
2. Cost of stock : Opening stock + Purchases + Freight + Direct wages + Manufacturing
Expenses – Closing Stock
= 15,000 +(650,000 – 60,000) + 40,000+ 80,000+150,000- 10,000
= 865,000
3. Calculation of Depreciation:
Block A Block B Block D
Opening WDV 15,00,000 80,000 350,000
Addition (60,000 *2/3) 40,000
Depreciation Basis 15,00,000 120,000 350,000
Depreciation Rate 6.67% 33.33% 20%
Depreciation 100,000 40,000 70,000
Total Depreciation Rs. 210,000
(Depreciation rate is normal rate plus additional 1/3 of normal rate)
Calculation of Allowable Repair:

Block A Block B Block D

Depreciation Basis 15,00,000 120,000 350,000
7% Limit 105,000 8,400 24,500
Actual Expenses 20,000 22,000
Allowable 20,000 8,400
Total Allowable Rs. 28,400
 4. Calculation of Interest
Interest was paid to owner entity. The company’s ownership lies with Non - resident persons
20 percent and 10 percent associated persons of non- resident persons. As per section 14(2) of
the act, an entity is deemed to be resident entity controlled by exempt organization for any
income year, in case the entity is resident and specified entities including non- resident
persons and/ or its associated persons hold at least 25% shares at any time during the income
year. In case a resident entity controlled by exempt organization pays interest to controlling
entity, then the interest allowable is the lower of actual interest paid or 50% of entity’s
adjusted taxable income for the year. ATI shall be calculated without including the interest
income and the interest expense, Pollution control cost, research and development expense
and donation.
Assessable Income from business before PCC, R&D cost and Interest expenses 190,000
Assessable Income from Investment before Interest Income 118,000
ATI 308,000
Allowable Interest expenses to controlling entity
Interest Rs. 5,000
50% of ATI Rs. 154,000 159,000.
Since the calculated amount is lower than the interest expenses paid Rs.500,000, hence Rs.
159,000 is allowable.
5. Calculation of Pollution Control Cost and R& D Cost:
ATI = 190,000
50% of 190,000 = Rs. 95,000 or actual whichever is lower is allowable.
Pollution control cost = Rs. 95,000 (being lower than actual cost of Rs. 2,00,000)
R & D cost = Rs. 95,000 (being lower than actual cost of Rs. 2,80,000)
6. Donation: As donation was made for conservation and promotion of religious heritage in
Nepal with the prior approval of IRD, as per section 12 ka of the act, limit of claim is the
minimum of actual expenditure or 10% of the assessable income or Rs. 10 Lacs. Here, since
assessable income is negative ( loss), no donation expenses is admissible.
7. As per section 21(2) of the act, if a person, having annual turnover of Rs. 20 lacs, makes an
expenditure by cash for amount more than Rs.50,000, then the expenditure is not deductible.
But the exception is for constitutional body, hence it is allowable.
b) As per section 33 of Income Tax Act, 2058 in any arrangements between associated
persons, operated by them according to general market practices (arms’ length), IRD
may, by a notification in writing, distribute, apportion or allocate the amounts to be
included or deducted in the income between the persons as to reflect their taxable income
or tax liability. IRD may in the process of notification:
Ka) Recharacterize the source and type of any income, loss and amount of payment or
Kha) Allocate costs, including head office expenses, incurred by one person in
conducting a business that benefits an associate or associates also in conducting their
businesses, based on the comparative turnover of the businesses.
As per Rule 15 of Income tax rules, the department may issue a notice in writing of the
following character to a person upon a request in writing of one or more persons for
clarity in distribution, apportionment or allocation to be done by the department on the
basis of arms’ length price with respect to particular amounts to be included or deducted
in calculating the person’s income under section 33(1) of the act.
Ka) The notice shall be for a period not exceeding five income years at a time,
Kha) Notwithstanding paragraph(a), the notice may be renewed.
 The notice shall be binding on the applicants and the department both. Provided that the
notice may be withdrawn if the department agrees with the request for withdrawl made
by the applicant.
c) If Future Industries P. Ltd. is based in highly undeveloped (Ati Avikasit) area, then it can
avail additional concession available as per section 11(2Kha) of Income tax act (amended
by Finance act 2076). For special industries located in highly undeveloped area, only ten
percent of applicable tax rate is applicable which means income tax rate shall be 10% of
20 i.e. 2%. [Section 11(3)(Kha)]
2.
a) Following is the details of income of Mr. Shyam Magar for FY 2076/077.

Particulars Amount (Rs.)

Income from sale of paddy and other crops harvested in own land 320,000.00
Pension income from British Gorkha, UK 960,000.00
Amount remitted by his son from US to purchase House in 6,000,000.00
Dharan
Income from small stationery shop 365,000.00
Training Fee received from British Army Training Center 234,000.00
Dharan (work as part time trainer)
Gain on sale of securities listed in NEPSE 456,000.00
Gain on sale of shares of public limited company 134,000.00
Dividend received from investment made in Nepalese company 95,000.00
Income of wife from beauty parlor 650,000.00
Gain on disposal of House and Land that he purchased before 9,080,000.00
20 years and lived for 13 years.
He has paid Rs. 50,000 each for him and his wife’s health insurance premium in Indian
Insurance Company while visiting Hospital in India for regular checkup of his wife.
Further, he paid last instalment of his life insurance premium of Rs. 137,500 this year in
UK’s Life Insurance Company. This life insurance policy will mature is FY 2077/078.
Assume Mr. Shyam Magar as single for tax purpose.
Required:
Calculate the Income Tax Liability of Mr. Shyam Magar for FY 2076/077. 7 marks
b) From the following, determine the withholding tax to be deducted if any on following
payments by mentioning relevant provision.
i) Mr. Dinanath Raya, an Indian citizen was employed by TU to conduct a research
assignment on how to conduct virtual online classes of TU and its affiliate college
and was paid Rs. 320,000 (INR 100,000×2Month×1.6). He resided in Nepal only for
2 months in the year. 3 marks
ii) Interest paid by Mr. Ramnarayan Rauniyar to Nation Development Commercial Bank
Ltd. of Rs. 120,000 on Loan obtained to finance his partnership firm. 1 mark
iii) Fly Nepal Air Pvt. Ltd., a Nepalese company has paid Rs. 32,000,000 to Fly Ireland
Ltd. of Ireland for leasing an aircraft. Aircraft of Ireland’s company was used due to
ongoing repair of its own aircraft. For repair works, Fly Nepal has paid Rs.
42,000,000 and aircraft was sent to Ireland for repair. 2 marks
iv) Secure Life Insurance Ltd. has paid Rs. 6,500,000 compensation to wife of Mr. Ram
Niraula on his demise. 1 mark
 c) Below is opening WDV of fixed assets of Everest Cement Limited as on 2076.04.01 as per Income
Tax Act.

Building Furniture and Vehicles Plant and Intangible Asset

Office Equipment Machinery
10,00,00,000 1,00,00,000 20,00,000 30,00,00,000 5,00,000

Transaction during income year 2076-77 are as below –

i) Company constructed office building on 2076.11.01 for Rs. 2,00,00,000.
ii) Company purchased new Computers for Rs. 10,00,000 on 2076.08.15, and new
Furniture on 2077.02.05 for Rs. 20,00,000.
iii) Company has taken loan of Rs. 5,00,00,000 on 2076.01.01 and paid to vendor for
purchase of new plant and machinery. Out of the said loan amount, Plant and
Machinery of Rs. 2,00,00,000 has been purchased and put to use on 2077.01.01.
Remaining plant and machinery is yet to be put to use. Total interest expenses for
the loan is Rs. 60,00,000 from date of loan till 2077.03.31.
iv) Company has purchased new ERP system on 2077.02.01 with useful life of 7 years
for Rs. 1,00,00,000.
v) Company sold its old furniture for Rs. 5,00,000.
vi) Company sold its only car for Rs. 15,00,000.
vii) Balance of intangible asset is for purchase of ERP software which was purchased 5
year back with useful life of 5 years.
viii) Below is repair and maintenance expenses for the income year 2076/77 :
Building Furniture and Office Vehicles Plant and
Equipment Machinery
100,00,000 5,00,000 1,00,000 3,00,00,000

You are required to calculate depreciation as per Income Tax Act, 2058 for the income
year 2076/77 and Opening WDV for income year 2077/78. 6 marks
Answer:
a)
Computation of Taxable Income of
Mr. Shyam Magar
For Income Year 2076/077
Particulars Amount (Rs.) Remarks
Income from sale of paddy and other
crops harvested in own land - Exempted under section 11(1)
Pension income from British Gorkha,
UK - Exempted under section 10(h)
Amount remitted by his son from US Not to be included in income, it is
to purchase House in Dharan - out of scope of Income Tax.
Income from small stationery shop 365,000.00 Income from Business
Training Fee received from British
Army Training Center Dharan (work
as part time trainer) 234,000.00 Income from Employment
Gain on sale of securities listed in 456,000.00 Income from Disposal of NBCA
 NEPSE
Gain on sale of shares of public
limited company
Dividend received from investment
made in Nepalese company
Income of wife from beauty parlor
Gain on disposal of House and Land
that he purchased before 20 years and
lived for 13 years.
Total Assessable Income
Less: Health Insurance Premium paid
Less: Life Insurance Premium Paid
Minimum of Rs. 25,000 and actual premium paid i.e.
Rs. 137,500
Taxable Income
134,000.00 Income from Disposal of NBCA
Subject to final withholding under
- section 92(1(1)).
Since he filed for single, no need
- to club the income of his wife.
It is not the NBCA and no tax is
- required to pay.
1,189,000.00
Not allowed to deduct under
section 1(16) of Schedule 1 of
Act, since the premium is not
paid to Resident Insurance
- Company.
Allowed to deduct under section
25,000.00 1(12) of Schedule 1 of Act.
1,164,000.00

Computation of Income Tax Liability of

Mr. Shyam Magar
For Income Year 2076/077
Taxable Tax
Particulars Amount Tax Rate Liability
1st Slab- Income from Employment 234,000.00 1% 2,340.00
1st Slab- Income from Business 166,000.00 0% -
Gain on Disposal of Securities, listed in
NEPSE 456,000.00 5% 22,800.00
Gain on Disposal of unlisted Securities 134,000.00 10% 13,400.00
2nd Slab 100,000.00 10% 10,000.00
3rd Slab 74,000.00 20% 14,800.00
Total Amount 1,164,000.00 63,340.00

b)
i) According to Article 20 of Agreement between Nepal and Republic of India on
“For The Avoidance Of Double Taxation And The Prevention Of Fiscal
Evasion With Respect To Taxes On Income “A professor, teacher or research
scholar who is or was a resident of the Contracting State immediately before
visiting the other Contracting State for the purpose of teaching or engaging in
research, or both, at a university, college or other similar approved institution in
that other Contracting State shall be exempt from tax in that other State on any
remuneration for such teaching or research for a period not exceeding two years
from the date of his first arrival in that other State.
Since the stay of Mr. Raya is not more than 2 years, there shall be no TDS on
income earned by him.
ii) According to section 88(4(a)), no TDS is deducted on payment made by natural
person except business related payment. In the given case, loan is obtained to
finance the business by the partner of the firm. Hence no TDS is required.
 iii) According to section 88(1(3)), 10% TDS shall be deducted while paying for lease
of aircraft. Hence, Fly Nepal Air Pvt. Ltd. has to deduct the TDS of Rs.
3,200,000.00 (10% of lease payment) while paying lease of aircraft to Fly Ireland
Ltd.
Similarly, according to section 89(3(a)) of Income Tax Act, while paying for
contract of aircraft repair, a resident person shall withhold 5% TDS. Hence, Fly
Nepal Air Pvt. Ltd. has to deduct the TDS of Rs. 2,100,000.00 (5% of craft repair
fee) while paying lease of aircraft to Fly Ireland Ltd.
iv) According to explanation clause of section 31(b(2)) compensation received
against death of the natural person shall not be included in calculating income of
the natural person. Hence, compensation received from insurance company on
death of Mr. Ram Niraula is not subject to TDS.
c)
Depreciation Chart

