CHARTERED ACCOUNTANCY PROFESSIONAL III (CAP-III)

Revision Test Paper

Group II

June 2024

The Institute of Chartered Accountants of Nepal

The Revision Test Papers are prepared by the institute with a view to assist the students in their study.
The suggested answers given here are indicative and not exhaustive. Students are expected to apply their
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Contents
Paper 5 - Management Information and Control System ..................... 3
Paper 6 – Advanced Taxation ............................................................... 26
Paper 7 – Advanced Cost and Management Accounting ..................... 57
Paper 8 – Strategic Management and Decision-Making Analysis ..... 106

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Revision Test Paper (RTP), June 2024 CAP III – Group II

Paper 5 - Management Information and

Control System

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Section 1: Questions:

Chapter-1: Organizational Management and Information System

Question No. 1:

Your Audit Firm has been appointed for conducting the IS Audit of Telecom Company. Your
Audit Manager has specifically assigned you to create an audit program outlining the essential
areas to be addressed when assessing the Enterprise Governance of Information Technology (IT).
Kindly provide recommendations on the key aspects to consider during the evaluation of IT
Enterprise Governance as an IS Auditor.

Question No. 2:

Why is information classification important, and what are the types of information classification?
The Chief Information Officer (CIO) of one of the leading banks is seeking assistance in
classifying the following information.

• Annual report, Internal audit report, HR data, Supplier agreement, career notice, banks IT
network diagram, customer accounts data, loan approval, strategic business plans,
employee code of ethics, promotion notice.

Chapter-2: Types of Information System

Question No.3:

Senior managers of ABC Pvt. Ltd. are facing problems in making decisions for the company. One
of the managers has come up with the idea of executive support systems so that they can summarize
information and their decision-making process would be easier. You, being their advisor, give your
opinion on the above matter.

Question No.:4

You are the CFO of a publicly traded company operating in the technology sector. Your company
has recently implemented AI-based financial analysis tools to assist in decision-making and
reporting processes. Highlight some high-level examples of activities where AI can help CFOs
function.

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Chapter-3: Information Technology Strategy and Trends

Question No.:5

ABC Manufacturing Company Limited wants to update their Information Security Policy. As an
Information Security Expert please suggest minimum points to be covered while defining
password policy.

Question No.:6

Considering the recent developments in cloud services, XYZ Bank Limited is contemplating the
transition of its in-house Data Center to the cloud. However, the bank lacks knowledge about
information security pertaining to the utilization of cloud services. As an Information Security
Expert, please assist them to design the process for acquisition, use, management and exit from
cloud services.

Chapter-4: System Development Life Cycle

Question No.:7

Explain the various dimensions of the feasibility during the process of system development.

Question No.:8

Briefly explain steps in Agile methodology for system development.

Question No.:9

The University library currently uses a legacy library management system that has been in
operation for over 15 years. While the system functions adequately for basic functionalities like
cataloging and searching, it lacks features for online book reservations and user account
management. Additionally, the library is looking to integrate with a new student ID system for
seamless user authentication and planning to start an online e-library program for students.

The IT department of the university is tasked with evaluating the upcoming modifications to the
library system and you are hired as a consultant for this project.

The proposed changes include:

1. Bug Fixes: Addressing minor display errors on specific screens.

2. New Feature: Implementing an online book reservation system.
3. System Integration: Integrating the library system with the new student ID system.
4. Feature Expansion: Redesigning the user interface for a more modern look and feel,
including user account management features.

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Considering the long-term maintainability of the system, rank the proposed changes in order of
priority from most to least important. Justify your reasoning for each ranking.

Chapter-5: System Analysis and Design

Question No.:10

A popular online food delivery service is facing scalability issues with their current order
management system. The system is unable to handle the increasing volume of orders efficiently,
leading to delays and customer dissatisfaction. You are hired to provide consultancy for
developing a new system that can handle high traffic efficiently and provide real-time order
tracking functionalities.

Outline the steps you would take to design a robust system for the online food delivery service that
are essential for the successful implementation of the system.

Question No.:11

Testing and Quality Assurance are crucial steps in the system development process, occurring
before the deployment and implementation stages. Briefly explain the testing and quality assurance
process in system development.

Chapter-6: E-Commerce and Inter Organizational Systems

Question No.:12

Discuss the essential factors that organizations should consider for effective work-from-home
arrangements, taking into account the background of technological infrastructure and
organizational dynamics.

Chapter-7: E-Business Enabling Software Package

Question No.:13

Explain the benefits of introducing a CRM module in the ERP of an ecommerce organization.

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Chapter-8: Information System Security, Protection and Control

Question No.:14

Most of the security breaches and incidents are caused by human error. Describe the key aspects
of user education in raising awareness and providing users with the knowledge and skills to
navigate the digital landscape securely.

Question No.:15

Explain the importance, usage and working mechanism of digital signature.

Chapter-9: Disaster Recovery

Question No.:16

How would you advise the Board and senior management on the significance, advantages,
drawbacks, and future implications of outsourcing IT services in Nepal's banking industry,
considering its current heavy reliance on in-house IT investments?

Chapter-10: Auditing and Information System

Question No.:17

During the IS audit of PQR Bank Limited, it was observed that a significant portion of the
employees lack awareness regarding basic cyber hygiene practices. Specifically, out of the
sampled 110 employees, 95 were found to be unaware. You, as a team leader for this IS Audit
project, please highlight this as audit observation along with possible impacts of lack of awareness
and recommendation.

Chapter-11: Ethics and legal Issues in Information Technology

Question No.:18

Write about Information Systems/Security Audit requirements in Nepal.

Question No.:19

Why Professional Accountant should be aware of IT Systems, Information Security and IT

Governance?

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Chapter-12: Electronic Transactions Act, 2063

Question No.:20

What are the cybercrimes that are considered as offenses relating to computers under Electronic
Transaction Act, 2063?

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Section 2: Answers:

Answer to Question No. 1:

Enterprise Governance of Information and Technology (EGIT) implies a system in which all the
stakeholders, including the board, top level management, internal stakeholders & various
departments provide input into the IT decision making process. EGIT is the responsibility of the
board of directors and top-level management. Assessing the EGIT by the IS Auditor is important
because of several reasons like it ensures that IT strategies align with the overall business
objectives, maximizing the value IT brings to the organization, it helps in identifying and
mitigating IT-related risks effectively, safeguarding the organization's assets and reputation etc.

Following key aspects should be evaluated while assessing the EGIT.

a. How overall governance of organization and EGIT are aligned.

b. Alignment of overall IT function with the organization’s mission, vision, values, objectives
and strategies.
c. Achievement of performance objectives established by the business and IT function.
d. Legal and regulatory requirements
e. IT investment and expenditure
f. Presence of inherent risk within the IT environment
g. Control environment of the organization

Answer to Question No. 2:

Data Classification or Information Classification is the process of classifying information into

significant categories to ensure critical data is protected. Effective data protection starts with
understanding what's worth protecting. Information classification helps organizations categorize
data based on its importance and sensitivity. This prioritization allows them to focus their security
controls on the most critical information, ultimately safeguarding valuable assets. There may be
different ways of classifying information. As per generally accepted principal, information may
be classified as below:

a. Public: Information which is intended for everyone and are freely accessible
b. Internal/Proprietary: Information which is restricted to the internal stakeholder only.
c. Confidential: Critical information that could harm the organization if disclosed publicly.
d. Secret: Highly critical information which is sensitive to the organization’s security or
survival.

CIO can classify the given information as below:

• Public: Annual Report, Career notice

• Internal: Supplier agreement, employee code of ethics, Promotion notice

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• Confidential: HR data, Customer accounts data, Loan approval, Internal audit report
• Secret: Bank IT network diagram, strategic business plans

Answer to Question No. 3:

Executive Support Systems (ESS) is designed to incorporate data about external events, such as
new tax laws or competitors, but they also draw-summarized information from internal MIS and
DSS. They filter, compress, and track critical data, displaying the data of greatest importance to
senior managers. ESS employs the most advanced graphics software and can present graphs and
data from many sources. Unlike the other types of information systems, ESS is not designed
primarily to solve specific problems. Instead, ESS provides a generalized computing and
communications capacity that can be applied to a changing array of problems.

Implementing executive support systems (ESS) can indeed be a prudent decision for ABC Pvt.
Ltd. These systems are specifically designed to assist senior managers in decision-making by
providing summarized information and analytical tools tailored to their needs. ESS has become
essential for the organization because it streamlined the decision-making process, providing real
time information and also supporting collaboration and communication among senior managers.

Below points highlight the need of Executive Support Systems (ESS):

a. To know the summary of status of all business activities going in the office and provide
the detailed information of the business activities whenever needed.
b. To provide the graphical summary of the status/progress of the work going in organization
in finance, sales, customer support, operation, maintenance, human resource etc.
c. To analyze the given comparative information, trends & ideas about business opportunities
& problems. To help in working precisely & effectively and increase the overall efficiency
without hassles, help in formulating unstructured decisions & taking right decisions at right
time.
In summary, senior managers of ABC Pvt. Ltd. may make better decisions by putting executive
support systems in place. This will help them react to changing market conditions and promote
competitiveness and sustainable growth. However, in order to increase the acceptance and
efficiency of these systems throughout the business, it is imperative to make sure that appropriate
training and change management procedures are in place.

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Answer to Question No. 4:

Nowadays, AI has undergone rapid evolution, leaving no department untouched, including

finance. AI-powered financial analysis tools are assisting CFOs in numerous ways, from
formulating financial strategies to crafting executive summaries of reports and extracting valuable
insights from data analysis. It helps CFO in enhanced decision making, improved report analysis,
fraud detection by analyzing financial transactions and identifying anomalies or suspicious
patterns. Below are some of the examples where AI based financial analysis tools help CFOs
functions:

a. Analyze the revenue and expense data and draft an executive summary highlighting key
trends and areas of concern.
b. Generate cash flow forecast for the next period (month/quarter/year) using historical cash
flow data and projected revenue figures.
c. Evaluate the financial impacts of a proposed acquisition assessing the financial statements
of the target company.
d. Comparing the financial performance of the company with selected competitors.
e. Preparation of presentation slides summarizing the financial health of the company,
including different ratios like profitability ratios, liquidity ratios etc.
f. Draft financial strategy proposal based on overall performance of the company, investment
opportunity reports and projected returns over the period of next 3 to 5 years.

Answer to Question No. 5:

Following minimum points should be considered while defining password policy of the
organization:

● Password expiration/password change period: It can be any period like 30 or 90 days.

● Minimum length: It can be 8 characters or more
● Password complexity: combination of special character, capital letter, small letter and
number
● Password history: It can be last 3 or 5 passwords
● Account lockout: It can be after 5 unsuccessful wrong attempts
● Lock-out duration: It can be for 30 minutes
● Renewed log in: It can be automatically after 30 minutes or manually by admin
● Screensaver: It can be after 10 minutes of ideal time.

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Answer to Question No. 6:

XYZ Bank should have to formulate the process for acquisition, use, management and exit from
cloud services in accordance with organizational information security policy. Following points
should be considered while defining such a process.

A. Acquisition
• Identify Needs: Bank should define business needs along with required specification
for cloud service.
• Evaluate cloud service providers: Evaluate available cloud service providers in terms
of security, features, pricing and compliance.
• Contract: Define service level agreement (SLA) outlining service details, security
measures, and exit strategy.
B. Use
• Onboarding and training to the users
• Implement proper access controls to restrict access to authorized users and data only.
• Monitor cloud service activity for suspicious behavior and maintain detailed logs for
audit purposes.

C. Management
• Performance evaluation: Regularly monitor service performance metrics as defined in
SLA.
• Data backup and recovery: Establish a data backup and recovery plan to ensure
business continuity in case of disaster.
• Security updates: Maintain up-to-date security configurations and apply security
patches promptly.

D. Exit
• Data deletion: Ensure complete data deletion from the cloud service according to your
agreement and data privacy regulations.
• Termination notice: provide notice to the cloud service provider for service
termination as outlined in the SLA.

Answer to Question No. 7:

Feasibility is the measure of how beneficial or practical the development of the Life cycle of an
information system will be to an organization. Feasibility analysis is the process by which
feasibility is measured.

In earlier chapters we called this a creeping commitment approach to feasibility. The scope and
complexity of an apparently feasible project can change after the initial problems and opportunities
are fully analyzed or after the system has been designed. Thus, a project that is feasible at one
point may become infeasible later. Various dimensions of feasibility can be summarized as below:
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a. Technical feasibility
Technical feasibility is concerned with the hardware and software system involved. The
technical feasibility issues are as follows:

• Is the essential technology available to do the task?

• Does the proposed equipment have the technical capacity to hold the data?
• Does the proposed system provide adequate responses to the inquiries regardless of
the number of users?
• Does the system have a scalability feature?
• Does the system provide data security, reliability and ease of access?

b. Economic feasibility
Economic feasibility is concerned about the incremental costs and benefits expected if the
proposed system is implemented. Various financial and economic concerns during the system
analysis and development phases are:

• Cost of conducting a full system.

• Cost of technology.
• Benefits in terms of reduced costs.
c. Operational feasibility
It is an assessment of how practical and communicative the operation of a system is given the
external and internal environment. Operational feasibility is about analyzing the impact of the
proposed system to the existing business process and system at an operational level. Assessing
the organization’s readiness and ability to adapt to the changes brought by the new system is
important so that the potential risks and challenges that may arise during or after the
implementation can be addressed.

d. Schedule Feasibility
Schedule feasibility focuses on the time frame needed for the development of a new system
and makes it operational. It also evaluates the promptness of the service provided after the
implementation of the new system.

e. Legal Feasibility
Analysis of any possible conflict between the newly proposed system and the legal obligations
of the organization's existing system is the main concern of the legal feasibility. For example,
the new system should comply with all applicable federal and state statutes about financial
reporting requirements as well as the company’s contractual obligations.

Answer to Question No. 8:

The Agile development methodology offers a structured yet flexible approach to project
management. It emphasizes continuous improvement and iterative development cycles. Here's a
breakdown of the Agile process:
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a. Project Planning
It includes defining the project scope, objectives, and potential team members, and creating a high-
level project schedule and initial resource estimate.

b. Product Roadmap Creation

In this step, we collaborate with stakeholders to identify key product features, organize these
features into a product backlog, described as user stories, and prioritize features based on their
value to the project.

c. Release Planning
Before each release, select features from the backlog considering:

• Priority
• Team capacity
• Overall project timeline
This ensures development efforts align with business goals.

d. Sprint Planning
It is planned to be short, time-boxed iterations (sprints) lasting 1-4 weeks selecting features from
the top of the backlog based on sprint duration and team velocity (work completed per sprint).

e. Daily Stand-Up Meetings

Throughout the sprint, daily stand-up meetings are conducted to discuss progress, obstacles, tasks
for the next 24 hours. This fosters transparency and collaboration.

f. Sprint Review and Retrospective

At the sprint's end, a review is conducted showcasing completed features to stakeholders to reflect
on successes, areas for improvement, strategies for enhancement in the next sprint.

g. Repeat the Cycle

The process iterates, starting anew with sprint planning for the next backlog features. This cyclical
approach enables continuous improvement, adaptation to changing requirements, and frequent
delivery of valuable product increments.

Overall, Agile promotes adaptability, collaboration, and incremental development, allowing teams
to respond effectively to project needs and deliver high-quality products efficiently.

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Answer to Question No. 9:

Ranking on proposed changes to be followed by IT department of the University is as below:

1. System Integration with New Student ID System

This change is crucial for ensuring seamless user authentication, which is fundamental for
security and accessibility. It also lays the foundation for future system enhancements and aligns
with the university's strategic objectives of modernization and efficiency.

2. New Feature: Online Book Reservation System

This feature directly enhances the user experience by providing convenience and flexibility for
students and staff. It addresses a significant functionality gap in the current system and aligns
with the evolving needs of library users in today's digital age.

3. Bug Fixes
Addressing minor display errors ensures accurate information presentation and a positive user
experience. Bugs may lead to difficulty and hinder efficient library usage, but don't
significantly impact core functionalities.
4. Feature Expansion: User Interface Redesign and Account Management
A modern UI and user account features are desirable for usability and appeal. However, they
are secondary to core functionalities like integration and reservations. While these changes
contribute to user satisfaction and engagement, they are secondary to the critical functionalities
of system integration and online reservation.

This order ensures a stable foundation before introducing new features and aesthetic changes.
Integrating with the student ID system first streamlines user authentication and lays the
groundwork for future enhancements. Implementing the online reservation system directly
improves user experience and addresses a key need. Fixing bugs maintains system reliability while
the UI redesign, while desirable, can be addressed later with less risk of impacting core
functionalities.

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Answer to Question No. 10:

Following are the steps to be taken for designing and developing robust system for online food
delivery company:

a. System Requirements Gathering

• Understanding Current System, its functionalities, limitations, and bottlenecks and
identifying areas causing delays and scalability issues.
• Understanding user needs for order placement, tracking, feedback, and managing
preferences, identifying functionalities crucial for restaurants like managing menus,
receiving orders, and tracking deliveries, and understanding functionalities for delivery
partners like accepting orders, navigation, and order status updates.
• Defining core functionalities like order placement, payment processing, real-time tracking,
and communication features.
• Specifying performance requirements (scalability, response time), security needs (data
encryption, access control), and reliability expectations (uptime, disaster recovery).

b. System Design
• Breaking down the system into independent, loosely coupled services (e.g., order
management, payment processing, location tracking). This improves scalability and
simplifies maintenance.
• Designing a scalable database schema to efficiently store and retrieve order information,
customer details, restaurant data, and delivery partner information.

c. System Development:
• Utilizing an agile approach like Scrum for iterative development and rapid feedback loops.
This allows for continuous improvement and adaptation to changing needs.
• Developing well-defined APIs to facilitate communication between different
microservices and external applications (e.g., payment gateways, mapping services).
• Implementing thorough automated testing for functionality, performance, and security
before deployment. Consider a phased deployment strategy to minimize disruptions.

Building a system that can handle high volumes of concurrent orders and user traffic, performance
testing throughout the development lifecycle, and implementing real-time location updates for
delivery partners with minimal latency are crucial to identify and address bottlenecks before
deployment.

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Answer to Question No. 11:

The process of testing and quality assurance (QA) in system development includes:

a. Quality Assurance (QA)

QA encompasses a broader set of activities aimed at preventing defects throughout the
development process. This includes defining quality standards, conducting code reviews,
implementing test automation frameworks, and establishing clear processes for defect tracking and
resolution.

b. Testing:
Testing involves actively executing the system to identify bugs, defects, and ensure it meets the
specified requirements.

There are two types of Testing:

• Functional Testing which verifies if the system functionalities work as intended.

• Non-Functional Testing which evaluates performance, usability, security, and other non-
functional aspects.
Testing can be done at different levels:

• Unit Testing: Individual units of code are tested in isolation.

• Integration Testing: Individual components are tested together to ensure they work
seamlessly.
• System Testing: The entire system is tested as a whole to validate its functionality against
requirements.
• Acceptance Testing: Users or stakeholders test the system to ensure it meets their needs
before deployment.

The step wise process in testing and quality assurance (QA) in system development is as below:

1. Planning and Design: QA activities begin early in the development process with defining
testing strategies and plans.
2. Development & Testing: Testing occurs throughout development, with different types of
testing conducted at each stage.
3. Defect Management: Identified defects are documented, tracked, and addressed before
deployment.
Pre-Deployment Testing: Rigorous testing ensures the system is stable and meets quality
standards before deployment.
The testing and QA processes reduces defects and helps to fix it at an early stage leading to
improved system quality and enhanced user experience.

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Answer to Question No. 12:

Work from home has become an alternative term for remote working as the aftereffect of Covid-
19. As a business continuity effort, most of the organization followed work from home for
providing its services and performing its activities from the residential place of the staff. Effective
work-from-home arrangements ensure productivity, collaboration, and security.

Firstly, organizations must assess their technological infrastructure to support remote work. This
includes evaluating the availability and reliability of high-speed internet, ensuring employees have
access to necessary hardware and software, and implementing secure virtual private network
(VPN) connections to safeguard data transmission and efficient connection to enterprise networks.
Organizations should also consider the compatibility of their existing systems with remote access
requirements, such as cloud-based applications and collaboration tools. Investing in robust
cybersecurity measures, such as encryption protocols and multi-factor authentication, is crucial to
protect sensitive information from cyber threats in the remote work environment.

Furthermore, organizational dynamics play a vital role in shaping work-from-home arrangements.

Clear communication channels and expectations are essential to ensure employees understand their
roles, responsibilities, and performance metrics while working remotely. Establishing regular
check-ins, team meetings, and virtual collaboration platforms fosters connectivity and maintains a
sense of belonging among remote workers. Flexible work policies that accommodate schedules
help to promote work-life balance and employee well-being. Providing adequate training and
support for remote work tools and technologies along with awareness helps staff to navigate
potential challenges and maximize productivity. Effective work-from-home arrangements also
require proactive monitoring and feedback mechanisms to identify and address any issues
promptly. Regular performance evaluations and feedback sessions provide support and guidance
to remote employees, ensuring alignment with organizational goals and objectives.

Effective work-from-home arrangements depend upon a combination of robust technological

infrastructure, clear communication channels, flexible policies, and supportive organizational
culture. By addressing these essential factors, organizations can facilitate seamless remote work
experiences for their employees while maintaining productivity, collaboration, and security.

Answer to Question No. 13:

Customer Relationship Management (CRM) is a strategy for managing an organization's

relationships and interactions with customers and potential customers. The CRM system maintains
customer-related data to support sales, marketing, and customer service processes, aiming to
enhance customer growth, satisfaction, and retention.

Introducing a CRM module in the ERP of an ecommerce organization offers enhanced customer
experience and synergy in activities between the sales team, customer support team, marketing
team and finance team. The several benefits of having CRM module are as below:
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a. Enhanced Customer Relationships: CRM systems facilitate better understanding and

management of customer interactions, leading to improved customer satisfaction and
loyalty.
b. Improved Cross-selling Opportunities: By gaining insights into customer needs and
preferences, organizations can offer tailored solutions, enhancing cross-selling capabilities.
c. Increased Team Collaboration: A robust CRM system provides comprehensive customer
data, enabling teams to align their efforts more effectively and enhance the overall
customer experience.
d. Enhanced Efficiency in Customer Service: Utilizing CRM for recording and tracking
customer interactions ensures that all team members are well-informed, leading to more
efficient and personalized customer service.
e. Greater Staff Satisfaction: Access to accurate and up-to-date customer information
empowers employees, leading to higher engagement and satisfaction levels.
f. Revenue Growth and Profitability: With increased productivity, shorter sales cycles, and
improved customer satisfaction, organizations can drive revenue growth and profitability.
g. Cost Savings: Although CRM implementation requires initial investment, the long-term
benefits, such as improved scheduling, streamlined processes, and centralized databases,
outweigh the costs.
h. Reduced Client Attrition: Engaging multiple team members through CRM reduces the
risk of client attrition significantly, leading to stronger and more enduring client
relationships.

Answer to Question No. 14:

As per the research from Stanford University and a top cybersecurity firm, it is found that
approximately 88% of all security breaches are caused by the mistakes of an employee. Human
error is still very much the driving force behind the majority of cybersecurity issues. So, it is a
continual process to aware, educate and test the users and employees to protect the organization
from probable security breaches in the future. The key aspects of user awareness in cybersecurity
includes:

a. Password Best Practices: Users must understand the importance of creating strong,
unique passwords and changing them regularly. They should also grasp the significance of
maintaining password confidentiality and refraining from sharing them with others.
b. Phishing Awareness: Users need training to recognize and avoid phishing emails,
deceptive messages aiming to extract sensitive information. They should exercise caution
when encountering suspicious links or requests for personal information with simulation
tests and continual awareness.
c. Social Engineering Attacks: Users should be familiar with social engineering tactics used
by the attackers to manipulate individuals into divulging sensitive information or taking
certain actions. Education should emphasize recognizing common tactics and exercising
skepticism with unfamiliar requests.
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d. Security Hygiene: Users should practice good security habits, including keeping devices
and software up to date with security patches, using reputable antivirus software, and being
cautious with downloads from unknown sources.
e. Reporting Suspicious Activity: Users should understand the importance of reporting any
suspicious or potentially malicious activity promptly to the appropriate authorities or IT
department. This includes reporting phishing emails, unusual system behavior, or any
incidents suggesting a security breach.
f. Maintaining backup: Users should backup all their necessary and important data in a
separate storage device or cloud and update the backup regularly.
g. The user shall ensure that access to laptops and mobile devices is protected with a passcode
and use built-in encryption settings to protect the data if the device gets stolen.

Answer to Question No. 15:

In today's digital era, safeguarding the integrity, authenticity, and confidentiality of electronic data
is paramount. Digital signatures and authentication mechanisms are pivotal in confirming sender
identity, preserving data integrity, and instilling trust in electronic communications and
transactions. A digital signature serves as an electronic endorsement for a document or message.
It verifies the sender's identity and ensures the data remains unchanged during transmission
digitally and securely.

Utilizing public key cryptography, digital signatures entail the signer using their private key to
generate a unique digital signature. This signature can then be authenticated using the
corresponding public key, binding the signer's identity to the document and affirming its
authenticity and integrity.

Digital signature is a mechanism by which a message is authenticated i.e. proving that a message
is effectively coming from a given sender, much like a signature on a paper document. For
instance, suppose that Alice wants to digitally sign a message to Bob. To do so, she uses her
private-key to encrypt the message; she then sends the message along with her public-key
(typically, the public key is attached to the signed message). Since Alice's public-key is the only
key that can decrypt that message, a successful decryption constitutes a Digital Signature
Verification, meaning that there is no doubt that it is Alice's private key that encrypted the message.

Digital signatures are legally valid and admissible in the court of law. Nepal follows a hierarchical
root of trust model where digital signatures issued by a Certifying Authority are considered legally
valid. Specific use cases for digital signatures are indicated in the Electronic Transactions Act,
2063 which highlights that a handwritten signature isn’t always needed for a contract to be
considered credible, and that contracts can’t be refused for simply being electronic. They’ll usually
be seen as such as long as legally able individuals have reached an agreement (this can be by

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agreeing verbally, electronically or by physically signing something). Digital signatures can be

used for corporate communications, signing a contract and agreement and cases where confidential
information needs to be shared (required by work or regulation).

Answer to Question No. 16:

Digital banking is the new evolution in fintech industry to provide banking services to the
customers at the tip of their fingers i.e., customers can avail banking facility anywhere, anytime
and anyplace. It is only possible due to technology which supports the banks and financial
institutions. For this, the banking industry has the option to in-source all the infrastructure and
have more control over it and another option is outsourcing which offers the institution a cost-
effective alternative to in-house capabilities.

Financial institutions have the option to outsource various operational aspects, including
information technology (IT) functions such as payment processing, customer account
management, and security monitoring. Reasons for outsourcing may include enhancing
operational or financial efficiency, enabling management to concentrate on core business
activities, reallocating internal resources, accessing specialized expertise, and expanding service
availability. Ultimately, the decision to outsource should fit into the institution's overall strategic
plan and corporate objectives, i.e., by outsourcing non-core functions, the organizations can focus
their resources on its core activities to strengthen their competitive advantage in the market.

IT outsourcing also introduces various risks, particularly operational or transaction risks, which
can originate from fraud, errors, or the inability to deliver services or products, maintain
competitiveness, or manage information. If not managed properly, operational risks can exacerbate
other risk types, including reputation, strategic, compliance, liquidity, price, and interest rate risks.

The board and management should take a proactive, risk-based approach to IT outsourcing,
ensuring alignment with strategic objectives and regulatory compliance. It's essential to have the
expertise to oversee outsourcing relationships and evaluate providers based on service scope and
importance. Despite the benefits, IT outsourcing comes with risks that require effective
management through a robust risk framework, diligent oversight from the board and management,
and a well-defined outsourcing policy.

Answer to Question No. 17:

Below is the detail of audit observation:

Audit observation:

Significant portion of the employees lack awareness regarding basic cyber hygiene practices.
During the course of the audit, we sampled 110 employees and evaluated their awareness through
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interview and noted that 95 were found to be unaware regarding basic cyber hygiene like password
policy, phishing email, email security etc.

Information security awareness, education & training should be provided to every employee at
least once in a year.

Consequences:

The persons interacting with the organization system may not be aware of the processes they are
performing, or the criticality of information they process, store or transfer. Lack of Information
Security Awareness among its users exposes the risk of successful phishing attacks and social
engineering. In the absence of infrequent Information Security Awareness Programs among the
employees, the chances of exploitable vulnerabilities increase as the threat changes constantly.

Recommendation for improvement:

Should provide awareness training to all the employees at least once in a year covering the
following areas/topic and develop a mechanism to track the effectiveness of the training program.

• About information and information security

• Social Engineering
• Identifying phishing email
• Computer security
• Password security
• Clean desk and clear screen policy
• Email Security
• Internet browsing security
• Reporting security incident

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Answer to Question No. 18:

Below is the requirement regarding Information Systems/Security Audit in Nepal:

a. Commercial Bank-Every Year

b. B & C class Bank and Financial Institution- Within 1 year of use of new systems and
then after in Every 2 year
c. National level D class FI: Once in every 3 years
d. Insurance Companies- Every Year
e. Telecommunication Service Providers-Every Year

Answer to Question No. 19:

Professional Accountant should be aware of IT Systems, Information Security and IT Governance

because of the following reasons:

● Should have to provide view on governance structure of technology driven business.

● Should have to assess the risk associated with technology and its effects on financial
reporting.
● Should have to assess IT and Information Security legal compliance.
● Should have to provide unbiased view on IT operations.

Answer to Question No. 20:

Chapter 9 of Electronic Transaction Act, 2063, has enlisted the offenses relating to computer which
are offenses and punishable under the act from section 44 to section 59 as below:

a. Piracy, destruction or alteration of computer source code.

b. Unauthorized access to computer material.
c. Damage to any computer and Information System
d. Publication of illegal materials in electronic form (Materials spreading hate or jealousy
against anyone; Materials jeopardizing harmonious relations among various castes, tribes,
communities; or Misbehavior towards women.)
e. Confidentiality to Divulge
f. To inform False statements (Providing false information for obtaining a license from
Certifying Authority or with any other intention to Controller or with an intention to obtain
Digital Signature Certificate or with any intention conceals statement knowingly or lies
any statement to be submitted to the Certifying Authority.)
g. Submission or Display of False License or Certificates (If a person publishes or otherwise
makes available a certificate to any other person by any means knowingly that a certificate
is not valid one. If a person having no license publishes a fake license or false statement in
regard to license or provided to any person by any other means.)
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h. Non-submission of Prescribed Statements or Documents

i. To commit computer fraud (fraud or any other illegal act, creates, publishes or otherwise
provides digital signature certificate or acquires benefit from the payment of any bill,
balance amount of any one's account, any inventory or ATM card)
j. Abetment and accomplice to above acts are also punishable.

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Section 3: Exam tips to students:

1. Build a solid foundation by thoroughly understanding the syllabus.

2. Practice past questions.
3. Make plan for revision of one day before exam.
4. Try to attempt all the questions.
5. Write your understanding in case of confusion with the exact requirements of question.
6. During the exam, keep your composure and be calm. Methodically approach each question
and remember, your confidence in your preparation is key to performing your best.

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Paper 6 – Advanced Taxation

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Section 1: Questions

Income Tax

1. Dayal Textile Pvt. Ltd. has reported net profit before tax for income year 2079/080 as Rs. 463.45
lakhs. The company is incorporated at special economic zone located at Bhairahawa. Profit of the
company comes after following amount is debited and credited in its profit loss statements prepared
under GAAP:
a. Company has charged Rs. 1,233.56 lakhs as salary to its 455 employees. This amount includes
profit bonus of Rs. 32 lakhs which is given as per Bonus Act. Company has not obtained PAN
number of 51 employees on 2080 Shrawan and total salary paid to those employees is Rs.
83.16 lakhs. Further, employee cost includes Rs. 6 lakhs paid to salary to security guard who
are assigned to home of CEO and ED of the Company.
b. Administrative expenses include an advertisement expense of Rs. 12 lakhs paid to an online
newspaper where son of Mr. Dayal has 52% shareholding. Last year company has paid Rs.
10 lakhs for similar advertisement published in another newspaper.
c. Marketing expenses includes Rs. 25 lakhs to research agency of China for making another
prototype of products which company is going to manufacture from next year. Amount of Rs.
12.25 lakhs paid to in-house lab technician is also included in marketing expenses.
d. Out of travelling expenses of Rs. 42.3 lakhs, 10% is for travelling of CEO for Australia for
her daughter graduation there. While staying there, she meets with new clients there and strike
a sales deal of Rs. 100 lakhs from which company has earn of Rs. 21 lakhs as profit.
e. On 2079/03/21 company receives tax assessment order from Medium Level Taxpayer Office
(MLTO) Babarmahal for tax return submitted for IY 2078/079. Major points of the assessment
order are as follows:
a) Company is not allowed depreciation of Rs. 1.23 lakhs on pool D on plant purchased
on 19th Falgun 2078 as the plant is not used during the year. Management of the
company insist that the plant is on trial and already started commercial operation from
10th Shrawan 2079.
b) Company is not allowed interest of Rs. 15 lakhs as the company borrowing loan from
banks at average interest rate of 5% meanwhile balance sheet of company shows
closing cash balance of Rs. 300 lakhs.
c) Inclusion of company is to be added by Rs. 64 lakhs due to mismatch of balance of
sundry debtors while submitting schedule 13 to IRD. This is because company is not
able to confirm the closing balance with debtors as the they are not responding to
company due to non-payment of due on time.
f. Depreciable assets of company include an asset costing Rs. 10 lakhs purchased on 2080.01.05
which is used to filter the smoke produced by the company at its factory site.
g. Company has obtained loan of Rs 900 lakhs to finance a plant two years ago at concessional
interest rate of 7.5% (interest on loan to other company is 9 %). Assets purchased through
loan is used from 2079.09.1 after its successful installation and trial run. Accountants of the
company forget to charge the depreciation on its profit loss statements.
h. On reveal of books of the company it is observed that company has credited VAT payable on
sales as sales revenue for Rs. 11 lakhs. Further, it is also observed that company has debited
entire VAT paid on a car (cost is Rs. 50 lakhs) for which payment is made on Poush 25 of
2079 and delivery is taken only on 3rd Baisakh 2080.