Particulars Building Furniture Vehicles Plant and Intangible

and Office Machinery Asset
Equipment
Opening WDV 10,00,00,000 1,00,00,000 20,00,000 30,00,00,000 5,00,000
Addition:
till Poush – 100% 10,00,000
Magh – Chaitra – 2/3rd 1,33,33,333
Baishak – Ashad – 6,66,667 68,26,667 33,33,333
1/3rd W.N.1
Total 11,33,33,333 1,16,66,667 20,00,000 30,68,26,667 38,33,333
Less : Sale (5,00,000) (15,00,000)
Balance 11,33,33,333 1,11,66,667 5,00,000 30,68,26,667 38,33,333
Depreciation Rate – 6.67% 33.33% 26.67% 20%
Special Industry
Total Depreciation 75,55,556 37,22,222 5,00,000 6,13,65,333 9,76,333
W.N.2 W.N.3
Balance 10,57,77,777 74,44,445 0 24,54,61,334 28,57,000
Balance Capitalization
Magh – Chaitra – 2/3rd 66,66,667
Baishak – Ashad – 13,33,333 1,36,53,333 66,66,667
1/3rd
Excess of repair and 20,66,667 85,22,133
Maintenance (W.N.4)
Opening WDV for 11,45,11,111 87,77,778 0 26,76,36,800 95,23,667
Next Year
W. N. 1
(a) Capitalization of Interest:
Total Interest Expenses for Plant and Machinery 60,00,000
Total tenure of Loan 15 Months
Interest Expenses related with Used Plant and Machinery 24,00,000
(60,00,000/5,00,00,000*2,00,00,000)
Interest Expenses of Last income year related with used Plant and Machinery 4,80,000
(interest of current income year will be charged to income statement) – of 3
Months – (24,00,000/15*3) – which is to be Capitalized
Plant and Machinery put to Use 2,00,00,000
Total Addition of Plant and Machinery 2,04,80,000
Total Addition of Plant and Machinery Addition – 1/3 68,26,667
W.N.2
 The company had only 1 vehicle which it had already sold. So, the balance of the block
of vehicle will be charged as terminal depreciation.
W.N.3
Calculation of Depreciation of Intangible Asset:
Rate of Depreciation for New ERP (1/7years) 14.29%
Depreciation on New ERP for the Year – 14.295% of 33,33,333 4,76,333
Depreciation for Old ERP 5,00,000
Total Depreciation of Intangible Asset 9,76,333
W.N.4
Particulars Building Furniture and Vehicles Plant and Intangible
Office Machinery Asset
Equipment
Closing WDV 11,33,33,333 1,11,66,667 0 30,68,26,667 38,33,333
7% of Closing 79,33,333 7,81,667 0 2,14,77,867 2,68,333
WDV
Actual Repair 1,00,00,000 5,00,000 1,00,000 3,00,00,000 0
and
Maintenance
Excess to be 20,66,667 0 0 85,22,133 0
Capitalized
Since there is
no block, not
considered

3.
a) What are the threats that may affect an auditor while providing assistance in the
resolution of tax disputes to audit client? Briefly mention factors that are relevant in
evaluating the threats by mentioning relevant provision of ICAN Code of Ethics, 2018.5 marks
b) An entity seeking for approval of retirement fund requests for your expert advice on
approval procedures of retirement fund as per Income Tax laws and also on below
mentioned matters: 5 marks
i) Are there any conditions to be fulfilled by such retirement funds?
ii) If there are any conditions to be fulfilled by such entity and if the entity breaches
such conditions, can the Income tax department cancel its approval?
iii) Does the act mention about its taxability and calculation of income for taxation
purpose?
iv) If approval of retirement funds is cancelled, will there be difference in its taxation as
per the Act?
Provide your answer based on the provisions of Income tax act and rules.
Answer:
a) According to subsection 604 of ICAN Code of Ethics 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 to an audit client 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 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.
 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.
b) As per section 63(1) of the act, if a person wants to establish an approved retirement
fund, it has to obtain a written and prior permission from Inland Revenue Department
(IRD). On receipt of application, department may approve its application on the terms
and conditions specified in the rules.
i) As per Rule 20(2) of Income tax rules, following are the conditions applicable for
granting the approved status:
Ka) The funds or deposits received by an approved retirement fund should be
invested in accepted investments. According to the rule, the accepted
investments are Investments in CIT established as per prevailing law,
investments in government bonds, investments in banks or investment in
finance companies having license from NRB to conduct financial transactions,
Investment for consortium financing and Investment in beneficiaries other
than its own shareholders.
Ka1) Paid up capital of such entity shall be at least 1 Crore.
Ka2) Number of beneficiaries, workers or employees shall be at least one thousand
Kha) The management of the fund should be done separately from that of the
employer, if the fund accepts the retirement contribution from the employer
on behalf of the employees. But this provision is not applicable for its
employees or workers.
Ga) The contribution amount should be deposited in the fund, within one month in
case the expenses are booked during the month of Ashadh or within fifteen
days in case the expenses are booked during the months of other than Ashadh.
Gha) The retirement payments to the beneficiaries could be made only under these
circumstances: on retirement of employees, on achievement of an age of fifty
eight years of the beneficiary, on death or on the occurrence of permanent
disability of the beneficiary.
ii) As per Rule 20(3) of Income tax rules, IRD may withdraw the approval if the fund
does not function according to the conditions specified. On withdrawn of approval,
the fund is converted into an unapproved retirement fund.
iii) As per section 64(2) of the act, income of an approved retirement fund is exempt
from income tax. In the calculation of income of a retirement fund, following
amounts are not considered:
 Ka) The contributions received from the members are not included in the income
of the fund.
Kha) The retirement expenses to the members are not included in the expenses of
the fund.
Ga) Interest of beneficiary in the retirement fund shall not be fund liability.
iv) If approval of retirement fund is cancelled by IRD, it has to pay income tax @25%
on the amounts calculated as follows:
Contributions received by the fund from the day approval is granted to the day of
approval being withdrawn plus any other amount that would be included in the
income if the approval were not granted minus retirement payments made from the
day of the approval being granted to the day of the approval being withdrawn.

4.
a) Following are the details of transaction of Ranipokhari Press Pvt. Ltd. for the month of Magh
2076.

S.N. Particulars Amount (Rs.) Remarks

Sales
1 Printing of Books 1,080,000.00
All material was provided by
customers, company only printed
2 Printing services 1,258,000.00 the books.
Printing of Annual Report
3 of Company 1,320,000.00
4 Printing of Profile 860,000.00
5 Calendar print 654,780.00
6 Printing of newspaper 1,234,780.00
Total 6,407,560.00
Purchase
Purchase of ink, paper, pin
1 etc. 1,785,600.00
Material Purchase for
2 Book Print 120,000.00
3 Other Direct Consumables 858,800.00 Inclusive of VAT
4 Internal Audit Fee 200,000.00
Material Purchase for
5 Printing of Profile 32,000.00
6 Electricity Expenses 63,795.60
7 Machine repair 124,830.00
Purchase of Delivery Van
8 (through bank loan) 2,260,000.00 Inclusive of VAT
9 Purchase of bicycle 60,000.00
10 Purchase of i20 Car 2,500,000.00
11 Diesel for generator 19,000.00
12 Petrol for delivery van 30,300.00
13 LP Gas for kitchen 4,425.00
14 Wages paid to labour 1,088,000.00
 15 Salary of employees 1,123,400.00
16 AMC of software 130,000.00
VAT paid purchase is of Rs.
17 Staff picnic 147,000.00 60,000 only
18 Building rent 78,000.00
Consultancy fee to
19 engineer 56,000.00 Inclusive of VAT
Total 10,681,150.60
Additional Information:
1. Amount of sales is exclusive of VAT.
2. Purchases except mentioned otherwise and exclusive of VAT.
3. 50% job for Profile Printing is obtained from Civil Aviation Authority of Nepal
(CAAN).
4. Company has VAT payable of Rs. 134,590 for previous month.
From the above information, you are required to:
i) Compute the VAT payable/receivable for the Month of Magh 2076. 8.5 marks
ii) If company file VAT return of Magh 2077 on 30th Falgun 2076, what would be the
fine for delay submission of VAT Return? 1.5 marks
b) Mr. XYZ Limited is a manufacturing industry engaged in export of its product to other
countries. It imports certain raw materials against letter of credit. It has not obtained
license for bonded warehouse. Currently it is going through cash flow stress due to
COVID 19 pandemic.
As a Tax consultant advice XYZ Ltd. on the following: 10 marks
i) Can customs duty on Raw materials, Auxilliary raw materials required for its
production be paid as deposit?
ii) Is there any time limit prescribed for the sale of finished goods from such raw
materials? Can they sell such goods within the country?
iii) If they want to sell their products to a project in Nepal, is the deposit facility
available?
iv) Is there any provision for release of deposit or refund?
v) Is there any condition for value addition?
vi) If raw materials imported on deposit are not exported as per the specified
conditions, what is the implication? Calculate the penalty amount, if applicable, on
contravention of specified conditions if chargeable customs duty is Rs. 10 Lacs.
Answer:
a)
i)
Computation of VAT Payable/Receivable
Ranipokhari Press Pvt. Ltd.
For Magh 2076
Taxable Exempt
Particulars Total Remarks
Amount Amount
Output Tax
Printing of Books - 1,080,000.00 1,080,000.00 Exempt
Printing services 1,258,000.00 0 1,258,000.00 Taxable
Printing of Annual
Report of Company 1,320,000.00 0 1,320,000.00 Taxable
Printing of Profile 860,000.00 0 860,000.00 Taxable
Calendar print - 654,780.00 654,780.00 Exempt
Printing of newspaper - 1,234,780.00 1,234,780.00 Exempt
Total Sales 3,438,000.00 2,969,560.00
Tax Rate 13% -
Output Tax (A) 446,940.00 -
Ratio of Taxable and
Exempt Sales 53.66% 46.34%
Input Tax
VAT
attractive
and
apportion
ed on the
Purchase of ink, paper, basis of
pin etc. 958,070.28 827,529.72 1,785,600.00 sales
Solely
used for
Material Purchase for exempt
Book Print - 120,000.00 120,000.00 item.
VAT
attractive
and
apportion
ed on the
basis of
sales,
VAT is
to be
segregate
Other Direct d from
Consumables 407,780.81 352,219.19 760,000.00 total cost.
VAT
attractive
and
apportion
ed on the
basis of
Internal Audit Fee 107,310.74 92,689.26 200,000.00 sales
Solely
used for
Material Purchase for taxable
Printing of Profile 32,000.00 0 32,000.00 item.
Exempt
Electricity Expenses - 0 - purchase.
VAT
attractive
and
apportion
ed on the
basis of
Machine repair 66,978.00 57,852.00 124,830.00 sales
 VAT
attractive
and
apportion
ed on the
basis of
sales,
VAT is
to be
Purchase of Delivery segregate
Van (through bank d from
loan) 1,073,107.39 926,892.61 2,000,000.00 total cost.
VAT
attractive
and
apportion
ed on the
basis of
Purchase of bicycle 32,193.22 27,806.78 60,000.00 sales
VAT
attractive
and
apportion
ed on the
basis of
sales,
proportio
nate of
input
VAT is
required
under
Rule
Purchase of i20 Car 536,553.70 463,446.30 1,000,000.00 41(2(b))
No credit
under
Rule
Diesel for generator - 0 - 41(1( c))
No credit
under
Rule
Petrol for delivery van - 0 - 41(1( c))
No credit
under
Rule
LP Gas for kitchen - 0 - 41(1( c))
Exempt
Wages paid to labour - 0 - expenses
Exempt
Salary of employees - 0 - expenses
VAT
attractive
and
apportion
ed on the
basis of
AMC of software 69,751.98 60,248.02 130,000.00 sales
 No credit
under
Rule
Staff picnic - 0 - 41(1(d))
Exempt
Building rent - 0 - expenses
VAT
attractive
and
apportion
ed on the
basis of
sales,
VAT is
to be
segregate
Consultancy fee to d from
engineer 26,590.27 22,967.25 49,557.52 total cost.
Total 3,310,336.39 2,951,651.13 6,261,987.52
Tax Rate 13% -
Input Tax (B) 430,343.73 -
VAT Payable for the
Month (A-B) 16,596.00

ii) According to section 29(h) of Value Added Tax Act, 2052, if any registered person
fails to submit the VAT return, he is required to pay fine at higher of Rs. 1,000 per
tax period or 0.05% of tax payable calculated on per day basis.
Here, due date to submit VAT return is Falgun 27 of 2076, as there is public holiday
from 24 to 26 of Falgun 2076. Date of filing tax return is 30th Falgun 2076. Total
delay in filing return is 3 days. Fine for delay return is higher of:
Rs. 1,000 or 0.05% of VAT payable on per day basis, i.e. 16,596*0.05%*3 = Rs. 25
Hence, fine for delay submission of VAT Return is Rs. 1,000.00
b) As per section 11 of Schedule 1 of Finance Act 2076 (related to section 2(1) of Finance
Act 2076) specifies the provisions related to import of raw materials of exportable goods
on deposit.
i) Industries that do not have the permission of bonded warehouse facility, may import
their raw materials or auxiliary raw materials by deposit of equivalent to chargeable
customs duty if they intend to export goods through letter of credit or through
prevalent banking documents or they intend to sell goods locally in convertible
foreign exchange under certain conditions. In case of packing materials not
manufactured in Nepal, the recommendation from the department of industry with the
certification that the materials could not be manufactured in Nepal is required to avail
such facility. Such industries may apply to customs office in a specified format for
depositing deposits equivalent to chargeable customs duty at the time of clearance of
the raw materials or auxiliary raw materials (including packing materials) indicating
their intentions to export. On the basis of such application, raw materials or auxiliary
raw materials (including packing materials) may be cleared on deposit equivalent to
chargeable customs duty. Such importation of raw materials or auxiliary raw
materials and the exportation of finished goods shall be mentioned specifically on
passbook.
 ii) The goods produced from such imported raw materials or auxiliary raw materials
should be either exported or sold locally, on convertible foreign exchange within
twelve months from the date of importation.
iii) If they want to sell such goods in Nepal, such facility is granted only to those
industries which sell their products in convertible foreign exchange to a project or
entity having full or partial customs privilege granted by Government of Nepal.
iv) Application for the release of deposit should be applied to the related customs office
after export or sale along with the bill of export or sales documents, foreign currency
earning certificate from the bank or proof of import in case of goods exported under
barter system and consumption ratio certified by the department of industry. After
examining the submitted documents, the deposit shall be released within one month
from the date of such application. Such clearance has to be mentioned in the pass
book. Industries importing raw materials or auxiliary materials (including packing
materials) under this section the deposit amount given for customs duty shall be
adjusted and mentioned in the pass book. If the cleared deposit is not adjusted within
one month, the excess deposit shall be refunded at the request of the industry.
v) There must be value addition of at least ten percent in exportable goods over the
value at the time of import of raw materials or auxiliary raw materials (including
packing materials)
vi) If the goods produced from such imported raw materials or auxiliary raw materials
(including packing materials) is not exported fully or partially or not sold in
convertible foreign exchange as per the specified conditions, such unexported
quantity shall be treated as local sale and the chargeable duty is adjusted from the
deposit and a penalty of ten percent shall also be levied on chargeable duty. Hence,
penalty shall be 1 Lakh.
5.
a) Sita Multispecialty Hospital Limited runs a 200-bed hospital at Dhangadi. During the
income year 2076/77, it has done various construction works at its hospital site. The
details of various construction work done by the hospital is as below:
i) Construction of Parking Lot:
Parking lot was constructed through a local contractor who is not registered under
VAT. The total cost paid to the contractor was Rs. 1,500,000 net. Apart from the
above cost, hospital has incurred Rs. 100,000 for clearance of the site which was
paid to the employees of the hospital as overtime.
ii) Construction of Canteen:
Hospital constructed canteen on its own for which hospital has paid below amount:
1. For Construction Material from VAT registered party – Rs. 565,000 (including
VAT).
2. For Labor and Engineering services to natural person not registered under VAT –
Rs. 100,000.
3. For Design of Canteen to natural person not registered under VAT – Rs. 100,000.
4. Various Expenses for approval of building design – Rs. 100,000 (paid to natural
person not registered under VAT).
iii) Repair of a Private Ward:
1. Hospital has given contract to a VAT registered party for repair of Private Ward
at Rs. 10,000,000 plus VAT.
 2. Hospital has taken loan of Rs. 1,500,000 from a bank for repair of the Private
Ward. It has paid interest of Rs. 100,000 till the date of completion of repair
work.
Hospital has duly submitted its VAT return showing Vatable and non-Vatable
transactions on due date. Assessing Officer during Audit raised issue that the
Hospital has not paid VAT on construction as required by the law, and should be
assessed for the same. Management of the Hospital is surprised to know that it has to
pay VAT on construction of various facilities for which there is no VAT bill. Citing
relevant provisions of the Value Added Tax Act, 2052 and Rules 2053, advise the
management of the Hospital on the above matter, and compute the amount of VAT
payable, if any. 7 marks
b) Himal Pvt. Ltd. has imported special type of the machinery during the financial year
2076/077. Due to certain problems, the imported machine was cleared from customs
office after 120 days on entering the goods in to custom point. Details regarding import
of special type of machine are as below.

Particular NPR/USD
FOB Price of machine Imported (Manufactured in Russia and $40,000
Supplied from Singapore) (1 US$=115.56 NPR)
FOB price of identical machine already imported in Nepal 4,000,000
Air freight: Supporting document not available. Estimated value of Air
freight is NPR. 250,000 determined by the custom officer however, the
company has paid by cash NPR. 200,000 which is not supported by any
documents.
Local Transportation 75,000
Insurance 165,000
Custom Agent Commission 75,000
Cost of installation in Nepal 75,000
Custom Rate 22%
Weight of Machine (Kg) 421.3
Required:
Compute total amount payable to custom officer under Custom Act, 2064 and Financial
Act, 2076. 7 marks
c) M/s Sita Ram Limited, an excise licensee, intends to convert spirit into denatured spirit
and intends to sell anhydrous ethanol to Nepal Oil Corporation for mixing with petrol. As
an expert, you have to provide your answer whether excise rules allow usage of such
spirit or sale of ethanol for other purposes. 6 marks
Answer:
a) Section 8(3) of Value Added Tax Act, 2052 provides that if any construction work of
more than Rs 50 Lakh has been carried out for business purpose from non-VAT
registered party, then VAT on such construction work should be deposited as if the said
construction work has been done from VAT registered Party. If the VAT is not deposited
for such construction works, then VAT can be assessed and recovered from owner of
such property.
Further, Value Added Tax Act Directives provides that for ascertaining the ceiling of Rs
50 Lakh, all the construction works carried out in a particular location should be
considered even though various construction works has been undertaken from various
 different parties. However, while paying VAT on construction, interest cost should not be
considered. Further, if VAT has already been paid on certain expenses, then such VAT
amount should be adjusted from final VAT payment.
Hence, contention of the Tax Officer is correct if total expenses incurred for construction
is more than 50 Lakh.
Computation of VAT Payable on Construction by Sita Multispeciality Hospital Limited
Particulars Expenses VAT Balance Remarks
(Rs.) Paid (Rs.) VAT(Rs.)
(a) Construction of
Parking
Lot:
Paid to Local Vendor 1,500,000 195,000
Site Clearance Expenses 100,000 13,000
(b) Construction of
Canteen:
Purchase of Construction 500,000 65,000 0 VAT already Paid
Material
Labor and Engineering 100,000 13,000
service
Design of Canteen 100,000 13,000
Expenses for 100,000 13,000
approval of
building design
(c) Repair of Private
Ward:
Contract Value 10,000,000 1,300,000 0 VAT already Paid
Interest 0 0 Interest should not be
Included in Construction
cost
Total Construction Value 12,400,000 1,365,000 247,000

Alternative answer:
Since nature of repair of private ward is not specified, it can be contested that repair by
nature is of permanent and temporary nature. Permanent nature of repair work can lead to
increase in useful life of asset and has to be capitalised. If repair is temporary in nature
and it would just maintain the estimated useful life of asset then it to be expensed off
when incurred. In the present case if repair of private ward of Rs. 1,00,00,000 is
considered to be normal in nature that it would fall out of coverage of explanation of
section 8(3) of Vat act. The construction of parking lot of Rs. 16,00,000 and construction
of canteen of Rs. 8,00,000 aggregates to Rs. 24,00,000 and doesn’t not pierce the ceiling
of Rs. 50,00,000. Thus there is no necessity to carry out the works from VAT registered
entity or assess VAT liability and recover thereof.
b) Calculation of custom value and custom payable of Import transaction at Custom office
S.N. Particulars (NPR)
1 FOB Price of machine Imported 4,622,400.00
2 Insurance 165,000.00
3 Air freight 250,000.00
4 Total Custom Value 5,037,400.00
5 Custom Service Fee 500.00
6 Custom Duty (22%) of Custom Value 1,108,228.00

Calculation of demurrage payable for late clearance of goods

 Particular NPR.
Weight of Machine (KG) 421.30
Equivalent Weight according to Custom Act, 2064 (Note b) 422.00
Demurrage (Delayed period 113 days) in Airport custom Point
For first 30 days (30*422*NPR 0.40) 5,064.00
For next 30 days (30*422*NPR 0.60) 7,596.00
For remaining period (53*422*NPR 0.8) 17,892.80
Total Demurrage 30,552.80