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i. Company has carry-forward tax loss of Rs. 54.5 lakhs from last income year.
j. Company has extended its time for submission of income tax return up-to Poush end of 2080.
k. The company is incorporated on 1st Shrawan 2074.
From the above information, you are required to calculate:

a) Taxable Income of the company for IY 2079/080 considering the effect of assessment order
is any.
b) Compute tax liability of the company.
c) Advise the company on the matters arose by assessment order issued by MLTO.

2. Apeksha Community Hospital established and operated by Jagaran Yuba Club, a tax-exempt
organization, paid interest to the Club @ 18% on a loan of Rs. 2,000,000 borrowed on 2079/02/03
from the club and refunded the whole loan amount on 2079/12/06. With the following relevant
information, calculate the interest allowable for deduction in the income year 2079/080.
Particulars Amount (Rs.)
Fees collected by the hospital 1,630,000
Salaries 740,000
Lab Expenses 60,000
Interest Earned from Fixed Deposit 71,000
Telephone Expenses 35,000
Previous Years’ Loss 56,000
Fuel 83,000
Donation to a political party registered in Election Commission 25,000
Interest paid to Bank 43,000
For your information, following are the days in the months of 2079/080:
Month Days Month Days
2079 Shrawan 32 2079 Magh 29
Bhadra 31 Falgun 30
Ashwin 31 Chaitra 30
Kartik 30 2080 Baishakh 31
Marga 29 Jeshtha 31
Poush 30 Ashadh 32
Total 366

3.
a. From the following information, determine the cost of trading stock of Nela Metal Craft Limited
for Income Year 2079/080:
Particulars Amount (Rs.) Remarks
Opening Stock (500 unit) 3,490,000
Purchase of raw materials 8,765,000
Variable factory overhead 3,214,500 Includes 10% as plant depreciation and 5% as repair
of finished goods
Fixed factory overhead 1,232,400 15% is repair of machine
Interest paid to bank 32,090 Obtain to import raw materials
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Normal annual production capacity: 2,000 unit

Actual production during the year: 1,800 unit
Sales during the year: 1,900 unit

b. Mr. Sonu, a major shareholder and chairperson of M/s Sonu Industries Pvt. Ltd., was worried about
the performance of the Company as it incurred losses of Rs. 5 crores during the last 4 financial
years ending F.Y. 2073/74. He brings a proposal to the Board of Director of the company to convert
the company into public limited company and raise further share capital. The BoD of the company
through its SGM passed the resolution and the company is converted into public limited company.
After the conversion, the company earned Rs. 1.5 crore as profit in F.Y. 2074/75. The Company
has submitted the income tax return by assessing a taxable loss of Rs. 3.5 crore for F.Y. 2074/75
under self-assessment by adjusting the carry-forward losses of Rs. 5 crores up to F.Y. 2073/74 u/s
20 of Income Tax Act, 2058. The Chief Tax Officer issued an order to pay income tax on Rs. 1.5
crore along with interest thereon by saying that there is change in control of the company by 100%
on conversion. The management of the Company seeks your advice on the said order from the
Inland Revenue Office.

4. Calculate the income tax liability of Mrs. Jullee Sharma for IY 2080/081 on the basis of below
detail:
▪ Basic Salary: Rs. 305,000 per month.
▪ As per the requirement of Contributed Social Security Act, 20% of basic salary is contributed
by the employer and 11% deducted from her salary and total of 31% deposited to Social
Security Fund.
▪ One-month basic salary is provided as festival allowance.
▪ 5% of the basic salary is provided as performance-based allowance per month.
▪ Employer has provided her one i-PAD worth Rs. 125,000 for her outstanding performance.
▪ Residence Allowance : Rs. 24,500 per month
▪ Medical Allowance : 2% of her basic salary per month
▪ Residence has one employee arranged by the employer for her domestic help with cost of Rs.
13,500 per month.
▪ Being in the core management team, she has attended 21 meetings during the year and received
Rs. 4,000 per meeting.
▪ The cost of education for her son and daughter costing Rs. 24,000 per month paid by her
employer.
▪ The cost of life insurance policy per year is Rs. 1,10,000, 50% reimbursed by the employer.
▪ The market value of Toyota car provided to her for official as well as personal use is Rs. 85
lacs.
▪ She has donated Rs. 205,000 to Sahara Nepal, which is a tax exempted entity.
▪ Her husband runs a proprietorship firm registered in the name of Jullee and annual profit from
the firm is Rs. 1,234,000 during the year.
▪ During the year she has earned Rs. 1,000,000 as interest from friend and TDS is not deducted
while paying to her.
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▪ She also earns Rs. 350,000 monthly as rental income from house. Her one house has been
given on rent to a commercial bank since last 10 years. Apart from that, she is also receiving
Rs. 25,000 per month as rent by letting out her car to a travel agency. Travel agency is
deducting TDS at 10% on such payment.
▪ She also receives Rs. 950,000 (after TDS) as dividend from Nepal Commercial Bank Ltd.
▪ During the year she sold jewelry at Rs. 1 000,000 which was purchased by her 6 years ago at
a cost of Rs. 380,000

5. Mr. Suresh Dahal is a resident natural person of Nepal and engaged in securities trading in
secondary market of Nepal. During the fiscal year 2079/080 he has earned Rs. 14,543,500 as gain
from sale of various securities. NEPSE has collected advance on his total transaction and TDS
return is submitted to IRD by disclosing his personal PAN. Mr. Suresh is of the opinion that his
total tax liability was collected and paid by NEPSE on his behalf, and he does not submit his tax
return till Magh 2080. Please advise him regarding submission of income return as per provisions
of Income tax Act, 2058 and also compute late submission fee if any applicable is he is going to
submit his income tax return for FY 2079/080 on 15th Falgun 2080.

6. As per provisions of Income Tax Act, 2058, mention the applicable withholding tax rate and
classify them as final or creditable withholding tax in case of the following transaction of the
financial year 2080/081 as per the provision of Income Tax Act 2058.
i) RST Limited paid Rs. 100,000 as sales commission to PQR Ltd. against tax invoice.
ii) PQR a commercial bank paid interest of Rs. 1,000,000 on deposit to a Life Insurance Company.
iii) ABC college of Kathmandu paid Rs. 900,000 to University of Philippines for registration,
education fee and exam fee of 10 students studying course offered by that university.
iv) Tax incentive amount for consumer who paid their bill through electronic payment instruments
like payment card, e-money (wallet), mobile banking on their purchase.
v) CP Pvt. Ltd. paid annual office space rent Rs. 1,500,000 to PT Ltd.
vi) Issue of bonus share by Growmore Hospitality Limited (five-star hotel operating in
Kathmandu) to its shareholder for expansion of its production capacity.

7. Sunaulo Life Insurance Company Limited is an entity registered at Beema Samiti for operating
life insurance business. The company had following transactions for the Fiscal Year 2078/79:
Particulars Amount (Rs.)
Insurance Premium Receipts (Gross) 4,628,400
Sum insured of Insurance policy 459,000,000
Commission paid against reinsurance taken 100,500
Commission received against reinsurance done 110,700
Interest Income on Investments 6,595,500
Other Miscellaneous Income 100,695
Amount paid against policy surrendered by a policy holder who had paid
550,000
NPR. 7 lacs Premium against it

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Amount paid dependent of a policy holder on his death, against which

700,000
premium NPR. 192,000 was received
Amount including bonus paid on maturity of a policy, against which a total
619,800
premium of NPR.481,500 was received
Commission Expenses 487,200
Management Expenses 1,760,850
Audit Expenses 225,000
Allowable Depreciation Expenses 445,815

Required:
Calculate the taxable income of Sunaulo Life Insurance Company for Fiscal Year 2078/79.

8. Department of Roads (DoR) has served the notice to Mr. Khagendra Khada to compulsory
acquisition of land located at Bhaktapur on 2074/05/27 for Express Highway. Mr. Khagendra
Khada purchased land at NPR 10 Million. The compensation has received was NPR. 15 million
and he purchased another land around 4 kilometers away from there on 2074/10/05. The cost of
the land is NPR. 12 million. Mr. Khagendra Khada is a CA Finalist student, he has aware of Income
Tax Act 2058 provisions and has given written application to Inland Revenue Department for
application of section 46 of the Act.

As a tax expert you are requested to calculate the gain on disposal of asset. What would be his gain
on disposal of asset if the application to apply the section 46 of the Income Tax Act 2058, is not
given to the Inland Revenue Department?

9. Employees’ Provident Fund, Nepal (EPF), established under the Employees’ Provident Fund Act,
has the following incomes for Income Year 2074/75. Find out its tax liability.

▪ Interest Income from Bank Deposit Rs. 150,000,000

▪ Dividend Income from Hydro-power projects from consortium financing with a
commercial bank Rs. 150,000,000
▪ Rent Income Rs. 150,000,000

10. Define Tax as per Income Tax Act, 2058. As the tax advisor, what is the priority of payment from
the amount collected by Mr. Liquidator of Insolvent Company Limited in the following cases?

M/S Insolvent Company Limited become insolvent on dated 27th of Jestha 2079 having with
Limited Liability Company. On dated 15th of Ashad 2079 Office of the Company Register has
appointed Mr. Liquidator as liquidator of the Insolvent Company Limited. As on the date of
liquidation the company has NPR. 2 Million as Tax Deducted at Source (TDS) liability and NPR.
6 Million Income Tax liability payable to Inland Revenue Department. The Inland Revenue
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Department has served notice for payment of TDS and Income tax liability within 15 days from
the date 30 Jestha 2079. The company has taken a loan from M/S Puja Bank Ltd. NPR. 6 Million
With fixed assets collateral having preferential rights i.e., Secured Creditors and other unsecured
creditors are NPR. 10 Million. In the process of liquidation, liquidation expenses are NPR. 0.5
Million. Mr. Liquidator has sold out all the assets of the company and collects cash of NPR. 20.5
Million as on dated 31st Ashad 2079.

Ethics and professional conduct in providing taxation services.

11. What are the various range of tax services to be performed by chartered accountants in public
services? How do you mitigate the threat created by tax calculations for the purpose of preparing
the accounting entries of audit client that are public interest entity?

International Taxation

12. Briefly mention the process of determination of residency of an individual as per the “Avoidance
of Double Taxation and the Prevention ff Fiscal Evasion With Respect to Taxes on Income”
between Nepal and The Democratic Socialist Republic of Sri Lanka.

13. What are the discloser requirements for multinational enterprises for transfer pricing as per OCED
guidelines for transfer pricing?

Value Added Tax

14. Guras International Trade Link, a proprietorship firm is a leading exporter of jewelry. The trade
link imports glass beads and exports jewelry made by the glass beads. It was registered on 15
Jestha, 2077 with the Inland Revenue Department. The books of accounts of the trade link shows
value added tax receivable Rs. 7 million at the end of Ashad, 2080. It has not produced any
application for refund. The details of the VAT receivable of Rs. 7 million are as follows:
2077 Jestha Rs. 1,000,000.00
2077 Ashad Rs. 500,000.00
Total of 12 periods (2077 shrawan to Ashad, 2078) Rs.2,400,000.00
Total of 12 periods (2078 shrawan to Ashad, 2079) Rs.1,500,000.00
Total of 12 periods (2079 shrawan to Ashad, 2080) Rs. 1,600,000.00
Rs.7,000,000.00
Further information:
The following issues are not adjusted till Ashad end, 2080.
▪ In the month of Shrawan, 2080, the trade link found the missing purchase invoice of Rs.
150,000.00 dated on 14 Shrawan 2079 during the tax auditing.
▪ In the month of Ashad, 2078, the trade link imported goods of Rs. 2,000,000.00 (declared value)
but the Custom officer could not determine the transaction value of the goods and asked the link
to deposit the VAT amount on the declared value. The declared value of this transaction was
determined on 15 Mansir 2079.
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Required:
Compute, how much VAT amount can be claimed for refund by the trade link on 25 Shrawan
2080.

15. Sharma Traders is owned by Mr. Pritam Sharma engaged in trading of VAT applicable goods.
Apart from this business, he has no earning activity. On reveal of the financial statements of last
Income Year, following information is found:
Particulars Amount in Rs.
Sales revenue 98,102,800.00
Cost of Goods Sold 75,463,210.00
Other Income 513,400.00
Other Indirect Expenses 4,532,890.00

On 1st of Magh 2080 Mr. Sharma decided to sale his entire business to his cousin Mr. Mukesh
Sharma. On 7th of Magh 2080 he obtained a letter from Department of Industry conferring the
transfer of business in the name of his cousin. Following is the status of assets and liabilities of the
firm immediately before the transfer of business:

Particulars Amount in Rs. Remarks

Bank loan 13,200,000.00 10% interest bearing
Sundry creditors 3,2145,000.00 Out of which 5% is not identifiable
Sundry debtors 26,514,890.00 Out of which 10% is not identifiable
Trading inventory 37,865,340.00 Replacement cost of inventory would increase
by 15%
Fixed assets (all VAT 5,432,100.00 All assets were left but one car having 25% of
paid) weight of total fixed assets whose market value
is 30 lakh is taken by Mr. Sharma for his
personal use.
Other assets 654,320.00

He went to the tax office on 19th Falgun 2080 to cancel his VAT registration. Assume you are a
tax officer and assess the VAT liability of Mr. Sharma if any by referring to the relevant provision
of Value Added Tax Act, 2052 and Value Added Tax Regulation, 2053.

16. Your group of clients, foreign mission/ diplomatic body, enquires you on VAT implications on
transfer of vehicles, cancellation of registration and few other related matters. By referring the
specific provision of VAT Act, you have to give your professional decision in the following
matters:
i) A foreign mission or donor agency wants to transfer the motor vehicles (imported with the
enjoyment of tariff facility) to governmental bodies. Is VAT attractive in this case?
ii) A diplomatic body wants to scrap and cancel the registration of motor vehicles which was
imported with the enjoyment of tariff facility. Is VAT attractive in this case?
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iii) Is there any VAT facility for goods or services imported by a mission and a person serving in
a diplomatic mission?
iv) Is there any VAT facility for any project as per previous treaty or agreement for sales tax
exemption?
v) Is there a refund of VAT facility for foreign diplomats, regional or international commission,
diplomatic commission, international institution?

Excise Duty

17.
a) Royal Industries Limited has imported following materials for the month of Magh 2080 and used
for production of finished goods:
S.N. Particulars Payment of Excise Duty Remarks
1 Raw materials 500,000 10% of raw materials is subject to
duty exemption
2 Subsidiary raw material 100,000
3 Packing raw materials 80,000

All the imported materials were used in the production of finished products and finished goods
were also delivered to its customers. The company has accounted for Rs. 653,000 as excise
payable for the month of Magh 2080.

Required:
Please determine the amount of excise duty payable by the company for the month of Magh 2080
by mentioning relevant provisions of the Act.

b) ABC Manufacturing Pvt. Ltd. if following self-removal system for goods produced from its
factory. For the month of Poush 2080, the company has determined excise duty payable of Rs.
300,000 and duty is paid on 29th Magh 2080 through good for payment cheque (GFP). Good for
payment cheque is realized by IRD on 3rd Falgun 2080.

Required:
Please explain the due for payment of excise duty for the given case. Does the company need to
pay any additional duty to IRD in the given case.

18.
a) What are the provisions regarding control on production, sales, and distribution of liquors?

b) Mr. President NRN has operating the best beer factories in Nepal since last 15 years. The
Marketing head and CFO of the company has planning to introduce some promotional Scheme of
beer targeting to company’s establishment day. They plan to give its customers coins of Silver 10

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gms , 20 gms and 50 gms for every one, two and three case of beer purchase. Marketing head and
CFO has proposed this scheme to CEO Mr. Excellent. CEO is seeking your advice of this
promotion plan of marketing head and CFO for the company’s establishment day.

Custom Duty
19.
a) Knitwear is a manufacturer of woolen pashmina shawls. Normally it exports 100% of its products.
The company availed bonded warehouse facility for woolen yarn. Due to some technical reasons,
about 20% of the product could not be exported and the company sold those products in Nepal.
The value of product sold in Nepal is Rs. 5,00,000. Knitwear had imported yarn to the value of Rs.
60,00,000 and applicable rate of custom duty for the yarn is 5%.
Knitwear applied for clearance of bank guarantee with required documents within specified period
along with reasons of selling in Nepal. Custom authorities have ordered the bank to pay Rs 97,650
and clear balance of guarantee. State whether custom authorities are right in their action. Assume
that transportation cost up to custom point is 5% of invoice price.

b) QRS Ltd. imported goods worth 2,50,00,000 from China and the goods arrived at customs point
on 15 Poush, 2080. However, due to some unavoidable reason, the importer could not get the
invoice of the transportation costs incurred in the importation of any goods and it would be
available only after 45 days. The goods may get damaged if not cleared within 7 days. How can
the company clear the goods from customs? Advise the remedy as per Customs Act and
Regulation.

20.
a) Surya Traders is an importer of various raw materials and finished goods and sale to different
industries and traders. The proprietor has recently negotiated a deal to sell some imported raw
materials to an industry located at the Special Economic Zone. He seeks your guidance regarding
any special provision of refund of custom duty on such materials supplied to special economic
zone.

b) Explain the provision of duty exemption on gold ornament brought to Nepal by Nepali citizen
having permanent residence in Nepal while returning from abroad?