Total amount payable to custom office = Custom duty + custom service fee + Demurrage
=1,108,228+500+30552.80 =1,139,280.80
Working notes:
a. According to Section 13 of Custom Act, 2064, custom value of transaction should be
determined from the value declared by the imported until custom officer believe or
evidence supported otherwise. Thus, local transport, insurance for inland, custom
agent commission and cost of installation are not considered for calculating
transaction value for custom purpose.
b. When importer is unable to substantiate the value of insurance or freight relating to
import, we must use value determined by Custom office according to section 13 of
Custom Act, 2064. According to clarification provided in Custom Act, 2064 that
weight of less than a kg should be taken as one kg for demurrage calculation purpose.
c. When goods are not cleared within 7 days from date of goods entered warehouse;
demurrage shall be levied from 8th day to date of good clearance from custom office.
Such charges should not exceed the custom value of the goods and shall be levied as
per Annexure 9 (related to sub-rule 2 of Rule 50). In this case 113 days are delay and
demurrage charged accordingly.
c) Rules 25Ka of excise rules allow usage of spirit or ethanol for other purposes with certain
guidelines:
Rule 25Ka(1) – In case the licensee intends to convert spirit into denatured spirit for other
purposes, the same shall be done mixing at least 0.02% of pyridine or colchicines or
methyl alcohol in rectified or herds spirit. IRD may direct the licensee to color the
denatured spirit as per the necessity. IRD shall permit the conversion of rectified spirit to
denatured spirit such that the recovery of excise duty is not reduced.
Rule 25Ka(2) – The licensee shall sell anhydrous ethanol produced for mixing with petrol
to Nepal oil corporation or entity approved by Government of Nepal. Approval of IRD is
must while selling anhydrous ethanol from enterprises. IRD shall permit such sales only
after ensuring that at least 2% of petrol is mixed with such anhydrous ethanol.
Rule 25Ka(3) – In case of raw materials such as molasses, rectified spirit, ENA, malt
spirit and import, production and sales of denatured spirit, the department may prescribe
and control.
6.
a) Mr. Diwash Tamang is a professor of Pokhara University and was a resident of Nepal
during income year 2075/076. On Ashwin 1, 2076, he went to Beijing under an
assignment for carrying out specific research work in Shangai University. For his
outstanding work, Shangai University paid remuneration of Chinese Yuan 200,000 for
the period Ashwin 1, 2076 to Ashadh 31, 2077. Discuss the tax liability of Mr. Hari
giving consideration to the agreement between Nepal and China for avoidance of double
taxation and prevention of fiscal evasion with respect to taxes on income. You need not to
calculate the tax payable. 5 marks
 (Assume exchange rate of One Yuan=NRs.16).
b) In the context of international taxation, briefly explain the concept of Base Erosion and
Profit Shifting (BEPS).
Answer:
a) According to Article 20 of the agreement between Nepal and China for avoidance of
double taxation and prevention of fiscal evasion with respect to taxes on income, a
professor or teacher who is or was a resident of one of the contracting states immediately
before visiting the other contracting state for the purpose of teaching or engaging in
research, or both, at a university, college, school or other approved institution in that
other contracting state shall be exempt from tax in that other state on any remuneration
for such teaching or research for period not exceeding two years from the date of his
arrival in that other state.
This provision applies to Mr. Diwash because he was resident in Nepal during FY
2075/076 and his stay in China has not exceeded two years. Therefore, remuneration of
Chinese Yuan 200,000 received by Mr. Diwash during income year 2076/77 is exempt
from tax in China. However, the income is taxable in Nepal, as he has been in Nepal for a
continuous period of 183 days before departure to Beijing.
b) Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used
by multinationals to shift profits from higher tax jurisdictions to lower tax jurisdictions,
thus eroding the tax base of the higher tax jurisdictions. OECD defines BEPS strategies
as also “ exploiting gaps and mismatches in tax rules”, however, academics proved
corporate tax havens (such as Ireland, the Caribbean, Luxemburg, The Netherlands,
Singapore, Switzerland, Hong Kong) who are the largest BEPS hubs, use OECD
whitelisted tax structures and OECD compliant BEPS tools.
BEPS is a concern in the context of digital economy. In the changing international tax
environment, a number of countries have expressed concern about how international
standards on which bilateral tax treaties are based allocate taxing rights between source
and residence states. While actions to address BEPS will restore both source and
residence taxation in a number of cases where cross border income would otherwise go
untaxed or would be taxed at very low rates. New international standards must be
designed to ensure the coherence of corporate income taxation at the international level.
BEPS issues may arise directly from the existence of loopholes, as well as gaps, frictions,
mismatches in the interaction of countries domestic tax laws. These types of issues
generally have not been dealt by OECD standards or bilateral treaty provisions. There is a
need to complement existing standards that are designed to prevent double taxation with
instruments that prevent double non taxation in areas previously not covered by
international standards and that address cases of no or low taxation associated with
practices that artificially segregate taxable income from the activities that generate it.
Moreover, government must continue to work together to tackle harmful tax practices
and aggressive tax planning.
Paper-7: Advanced Cost and Management Accounting
Attempt all questions. Working notes should form part of the answer. Make assumptions
wherever necessary.
Use separate answer book for each question.
1. Motor Components Ltd has secured an order for 3,000 components per week from a car
manufacturer but there is a shortage of available labour capacity which is restraining the
Company from producing the entire quantity within the Company.
Production, cost and sales information of Motor Components Ltd as under:
Sales price of complete component (Rs.) 1,500
Skilled labour capacity per week (hours) 7,500
Production Labour rate per hour (Rs.) 120
Variable production overhead (Rs.) 50% of Labour Cost
Fixed Overhead (Rs.) 500,000 per week
Testing cost per complete component (Rs.) 20
Each component is finally assembled from three different sections producing different sub
components , make up of cost as well as individual subcontracting price for each sub
component are as under.
Sub Component (SC) SC 1 SC 2 SC 3
Part per Sub Component (Number) 5 4 1
Material Cost per part (Rs.) 60 40 20
Material Cost per Sub Component 300 160 20
Production labour per part (Minutes) 18 15 30
The sub-contracting price for sub components
of Rs. 1,400 are made up of as (Rs.) 700 500 200
Two production strategies available are:
a) To produce as many completed components as possible within the existing weekly skilled
labour capacity and subcontracting the remaining complete components, and
b) Produce as many of the sub components in three sections as possible and subcontracting
the remaining sub components.
Required: Advise which of the above two production strategies would be more profitable for
the Company. 20 marks
Answer:
Evaluation of strategy (a)
Working Note 1: Time Taken
Section 1- 5 parts × 18 minutes = 90 Minutes i.e. 1.5 hours
Section 2 - 4 parts × 15 minutes – 60 Minutes i.e. 1 hour
Section 3 - 1 part × 30 minutes = 30 Minutes i.e. 0.5 hours
Total time taken by for assembling all the sections of the components 3 hours
Complete components to be produced in 7,500 hours = 7,500 ÷ 3 = 2,500 Units
Complete components to be sub contracted (3,000 – 2,500) = 500 Units
Statement showing the profitability under Strategy (a)
Particulars Rs.
A Total cost of producing 2,500 units
Material Cost [(300+160+20) x 2,500] 1,200,000
Labour Cost [3 hours x 120] x 2500 900,000
Variable Cost [3 hours x 60] x 2500] 450,000
Testing (2,500*20) 50,000
Total Variable Cost 2,600,000
Fixed Overhead 500,000
Total cost of producing 2,500 units 3,100,000

B Total cost of sub contracting 500 units

Cost of sub contracting of 500 Units = 500 x (700+500+200) 700,000
Testing of sub contracting units (500 x 20) 10,000
Total cost of sub contracting 500 units 710,000

C Total Cost of entire order of 3,000 units 3,810,000

D Total Sales [ 3,000 x 1,500] 4,500,000

E Profit 690,000

Statement showing the profitability under Strategy (b)

Particulars Rs.
A Total variable cost of own manufacturing
Section/Sub component 1 [ 2,000 x 570] 1,140,000
Section/ Sub component 2 [ 3,000 x 340] 1,020,000
Section/ Subcomponent 3 [ 3,000 x 110] 330,000
B Total variable cost of sub contracting 1,000 units of section/Subcomponent 1 700,000
C Testing fee [ 3,000 x 20] 60,000
D Fixed Cost 500,000
E Total Cost 3,750,000
F Total Sales 4,500,000
G Profit 750,000
Decision : Strategy (b) should be adopted since it increases profut by Rs. 60,000.
 Working Note 2 : Statement showing contribution per hour of producing over sub contracting
Sub components
Particulars
1 2 3
A. Sub contracting Price (Rs) 700 500 200
B. Less, Variable Cost of own manufacture 300 160 20
Labour Cost @ Rs 120 per hour 180 120 60
Variable Production Overhead 90 60 30
Total relevant cost of manufacture (Rs) 570 340 110
C. Saving in producing over sub contracting (Rs) 130 160 90
D Labour hour per section (Sub Component) 1.50 1.00 0.50
E. Contribution per hour (Constraint) (Rs) 86.67 160.00 180.00
F. Ranking for manufacturing 3 2 1

Working Note : Statement showing allocation of 7,500 hours Hours

A. Total hours available 7,500
B. Less: Hours utilised to produce 3,000 components of Section/Sub component 3(1,500)
Available Hours 6,000
B. Less: Hours utilised to produce 3,000 components of Section 2 (3,000)
Available Hours 3,000
C. Less: Hours utilised to produce 2,000 components of Section 1 (3,000)
Available Hours -
Thus, the following strategy would be adopted
Subcomponents in Units Section 1 Section 2 Section 3
Own manufacture 2,000 3,000 3,000
Sub contracting 1,000 - -
2.
a) Hemant Trading Pvt. Ltd. presents the following information relating to FY 2076/77 to
you for your consultancy:

Particulars Variable Costing Absorption

(Rs. in millions) Costing (Rs. in
millions)
Revenues 45.00 45.00
Cost of goods sold (at standard cost) 23.40 29.30
Fixed manufacturing overhead (budgeted) 6.00 0.00
Fixed manufacturing overhead variances:
Spending (unfavourable) 0.50 0.50
Production volume (unfavourable) 0.00 2.00
Total marketing and administrative cost 7.50 7.50
(fixed)
Total cost 37.40 39.30
Operating income 7.60 5.70

Inventories at standard cost:

On Ashadh 31, 2076 6.00 8.60
On Ashadh 31, 2077 0.33 1.03
Required: (2.5+2.5+2.5+2.5=10 marks)
i) At what percentage of denominator level was the plant operating during FY
2076/77?
 ii) How much fixed manufacturing overhead was included in the FY 2075/76 and the
FY 2076/77 ending inventory under absorption costing?
iii) Reconcile and explain the difference in FY 2076/77 operating incomes under
variable and absorption costing.
iv) The CEO of the company notes that despite an increase in sales over FY 2075/76,
FY 2076/77 operating income has actually declined under absorption costing.
Explain how this occurred.
b) Lumbini Family Stores (LFS) started the business of dealing in goods of daily needs from
the beginning of FY 2075/76. It has three product lines; viz., baked goods, milk & fruit
juice, and frozen foods. Due to its free home delivery service, reasonable price of goods
and availability of fresh products, it picked up the market immediately. Now, it operates
at capacity and decides to apply ABC analysis to its product lines. It identifies four
activities and their activity cost rates as follows:
Ordering Rs. 1,000 per purchase order
Delivery and receipt of merchandise Rs. 40 per delivery
Shelf-stocking Rs. 10 per hour
Customer support and assistance Rs. 4 per item sold
Other related information for the last two months of FY 2076/77 is as follows:

Baked Milk & Frozen

Goods Fruit Juice Products
Sales revenue (Rs.) 570,000 630,000 520,000
Cost of goods sold (Rs.) 300,000 400,000 300,000
Store support costs (Rs.) 114,000 141,000 105,000

Activity area usage:

Ordering (no. of purchase orders) 30 25 13
Delivery (no. of deliveries) 196 92 75
Shelf-stocking (hours) 366 272 170
Customer support (no. of item sold) 22,500 9,500 7,850
Under its simple costing system, LFS allocated support costs to products at the rate of
25% of cost of goods sold.
Required: (2+4+4=10 marks)
i) Prepare a product-line profitability report of LFS for the period using simple costing
system.
ii) Prepare a product-line profitability report of LFS for the period using ABC system.
iii) Prepare a detail profitability analysis report with new insights of ABC system for
LFS management.
Answer:
a)
i) Since production volume variance is unfavorable, the budgeted fixed manufacturing
overhead must be larger than the fixed manufacturing overhead allocated.
We know that,
Production volume variance = Budgeted fixed manufacturing overhead – Fixed
manufacturing overhead allocated
Rs. 2 millions = Rs. 6 millions – Allocated FMOH
 Allocated FMOH = Rs. 4 millions
This allocated FMOH is 66.67% of budgeted FMOH of Rs. 6 millions.
If 66.67% of the budgeted fixed costs were allocated, the plant must have been
operating at 66.67% of denominator level in FY 2076/77.
ii) The problem provides the beginning and ending inventory balances under both,
variable and absorption costing.
Under variable costing, all fixed costs are written off as period costs, i.e., they are not
inventoried.
Under absorption costing, inventories include variable and fixed costs.
Therefore the difference between inventory under absorption costing and inventory
under variable costing is the amount of fixed costs included in the inventory as below:
(Rs. in millions)
Inventories as on Variable Absorption FMOH included in inventory
costing costing
Ashadh 31, 2076 6.00 8.60 2.60
Ashadh 31, 2077 0.33 1.03 0.70

iii) The difference in operating income of Rs. 1.90 millions (i.e.; Rs. 7.60 millions – Rs.
5.70 millions) is explained by the release of Rs. 1.90 millions of fixed manufacturing
costs when the inventories were decreased during FY 2076/77:
VCOI – ACOI = FMOH in opening inventory – FMOH in closing inventory
Rs. 7.60 millions – Rs. 5.70 millions = Rs. 2.60 million – Rs. 0.70 million
Rs. 1.90 millions = Rs. 1.90 millions.
Alternatively, the presence of fixed manufacturing overhead costs in each income
statement can be analyzed:
(Rs. in millions)
Particulars Variable Absorption FMOH
Costing Costing
Cost of goods sold 23.40 29.30 5.90
Production volume variance 0.00 2.00 2.00
Total 7.90
Fixed manufacturing overhead 6.00 0.00 (6.00)
Difference in operating income 7.60 5.70 1.90

iv) Under absorption costing, operating income is a function of both sales and
production (i.e., change in inventory levels).
During FY 2076/77, Hemant Trading experienced a severe decline in inventory
levels. This may be due to sales being higher than anticipated and production being
lower than planned (at 67% of denominator level), resulting in much of the opening
inventory passing through cost of goods sold.
This means that under absorption costing, large amounts of inventoried fixed costs
have flowed through the cost of goods sold in FY 2076/77, resulting in a smaller
operating income than in FY 2075/76, despite an increase in sales volume.
b)
i) Product-line profitability report of LFS for the period using simple costing system
(in Rs.)
Particulars Baked Milk & Frozen Total
Goods Fruit Juice Products
Sales revenue 570,000 630,000 520,000 1,720,000
Costs:
Cost of goods sold 300,000 400,000 300,000 1,000,000
Store support costs (25% of 75,000 100,000 75,000 250,000
CoGS)
Total costs 375,000 500,000 375,000 1,250,000
Operating income 195,000 130,000 145,000 470,000
Operating income margin of 34.21 20.63 27.88 27.33
revenue (%)

ii) Product-line profitability report of LFS for the period using ABC system (in Rs.)
Particulars Baked Milk & Frozen Total
Goods Fruit Juice Products
Sales revenue 570,000 630,000 520,000 1,720,000
Costs:
Cost of goods sold 300,000 400,000 300,000 1,000,000
Ordering (Rs. 1000×30; 25; 13) 30,000 25,000 13,000 68,000
Delivery (Rs. 40×196; 92; 75) 7,840 3,680 3,000 14,520
Shelf-stocking (Rs. 10×366; 272; 3,660 2,720 1,700 8,080
170)
Customer support (Rs. 4×22,500; 90,000 38,000 31,400 159,400
9,500; 7,850)
Total costs 431,500 469,400 349,100 1,250,000
Operating income 138,500 160,600 170,900 470,000
Operating income margin of revenue 24.30 25.49 32.87 27.33
(%)

iii) Profitability analysis report with new insights of ABC system.

Ranking of the product-line on the basis of profitability:
Particulars Baked Goods Milk & Frozen
Fruit Juice Products
Profitability under Simple costing 34.21 20.63 27.88
system
Rank I III II
Profitability under ABC system 24.30 25.49 32.87
Rank III II I

Percentile analysis of revenue and each item of cost activities of each product line:
Particulars Baked Milk & Frozen Total
Goods Fruit Juice Products
Sales revenue 33.14 36.63 30.23 100
Cost of goods sold 30.00 40.00 30.00 100
Ordering 44.12 36.76 19.12 100
Delivery 54.00 25.34 20.66 100
Shelf-stocking 45.30 33.66 21.04 100
Customer support 56.46 23.84 19.70 100

The baked goods line drops sizably in profitability when ABC is used. Although it
constitutes 30% of COGS, it uses a higher percentage of total resources in each
activity area, especially the high cost delivery activity and customer support area. In
 contrast, frozen products line draws a much lower percentage of total resources used
in each activity area than its percentage of total COGS. Hence, under ABC system,
frozen products is much more profitable. Besides, milk & fruit juice is more
profitable than baked goods.
Hence, LFS may want to explore ways to increase sales of frozen products and milk
& fruit juice. It may also want to explore price increases on baked goods.
3.
a) Consider the following table with demand, supply and the related transportation cost per unit:
From / To D E F G H Supply (Unit)
A Rs. 600 Rs. 500 Rs. 300 Rs. 400 Rs. 600 40
B Rs. 400 Rs. 400 Rs. 700 Rs. 600 Rs. 800 60
C Rs. 700 Rs. 600 Rs. 500 Rs. 600 Rs. 800 80
Demand (Unit) 20 40 30 40 50

Required: (4+6=10 marks)

i) Construct a linear programming model.
ii) Find a feasible solution by Vogel's Approximation Method.
b) A Production Supervisor is considering how he should assign five jobs that are to be
performed to five Operators. He wants to assign the jobs to the Operators in such a manner
that the aggregate costs to perform the job is the least. He has the following information
about the wages paid to the Operators for performing these jobs –
Operators Jobs
1 2 3 4 5
A 10 3 3 2 8
B 9 7 8 2 7
C 7 5 6 2 4
D 3 5 8 2 4
E 9 10 9 6 10

Required:
Assign the Jobs to the Operators so that the aggregate cost is the least. 10 marks
Answer:
a)
i) Let X be the number of units for supply (from ith place) and demand (to jth place)
Objective function (to minimize transportation cost):
Min. z =
XAD+XAE+XAF+XAG+XAH+XBD+XBE+XBF+XBG+XBH+XCD+XCE+XCF+XCG+XCH
Subject to,
Supply capacity constraints:
XAD+XAE+XAF+XAG+XAH = 40
XBD+XBE+XBF+XBG+XBH = 60
XCD+XCE+XCF+XCG+XCH = 80
Demand constraints:
 XAD+ XBD+ XCD = 20
XAE+ XBE+ XCE = 40
XAF+ XBF+ XCF = 30
XAG+ XBG+ XCG = 40
XAH+ XBH+ XCH = 50
And, Xij ≥ 0 (where i = A, B & C and j = D, E, F, G & H)
ii) In VAM, penalties are assigned to a row whenever the lowest entry in that row is not
utilized. The penalty is the difference between the lowest and the second-lowest
transportation cost in the row. Thus, similar penalties can then be calculated for all
rows and columns.
To D E F G H Supply Penalty Penalty Penalty
1 2 3
(Unit)
From Rs. Rs. Rs. Rs. Rs.
A 600 500 300 400 600 40/0 100
XAH = 40
B 400 400 700 600 800 60/40/0 0 200 200
XBD = 20 XBE = 40

C 700 600 500 600 800 80 100 100 100

XCF = 30 XCG = 40 XCH = 10

Demand 20/ 0 40/ 0 30/ 0 40/ 0 50/

(Unit) 10/ 0
Penalty 1 200 100 200 200 200
Penalty 2 300 200 200 0 0
Penalty 3 200 200 0 0

Since there are four demand destination with same highest penalty (Rs. 200),
demand destination H is chosen to be supplied from the lowest cost supply source.
The lowest cost supply source will be A with Rs. 600 cost.
Supply all 40 units to H. Remaining demand in H is 10 units and remaining supply
in A is 0 units.
Calculate the penalties again.
Now choose demand destination D (20 units).
Supply 20 units from B with Rs. 400 cost. Remaining demand in D is 0 units and
remaining supply units in B is 40 units.
Calculate the penalties again.
Now choose demand destination E (40 units).
Supply 40 units from B with Rs. 400 cost. Remaining demand in E is 0 units and
remaining supply units in B is 0.
Now there is only one source of supply C (80 units) is left.
Supply these 80 units from C to F (30 units) with Rs. 500 cost, to G (40 units) with
Rs. 600 cost and to H (10 units) with Rs. 800 cost.
Now, the feasible solution is:
XAH = 40 units, XBD = 20 units, XBE = 40 units, XCF = 30 units, XCG = 40 units &
XCH = 10 units
b)
 A. Given Matrix
10 3 3 2 8
9 7 8 2 7
7 5 6 2 4
3 5 8 2 4
9 10 9 6 10
B. Row Operations

8 1 1 0 6
7 5 6 0 5
5 3 4 0 2
1 3 6 0 2
3 4 3 0 4
C. Column Operation
7 0 0 0 4
6 4 5 0 3
4 2 3 0 0
0 2 5 0 0
2 3 2 0 2

D. Subtracting from LOE, We have

9 0 0 2 6
6 2 3 0 3
4 0 1 0 0
0 0 3 0 0
2 1 0 0 2
E. Optimal Assignment

9 0 0 2 6
6 2 3 0 3
4 0 1 0 0
0 0 3 0 0
2 1 0 0 2
So, Assignment to each operator to minimize cost will be as follows:
Operator Assignment
A 3
B 2
C 4
D 3
E 9
Total Assignment 21
4.
a) Star Tailoring is a manufacturer of designer suits. The cost of each suit is the sum of
three variable costs (direct material costs, direct manufacturing labour costs, and
manufacturing overhead costs) and one fixed-cost category (manufacturing overhead
costs). Variable manufacturing overhead cost is allocated to each suit on the basis of
budgeted direct manufacturing labour-hours per suit. For Marga 2076 each suit is
budgeted to take four labour-hours. Budgeted variable manufacturing overhead cost per
 labour-hour is Rs. 200. The budgeted number of suits to be manufactured in Marga 2076
is 900.
Actual variable manufacturing overhead costs in Marga 2076 were Rs. 816,480 for 1,000
suits started and completed. There was no beginning or ending inventories of suits.
Actual direct manufacturing labour-hours for Marga 2076 were 4,536.
Star Tailoring allocates fixed manufacturing overhead to each suit using budgeted direct
manufacturing labour-hours per suit. Data pertaining to fixed manufacturing overhead
costs for Marga 2076 are: budgeted Rs. 684,000, and actual Rs. 718,000.
Required: (4.5+3.5=8 marks)
i) Compute the flexible budget variance, the spending variance, and the efficiency
variance for variable manufacturing overhead. Comment on the result.
ii) Compute the spending variance for fixed manufacturing overhead. Also compute the
production-volume variance for Marga 2076. Comment on the result.
b) Computer World is an authorized distributor for Nepal of videoconferencing products
made in South Korea. Regular units are ordered by Computer World to meet marketing
projections, and specialized units are ordered after an order is received from the
customer. Providing maintenance service for the supplied videoconferencing equipment
is an important area of customer satisfaction. With the recent downturn in the economy,
the videoconferencing equipment segment has suffered, leading to a decline in Computer
World's financial performance. The following income statement shows results for FY
2076/77:
Income Statement
For the year ended Ashadh 31, 2077
Particulars Amount Amount
(Rs. in millions) (Rs. in millions)
Revenues:
Equipment sales 600
Maintenance contracts 200
Total revenues 800
Cost of goods sold 460
Gross margin 340
Operating costs:
Marketing 60
Distribution 15
Customer maintenance 100
Administration 90
Total operating costs 265
Operating income 75

Computer World's management team is in the process of preparing the budget for the FY
2077/78 and is studying the following information:
i) Selling prices of equipment are expected to decline by 5% as the economic recovery
will not begin in this financial year. The price of each maintenance contract is
expected to remain unchanged from FY 2076/77.
ii) Equipment sales in units are expected to decline by 10%, but there will be 6%
growth in units of maintenance contracts.
iii) Cost of each unit sold is expected to increase by 5% to pay for the necessary
technology and quality improvements.
 iv) Marketing costs are expected to increase by Rs. 5 million, but administration costs
are expected to remain at the levels of FY 2076/77.
v) Distribution costs vary in proportion to the number of units of equipment sold.
vi) Three maintenance engineers and three technicians are to be hired at a total cost of
Rs. 3 million, which covers compensation benefits and related travel costs. The
objective is to improve customer service and shorten response time.
vii) There is no beginning or ending inventory of equipment.
Required: 7 marks
Prepare a budgeted income statement for the FY ending Ashadh 31, 2078.
Answer:
a)
i) Variable manufacturing overhead analysis:
Actual Budgeted Actual Budgeted Actual cost Budgeted Budgeted cost of
LH LH input output rate (Rs.) of actual cost of actual output (Rs.)
input per unit (unit) LH (Rs.) actual LH
(hrs) (hrs) (Rs.)
(a) (b) (c) (d) (e)=given (f)=(a×d) (g)=(b×c×d)
4,536 4 1,000 200 816,480 907,200 800,000

Spending variance (h) = (f – e) Rs. 90,720 (F)

Efficiency variance (i) = (g – f) Rs. 107,200 (U)
Flexible budget variance (j) = (g - e) Rs. 16,480 (U)

Star Tailoring had a favourable spending variance of Rs. 90,720 because the actual
variable overhead rate was Rs. 180 (i.e.; Rs. 816,480 ÷ 4,536 hrs) per direct
manufacturing labour hour versus Rs. 200 per hour budgeted. It had an unfavourable
efficiency variance of Rs. 107,200 (U) because each suit averaged 4.536 labor-hours
(4,536 hours ÷ 1,000 suits) versus 4 hours per suit budgeted.

ii) Budgeted fixed overhead rate per direct manufacturing labour hour
= Budgeted fixed mfg. OH/ (Budgeted LH per unit × Budgeted output)
= Rs. 684,000/ (4 hrs × 900 units) = Rs. 190
Fixed manufacturing overhead analysis:
Budgeted Actual Budgeted Actual cost Budgeted cost of Budgeted cost
LH input output rate (Rs.) of actual LH budgeted output of actual output
per unit (unit) (Rs.) (Rs.) (Rs.)
(hrs)
(a) (b) (c) (d)=given (e)=given (f)=(a×b×c)
4 1,000 190 718,000 684,000 760,000

Spending variance (g) = (e – d) Rs. 34,000 (U)

Production volume (h) = (f – e) Rs. 76,000 (F)
variance

Star Tailoring had unfavourable spending variance because of actual production and
hours worked being more than budgeted. Besides, the production volume variance is
Rs. 76,000 (F). This arises because Star Tailoring utilized its capacity more
intensively than budgeted (the actual production of 1,000 suits exceeds the budgeted
 900 suits). This resulted in overallocated fixed manufacturing overhead of Rs.
76,000 (4 × 100 × Rs. 190).

b)
Computer World
Budgeted Income Statement
For the year ended Ashadh 31, 2078
Particulars Amount Amount
(Rs. in (Rs. in
millions) millions)
Revenues:
Equipment sales (600×0.95×0.90) 513.00
Maintenance contracts (200×1.06) 212.00
Total revenues 725.00
Cost of goods sold (460×1.05) 483.00
Gross margin 242.00
Operating costs:
Marketing (60+5) 65.00
Distribution (15×0.90) 13.50
Customer maintenance (100+3) 103.00
Administration 90.00
Total operating costs 271.50
Operating income/ (loss) (29.50)

5. Write short notes/Distinguish between: (5×3=15 marks)

a) Time differential on Pricing and its types
b) Advantages of Cost plus pricing model

c) Kaizen Umbrella
d) Responsibility accounting and its prerequisites

e) ‘Smoothing of production’ with reference to J-I-T

Answer:
a) Time Differential – Charging different prices on the basis of time is another kind of price
discrimination. Under time differentials, the objective of the seller is to take advantage of
the fact that buyer’s demand elasticity vary over time. Time differential can be classified
under the following heads:
i. Clock Time Differential – The price differentials are known as clock time
differentials when different prices are charged for same service of commodity at
different times within a 24 hour period. E.g. Cinema hall tickets are cheaper for
morning show etc.
ii. Calendar time differentials – The price differentials are known as calendar time
differentials when different prices are charged for different weeks/months/season
(period in excess of 24 hours). E.g. Hotel charges for peak and non-peak seasons.
iii. Geographical price differentials: It refers to price differentials based on buyer’s
location. The objective here is to exploit the differences in transport cost due to
varying distances between location of plant and customer.
 iv. Customer category price differentials: Price discrimination is frequently practiced
according to consumer categories in the case of public utilities e.g.. NEA charges
different rates for residential consumer and industrial consumer.
b) Following are the advantages of cost plus pricing
i. Fair method: It is fair method of price fixation. The business executives/ managers
are convinced that the price fixed will cover the cost.
ii. Assured Profit: If price is greater than cost, the risk is covered. This is true when
normal expected capacity basis of cost estimation is used.
iii. Reduced risk and uncertainties: A decision makers has to take decisions on the face
of many uncertainties. He may accept a pricing formula that seems reasonable for
reducing uncertainty.
iv. Considers market factors: Thus sort of pricing does not mean that market forces are
ignored. The markup added to the cost to make a price reflect the well-established
customs of trade, which guide the price fixer towards a competitive price.
c) Kaizen, meaning “continuous or ongoing improvement” in Japanese, is an inseparable
aspect of the management of quality. There is an old saying in Japanese, which is very
apt: “If a man has not been seen for three days, his friends should take a good look at him
to see what changes have befallen him.” Such is the Japanese belief in unending
improvement.
In fact, continuous improvement is required in all activities of the organization, be it
productivity improvement or new product development or labor management relations or
delivery system or customer orientations. All directly and indirectly productive or
productivity generating activities of the organization come under the umbrella of Kaizen.
d) Responsibility Accounting and its prerequisites – Responsibility Accounting emphasizes
division of organization among different sub units in such a way that each unit is the
responsibility of an individual manager. This approach recognizes cause and effect
relationship between a manager’s decision and action and it seeks to relate the cost and
revenue results of these decisions and actions. The basic theme of this approach is that a
manager should be held responsible for those activities, which are under his or her direct
control. This approach should be used exclusively to assist management in planning and
controlling the organizational activities efficiently and effectively.
e) ‘Smoothing of production’ with reference to J-I-T.
‘Smoothing of production’ is one of the important aspect of J-I-T, where it is essential to
convert the demands for the final products into a sequence of single unit productions, the
sequence repeating itself in time. Inventories are to be avoided at all places including the
finished goods and to have uniform workload at all work places. Sequencing at the single
unit of product level helps in eliminating the lot sizes, in facilitating smooth withdrawals
from preceding processes and in the even balancing of the work flow through the various
work spots. For such smooth production flow, a monthly (depending upon various lead
times) fairly stable production plan is necessary.
6.
a) Tula Enterprise gives you the following information for quality and time for FY 2075/76 of its
product:
Number of returned goods 385
Number of defective units reworked 1,122
Annual hours spent on quality training per employee 32
Number of units delivered on time 12,438
 Units of finished goods shipped 14,240
Average total hours worked per employee 2,000
Average amount of time needed to complete an order (in days):
Wait time
From order being placed to start of production 8
From start of production to completion 6
Inspection time 2
Process time 4
Move time 2
Required: (2+1+1+1=5 marks)
i) Compute the manufacturing cycle efficiency.
ii) Calculate percentage of goods returned.
iii) Calculate defective units reworked as a percentage of units shipped.
iv) Calculate percentage of hours spent by each employee on quality training.
b) Jaya has invested just Rs. 90,000,000 and built a 75-room motel. She anticipates renting
these rooms for 20,000 nights next year (or 20,000 room-nights) and expects the demand
for rooms to be uniform throughout the year. All rooms are similar and will rent for the
same price.
Jaya estimates the following operating costs for next year:
Variable operating costs Rs. 550 per room-night
Fixed costs:
Salaries and wages Rs. 12,500,000
Maintenance of building and pool Rs. 2,500,000
Other operating and administration costs Rs. 7,500,000
Jaya's target return on investment is 20%. She plans to price the rooms at full cost plus a
markup on full cost to earn the target return on investment.
Required: 5 marks
What price should Jaya charge for a room-night? What is the markup as a percentage of
the full cost of a room-night?
Answer:
a)
i) Manufacturing cycle time
= Total time from receipt of an order by production till its completion.
= (8 + 6 + 2 + 4 + 2) days = 22 days
Manufacturing cycle efficiency (MCE)
= Value-added manufacturing time ÷ Manufacturing cycle time
= 4 days of processing time ÷ 22 days manufacturing cycle time
= 0.18
 ii) Percentage of goods returned
= No. of returned goods ÷ Units of finished goods shipped
= 385÷14,240 = 2.70%
iii) Defective units reworked as a percentage of units shipped
= No. of defective units reworked ÷ Units of finished goods shipped
= 1,122÷14,240 = 7.88%
iv) Percentage of hours spent by each employee on quality training
= 32÷2,000 = 1.60%
b)
Target operating income = Target return on investment × Invested capital
= 20% × Rs. 90,000,000 = Rs. 18,000,000
Target contribution margin = Target operating income + Total fixed costs
= Rs. 18,000,000 + (Rs. 12,500,000 + Rs. 2,500,000 + Rs. 7,500,000)
= Rs. 18,000,000 + 22,500,000 = Rs. 40,500,000

Target contribution per room-night = Rs. 40,500,000 ÷ 20,000 = Rs. 2,025

Add: variable costs per room-night = Rs. 550
Price to be charged per room-night = Rs. 2,575
The full cost of a room = variable cost per room + fixed cost per room
= Rs. 550 + (Rs. 22,500,000 ÷ 20,000)
= Rs. 550 + Rs. 1,125
= Rs. 1,675
Markup per room = Rental price per room – Full cost of a room
= Rs. 2,575 – Rs. 1,675
= Rs. 900
Markup percentage as a fraction of full cost = Rs. 900 ÷ Rs. 1,675
= 53.73%
Paper-8: Strategic Management & Decision Making Analysis

Attempt all questions.