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Section 2: Answer

Q.N. 1(a).

Computation of Taxable Income

S.N. Particulars Amount (Rs.)
1 Profit before tax as per Books as given in question 46,345,000.00
Add:
Distribution of bonus is allowed as deduction at the year when provision is
1 made. Distribution will be made after the provision. So, deduction is not 3,200,000.00
allowed at the time of distribution.
As per section 21 of Income Tax Act, 2058, salary payment to staff having
no PAN is not allowed as deduction. Further, section 90 of the Act requires
2 the submission of TDS return by mentioning the PAN number of employee. 8,316,000.00
Hence, salary paid to employee having no PAN at the time of payment is not
allowed as deduction.
Salary paid to security guard assigned to home of CEO and CFO is allowed
3 as deduction assuming that salary of security guard is included in the income -
of CEO and ED.
Transaction between associated parties shall have to be done in market
value. In the given case, an additional 2 lakhs is given for advertisement of
4 200,000.00
company to associated party which is not allowed as deduction. Amount to
the extent of market value is allowed.
Payment made for making prototype of product is of Research and
development nature and needs to be deducted as per section 18 of the Act
5 2,500,000.00
and hence not allowed here. Further, salary paid to lab technician is allowed
as deduction.
Since the primary motive of travelling of CEO to Australia for her private
purpose and hence travelling cost becomes personal expenses and not
6 423,000.00
allowed as deduction as per section 21. Activities done in Australia is not
considered as basis for deduction.
Cost of Smoke filter plant is of pollution control expenses and to be
deducted as per section 17. Hence, to the extent of depreciation on smoke
7 66,666.67
filter plant charged on depreciable assets needs to be added in income.
(1,000,000x1/3x20%)
Less:
Since the depreciable assets is used from 10th Shrawan, assessment made
by MLTO by disallowing depreciation on such assets is correct. As per
section 19 and Schedule 2 assets should be added on pool of assets on later
1 24,600.00
of purchase date or use date. Here pooling date is 10th Shrawan 2079. So,
additional depreciation to the extent of depreciation applicable on IY
2078/079 depreciation is allowed as deduction during the year. (Here we
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have amended the tax base of depreciable assets.) [1.23x20% considering

accelerated depreciation.)
Since the assets purchased through loan is used during the year, interest
2 accrued during the year is to be deducted while computing taxable income. 6,750,000.00
[900*7.5%]
Since the plant purchased through loan is used from 2077.09.01,
3 depreciation on such assets is to be charged this year for tax. 19,350,000.00
[900+900x7.5%]x20%x100,000
4 VAT credited in sales account mistakenly 1,100,000.00
40% VAT paid on purchase of car is allowed as input tax credit. Here,
company mistakenly takes entire VAT paid on Car is taken as credit but
5 34,671.00
60% of such VAT is to be capitalized in assets which will increase
depreciation charge. [5,000,000x13%x60%x1/3x26.67%]
Taxable Income before deduction u/s 17 and 18 33,791,395.67

W.N.1
For Section
Computation of Adjusted Taxable Income For Section 17
18
Taxable Income before deduction u/s 17 and 18 33,791,395.67 33,791,395.67
Less: Pollution Control Expenses - 1,000,000.00
Less: Research and Development Expenses 2,500,000.00 -
Adjusted Taxable Income 31,291,395.67 32,791,395.67
50% of Adjusted Taxable Income (a) 15,645,697.83 16,395,697.83
Actual expenses for respective section (b) 1,000,000.00 2,500,000.00
Allowable Expenses (minimum of A and B) 1,000,000.00 2,500,000.00
Amount to be Capitalized to Respective Pool - -

Computation of Taxable Income

Particulars Amount (Rs.)

Taxable Income before deduction u/s 17 and 18 33,791,395.67
Less: Pollution Control Expenses (W.N.1) 1,000,000.00
Less: Research and Development Expenses (W.N.2) 2,500,000.00
Assessable Income from Business for the Year 30,291,395.67
Less: Carry forward of tax loss from last year (Since the company is
entertaining full tax holiday until previous year as per section 11(3a(b)), tax
-
exempt loss can’t set-off with taxable income hence, no loss set-off is
allowed.
Taxable Income for the Year 30,291,395.67

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Q.N. 1(b).

Computation of Tax Liability

Computation of Tax Liability of the Company
Taxable Income 30,291,395.67
Rate of Tax (W.N.2) 10%
Tax Liability 3,029,139.57

Computation of Tax Rate to the Company

Option I
Special Industry 20%
Less: Concession u/s 11(3(a)) for Providing direct employment to more than 300
employees 4%
Applicable Tax Rate 16%
Option II
Special Industry 20%
Less: Concession u/s 11(3a(b)) for Special Industry Established in Special
Economic Zone and operating in 6th year of operation 10%
Applicable Tax Rate 10%

Q.N. 1(c).

Advise to the Company

In case of Disallowance of Depreciation:

Since the depreciable assets is used from 10th Shrawan 2079, assessment made by MLTO by
disallowing depreciation on such assets is correct. As per section 19 and Schedule 2 assets should
be added to the pool of assets on later of purchase date or use date. Here pooling date is 10th
Shrawan 2079. No further action needs to be taken on these matters. Appropriate adjustment needs
to be made in books.

In case of Disallowance of Interest:

Rational person does not obtain loan to reduce tax liability. Further, cash and bank balance
represented by the balance sheet is balance of cut-off date only. So, MLTO can’t disallow interest
in such findings. This matter needs to be raised for administrative review.

Inclusion due to Mismatch in Schedule 13:

Merely mismatching of balances with parties in schedule 13 is not the evidence of disposal of
debtors. If the company make its book accurately, then the company needs to give the details of
transactions taken with parties to resolve the mismatch. There shall be no additional tax merely
due to mismatch. This matter needs to be raised for administrative review.
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Q.N. 2.

According to Section 14(2), interest paid to a controlling tax-exempt organization is deductible to

the extent of the amount of interest income and 50% of adjusted taxable income before any interest
items.
Particulars Amount (Rs.)
Inclusions Fees collected by the hospital 1,630,000
Deductions Salaries 740,000
Lab Expenses 60,000
Telephone Expenses 35,000
Previous Years’ Loss 56,000
Fuel 83,000
Adjusted Taxable Income before interest items 656,000
50% of Adjusted Taxable Income before interest items 328,000
Interest Income 71,000
Maximum ceiling of the interest deductible 399,000
Actual interest paid 243,934.43
(2000000*18%*(32+31+31+30+29+30+29+30+6)/366
Deductible interest 243,934.43

Q.N. 3(a).

Computation of cost of trading stock of Nela Metal Craft Limited

For Income Year 2079/080
Particulars Details Amount (Rs.) Remarks
Opening Stock (A) 3,490,000.00 Given
Cost of Production:
Cost of raw materials 8,765,000.00 Given
Variable factory overhead 3,214,500.00 Given
Depreciation is subject to
Less: Depreciation of plant (321,450.00) deduction u/s 19
Allowable Variable Overhead 2,893,050.00
Fixed Factory overhead 942,786.00 W.N. 1
Unabsorbed fixed factory overhead 104,754.00
Total Cost of Production (B) 12,705,590.00
Value of Closing Stock (Assuming FIFO method) unabsorbed fixed factory
(C) 2,800,185.78 overhead is not included
[(Unit of closing stock= 500+1800-1900= 400)] in cost of closing stock
Allowable Cost of Trading Stock (A+B-C) 13,395,404.22

W.N. 1 Allocation of Fixed Factory Overhead

Fixed factory overhead (given) 1,232,400.00
Less: Repair of plant included in fixed factory overhead (184,860.00)
Net Fixed Factory Overhead 1,047,540.00

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Normal production capacity 2,000.00

Absorption rate for fixed factory overhead 523.77

Fixed factory overhead is to be allocated to total production unit at higher of normal production
capacity and actual production. Here, actual production is lower than normal production, so the
cost is to be allocated to normal production capacity. An unabsorbed portion of fixed factory
overhead is allowed as a deduction during the year.

W.N. 2 Interest to Bank

Interest paid to the bank is allowed as deduction u/s 14 and not to be included in cost of trading
stock u/s 15.

Q.N. 3(b).

As per Sec. 20 (1), where a person has assessable income from any business or investment during
any Income Year, such income may be used to set off losses sustained by the same person from
any other business during the same income year or any unrelieved portion of such losses sustained
by the same person in the same or any other business in last seven income year(s).

As per Sec. 57 (2) (Kha), where there is change in ownership by 50% of any entity while compared
with the ownership three years previously, the income generated by the entity after the change of
control cannot be used to set off any unrelieved loss sustained during the period before such change
in control.

As per Sec. 57 (1Ka), where the changes in ownership of such shareholders holding 1% or more
shares shall be counted to determine the threshold of 50%, and in case of persons holding less than
1% shares, changes in respect of such holders who are associated to holders holding 1% or more
of ownership shall only be counted.

Further, merely conversion of company from public limited to private limited and vice versa by
not changing shareholding pattern cannot be considered as change in control and there will be no
application of section 57.

Conclusion:
In the given case there is no change in ownership of the company, instead it is merely a change in
the form of the company. Hence section 57 is not applicable in this case and the company can set-
off loss and order issued by chief tax officer can be challenged through Administrative Review
and Revenue Tribunal.

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Q.N. 4.

Calculation of Tax Liability of Mrs. Jullee Sharma for FY 2080.081

Total
Particulars Amount Unit
Amount (Rs.)
Assessable Income from Employment
Basic Salary 305,000 12 3,660,000
Contribution to Social Security Fund (20% of basic salary
61,000 12 732,000
contributed by employer)
Festival Allowance 305,000 1 305,000
Performance Allowance (5% of basic salary each month) 15,250 12 183,000
Gift from Employer (i-Pad quantified at market value u/s 27) 125,000 1 125,000
Residence Allowance 24,500 12 294,000
Medical Allowance (2% of basic salary) 6,100 12 73,200
Cost of Domestic Helper 13,500 12 162,000
Meeting Allowance (Final Withholding, not included in
0
assessable income u/s 92)
Cost of Education of Children paid by employer 24,000 12 288,000
Cost of life policy reimbursement by employer (50% of the
55,000 1 55,000
premium)
Quantification of Vehicle Facility for Personal Use (0.5% of
18,300 1 18,300
3,660,000)
Assessable Income from Employment (A) 5,895,500
Assessable Income from Business
Annual profit from proprietorship firm 1,234,000
Total Assessable Income from Business (B) 1,234,000
Assessable Income from Investment
Interest received from friend (TDS is not necessary) 1,000,000
Rent income of house owned by natural person is subject to
tax by local level and no tax is applicable under Income Tax 0
Act, 2058.
Rental income from car (TDS paid can be set-off with total
25000 12 300,000
tax liabilities)
Dividend from resident company is subject to final
0
withholding u/s 92
Jewelry is her person asset and not defined as investment by
Income Tax Act, 2058 and gain from sale of Jewelry is not to 0
be taxed.
Total Assessable Income from Investment (C ) 1,300,000
Total Assessable Income (A+B+C) 8,429,500
Allowable Reductions:
Less: Contribution in SSF is allowed as reduction at lower
(500,000)
of following:

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Lump sum amount Rs. 500,000 500,000

1/
3rd of Assessable Income 2,809,833
Actual Contribution in SSF (Rs. 305000*31%*12) 1,134,600.00
Adjusted Taxable Income 7,929,500
Less: Donation given to exempt organization is allowed as
reduction at lower of following:
5% of Adjustable Taxable Income (5% of 7,929,500) 396,475.00 100,000
Lump sum amount Rs. 100,000 100,000.00
Actual Donation to Exempt organization 205,000
Less: Life Insurance Policy (Minimum of following)
Lump sum amount Rs. 40,000 40,000
Actual Premium Paid i.e. Rs. 110,000
Taxable Income 7,789,500
Assuming She claims as Couple
No social security tax for 600,000 -
10% for Next 200,000 20,000
20% for Next 300,000 60,000
30% for Next 900,000 270,000
36% for Next 3,000,000 1,080,000
39% for Balance Rs. 2,789,500 1,087,905
Total Tax 2,517,905
Less: 10% TDS deducted by Travel Agency 30,000
Net Tax Liabilities 2,487,905

Q.N. 5.

As per section 96 of the Act, each person shall file an income return to the IRD within three
months from the closure of respective income year through electronic means.
As per Sec. 97 (1), a natural person satisfying all the following conditions, is not required to file
income return unless IRD requires so in writing or through public circular or the natural person’s
income exceeds Rs. 40 Lakhs during the Income Year:
▪ The natural person earns income only from employment having source in Nepal,
▪ There is only one employer at a time, and all employers are resident of Nepal, and
▪ The person claims medical tax credit and contribution to approved retirement fund to the
extent paid through employer and does not claim donation.

In the given case the total assessable income of Mr. Suresh is more than Rs. 40 lakhs hence Mr.
Suresh is required to submit income return to IRD within Aswin end of 2080.

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If a person requiring submitting an income return to IRD fails to submit income return then higher
of the following amount shall be charged as fee u/s 117(1(ga)) of Income Tax Act, 2058 for the
period of delay in filing return:
Rs. 100 per month or
0.1% p.a. on total assessable income (amount derived by adding all amount of inclusion but
ignoring amount of deduction if any)
In the given case, delay in submission of return (if return is submitted on 15th Falgun) =
30+30+29+29+15 = 133 days

Applicable fee under section 117 is higher of:

i. Rs. 100x5 = Rs. 500
ii. 0.1% of assessable income i.e. 14,543,500x0.1%x133/365 = Rs. 5,299.41
So, the applicable fee will be Rs. 5,299.41

Q.N. 6.

As per provisions of Income Tax Act, 2058, applicable withholding tax rate and its classification
as final or advance withholding tax in case of the given transactions are as follows:
TDS or Not Rate Final withholding or not
i) Yes 1.5% Creditable Withholding
ii) Yes 5% Creditable Withholding
iii) Yes 5% Final Withholding
iv) No - Exempted under section 88
v) Yes 10% Creditable withholding
vi) No - Exempted u/s 11(3tha)

Q.N. 7.

Computation of taxable income of Sunaulo Life Insurance Company for Fiscal Year 2078/79:

S.N. Particulars NPR.

Amount to be included in Income
i. Insurance Premium Receipts (Gross) (Working note 1) -
ii. Interest Income 6,595,500.00
iii. Other miscellaneous income 100,695.00
iv. Commission received against reinsurance done 110,700.00
TOTAL (A) 6,806,895.00
Allowable Expenses
i. Commissions Paid against Reinsurance taken 100,500.00
ii. Commissions Expenses 487,200.00
iii. Management Expenses 1,760,850.00
iv. Audit Fee 225,000.00

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v. Depreciation Expenses 445,815.00

TOTAL (B) 3,019,365.00
TAXABLE INCOME (A-B) 3,787,530.00

Working Note 1. Insurance Premium Receipts (Gross)

The Insurance Premium receipts of NPR. 4,628,400 is not considered as income or liability of the
insurer. So, it is not taken for calculation of Taxable Income. As per the provision of section 61,
in computing the income from investment insurance, all the amounts which are required to be
included as per the other provisions of the Act, should be included in computing the income for
the year except the following amounts:

▪ Amount derived in respect of insurance as a premium and a re-insurance premium.

▪ Amount derived by it during the year under any contract of re- insurance, guarantee,
security, or indemnity in respect of the payment to be made by it as an insurer.2.

Treatment of Payment made to policy holders.

Particulars Received Paid Remarks
Matured policy 481,500 619,800 Gain to policy holder Rs. 138,300.00
Death Claim 192,000 700,000 Gain to policy holder Rs. 508,000.00
Capital receipt to the insurance company Rs. 150,000.00
Policy
700,000 550,000 If distribution is made by company, included in income
Surrendered
u/s 56.

Q.N. 8.

Particular Amount
Incomings from disposal of assets 15,000,000
Less: Cost of substitute land acquired 12,000,000
Net Incoming 3,000,000
Incomings along with the compulsory disposal deemed to have been received
under section 46(1ka) 13,000,000
Outgoing just before the disposal of assets 10,000,000
Gain from Involuntary disposal of land 3,000,000
If the application was not filed with the Inland Revenue Department for
application of section 46 of the Income Tax Act 2058, the Net Gain will be 5,000,000

Q.N. 9.

EPF is an Approved Retirement Fund (ARF) under Income Tax Act and Rules (Section 63 and
Rule 20). Section 64 (2) of the Act has exempted for all incomes of an ARF from income tax.
However, Rule 20 has prescribed that the investment of an ARF can be only in ‘approved
investment’. Approved investments are – the investments in Citizen Investment Trust, investment

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in banks established under the prevailing banking laws, investment in government bonds,
investment in consortium financing with bank, and investment to the own beneficiaries of the ARF
except to the own shareholders.

If the investment is not an approved investment, any income from the investment are not exempted.
Accordingly, the rent income is taxable and the other two incomes are not taxable. Thus, the
taxable income and tax liability shall be as follows:
S. N. Particulars Amount Rs. Workings
1 Inclusion 150,000,000
An ARF is tax exempted for the income from
Interest Income from
1.1 - approved investment. The bank deposit is an
Bank Deposit
approved investment, so, it is not taxable.
Dividend Income from An ARF is tax exempted for the income from
Hydro-power projects approved investment. The investment in a
1.2 -
from consortium consortium financing with a bank is an
financing with a bank approved investment, so, it is not taxable.
An ARF is tax exempted only for the income
1.3 Rent Income 150,000,000 from approved investment. Renting a house is
not an approved investment, so, it is taxable.
2 Taxable Income 150,000,000
3 Tax Rate 25%
4 Tax Liability 37,500,000

Q.N. 10.

As per section 2(Dha) of Income Tax Act, 2058, Tax means income tax imposed under this act
and includes the following payments:
1) Expenses incurred in the process of creating a charge and performing auction of the
property of tax creditor by the department as mentioned in section 104(8)(a);
2) The amount payable by a withholding agent or withholdee under section 90, or amount
payable by an installment payer under section 94, amount payable by Withholding agent
tax deducted at sources as per section 95 Ka and amount payable on assessment under
sections 99, 100, and 101;
3) The amount payable to the Department in respect of tax liability of a third party under
section 107(2), 108(3) or (4), 109(1), and 110(1);
4) The amount payable by way of interest and penalties under Chapter 22 of the Income Tax
Act 2058; and
5) The amount payable by way of fines in order of the department as per section 129.

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Payment priority of M/s Insolvent Company Limited by Mr. Liquidator as on dated 31st
Ashad 2079
S.N. Particular Amount Remarks
1 Amount collected from Sale of Assets 20,500,000.00
2 Less: Expenses of liquidation (500,000.00) Note 1
3 Less: Tax Deducted At Source (TDS) liability (2,000,000.00) Note 2
4 Less: Secured Creditors (preferential Right) (6,000,000.00) Note 3
5 Less : Income Tax payable (6,000,000.00) Note 4
Remaining amount 6,000,000.00 Note 5

Note 1:
As per section 104(8ka) of the Income Tax Act 2058, expenses of liquidation i.e notice of
liquidation, legal expenses incurred during the process of the auction are allowed for deduction.
Therefore NPR. 500,000 has first right over the payments. ( as per section 2 Dha(1) of Income Tax
Act, 2058 and as per section 105(5) of Income Tax Act 2058)

Note 2:
As per section 105(5) of Income Tax Act 2058 and as per section 2 Dha(2) of Income Tax Act
2058, NPR. 2 Million TDS liability need to pay to IRD as a second priority by the Liquidator.

Section 105(5) of Income Tax Act 2058 has following provision for auction of charged assets “The
proceeds of an auction under subsection (4) of Section 105 shall be used to pay the costs of charge
and auction of the assets sold, then to pay the tax payable and interest accrued with respect to that
tax under section 119, and any remainder shall be paid to the tax debtor” and income tax manual
2066(Updated) also clarify secured creditors with preferential right over the other tax payment
while making payment by liquidator.

Note 3:
After payment of tax Mr. Liquidator has to pay NPR. 6 Million Secured Creditors (preferential
Right) (Section 105(5) of Income Tax Act 2058 and Income tax manual 2066(Updated))

Note 4:
After payment of Secured creditors Mr. Liquidator need to pay Income tax Liability of NPR. 6
Million, as per section (Section 105(5) of Income Tax Act 2058 and Income tax manual
2066(Updated))

Note 5:
Amount remaining after above payment NPR. 6 million shall be distributed over the unsecured
creditors on a proportionate basis.

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Q.N. 11.

As per sub section 604.3 A1 of Handbook of the Code of Ethics for Professional Accountants,
Tax services comprise a broad range of services, including activities such as:
▪ Tax return preparation.
▪ Tax calculations for the purpose of preparing the accounting entries.
▪ Tax planning and other tax advisory services.
▪ Tax services involving valuations.
▪ Assistance in the resolution of tax disputes.

Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for the
purpose of preparing accounting entries that will be subsequently audited by the firm creates a
self-review threat.

A firm or a network firm shall not prepare tax calculations of current and deferred tax liabilities
(or assets) for an audit client that is a public interest entity for the purpose of preparing accounting
entries that are material to the financial statements on which the firm will express an opinion.

Q.N. 12.

As per the DTAA between Nepal and The Democratic Socialist Republic of Sri Lank“, "resident
of a Contracting St”te" means any persons who, under the laws of that State, is liable to tax therein
by reason of his domicile, residence, place of management or any other criterion of a similar nature.

Whereby reasons of the above provisions an individual is a resident of both Contracting States,
then his status shall be determined as follows:
i. he shall be deemed to be a resident of the State in which he has a permanent home available to
him; if he has a permanent home available to him in both States, he shall be deemed to be a
resident of the State with which his personal and economic relations are closer (center of vital
interests);
ii. if the State in which he has his center of vital interests cannot be determined, or if he has not a
permanent home available to him in either State, he shall be deemed to be a resident of the
State in which he has a habitual abode;
iii. if he has a habitual abode in both States or in neither of them, he shall be deemed to be a
resident of the state of which he is a national;
iv. if he is a national of both Contracting States or of neither of them, the competent authorities of
the Contracting States shall settle the question by mutual Agreement.

In case of a person other than an individual is a resident of both Contracting States, then it shall be
deemed to be a resident of the State in which its place of effective management is situated.

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Q.N. 13.

As per OECD Guidelines for Multinational Enterprises 2011, following are the required
disclosure:
a. Enterprises should ensure that timely and accurate information is disclosed on all material matters
regarding their activities, structure, financial situation, performance, ownership and governance.
This information should be disclosed for the enterprise as a whole, and, where appropriate, along
business lines or geographic areas. Disclosure policies of enterprises should be tailored to the
nature, size and location of the enterprise, with due regard taken of costs, business confidentiality
and other competitive concerns.

b. Disclosure policies of enterprises should include, but not be limited to, material information on:

i) the financial and operating results of the enterprise;

ii) enterprise objectives;
iii) major share ownership and voting rights, including the structure of a group of enterprises
and intra-group relations, as well as control enhancing mechanisms;
iv) remuneration policy for members of the board and key executives, and information about
board members, including qualifications, the selection process, other enterprise directorships
and whether each board member is regarded as independent by the board;
v) related party transactions;
vi) foreseeable risk factors;
vii) issues regarding workers and other stakeholders;
viii) governance structures and policies, in particular, the content of any corporate governance
code or policy and its implementation process.

c. Enterprises are encouraged to communicate additional information that could include: a) value
statements or statements of business conduct intended for public disclosure including, depending
on its relevance for the enterprise‘s activities, information on the enterprise‘s policies relating to
matters covered by the Guidelines; b) policies and other codes of conduct to which the enterprise
subscribes, their date of adoption and the countries and entities to which such statements apply; c)
its performance in relation to these statements and codes; d) information on internal audit, risk
management and legal compliance systems; e) information on relationships with workers and other
stakeholders.

d. Enterprises should apply high quality standards for accounting, and financial as well as non-
financial disclosure, including environmental and social reporting where they exist. The standards
or policies under which information is compiled and published should be reported. An annual audit
should be conducted by an independent, competent and qualified auditor in order to provide an
external and objective assurance to the board and shareholders that the financial statements fairly
represent the financial position and performance of the enterprise in all material respects.

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Q.N. 14.

Calculation of VAT that can be claimed for refund:

Particulars Taxable Amount of Remarks
Amount VAT (Rs.)
(Rs.)
Vat Receivable at the end of Ashad, 2080 7,000,000
Adjustment:
Missing invoice 150,000 0 W.N. 1
Adjustment of imported goods on Ashad, 2078 2,000,000 260,000 W.N. 2
Less: VAT Cannot claimed for refund (1,500,000) W.N. 3
VAT amount can be claimed for refund by the 5,760,000
trade link on 25 Shrawan, 2080

W.N.1
As per rule 39 (2) of Value Added Tax Rules, 2053, tax deduction may be made only once under
this Rule. When making a tax deduction, there must be invoices or the import documents up to one
year before the date of making the claim. So, the missing invoice was expired the term of one year,
tax cannot be deducted.

W.N.2.
As per section 48 (4) of Value Added Tax Rules, 2053, in case any goods have been imported by
furnishing a deposit, a claim for a tax deduction may be made only within a year from the date of
determination of the value. The value was determined on 15 Mansir 2079, so tax amount has been
claimed. It is within a year after the determination.

W.N.3.
As per section 25D of Value Added Tax Act, 2052, no vat shall be refund if an application is not
made for the refund of the amount refundable pursuant to this Act within three years after the
date of expiration of the period of tax. The time from Jestha, 2077 to Shrawan, 2080 is 3 years 2
months. So, VAT receivable of Jestha & Ashad, 2077 cannot be claimed for refund on Shrawan,
2080.

Q.N. 15.

Answer:
As per section 5A of Act, VAT is not applicable on transfer of ownership of transaction (i.e.
business) on either of following condition.

a) When registered person sells its transaction to another registered person; or

b) Transfer to any inheritor after the death of an owner.

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In case of such transfer, person obtaining ownership of such transaction shall:

• Owe all tax obligations in relation to the period before the transfer.
• Have a responsibility to maintain safe custody of accounts, books of accounts and documents in
relation to the period before and after such transfer until such period as prescribed.

Rule 11 of the VAT Regulation states information of such transfer (partial or full) is to be notified
to IRD within 7 days of such transfer. Information is to be provided on schedule 4 of the Rule.
Upon the receipt of information, the tax officer may give necessary directions to the transferor and
transferee in relation to the fulfillment of the obligation under this Act of Rule.

In the given case, Mr. Pritam Sharma sold his registered business to his cousin on 7 th Magh 2080
and went to tax officer on 19th Falgun 2080 for cancellation of VAT Registration. So, Mr. Pritam
Sharma has violated the Value Added Tax Rule by not informing the tax officer within 7 days of
transfer of business. So, Mr. Sharma is not allowed to entertain the VAT exemption facility given
by Section 5A of the Value Added Tax Act, 2053. The tax officer needs to assess VAT under
section 20(1(ja)) of the Act.

In the given case, trading inventory is to be disposed of at market value. In the given case, the
market value of the inventory will be the higher of replacement cost of inventory and normal gross
margin on sales.

Now, we must calculate the Gross Margin of the business based on previous year’s data. Gross
margin would be:

Particulars Amount in Rs.

Sales revenue 98,102,800.00
Less: Cost of Goods Sold 75,463,210.00
Gross Profit 22,639,590
Gross Margin (approx.) (a) 23%
Replacement Cost of the inventory is higher by (b) 15%
So, market value of the inventory will be 123% of the cost of inventory

Similarly, capital items also need to be sold at market value and VAT is to be collected
accordingly.

Computation of VAT Liability

Particulars Inventory Capital Items

Book Value 37,865,340.00 5,432,100.00
Add: Markup for Inventory (23% of
cost) 8,709,028.20 -
Add: Markup on Capital Items - **1,641,975.00
Total Market Value 46,574,368.20 7,074,075.00
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Collection of VAT @13% 6,054,667.87 919,629.75

Total VAT to be Collected 6,974,297.62
Add: Fine u/s 29(2) 6,974,297.62
VAT Payable 13,948,595.23
** Market Value of capital item = Book value of other assets + Market value of car
= 5,342,100x75% + 3,000,000= 7,074,075

Q.N. 16.

i) As per clause 14 of schedule 1 Group 11 of VAT Act, Value Added Tax shall not be levied on
transfer of motor vehicle (not crossed ten years from the first year of manufacturing) that were
imported by any foreign mission or donor agency with the enjoyment of diplomatic facility or
tariff facility to the project itself in consonance with the annual approved program of the project
and converting their number plates into government ones or on transfer, with the approval of
ministry of finance, any motor vehicles (not crossed ten years from the first year of
manufacture) that were imported in the name of any project with the enjoyment of full or partial
tariff facility (except those imported on record or bank guarantee) to any governmental body
after the completion of the project and converting their number plates into governmental ones.

ii) As per clause 15 of schedule 1 Group 11: Other goods and services of VAT Act, if any
diplomatic body, project or other body (governmental or nongovernmental organization)
intends to scrap and cancel the registration of any motor vehicle that it has imported with
enjoyment of tariff facility and that is more than 15 years old after the year of initial production,
with the approval of ministry of finance, value added tax shall not be levied on such motor
vehicle.

iii) As per clause 3 of schedule 2 of VAT Act, zero VAT shall be levied on goods or services
imported by a person or mission enjoying diplomatic facility and a person serving in a
diplomatic mission enjoying tariff facility, on the recommendation of ministry of foreign
affairs, government of Nepal.

iv) As per clause 4 of schedule 2 of VAT Act, zero VAT shall be levied if any previous treaty or
agreement provides for sales tax exemption on imports and local purchase is made from the
registered taxpayers, on the recommendation of concerned project, the facility of zero rate shall
be provided on such supplies so long as such treaty or agreement is in effect.

v) As per section 25(1) (Ka) of VAT Act, the amount of tax paid, to the extent of own
consumption, inside the territory of Nepal by a diplomat, situated in Nepal, of a foreign
country, regional, international commission or institution if the foreign country or regional,
international commission or institution grants on reciprocal basis tax exemption privileges to
Nepalese diplomats recognized by the ministry of foreign affairs, Government of Nepal to that
foreign country.
As per section 25(1)(ka1) of VAT act, on the basis of recommendation made by Government
of Nepal, Ministry of foreign affairs, VAT paid by diplomatic mission on goods or services
purchased within Nepal shall be refunded.

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As per section 25(1)(kha) of VAT act, the amount of tax paid by an international institution
for which Government of Nepal, Ministry of Finance, has granted the privileges of tax
exemption.
Application for such VAT refund shall have to be made within three years from the date of the
concerned transaction and tax paid by a diplomatic mission or diplomat on purchase of goods
or services should not be less than ten thousand at one time of purchase.

Q.N. 17(a).

As per section 3A of The Excise Duty Act, 2058 excise duty paid on consumption of raw materials
which is used to finished goods can be set off with excise duty payable upon removal of the final
goods.
While deducting excise duty pursuant to this Section, excise duty paid on import of auxiliary raw
materials, packaging materials, and raw materials and machinery parts having customs duty
exemption shall not be allowed to be deducted.
Computation of Excise duty payable for the month of Magh 2080:

Particulars Amount Remarks

(Rs.)
Duty collected on sales 653,000
Less:
Excise duty paid on consumption raw (450,000) 10% of raw materials is subject to
materials duty exemption and no deduction is
available
Excise duty paid on consumption - Deduction is not available
subsidiary raw materials
Excise duty paid on consumption of - Deduction is not available
packing raw materials
Net Duty Payable 203,000

Q.N. 17(b).

As per section 4B of The Excise Duty Act, 2058 in case of goods or services produced, sold and
distributed under Self Removal System, excise duty collected pursuant to this Act shall be
deposited within twenty-fifth day of the month following the issuance of the invoice.
If the excise duty is not paid within the time limit prescribed, a delay fee at the rate of 0.05
percent per day shall be charged on the amount of excise duty remaining due.

In the given case due date for payment of the excise duty is 25th of Magh 2080. But the company
has paid duty on 29th Magh 2080 through GFP. Total delay for payment is four days. Hence the
delay fee payable to company is

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Duty Payable x Number of Delay Days x Per Day Rate of Delay Fee
=300,000x4x0.05%
= Rs. 600

Q.N. 18(a).

Following are the provisions regarding sales and distribution of alcohol:

a. As per Rule 16 of Excise Duty Rules, the Licensee who produces Liquors shall produce
Liquors only from the mixture (blending) of spirits produced from the patent steel plant. The
Licensee producing Liquors shall produce and seal in the bottle beer, wine and Liquors of 25,
30, 40 U.P. strength in the quantity as prescribed by the Department. The Licensee producing
Liquors shall sell the Liquors of 70 U.P. strength, produced by the Licensee, in a pet bottle of
300 ml or in a sealed bottle as prescribed by the Department. During the production of wine,
fermentation shall be done in patent steal tank or wooden container (Vyat).
b. As per section 4Gha of Excise Duty Act, a businessperson, other than hotel and restaurants,
carrying out transaction of liquor shall only transact liquors and tobacco. However, a
departmental store shall carry out transaction of liquors and tobacco by maintaining a separate
sales section.
c. As per Rule 29(1) of Excise Duty Rules, the Licensee producing and importing Liquor, beer
shall make public the selling price to his/her distributor, wholesaler and retailer and shall
indicate the maximum retail price in the goods produced by him/her.
d. As per Rule 29(2) of Excise Duty Rules, in case the Licensee requires to change the shape or
quality standard or produce a new brand, such Licensee shall obtain the prior approval of the
Department and all the due and payable revenues shall be paid up prior to producing such a
new brand.
e. As per Rule 21 of the Excise Duty Rules, the Licensee producing Liquors has to maintain an
inspection book as prescribed by the Department in the distillery or brewery. The Excise Duty
Officer or the employee deputed by such Officer shall, while inspecting the distillery or
brewery, mention in the inspection book all matters including the date and time of inspection
and the errors, if any, found in the process of making Liquors.

Q.N. 18(b).

Liquor, beer or cigarette manufacturing industries, importer and seller of offering any schemes and
giving discount to while selling goods shall be deemed to violate the condition of license as per
section 4E of The Excise Duty Act, 2058. By referring this the proposed promotion plan for the
Company’s establishment day by marketing head and CFO in not according with the provisions
of The Excise Duty Act, 2058. It is recommended to CEO Mr. Excellent not to implement and
endorse the scheme of silver coins to its customers.