Use separate answer book for each question.
1. Read the following and answer the questions accordingly:
Kathmandu Mithai Bhandar (KMB) is the traditional Nepali sweets shop established in 2021
B.S. by Ram Rajkarnikar in Tripureswor, Kathmandu. It is the family owned sole trading firm
and an ace in the industry serving the needs of locals. Sales and profits had been soaring and
sky rocketing over the years as it was enjoying monopolistic position in the city. However,
this situation has started changing over the years.
After the democracy movements, ensuing governments started speeding up liberalization and
privatization processes. This has caused soaring of imports and advent of competitors from
neighboring India in all the sectors including sweet industry. The situation is much
aggravated due to the worldwide movement LGP: liberalization, globalization, and
privatization. Nepal experienced migration of Nepalese abroad temporarily for employment
and other reasons and some permanently settling there. Over the years, Nepal the center of
attraction for international tourists for various reasons, and Kathmandu has been the city of
choice for foreign returned Nepalese too. Due to unprecedented economic revolution in the
last couple of decades, people’s disposable income grew rapidly and people started to be
picky of their purchases. This is true in case of sweets industry too.
Having had the tastes of modern non-traditional sweets, customers started expressing their
demand for different types of non-traditional sweets hence shadowing traditional Nepalese
sweets. Indian sweets started to dominate the market in the last couple of decades. Even
other competing sweets shops started to emerge and lure customers in terms of hygiene and
ambience of restaurant. Moreover, these competitors started opening new branches in
strategic locations in the city. Socio-cultural changes were drastic due to exposure due to
various reasons like television, internet and the fact that people started becoming health
conscious, cannot be overlooked, e.g. sweets are not good for health. On the other hand, the
overall tendencies of people in eating out in restaurants have been on the increasing trend
but its impact on KMB was not overwhelming, it is quite the contrary.
Because of the changing scenario, KMB started losing customers and obviously sales
sharply. In the organizational history of KMB, such situation never occurred. The young
generations of the KMB owners were educated and felt embarrassed to conduct this low-
profile business and the existing management was in a dilemma regarding what to do. To
add fuel to the fire, Department of Nepal Government Food Quality Standard Control have
had a couple of raids on KMB and issued tickets and warning on the quality standard of food
and services offered.
In response to all these situations and scenarios, the management of KMB decided and did
some revamping in the business in terms of adding varieties, promoting restaurant look,
adding more service staff, and creating more hygienic environment. But the sales did not
grow in proportion to the investment spent on revamping. The management had once thought
of attracting customers by reducing price of the products but the ever-rising costs of
production (rent, salary, raw materials, etc.) did not allow KMB to attract more customers in
terms of lower prices. Now the management is really disheartened and confused about what
to do and what not to do.
a) Prepare and elaborate the strategic advantage profile and ETOP of KMP. 10 marks
b) If you are approached by KMP as a strategic consultant, what would be your tips and
suggestions to KMP management. Discuss. 10 marks
Answer
a) Strategic Advantage profile of KMP (Explain each of the items elaborately)
Internal Environment Strengths (-3……+3) Weaknesses (-3….+3)
Strengths
-Long history reputation +3
-Branding of firm and its products +2
-Local traditional sweets +3
-Experience curve benefits +3

Weaknesses
-Limited sales outlets -3
-New generation of owners not willing to take over -2
-Failure to maintain hygiene -1
-Failure to notice the emerging trends in the market

This is the ETOP of KMP (Explain each of the items elaborately)

External Environment Opportunities (-3……+3) Threats (-3….+3)
Opportunities
-Rise of disposable income +2
-Outgoing nature of dining and eating +2
-Globalization trend and inflow of tourists +2
-Exportability possibility

Threats
-Change in customer taste -2
-Rise in non-traditional restaurants -2
-Liberalization policy of governments -1
-Rising costs -1

b) As a strategic consultant, followings are the tips & suggestions for KMB management.
i. First, Draft clear organizational strategic goals in terms of vision, mission, and
objectives.
ii. Discuss the strategic goals with all the members of KMP.
iii. Analyze the industry environment and general environment in terms of
opportunities and challenges.
iv. Analyze the internal environment of KMP to identify its strengths and weaknesses
v. Prepare SWOT analysis.
vi. Generate alternative strategies and evaluate them and select optimum strategies:
diversification, divestment, niche orientation, etc.
vii. Draft strategic implementation program and communicate to all members.
 viii. Seemingly threats might in fact be opportunities, e.g. changing customers wants
may be a threat but can be taken as opportunity to serve their new wants with new
products. Similarly, government quality raid may not be taken as threat but may
be considered as an opportunity to improve our hygienic environment.
ix. To do all these strategic decisions and actions, KMP can recruit and employ an
efficient & capable CEO, and if possible he may be offered certain percentage of
shares of KMP so that he will invest his expertise to revamp the ailing
organization.
2.
a) What is strategic planning? Explain the elements and process of strategic management.
(4+6=10 marks)
b) How does portfolio analysis help in choosing right strategy? Illustrate with example. 10 marks
Answer
a) Strategic planning is the process of formulating and implementing strategic plans. It
involves identifying the major objectives of the organization, choosing the strategies
needed to achieve them, creating plans to implement the strategies and then doing the
required works. Strategic planning involves matching strengths with opportunities,
analyze internal and external environment, identifying and analyzing strengths and
weaknesses resulting from internal environment and opportunities and threats from
external environment, and final defining organization’s vision, mission, objectives, and
strategies.
Strategic management is a set of decisions and actions that have long-run impact on the
operations of the organization. Strategic management provides the direction and scope of
the business. The primary intention is to make strategic fit through which the
organization gain competitive advantage.
The set of decisions includes two components:
i. Environment scanning: This component is concerned with identification,
monitoring, assessment, and evaluation of both internal factors and external factors.
Internal factors include resources, structure, policies, strategies, management
practices, and organizational culture. These internal factors either provide strengths
or weaknesses. The strategic advantage profile (SAP) and the Internal Factor
Analysis Summary (IFAS) are some important tools which are used to analyze the
strengths and weaknesses. External factors include political, economic, socio-
cultural, legal, technological factors. These factors either provide opportunities or
threats which an organization can come to identify and analyze with the helps of
tools such as Environmental Threat and Opportunities Profile (ETOP) and External
Factor Analysis Summary (EFAS).
ii. Strategy Formulation: It involves defining organization’s vision, mission,
objectives, strategies and policies. Vision is the aspiration of the organization.
Mission provides the reasons for the existence of the organization in the society.
Objective is the ultimate end the organization intends to achieve. Strategies are the
broad plans for the achievement of the objectives. Policies are the guidelines for the
execution of the strategies.
The Sub-component of strategic management process i.e. set of actions includes:
i. Strategy implementation: This sub-component is concerned with planning and
expediting necessary resources, designing organization’s structure which suits to
 the implementation of the planned actions, and design and application of
management system.
ii. Evaluation and control: This sub-component is concerned with the evaluation of
the performance. Evaluation is conducted on qualitative and quantitative basis. The
indicator for qualitative evaluation may include image and reputation of the
organization, customer satisfaction, employee satisfaction, loyalty, commitment and
so forth. Quantitative evaluation may use the information related to sales, profit,
productivity etc. Control is a mechanism to ensure that the actions being carried out
are according to plan and are leading the organization toward the accomplishment
of goals. Various types of strategic control should be considered which include
premise control, strategic surveillance control, special alert control, and
implementation control.
b) Portfolio in strategic management connotes the number of businesses a particular
organization has started either as intendent SBUs or as divisions. Analysis of each of the
SBU is called portfolio analysis. There are various types of techniques to analyze the
portfolio which helps the CEO to decide which SBU is to be expanded, which to be
disbanded, and which to be continued as it is.