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Q.N. 19(a).

As per Rule 16 of The Custom Regulation, 2065 does not comply with the terms and conditions
of the Regulation, then duty shall be collected from the bank guarantee by adding additional 15%
of applicable duty. In the given case, the manufacturer sold 20% of its production in Nepal and
hence custom duty shall be collected by custom authority from the Bank Guarantee as computed
below:
Invoice Value (20% of 60,00,000) 1,200,000.00
Transportation Expenses 60,000.00
Transaction Value 1,260,000.00
Custom Duty (5%) 63,000.00
Fine (15% of custom duty) 9,450.00
Total Duty to be paid 72,450.00

Q.N. 19(b).

According to section 15 of the Custom Act 2064, where, owing to a circumstance beyond his or
her control, an importer is not able to forthwith submit documents of cost, insurance or related
costs incurred in the importation of any goods, the importer may submit an application,
accompanied by the reason for the same, to the Customs Officer for the fixation of the estimated
amount of such freight, insurance or other related expenses. Where, in inquiring into the
application, the contents appear to be reasonable, the Customs Officer may fix the estimated
amount for freight, insurance, or other related expenses likely to be included in the transaction
value of such goods.

The concerned importer shall submit documents and evidence relating to the actual freight,
insurance, and other related expenses no later than ninety days after the date of fixation of the
estimated amount of freight, insurance, or other related costs. If the amount set forth in the
documents and evidence so submitted is more than the estimated amount fixed by the custom
officer, the importer shall pay the duty chargeable on such excess value, and if it is less than that,
the Customs Office shall refund the remaining amount, upon deduction of the chargeable duty, to
the importer.

If the concerned importer fails to submit documents and evidence within the specified period or
unless it is proved otherwise, the estimated amount fixed by the Customs Officer shall be
considered as the final amount of such freight, insurance, or other related costs.

Q.N. 20(a).

Rule 18 of Custom Rules has a provision regarding the refund of the customs duty on such goods
sold to the industry located in the Special Economic Zone. Accordingly, on the prior approval of
the Department, if the importer sales imported goods to the industry located in the Special
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Economic Zone, such importer, in case of payment of customs duty at the time of import, should
apply at the customs office for the refund of the customs duty within sixty days of the date of
import along with the attachment of the following documents:
i. Invoice, Customs declaration form and cash receipt at the time of import.
ii. Sales Agreement between the purchaser industry and the seller importer.
iii. Receipt of sales of goods.
iv. Certified copy of the ledger for the purchase of goods by the purchasing industry.
v. Documents relating to the payment for the purchase by the purchasing industry.
vi. Bank Guarantee issued in favor of the customs office equivalent to the customs duty on
behalf of the purchasing industry or the sales importer.

If the chief of the customs office found, on the scrutiny of the application received, that the refund
of the customs duty is justified, refund full or partial- should be made within thirty days from the
date of application received.
If the chief of the customs office found, on the scrutiny of the application received, that the refund,
full or partial, of the customs duty is not justified, the applicant will be notified accordingly.

If the industry located in the Special Economic Zone submits the documents relating to the sales
of finished product manufactured from the goods sold, and the foreign exchange receipt against
the export of such finished product, the bank guarantee as per clause (vi) above will be released.

However, in case the seller has sold the goods by adding the customs duty in the import price, such
customs duty will not be refunded.

Q.N. 20(b).

Answer:
According to a notice issued by the Ministry of Finance in the Nepal Gazette on 2080/02/15, Nepali
citizens with permanent residence in Nepal are permitted to bring back gold ornaments up to 25
grams for males and up to 50 grams for females when returning from abroad, without being subject
to duty.

If travelers carry gold ornaments exceeding the allowed limit, they will be subject to the prevailing
duty on the first 100 grams, with an additional 3% duty imposed on any additional 100 grams of
gold ornaments.

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Section 3: Exam tips to students:

Tip 1 :

Always start writing answers with easy questions where you feel comfortable. Don’t rush to
question no 1 always.

Tip 2 :

Try to attempt all questions. If you can’t answer the entire question, write some working notes,
or solve the part of the question you understand and know.

Tip 3 :

You will get marks on a step wise basis. Always give focus to proper working notes.

Tip 4 :

Don’t quote section, rule, or reference of case law if you are not sure.

Tip 5:

Mention the question number clearly on the top of the answer sheet. Start answering question or
sub-question on the fresh page.

Tip 6:

Read the question carefully before answering it. Sometime what you are answering will be
different from what is asked.

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Paper 7 – Advanced Cost and

Management Accounting

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Section 1: Questions:

Chapter: Marginal Costing and Decision-Making Problems

Question No. 1:

Jupiter Ltd, a ‘Fast-Moving Consumer Goods (FMCG)’ company intends to diversify the product
line to achieve full utilization of its plant capacity. As a result of considerable research made, the
company has been able to develop a new product called ‘EXE’.
‘EXE’ is packed in cans of 100 ml capacity and is sold to the wholesalers in cartons of 24 cans at
Rs 120 per carton. Since the company uses its spare capacity for the manufacture of ‘EXE’, no
additional fixed expenses will be incurred. However, accountant has allocated a share of Rs
1,12,500 per month as fixed expenses to be absorbed by ‘EXE’ as a fair share of the company’s
present fixed costs to the new product for costing purposes.
The company estimates the production and sale of ‘EXE’ at 1,50,000 cans per month and on this
basis the following cost estimates (per carton) have been developed:
Particulars Amount (Rs.)
Direct Materials 54
Direct Wages 36
All Overheads 27
Total Costs 117

After a detailed market survey, the economy is confident that the production and sales of ‘EXE’
can be increased to 1,75,000 cans per month and ultimately to 2,25,000 cans per month.
The company at present has a capacity for the manufacture of 1,50,000 empty cans and the cost of
the empty cans if purchased from outside will result in a saving of 20% in material and 10% in
other costs of ‘EXE’. The price at which the outside firm is willing to supply the empty cans is Rs
0.675 per empty can. If the company desires to manufacture empty cans in excess of 1,50,000 cans,
a machine involving an additional fixed overhead of Rs 7,500 per month will have to be installed.
Required
(i) State by showing your workings whether the company should make or buy the empty cans at
each of the three volumes of production of ‘EXE’ namely, 1,50,000, 1,75,000 and 2,25,000
cans.
(ii) At what volume of sales will it be economical for the company to install the additional
equipment for the manufacture of empty cans?
(iii)Evaluate the profitability on the sale of ‘EXE’ at each of the aforesaid three levels of output
based on your decision and showing the cost of empty cans as a separate element of cost.

Question No. 2:

Satish Enterprises are leading exporters of Kid's Toys. J Ltd. of U.S.A. have approached Satish
Enterprises for Exporting a special toy named "Jumping Monkey". The order will be valid for next
three years at 3,000 toys per month. The export price of the toy will be $4.
Cost data per toy is as follows:

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Rs.
Materials 60
Labor 25
Variable overheads 20
Primary packing of the toy 15
The toys will be packed in lots of 50 each. For this purpose, a special box, which will contain the
50 toys will have to be purchased, cost being Rs.400 per box.
Satish Enterprises will also have to import a special machine for making the toys. The cost of the
machine is Rs.24,00,000 and duty thereon will be at 12%. The machine will have an effective life
of 3 years, and depreciation is to be charged on straight-line method.
Apart from depreciation, annual fixed overheads is estimated at Rs.4,00,000, for the first year with
6% increase in the second year. Fixed overheads are incurred uniformly over the year.
Assuming the average conversion rate to be Rs. 50 per $, you are required to:
i) prepare a monthly and yearly profitability statements for the first year and second year
assuming the production at 3,000 today per month.
ii) Compute a monthly and yearly break-even unit in respect of the first year.
iii) In what contingency can there be a second break - even point for the month and for the year
as a whole?
iv) Have you any comments to offer on the above?

Question No. 3:

J Ltd., manufactures and sells 25,000 table fans annually. One of the components required for fans
is purchased from an outside supplier at a price of Rs 190 per unit. Annually it is purchasing 25,000
components for its usage. The Production Manager is of the opinion that if all the components are
produced at own plant, it is possible to maintain better quality in the finished product. Further, he
proposed that the in-house production of the component with other items will provide more
flexibility to increase the annual production by another 5,000 units. He estimates the cost of
making the component as follows:

Particulars Rs. Per Unit

Direct Material 80
Direct Labour 75
Factory Overhead (70% Variable) 40
Total Cost 195

The proposal of the Production Manager was referred to the Marketing Manager for his remarks.
He pointed out that to market the additional units, the overall unit price should be reduced by 5%
and additionally Rs 1,00,000 p.m. should be incurred for advertising. Present selling price and
contribution per fan are Rs 2,500 and Rs 600 respectively. No other increase or decrease in all
other expenses as a result of this proposal will arise.

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Required

Since the making cost of the component is more than the buying cost, the Management asks you
to:

(i) Analyze the make or buy decision on unit basis and total basis.

(ii) Recommend the most profitable alternative.

Chapter: Standard Costing and Variance Analysis

Question No. 4:

From the following information extracted from the books of a manufacturing company, calculate
Fixed and Variable Overhead Variances.

Particulars Budgeted Actual

Production – Units 22,000 24,000
Fixed Overheads Rs 44,000 49,000
Variable Overheads Rs 33,000 39,000
Number of Days 25 26
Number of Man Hours 25,000 27,000

Question No. 5:

Y Ltd. manufactures a single product, the standard cost per unit of which is as follows:
Rs. Rs.
Standard selling price 2,680
Less standard cost:
Material (80 kg @ Rs. 8 per kg) 640
Labor (20 hours @ Rs. 6 per hour) 120
*Overhead (20 hours @ Rs. 48 per hour) 960 1,720
Standard Profit 960
*Total overhead costs are allocated on the basis of budgeted direct labor hours. The following
information relates to last month:
Particulars Budgeted Actual
Production and Sales 600 Units 500 Units
Direct Labor 12,000 hrs. @ 11,500 hrs. @
Rs. 6 per hour Rs. 6 per hour
Fixed Overhead Rs. 1,92,000 Rs. 2,00,000
Variable Overhead Rs. 3,84,000 Rs. 4,04,000
Material 48,000 kg @ 48,000 kg @
Rs. 8 per kg Rs. 8 per kg
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The actual selling price was identical to budgeted selling price and there was no opening & closing
stock during the period.
You are required to calculate the variances and reconcile budgeted and actual profit for each of
following method.
i) The Traditional Method.
ii) The Relevant Cost Method assuming materials are limiting factor and restricted to
48,000 kg for the period.
iii) The Relevant Cost Method assuming labor hours are limiting factor and labor hours
are restricted to 12,000 for the period.
iv) The Relevant Cost Method where there is no scarce input.

Chapter: Budget and Budgetary Control

Question No. 6:

A firm at present operates at 60% of its capacity. At this level and at the level of 50% utilization
of capacity, the figures relating to its operations could be summarized as stated below:

Particulars 50% 60%

Rs. Rs.
Materials 1,000,000 1,200,000
Labor 800,000 900,000
Manufacturing Overheads 600,000 660,000
Administrative Overheads 350,000 350,000
Selling and Distribution 450,000 500,000
Overheads
Research and Development 150,000 200,000
Total 3,350,000 3,810,000
Profit 150,000 390,000
Sales 3,500,000 4,200,000

Draw up the budget at 80% utilization of capacity assuming that –

i) sales at this level can be maintained only by a flat 5% reduction in the selling price;
ii) economy in purchase of material will equal to 2-1/2% of the current amounts;
iii) the research and development expenditure will be pegged at `2,50,000 per annum; and
iv) administrative overheads will require 10% increase.

Chapter: Activity Based Costing

Question No. 7:

The cost accountant of ABC Manufacturing attended a workshop on activity-based costing

and was impressed by the results. After consulting with the production personnel, he prepared

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the following information on cost drivers and the estimated volume for each driver.

Products Total
A B C
Units produced 25,000 15,000 5,000 45,000
Direct materials 40.0 30.0 55.0
Cost Per Unit in
Rs
Direct labour in Rs 15.0 15.0 15.0

Cost driver Cost driver volume Total

A B C
Number of setups 125 75 50 250
Machine hours 2,500 1,500 2,000 6,000
Direct labor hours 25,000 15,000 5,000 45,000
Number of 50 25 25 100
Inspection

The cost accountant also determined how much overhead costs were incurred in each of
the four activitiesas follows:

Activity Overhead costs in `

Machining
Setup 1,50,000
Machining 7,50,000
Total of Machining Overhead Cost 9,00,000

Assembly
Assembly 360,000
Inspection 90,000
Total of Assembly Overhead Cost 4,50,000
Total Overhead Cost 13,50,000
Required:
1. Determine the cost driver rate for each activity cost pool.
2. Use the activity-based costing method to determine the unit cost for each product.

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Chapter: Costing of Service Sector

Question No. 8:

A hospital operates a 40-bed capacity special health care department. The said department levies
a charge of Rs. 425 per bed-day from the patient using its services. The data relating to fees
collected and costs for the year 2024 are as under:

Fees collected during the year Rs. 34,95,625

Variable costs based on patient days 13,57,125
Department fixed costs 6,22,500
Apportioned cost of the hospital administration charges 10,00,000

Besides the above, nursing staff were employed as per the following scale at Rs. 48,000 per annum
per nurse.
Annual Patient days No. of Nurses required
Less than 5,000 3
5,000 – 7,000 4
7,000 – 9,000 6
Above 9,000 8
The projections for the year 2024 are as under:
• The costs other than apportioned overheads will go up by 10%.
• The apportioned overheads will increase by Rs. 2,50,000 per annum.
• The salary of the nursing staff will increase to Rs. 54,000 per annum per nurse.
The occupancy of the bed capacity is not likely to increase in 2024 and consequently the
management is actively considering a proposal to close down the department. In that event, the
department fixed costs can be avoided.

You are required to:

i) Present statements to show the profitability of the department for the years 2023 and 2024.
ii) Calculate the:
(a) Break-even bed capacity for the year 2024.
(b) Increase in fee per bed-day required to justify continuance of the department.

Chapter: Pricing Strategies

Question No. 9:

Beta Ltd. manufactures Product Z in Departments A and B which also manufacture other
products using same plant and machinery. The information of Product Z is as follows:

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Items Department A (Rs.) Department B (Rs.)

Direct Material per Unit 30 25
Direct Labor per Unit (Rs 10 30 40
per hour)
Overhead Rates:
Fixed 8 per hour 4 per hour
Variable 6 per hour 3 per hour
Value of Plant & Machinery 25 lakhs 15 lakhs

Overheads are recovered on the basis of Direct Labor Hours. Variable Selling & Distribution
Overheads relating to Product Z are amounting to Rs 30,000 per month. The product requires a
working capital of Rs 400,000 at the target volume of 1,500 units per month occupying 30% of
practical capacity.

You are required to:

a. Calculate the price of Product Z to yield a contribution to cover 21% rate of Return on
Investment.
b. Set the Minimum Selling Price of the Product if – (i) the product is well established in the
market, (ii) the product is first time launched in the market.

Question No. 10

Surya Oil Limited has three divisions, viz. Harvesting, Processing and Packaging. The Harvesting
division harvest oilseeds and transport the same to Processing division which manufactures olive
oil. The Packaging division packs the oil in 2 kg. (netoil) packet which is sold at Rs. 150. The
Processing plant has a yield of 1,000 kg of oil from 2,000 kg. of oilseeds in a period. The Packaging
division has a yield of 500 packets of oil of 2 kg. each from every 1,000 kg. of oil. The cost data
for each division for the period are as under:
Harvesting division
Variable cost per kg. of oilseed Rs. 2.50
Fixed cost per kg. of oilseed Rs. 5.00
Processing division
Variable cost per kg. of oil produced Rs. 10.00
Fixed cost per kg. of oil produced Rs. 7.50
Packaging division
Variable cost per packet of 2 kg. oil Rs. 3.75
Fixed cost per packet of 2 kg. oil Rs. 8.75
The fixed costs are calculated on the basis of the estimated quantity of 2,000 kg. of oilseeds
harvested, 1,000 kg. of processed olive oil and 500 packets of olive oil packed by the aforesaid
divisions respectively during the period under review.

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The other oil mills buy the oilseeds of the same quality at Rs. 12.50 per kg. in the market. The
market price of the olive oil processed by the oil mill, if sold without being packed in the Packaging
division is Rs. 62.50 per kg.

You are required to:

i) Compute overall profit of the company of harvesting 2,000 kg. of oilseeds, processing it into the
olive oil and selling the same in 2 kg. packets as estimated for the period under review.
ii) Compute the transfer prices under the following pricing method that will be used for internal
transfers from Harvesting division to Processing division; and from Processing division to
Packaging division:
i. Shared contribution in relation to variable costs method; and
ii. Market price method
iii) Which transfer pricing method will each divisional manager prefer to use and why?

Question No. 11

UK Ltd prepared a Draft Budget for the next year as follows:

Quantity 10,000 units

Rs.
Selling Price per Unit 60
Variable Cost per Unit
- Direct Materials 16
- Direct Labor (2 hours x Rs 6) 12
- Variable Overheads (2 hours x Rs 1) 2
Contribution per Unit 30
Total Budgeted Contribution 300,000
Less: Budgeted Fixed Overheads 280,000
Total Budgeted Profit 20,000
The Board of Directors are not satisfied with this Draft Budget and suggested the following
changes for the better profit:

i) The Budgeted Profit is Rs 50,000,

ii) The Company should spend Rs 57,000 on advertisement and the Target Sales Price up to Rs
64 per unit.
iii) It is expected that the Sales Volume will also rise, in spite of the price rise, to 12,000 units.
In order to achieve the extra Production Capacity, however, the work force must be able to reduce
the time taken to make each unit of the product. It is proposed to offer a pay and productivity deal
in which the wages rate per hour is increased to Rs 8. The hourly rate for Variable Overheads will
be unaffected. You are required to calculate the target labor time require to achieve the Target
Profit.

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Chapter: Total Quality Management

Question No. 12:

Supreme Prakashan Ltd is in the business of publishing a leading newspaper which has a wide
customer base. It measures quality of service in terms of –
(i) Print Quantity
(ii) On time Delivery
(iii) Number of Damaged and Unsold Papers.
To improve its business prospects and performance, the Company is considering installing a
scheduling and tracking system which involve an annual additional cost of Rs 3,00,000, beside
Equipment costing Rs 4,00,000 needed for the installation of System. To purchase the Equipment,
the Company is planning to utilize the proceeds of an Investment fetching an Annual Income of
9%. Details, regarding the present and future performance are given as under:

Present Expected

On–Time Delivery 85% 97%

Variable Cost per lot of Newspaper Damaged and Unsold Rs 40 Rs 40
Fixed Cost Rs 50,000 Rs 50,000
No. of lots of Newspaper Damaged and Unsold 6,000 1,000
It is expected that each percentage increase in on time performance will result in Revenue Increase
of Rs 36,000 per annum.
Required Contribution Margin is 40%.
Should Supreme Prakashan Ltd install the New System?

Chapter: Life Cycle Costing

Question No. 13:

Zenith Ltd. manufacturers tablet batteries. The company is preparing a product life cycle budget
for a new type of battery. Development on the new battery is to start shortly. Estimates for the
new battery are as follows:

Life cycle units manufactured and sold 200,000

Selling price per battery Rs 55
Life cycle costs:
R&D and design cost Rs 800,000
Manufacturing:
Variable cost per battery Rs 25
Variable cost per batch Rs 300
Battery per batch 250
Fixed costs Rs 1,200,000
Marketing
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Variable cost per battery Rs 3.50

Fixed costs Rs 800,000
Distribution:
Variable cost per batch Rs 140
Battery per batch 100
Fixed costs Rs 460,000
Customer service cost per battery (Variable) Rs 1.70
Ignore the time value of money.

Required:

i) Calculate the budgeted life cycle operating income for the new battery.
ii) What percentage of the budget total product life cycle costs will be incurred by the end of the
R&D and design stages?
iii) Company’s market research department estimates that reducing price by Rs 2.50 will increase
life cycle unit sales by 8%. If unit sale increases by 8%, the company plans to increase
manufacturing and distribution batch sizes by 8% as well. Assume that all variable costs per
battery, per batch and fixed costs will remain the same. Should the company reduce battery
price by Rs 2.50? Show your calculations.

Chapter: Linear Programming

Question No. 14:

IBM Limited produces three models of computer, which are first required to be machined and then
assembled. The time (in hours) for these operations for each model is as under:
Model Machine Time Assembly Time
GenNext 20 5
iLed 15 4
P4 12 3

The total available machine time and assembly time as 1,000 hours and 1,500 hours respectively.
Selling price and other variable costs for each model are:

GenNext iLed P4
Selling price (NPR.) 3,000 5,000 15,000
Material, Labour and other variable cost (NPR.) 2,000 4,000 8,000

The balance sheet of IBM Limited as on end Ashadh 2080 is as follows:

Liabilities Amount Assets Amount

(NPR.) (NPR.)
Equity Share Capital 100,000 Land 80,000

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Capital Reserve 20,000 Buildings 50,000

Profit and Loss Account 30,000 Plant and Machinery 100,000
Long-term Loan 200,000 Furniture 20,000
Loan from Development Bank 100,000 Vehicles 40,000
Loan from Commercial Bank 50,000 Cash 210,000
Total 500,000 Total 500,000

Other information is:

• The commercial bank loan has to be repaid on 1 Shrawan 2080 whereas development loan has
given its consent to renew the loan.
• The company is required to pay a sum of NPR. 15,000 towards salary.
• Interest on long-term loan is to be paid every month @ 18% per annum. Interest on loan from
development bank and commercial bank may be taken as NPR. 1,500 per month.
• The company has already promised to deliver three GenNext, two iLed and five P4 types of
computers to M/s. Computech next month.
• The level of operation in the company is subject to the availability of cash next month.

The Production Manager of the company is willing to know how many computers of each model
must be manufactured next month, so as to maximize the profit.

Required:
Formulate linear programming problem for the above.

Chapter: Transportation Problem

Question No. 15:

A company has three warehouses A, B and C and four stores W, X, Y and Z. The warehouses have
altogether a surplus of 150 units of a given commodity as follows:

A 50
B 60
C 40

The four stores altogether need also 150 units of the commodity as follows:

W 20
X 70
Y 50
Z 10

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Costs of shipping of one unit of commodity in terms of rupees from warehouse i to store j are as
follows:

Warehouses/ Stores W X Y Z
A 50 150 70 60
B 80 70 90 10
C 15 87 79 81

Schedule the transport to minimize the cost of transportation. Also find out the minimum possible
transportation costs for the given problem.

Chapter: Assignment Problem

Question No. 16:

A company is producing a single product and selling it through five agencies situated in different
cities. All of a sudden, there is a demand for the product in five more cities that do not have any
agency of the company.

The company is faced with the problem of deciding on how to assign the existing agencies to
dispatch the product to the additional cities in such a way that the travelling distance is
minimized. The distances (in km) between the surplus and deficit cities are given in the following
distance matrix.
Deficit City I II III IV V
Surplus city
A 160 130 175 190 200
B 135 120 130 160 175
C 140 110 155 170 185
D 50 50 80 80 110
E 55 35 70 80 105
Determine the optimum assignment schedule.

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Chapter: Network Planning – PERT / CPM

Question No. 17:

The network diagram and relevant table is presented below:

X
W
Y

Activity Normal Normal Cost Crash Duration Crash Cost

Duration (Days) (Rs.) (Days) (Rs.)
T 8 2,250 6 2,750
U 16 1,875 11 2,750
V 14 2,250 9 3,000
W 12 3,000 9 3,750
X 15 1,000 14 2,500
Y 10 2,500 8 2,860

Perform step by step crashing and reduce the project duration by 11 days while minimizing the
crashing cost. What would be the cost of the crashing exercise?

Chapter: Learning Curve Theory

Question No. 18:

A company has just completed the manufacture of 40 units of a new product. The manufacturing
costs are as under:
Rs.
Direct materials 200,000
Direct Labor: 8,000 hours @ Rs. 20 per hour 160,000
Variable overheads 80,000

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Special tools (re-usable) 10,000

Fixed overheads apportioned 100,000
Total 550,000

The company's policy is to add a profit of 12 % on selling price.

The company received another order for 120 units of this product for which the company quoted,
based on its policy on absorption cost basis, a price of Rs. 15,625 per unit. The customer struck
the order to Rs. 11,000 per unit. The company is short of work and so is keen to take up more
orders but it is reluctant to accept this order price because it is against the policy to accept any
price below its cost. The company experiences a learning curve of 90 %.

Required:
i) Compute the gain or loss arising from acceptance of the order at Rs. 11,000 per unit.
ii) Advise whether the company should accept this order for 120 units or not.

Chapter: Simulation

Question No. 19:

A single counter ticket booking center employs one booking clerk. A passenger on arrival
immediately goes to the booking counter for being served if the counter is free. If, on the other
hand, the counter is engaged, the passenger will have to wait. The passengers are served on first
come first served basis. The time of arrival and the time of service varies from one minute to six
minutes. The distribution of arrival and service time is as under:

Arrival / Service Time Arrival (Probability) Service (Probability)

(Minutes)
1 0.05 0.10
2 0.20 0.20
3 0.35 0.40
4 0.25 0.20
5 0.10 0.10
6 0.05 -
Required

i) Simulate the arrival and service of 10 passengers starting from 9 A.M. by using the following
random numbers in pairs respectively for arrival and service.
Random numbers-

(60, 09); (16, 12); (08, 18); (36, 65); (38, 25); (07, 11); (08, 79); (59, 61); (53, 77); (03, 10).

ii) Determine the total duration of

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(1) Idle time of booking clerk and

(2) Waiting time of passengers.

Theory Questions

Question No. 20

Write Short Notes and Discuss on the following:

a) State the importance of random numbers in Monte Carlo Simulation method.

b) Learning curve is the process by which an individual acquires skill, knowledge and
ability. Knowledge of learning curve can be useful both in planning and control. But still
there are some limitations of learning curve theory. Briefly explain the main limitations.
c) "Simulation is an especially valuable tool in a situation where the mathematics needed to
describe a system realistically is too complex to yield analytical solutions." Explain.
d) How are cost variances disposed off in a standard costing system? Explain.
e) What do you mean by back-flushing in JIT system? What are the problems that must be
corrected before it will work properly?
f) “Customer profile is important in charging cost.” Explain this statement in the light of
customer costing in service sector.

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Section 2: Answers

Answer to Question No. 1:

(i) If the company increases production to 1,75,000 cans of ‘EXE’, 1,50,000 empty cans should
be manufactured and additional 25,000 cans should be purchased at Rs 16,875. [Refer W.N. 5
& 6]

If the company increases production to 2,25,000 cans of ‘EXE’, 1,50,000 empty cans should
be manufactured and additional 75,000 cans should be purchased at a cost of Rs 50,625. [Refer
W.N. 5 & 6]

(ii) Additional fixed overheads to be incurred on a new machine: Rs 7,500 Savings per unit if
empty cans are made instead of buying:

Rs 0.675 – Rs 0.6375 = Rs 0.0375

Minimum additional quantity of empty cans to be made to recover the additional fixed costs:

Rs 7,500/ Rs 0.0375 = 2,00,000 empty cans

Installation of the new machine for the manufacture of empty cans will be economical at
production level of 3,50,000 cans per month.

(iii) Evaluation of the Profitability on Sale of “EXE” at the 3 Levels.

Particulars Per Can 150,000 Can 175,000 Can 225,000 Can

(Rs.) (Rs.) (Rs.) (Rs.)
Sales 5.0000 750,000 875,000.00 1,125,000.00
Less: Direct Material 1.8000 270,000 315,000.00 405,000.00
Direct Wages 1.3500 202,500 236,250.00 303,750.00
Variable Overheads 0.3375 50,625 59,062.50 75,937.50
Empty Can Made 0.6375 95,625 95,625.00 95,625.00
Empty Can Purchases 0.6750 16,875.00 50,625.00
Net Gain 131,250 152,187.50 194,062.50

Workings

(1) All Overheads for one carton or 24cans Rs 27

Therefore, per can Overheads (Rs 27/24) 1.125

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Fixed Overheads Allocated for 1,50,000 cans Rs 112,500

Per can Fixed Overheads (Rs 1,12,500 / 1,50,000 cans) Rs 0.75

Variable Overheads per can (Rs 1.125 – Rs 0.75) Rs 0.375

(2) Direct Wage per carton Rs 36

Per can (Rs 36 / 24) Rs 1.50

(3) Direct Materials per carton Rs 54

Per can (Rs 54 / 24) Rs 2.25

(4) Cost of making one empty can:

Particulars Cost per Can Cost % Cost Empty Cost of per

of EXE (Rs.) Empty Can Can (Rs.) can of EXE
without empty
can (Rs.)
Direct Material 2.250 20 0.4500 1.8000
Direct Wages 1.500 10 0.1500 1.3500
Variable 0.375 10 0.0375 0.3375
Overheads
Total 4.125 0.6375 3.4875

(5) Cost of manufacturing/buying of 1,50,000 empty cans of ‘EXE’:

Particulars Empty Can Cost If Empty Can If Empty Can

(Rs.) Made (Rs.) Purchased (Rs.)
Direct Material 0.4500 67,500.00 -
Direct Wages 0.1500 22,500.00 -
Variable Overheads 0.0375 5,625.00 -
Purchase Price 0.6750 - 101,250.00
Total 95,625.00 101,250.00

Company should manufacture the empty cans for a production volume of 1,50,000 ‘EXE’
cans as capacity is available and cost of manufacture is lower.

(6) After the level of 1,50,000 empty cans, the company has to install a new machine involving
a total additional Fixed Overheads of Rs 7,500. The cost of making and buying the
additional cans of 25,000 and 75,000 will be as follows:

Particulars Cost per Can Make (Rs.) Buy (Rs.) Make (Rs.) Buy (Rs.)
(Rs.) 25,000 cans 75,000 cans
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Direct Material 0.4500 11,250.00 - 33,750.00 -

Direct Wages 0.1500 3,750.00 - 11,250.00 -
Variable 0.0375 937.50 - 2,812.50 -
Overheads
Additional 7,500.00 - 7,500.00 -
Overheads
Purchase Price 0.6750 - 16,875.00 - 50,625.00
Total 23,437.50 16,875.00 55,312.50 50,625.00

The cost of buying additional empty cans at both the levels is lower than the cost of their
manufacture

Answer to Question No. 2:

(i) Profit Statement of M/s Satish Enterprises for first and second year on monthly and yearly
basis.

First Year Second Year

Monthly Yearly Monthly Yearly
Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000
Sales revenue: (A) 600 7,200 600 7,200
(3,000 units × Rs. 200)
Material cost 180 2,160 180 2,160
(3,000 units × Rs. 60)
Labor cost 75 900 75 900
(3,000 units × Rs. 25)
Variable overheads 60 720 60 720
(3,000 units × Rs. 20)
Primary packing cost 45 540 45 540
(3,000 units × Rs. 15)
Boxes cost 24 288 24 288
Rs. 3000 units
 12 months  × 400
 
Total fixed overhead 108 1,296 110 1,320
(Refer to working note 1)  Rs. 1296   Rs. 1320 
12 months 12 months
   
12 months
Total cost: (B) 492 5,904 494 5,928
Profit : C = [(A) - (B)] 108 1,296 106 1,272

Working Note:
1. (i)
Fixed overhead First year : (Rs.) Second year (Rs.)
Depreciation 8,96,000 8,96,000
Rs. 2400000 + Rs. 288000 duty
3 years
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Other fixed overheads 4,00,000 4,24,000

Total fixed overheads 12,96,000 13,20,000

(ii) Statement of monthly break - even units of the first year.

Levels - No. of units (Refer to working 1351 -1400 1401 -1450 1451-1500 1501 -
note) 1500
Rs. Rs. Rs. Rs.
Fixed costs (A)
Total fixed, overheads per month 1,08,000 1,08,000 1,08,000 1,08,000
(Refer to working note)
Semi - variable costs (Special boxes 11,200 11,600 12,000 12,400
cost) - (B)
(28 boxes (29 boxes (30 boxes × (31 boxes ×
× Rs.400) × Rs.400) Rs.400) Rs.400)
Total fixed and semi variable costs : 1,19,200 1,19,600 1,20,000 1,20,000
(A+B)
Break-even level of units: 1490 1495 1500 1505
Total fixed and semi - variable costs (Rs. (Rs. (Rs. (Rs.
Contribution per unit 1,19,200 / 1,19,600 / 1,20,000 / 1,20,000 /
Rs.80) Rs.80) Rs.80) Rs.80)

The first and second break-even level of unit viz. 1490 and 1495 units falls outside the range of
1350-1400 and 1401 - 1450 units respectively. Here a monthly break-even level of units is 1,500
units which lies in the range of 1451 - 1500 units.

Statement of yearly break-even points of the first year

Levels - No. of units 17851-17900 17901-17950 17951-18000 18001-18050
Rs. Rs. Rs. Rs.
Fixed costs (A) 12,96,000 12,96,000 12,96,000 12,96,000
Semi -variable costs 1,43,200 1,43,200 1 ,44,000 1 ,44,000
(Special boxes cost) - (B)
(358 boxes × (359 boxes × (360 boxes × (361 boxes ×
Rs.400) Rs.400) Rs.400) Rs.400
Total fixed and semi 14,39,200 14,39,600 14,40,000 14,40,000
variable costs : (A+B)
Break-even level units: 17,990 17,995 18,000 18,005
(Rs. 1,19,200, / (Rs. 1,19,600 (Rs. 1,20,000 (Rs. 1,20,000 /
Rs.80) / Rs.80) / Rs.80) Rs.80)

Have a break-even level of units (on yearly basis) is 18,000 units which lies in the range of 17,951
-18,000 units as well. The other first two figures do not lie in the respective ranges, so they are
rejected.