For example, if we use BCG matrix as portfolio analysis, the typical recommended strategy
to choose is expansion for the SBUs falling in the STAR quadrant, and divestment strategy
for ones falling in DOG quadrant, while those falling in STAR category, such SBUs should
be the source of fund for investing other SBUs and the like.
Similarly, if we use GEC matrix as portfolio analysis, the typical recommended strategy to
choose is expansion strategy for the SBUs falling in green zone but divestment for ones
falling in red zone.
 Business falling in cell 1, 2, and 4 should be expanded by investment while business falling
in cell 6, 8, and 9 now should be divested and harvested, while business falling in cell 3, 5,
and 7 should be held stable due to obvious reasons.
3.
a) What do you mean by project? What are the essential skills required to be a successful
project manager? Discuss. (3+7=10 marks)
b) Why project management is essential in organizations? Explain various components of
project management plan for effectiveness and efficiency. (6+4=10 marks)
Answer
a) A project is any series of activities and tasks that has specific objective to be completed
within certain specifications, have defined start and end dates, have funding limits and
consume resources. It is a unique, one-time job that has specified starting and ending
dates, a clearly specified objective and goals, a scope of work to be performed,
predefined budget and usually a temporary organization in dynamic environment.
The major characteristics of the project are
 Specific objectives
 Life span
 Single entity
 Custom made
 Time, cost/budget and quality constraints
The essential skills required to be a successful project manager are discussed below.
1. Technical skills: They are the knowledge, abilities and proficiencies in performing a
specialized task using technology. For this he/she should;
 Have a clear understanding of technology involved in the project
 Have a technical concept and solution
 Communicate technically with project team
 Assess technical risk, trend and innovations.
2. Managerial skills: It is the ability to practice management concepts, tools and
techniques. With regard to management skill the project manager must possess.
  Planning and control skills
 Organizational skills
 Decision making skills
 Human resource management skills
 Leadership skills
3. Human skills: It is the ability to understand, communicate, motivate, coordinate, lead
and control the behavior of project team members including project stakeholders.
They basically are related to human side of project management. The major human
skills required are
 Communication skill
 Motivation skill
 Negotiation and bargaining skill
 Conflict management skill
 Stress management skill
4. Conceptual skill: In involves the ability of the project manager to visualize
holistically the project in its environment. These skills include the project manager's
ability to identity problems and resolve problems for the realization of project
deliberates within the various constraints.
5. Team building skills: One of the major responsibilities of project manager is to build
a team. Hence, he must be capable of identifying, committing and integrating the
various cross functional task groups into a single project team.
b) Project is a temporary endeavor designed for particular purpose to satisfy specific group
of consumers within specific time. Project focuses on activities to meet the creation of a
unique product or service to satisfy target customers within defined time. Project
management is the art of managing all the aspects of a project from inception to closure
using a scientific and structured methodology. Project management is very important in
production of goods and services.
Project management is essential for the organization for the following reasons:
i. Strategic alignment: Good project management ensures that the goals of projects
closely align with the strategic goals of the business. Project management sets action,
deliver value and align them with national plans and policies.
ii. Leadership: Without project management, employees get no direction, control or
purpose. Project management provides leadership and vision, facilitates employee
motivation, and overcomes probable obstacles, inspiring the team to do their best
work.
iii. Focus on objectives: Project management is important because it ensures that there’s
a proper plan for executing strategic goals. Project management allows project team
to execute the work plan with proper guidance and supervision.
iv. Realistic project planning: Project management ensures proper expectations around
what can be delivered, by when, by whom, to whom and for how much. It helps in
estimation of budget, resources, and project delivery timelines.
v. Quality control: Projects management is important for establishing quality standard
of project output. It delivers the expected quality level, measures the actual output
and the corrective actions to ensure the set quality standard.
 Components of project management
The primary components of a project management plan are:
 Scope statement: Every tool purchase, equipment rental, employee wage, cup of
coffee or any item of expense must be defined as either a part of the project, or not a
part of the project. Scope statement should be specific, measureable, attainable,
relevant, and time specific.
 Deliverables: Project management plan should state deliverables as the products or
services as the results of the project for effectiveness.
 Work Breakdown Structure (WBS): It is the details of activities essential to
accomplish the project. Each activity needs to be clearly identified and linked with
other activity. This helps to prepare schedule and manage the resources.
 Schedule: Based on WBS, it is essential to breakdown each activity for the earliest
possible time to start and completion. Effective schedule helps to complete the project
in time.
 Budget: For effective project management, project manager needs to prepare budget
for each activity as well as total budget, and cash flow statements.
 Quality: Quality is one of the constraints for project management which needs to
maintain for effectiveness. Thus, project plan should estimate the quality standard,
strategies to meet the quality and quality control techniques.
 Human Resources plan: Project plan should prepare the HR requirement,
acquisition, training and development, compensation and maintenance plans.
 Procurement plan: The project management plan should identify the outside
products and services are required, process for procurement, monitor progress, and
quality.
4.
a) Explain the process of strategy implementation. 8 marks
b) Elaborate the role of chief executive in strategy implementation. 7 marks
Answer
a) Strategy implementation may be defined as the sum total of the activities required for the
successful execution of strategy. This phase is subsequence of strategy formulation.
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 begins with the development of annual objectives;
functional planning; programs, budget and procedures; policies, and communication of
above documents to key employees.
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.
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.
Strategy implementation may call for reengineering in which critical problems are
identified and fixed through process management, process innovation, or process
redesign. It involves reconfiguring or redesigning work, jobs, and process to improve
cost, quality, service and speed.
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.
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’.
Implementation of new strategy may demand different culture. Incompatible aspects of
existing culture to proposed strategy should be identified and changed.
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.
b) Role of chief executive in strategy implementation.
Followings are the roles that the chief executive officer (CEO) is expected to perform in
the process of 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 implementor of strategies because he links the organizational
members with the BOD of the company.
 vi. Strategy implantation is not a static process but involves tweaking either
implementation tactics as per changes in external and internal environmental
changes and who but CEO has the best understanding of the overall external and
internal dynamics.
vii. Developing precise program is the component of strategy implantation that is
definitely better led by the CEO. He is the chief agent in preparing precise,
detailed program as he possesses the broader knowledge of the overall operations
of the company.
viii. Strategy implementation and control
CEO is the chief executing officer leads the strategy implementation and control process.
He is the one who sees whether there a fit between strategy and other dependent
variables, i.e. corporate leadership, culture, structure, style, design, SIS, change
management, resource, etc. He also ensures various types of strategic control, e.g.
premise control, special alert control, etc.
5. Write short notes on the following: (5×3=15 marks)
a) Strategic advantage profile
b) Unique resources
c) Environmental monitoring
d) Managing resistance to change
e) Turnover strategies
Answer
a) Strategic advantage profile
Strategic advantage profile (SAP) is a method of internal analysis that helps diagnose key
strengths & weaknesses, and strategic advantages of the company. SAP is a tool for
providing a picture of the most critical factors which can be S-W in the future.
SAP should parallel the diagnosis of environment factors, e.g. PESTEL (especially
competitive environment) as strengths & weaknesses are always relative to opportunities
& threats.
Factors such as the strategist’s characteristics, the strategist’s job, and the strategist’s
environment affect the diagnosis of strengths & weaknesses, i.e. SAP.
For preparing SAP, identify & analyze strategically important relevant key factors (I.e.
most critical internal factors) and diagnose them as strengths & weaknesses.
Strategic advantage profile (SAP) is misnomer, as it contains not only advantage factors
but disadvantage factors too.
An example of SAP of a hypothetical company has been exhibited here
Exhibit: SAP of XYZ Ltd
Internal area Competitive strengths & weaknesses
Marketing + Extensive product line, excellent service
- Weak distribution channel
+ Capable sales force
R&D - No R & D performed
+ Backing in R & D expected from parent US company
 Operations + Excellent sourcing for raw materials
- Old & outdated facilities
+ Access to economies of scale
Finance + B/S exhibits capability to obtain additional capital
+ Favorable stock price
- High cost of capital
Human resources - Union members complain frequently
0 quality of mangers & workers comparable
Corporate resource - Market image is weak
+ MIS is efficient
i. Here plus (+) sign indicates strength, minus (-) sign indicated weakness, and neutral
(0) indicates neither strength nor weakness.
ii. The manager should apply strengths to capitalize opportunities and convert threats
into opportunities by applying strengths. The manager should strengthen weakness by
rearrangement or reallocation of its resources or if it will not work, withdraw. He
should safeguard company from the weaknesses and external threats. All these are
possible when ETOP or PESTEL is combined with SAP to form SWOT analysis.
b) Unique resources
Unique resources are those which critically underpin competitive advantage. They sustain
the ability to provide value in the product value in the product, are better than
competitors’ resources and are difficult to imitate. Unique resources are crucial for the
success of an organization. They must be carefully identified for objectives setting and
strategy formulation. They are the sources of strengths of an organization.
The key characteristics of unique resources include valuable, non-substitutable, costly to
imitate, and rare.
c) Environmental monitoring
Environmental monitoring is done after environmental scanning. Monitoring is the act of
checking or observing. Monitoring is a follow-up and deeper analysis of relevant
environmental forces identified through scanning. Thus, at this stage information from
the relevant environment is collected, checked to observe the trends. For environmental
monitoring, company records, publications, spying and verbal talks with the employees,
customers, dealers, suppliers and competitors, etc are imperative.
d) Managing Resistance to Change
People may fear from the changes due to economic loss, inconvenience, uncertainty, and
a break in normal social patterns. Changes in structure, technology, people, or strategies
may disrupt comfortable interaction patterns. Reorienting an organization to get people to
think and act strategically is not an easy task. Resistance to change could be overcome by
changing attitudes of employees for which application of Lewin's three step model could
be appropriate. Three step model includes unfreezing, Movement and refreezing.
Resistance to change can be considered the single greatest threat to successful strategy
implementation. People often resist strategy implementation because they do not
understand why changes are taking place. Successful strategy implementation hinges
upon managers’ ability to develop an organizational climate conducive to change.
 Change must be viewed as an opportunity rather than as a threat by managers and
employees.
e) Turnaround strategies
Turnaround strategy is about turning out, withdrawing or diminishing from a decision
taken earlier in order to reverse the process of retrenchment. Turnaround strategy
becomes appropriate in the following situations:
 Continuous losses
 Constant negative cash flow
 Decreasing market share
 Decline in physical facilities
 Over-manpower, high turnover of employees, and low morale
 Uncompetitive products or services
 Mismanagement in major activities
6.
a) Explain the need for effective strategic management in Nepal. 5 marks
b) Define strategic decision and write any three major differences between strategic and
operational decisions. (2+3=5 marks)
Answer
a) Strategic management is the only way to have maximum utilization of national resources
to reach to a level of development. Strategic management helps in exploitation of
resources to reduce poverty, illiteracy and poor infrastructure to attain the development
goals. For Nepal, strategic management is much important as it has to exploit many
resources and to develop its situation. Following points justify the need for effective
strategic management in Nepal.
 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 and reduce the risk. Strategic management ensures the availability;
allocation and optimal utilization of resources to grab the opportunities. The strategic
management process allows organization to take actions at an early stage of new
trend and consider the lead-time of effective management.
 Clear objective and direction: Strategic management provides clear objective and
direction for the entire organization. It 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. In many of the Nepalese organizations, it seems having poor
objectives focused short term and lacks the clear directions. Strategic management
facilitates clear, long vision and clear directions.
 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. Strategic management has an inherent
quality to maintain horizontal as well as vertical alignment among the strategies,
structures, programs, resources, managerial activities and policies.
 Efficiency and effectiveness: Strategic management facilitates organizations to put
the resources in a right way, which ensures their maximum contribution to
 organizational objectives. It also facilitates CEOs to become better decision maker,
which increases effectiveness. It improves corporate communication, coordination,
and cooperation in allocation of resources and utilization. This helps to increase
effectiveness and efficiency of the organization.
 Effective control: Strategic management sets the goals, formulates the policies to
utilize the resources to attain the goals and makes corrections to cope with
environmental changes. This ensures the effective control in strategy, actions and
resources of the organizations.
 Focusing on R & D: Strategic management focuses on research and development so
that innovative ideas for product innovation and development. It is essential for
organizational growth and diversification. Strategy facilitates the research and
development and it is facilitated by research and development. In Nepalese
organizations, much works in product diversification is still important. It is only
possible through effective strategic management.
 Cope with environmental changes: Strategic management helps to cope up with
organizational changes. Strategic management analyzes the business, evaluates the
strategic fits, and brings the changes in current strategies in regular basis to cope with
changing environment. Nepalese organizations should have to maintain strategic
management to cope with environmental changes.
b) Strategic decision is guided by policies, available resources and the insights of the
strategists. It is normally about trying to achieve some advantage for the organization
over competitors and concerned with the scope of an organization's activities. It deals
with knowing organizational objective, resources availability, customers to be served and
the competitors to be faced; and preparing alternative strategies to select one of the most
appropriate.
The following are the three major differences between strategic and operational
decisions.
Bases of
Strategic Decisions Operational Decisions
Difference
Magnitude Strategic decisions are big Operational decisions are regular
decisions and affect the whole decisions and affect only a part of
organization or a large part. organization.
Time-scale Strategic decisions set the Operational decisions direct the
direction for the organization over organization for a short period
the medium to long-term. usually less than one year.
Reversibility Strategic decisions involve Operational decisions can be
making choices, and committing reversed in a reasonable way.
resources in ways that cannot be
reversed easily