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Working note:
Rs.
1. Fixed overhead in the first year 12,06,000
Fixed overhead per month 1,08,000
Contribution per unit (S.P. per unit-VC per unit) 80
Hence, the break-even number of units will be above 1,350 units
(Rs. 1,08,000 / Rs. 80)

iii) If the number of toys goes beyond the level of 1,500 numbers, one more box will be required
to accommodate each 50 additional units of toys. In that case the additional cost of a box will
be Rs.400/- this amount can be recovered by the additional contribution of 5 toys. Hence, the
second break-even point in such a contingency is 1,505 toys.

iv) Comments: Yearly break-even point of 18,000 units of toys in the first instance is equal to
12 times the monthly break-even point of 1,500 units, because the monthly and yearly figures
of break-even point fell on the upper limit of the respective range. In the second instance, it
is not so because the monthly and early break-even point fell within the range of 50 toys.

Answer to Question No. 3:

J Ltd. purchases 25,000 units of components to manufacture 25,000 fans annually. The external
purchase price per component is `190 per unit. It has the option of manufacturing these components
in house. The cost structure of manufacturing these components would be as below:

Cost Structure Cost per Component

Unit (Rs.)
Direct Material 80
Direct Labour 75
Variable Factory Overhead (70% of Rs 40) 28
Total 183

(i) Analysis

If J Ltd. decides to manufacture the components in-house, the following would be the financial
impact:

(a) Production Capacity will increase from 25,000 fans to 30,000 fans.

(b) Variable Cost of Production of fan would be Rs 1,710 [(2,500 - 600) -190] per unit.

(c) Fixed Factory Overhead of Rs12 per component would be incurred irrespective of whether
component is produced or not. Therefore, this cost is not considered.

(d) Increase in advertising expense would be Rs 100,000 per month or Rs 12,00,000 annually.

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(e) Overall selling price would reduce from the current rate of Rs 2,500 per fan to Rs 2,375
(95% of Rs 2,500) per fan.

(f) Current contribution considering a procurement price of Rs 190 per component unit, is Rs 600
per fan. As calculated above, if produced in house, the variable cost would be Rs 183 per
component unit. This would result in an increase in contribution by Rs 7 per fan (procurement
price of Rs 190 per component unit less variable cost of Rs 183 per component unit). In
addition, there is an impact of Rs 125 on account of reduction in selling price. Therefore, the
contribution if component produced in house would be Rs 482 per fan (Rs 600+Rs 7-Rs 125).

To summarize the above figures:

Particulars Procurement 25,000 Produce 30,000 Components

Components
Selling price per 2,500 62,500,000 2,375 71,250,000
fan
Contribution per 600 15,000,000 482 14,460,000
fan
Therefore, incremental loss by switching to in house production (on a total basis) would be
Rs 1,740,000 (incremental loss Rs 540,000 – additional advertising expenses Rs 1,200,000).
On a per unit basis, it would result in a loss of Rs 58 per fan.

(ii) Recommendation

As explained above, if production increases from 25,000 fans to 30,000 fans, it would not be
profitable to make these components in house. Overall profit decreased by Rs 17,40,000.
However, J Ltd. may prefer to make component, even though it could be financially beneficial
to buy from outside supplier. Sometimes qualitative factors become very important and can
override some financial benefit. This can be coupled with uncertainty about the supplier ’s
ability or intention to maintain the price, quality, delivery dates of the components etc.

Alternatively, J Ltd. may continue with the sale of 25,000 units without any price reduction
and advertising expenses. The component required for the 25,000 fans may be produced
internally at a cost of Rs 183 per unit. In this situation, the contribution shall be increased by
Rs 1,75,000 (Rs 7 ×25,000 units).

Thus, J Ltd. may choice the alternative after due and careful consideration of the facts
illustrated above.

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Answer to Question No. 4:

(A) Fixed Overhead Variances:

(I) Fixed Overhead Cost Variance:

Standard Fixed Overheads for Actual Production – Actual Fixed Overheads

= Rs 48, 000 – Rs 49, 000
= Rs 1, 000 [A]
Note: Standard fixed overheads for actual production = Actual Production 24, 000 × standard
rate Rs 2 [Rs 44, 000 budgeted fixed overheads / 22, 000 budgeted production = Rs 2]

(II) Fixed Overhead Expenditure Variance:

Budgeted Fixed Overheads – Actual Fixed Overheads

= Rs 44, 000 – Rs 49, 000
= Rs 5, 000 [A]

(III) Fixed Overhead Volume Variance

Standard Rate [Budgeted Quantity – Actual Quantity]
= 2 [22, 000 – 24, 000]
= Rs 4, 000 [F]
The variance is favorable as the actual quantity produced is more than the budgeted quantity.
Reconciliation I = Cost Variance = Expenditure Variance + Volume Variance
1, 000 [A] = Rs 5, 000 [A] + Rs 4, 000 [F]

(IV) Fixed Overhead Efficiency Variance

Standard Rate [Standard Quantity – Actual Quantity]
= Rs 2 [23,760 – 24,000]
= Rs 480 [F]
Note: Standard quantity of production is in reference to actual number of hours. If 22,000
units are produced in 25,000 hrs. [standard hours], in actual 27,000 hours, 23,760 units should
have been produced. When number of days and number of hours, both are given, the standard
quantity is always to be computed in relation to the actual hours. However, if only number of
days is given, the standard quantity will have to be computed in relation to number of days.

(V) Fixed Overhead Capacity Variance

Standard Rate [Standard Quantity – Budgeted Quantity]
= Rs 2 [23,760 – 22,000]
= Rs 3,520 [F]
Reconciliation II = Volume Variance = Efficiency Variance + Capacity Variance
4, 000 [F] = Rs 480 [F] + 3, 520 [F]

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(VI) Fixed Overhead Revised Capacity Variance

= Standard Rate [Standard Quantity – Revised Budgeted Quantity]
= Rs2 [23,760 – 22,880]
= Rs 2 × 880
= Rs 1760 [F]
Note: Standard quantity is computed as shown in the Efficiency Variance. Revised Budget
Quantity is computed as: in 25 days, the production is 22,000 so in 26 days the revised
quantity is 22,880 units.

(VII) Fixed Overhead Calendar Variance

Standard Rate [Revised Budgeted Quantity – Budgeted Quantity]
= Rs 2 [22,880 – 22,000]
= Rs 2 × 880
= Rs 1,760 [F]
Reconciliation III = Capacity Variance = Revised Capacity Variance + Calendar Variance
3, 520 [F] = Rs 1760 [F] + Rs 1760 [F] = 367

(B) Variable Overhead Variances:

(I) Cost Variance:

Standard Variable Overheads for Actual Production – Actual Variable Overheads:
= Rs 36,000 – Rs 39,000
= Rs 3,000 [A]
Note: Standard Variable Overheads for Actual Production = Standard Rate Per Unit × Actual
Production Units = Rs 1.5 [Budgeted variable overheads Rs 33,000 /Budgeted production
units 22,000 = Rs 1.5] × 24,000 units = Rs 36,000
(II) Expenditure Variance:
Standard Variable Overheads for Standard Production – Actual Variable Overheads:
Rs 1.5 × 23, 760 – Rs 39,000 = Rs 3360 [A]
(III) Efficiency Variance:
Standard Rate [Standard Quantity – Actual Quantity] 1.5 [23,760 – 24,000] = Rs 360 [F]

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Answer to Question No. 5:

Reconciliation Statement of Budgeted Profit

Labor
Traditional Material No Scarce Working
Hours
Method Scarce Units Note No.
Scarce
Budgeted profit 5,76,000 5,76,000 5,67,000 5,76,000 15
Direct material usage
2&3
variance 64,000 (A) 1,92,000 (A) 64,000 (A) 64,000 (A)
Direct material price
0 0 0 0
variance
Labor rate variance 0 0 0 0
Labor efficiency variance
4&5
9,000 (A) 9,000 (A) 1,05,000 (A) 9,000 (A)
Variable overhead
6
efficiency variance 48,000 (A) 48,000 (A) 48,000 (A) 48,000 (A)
Variable overhead
7
expenditure variance 36,000 (A) 36,000 (A) 36,000 (A) 36,000 (A)
Fixed overhead efficiency
8
variance 24,000 (A) 0 0 0
Fixed overhead capacity
9 & 10
variance 8,000 (A) 0 32,000 (A) 0
Fixed overhead expenditure
11
variance 8,000 (A) 8,000 (A) 8,000 (A) 8,000 (A)
Sales price variance 0 0 0 0
Sales margin volume
12 & 13
variance 96,000 (A) 0 0 1,28,000
Actual Profit 2,83,000 2,83,000 2,83,000 2,83,000 14

Working Notes:
1. Fixed Overhead rate per hour = 1,92,000/12,000 = Rs. 16
Variable Overhead rate per hour = 3,84,000/12,000 = Rs. 32
Contribution per unit = 2,680 – (640 + 120 + 640) = Rs. 1,280
Contribution per Unit of Material = 1,280/80 = Rs. 16
Contribution per Labor hour = 1,280/20 = Rs. 64
2. Material Usage Variance = SR (SQ – AQ) = 8 {(500 × 800) – 48,000}
= 64,000 (A)
3. Material Scarce = Material Usage Variance + Contribution foregone
= 64,000 (A) + 100 × 80 kg × 16 = 1,92,000 (A)
4. Labor Efficiency Variance = SR (SH – AH) = 6 (500 × 20 – 11,500)
= 9,000 (A)
5. Labor hour Scarce = Labor Efficiency Variance + Contribution foregone
= 9,000 (A) + {64 (500 × 20 – 11,500)} = 1,05,000 (A)
6. Variable Overhead Efficiency Variance = 32 (10,000 – 11,500)
= 48,000 (A)

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7. Variable Overhead Expenditure Variance = SVO – AVO

= 11,500 × 32 – 4,04,000
= 36,000 (A)
8. Fixed Overhead Efficiency Variance = 1,500 hrs. × 16 = 24,000 (A)
9. Fixed Overhead Capacity Variance = SR (AH – BH)
= 16 (11,500 - 20 × 600) = 8,000 (A)
10. Contribution foregone on 500 labor hours = 500 × 64 = 32,000 (A)
11. Fixed Overhead Expenditure Variance = BFO – AFO
= 1,92,000 – 2,00,000 = 8,000 (A)
12. Sales Margin Volume Variance = 100 units × 960 = 96,000 (A)
13. No scarce input hence sales is limiting factor
Contribution foregone = 100 × 1,280 = 1,28,000 (A)
14. Actual Profit
= [(500 × 2,680) – (4,800 × 8) – (11,500 × 6) – (2,00,000 + 4,04,000)]
= Rs. 2,43,000
15. Budgeted Profit = 600 × 960 = Rs. 5,76,000

Answer to Question No. 6:

Budget at 80% capacity utilization

Particulars 60% 80%
Rs. Rs.
Materials 1,200,000 1,560,000
Labor 900,000 1,100,000
Manufacturing Overheads 660,000 780,000
Administrative Overheads 350,000 385,000
Selling and Distribution 500,000 600,000
Overheads
Research and Development 200,000 250,000
Total 3,810,000 4,675,000
Profit 390,000 645,000
Sales 4,200,000 5,320,000

Working Notes:
(1)
Rs. Rs.
Materials at 60% capacity 1,200,000
At 80% capacity 1,600,000
Less: 2-1/2 % 40,000 1,560,000

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(2) Variable fixed portion of various expenses

50% 60% Increase for Total Fixed
Rs. Rs. 10% variable
(variable)
Labor 800,000 900,000 100,000 600,000 300,000
Manufacturing 600,000 660,000 60,000 360,000 300,000
Overhead
Selling 450,000 500,000 50,000 300,000 200,000
Overheads

(3) At 80% capacity:

Labor: Fixed 300,000
Variable (Rs 100,000 for every 10%) 800,000 1,100,000

Manufacturing overheads: Fixed 300,000

Variable (Rs 60,000 for every 10%) 480,000 780,000

Selling overheads: Fixed 200,000

Variable (Rs 50,000 for every 10%) 400,000 600,000

(4) Sales: At 60% capacity 4,200,000

At 80% capacity 5,600,000
Less: 5% 280,000 5,320,000

Answer to Question No. 7:

Activity Cost drive rate Machining

Setup Rs 600 per setup ( Rs 150,000 ÷ 250 setups)

Machining Rs 125 per machine hour (Rs 750,000 ÷ 6,000 machine hours)
Assembly

Assembly Rs 8 per direct labor hour (=Rs 360,000 ÷ 45,000 direct labor hours)
Inspection Rs 900 per inspection (=Rs 90,000 ÷ 100 inspections)
In the following table, the total costs are divided by the number of units to arrive at the unit
cost for each product.
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A B C
Direct Materials in Rs 10,00,000 4,50,000 2,75,000
Direct Labor in Rs 3,75,000 2,25,000 75,000
Applied Overhead
Set Up cost in Rs 600 per setup 75,000 45,000 30,000
Machining cost in Rs 125 per Machine Hours 3,12,500 1,87,500 2,50,000
Assembly cost in Rs 8 per Labor Hour 2,00,000 1,20,000 40,000
Inspection cost in Rs 900 per inspection 45,000 22,500 22,500
Total Overhead Cost in Rs 6,32,500 3,75,000 3,42,500
Total Cost in Rs 20,07,500 10,50,000 6,92,500
Number of Units 25,000 15,000 5,000
Unit Cost in Rs 80.3 70 138.5

Answer to Question No. 8:

(i) Statement showing profitability of Special Health Care Department

(For the years 2023 and 2024)
Year 2023 Year 2024
(Rs.) (Rs.)
Total contribution (Notes 1, 2 & 3) 21,38,000 20,02,788
Fixed cost: 21,38,500 20,02,788
Departmental fixed cost
Apportioned fixed cost 10,00,000 12,50,000
Salary of nursing staff (Rs. 48,000 *6). (Rs. 54,000 2,88,000 3,24,000
* 6)
19,10,500 22,58,750
Profit/(Loss) 2,28,000 (2,55,962)
@ 8,225 bed-days * Rs. 260; 8,225 bed-days * Rs. 243.50
# Based on 8,225 bed-days
(ii) (a) Break-even bed capacity for 2024
= Total fixed cost/ Contribution per bed = Rs. 22,58,750 (Rs. 425 – 181.50)
= Rs. 22,58,750 243.50 = 9,276 bed-days (approx.)

The above answer is not correct, because for 9,276 bed-days, 8 nurses are required. For this,
fixed cost will be as follows:
Departmental fixed cost = Rs. 6,84,750
Apportioned fixed cost = 12,50,000
Nursing staff (Rs. 54,000 * 8) = 4,32,000
= 23,66,750
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Break-even point = Rs. 23,66,750 243.50 = 9,719.17 or 9,720 bed-days

(b) Increase required in fee per bed day to justify continuance Special Health Care Department
Desired contribution = Rs. 22,58,750
Bed-day of occupancy = 8,225
Contribution per day = Rs. 274.62
Less : Variable cost per day = 181.50
Required fee per bed-day 456.12
Increase in fee = Rs. 456.12 – 425.00 = Rs. 31.12.

Working Notes:
1. Total number of bed –days of occupancy:
Rs. 34,95,625 Rs. 425 = Rs. 8,225 bed-days
2. (a) Variable cost per bed-day:
Rs. 13,57,125 8,225 days = Rs. 165 per bed
(b) Variable cost per bed-day in 2024 = Rs. 165 * 1.10 = Rs. 181.50
3. Contribution per bed:
In 2023: Rs. 425 – 165 = Rs. 260 per bed
In 2024: Rs. 425 – 181.50 = Rs. 243.50 per bed
4. Departmental Fixed Costs:
In 2023 (given) = Rs. 6,22,500
In 2024 (10% increase) = Rs. 6,22,500 * Rs. 1.10 = Rs. 6,84,750
5. Apportioned overhead:
In 2023 (given) = Rs. 10,00,000
In 2024 = Rs. 10,00,000 + 2,50,000 = Rs. 12,50,000
6. Nursing Staff Salary:
Year 2023 = Rs. 48,000 * 6 = Rs. 2,88,000
Year 2024 = Rs. 54,000 * 6 = Rs. 3,24,000
7. Total fixed cost in 2023:
Departmental fixed cost = Rs. 6, 22,500
Apportioned fixed cost = 10, 00,000
Salary of Nursing Staff (For 8,225 patient days 6)
Nurses are required as per table given) Rs. 48,000 6 = 2, 88,000
19, 10,500
8. Total fixed cost in 2024:
Departmental fixed cost = Rs. 6, 84,750
Apportioned fixed overhead = 12, 50,000
Nursing staff (6 × Rs. 54,000) = 3, 24,000
22, 58,750

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Answer to Question No. 9:

(a) Computation of Required Sale Price per Unit

Particulars Computation Rs.
Share of Investment in Plant 30% of (Rs 25 lakhs + Rs 15 1,200,000
and Machinery lakhs)
Investment in Working Capital 400,000
Total Investment 1,600,000
Required ROI = 21%. So, 21% on Rs 1,600,000 336,000
Required EBT p.u.
Required EBT per unit per (Rs 336,000 / 12 months) / 18.67
month 1,500 units
Variable OH p.u. specifically Rs 30,000 / 1,500 units 20.00
for Product Z
Material cost p.u. Dept A: Rs 30 + Dept B: Rs 25 55.00
Labour cost p.u. Dept A: Rs 30 + Dept B: Rs 40 70.00
VOH p.u. (Dept A: Rs 6 ph x 3 hrs) + 30.00
(Dept B: Rs 3 ph x 4 hrs)
FOH p.u. (Dept A: Rs 8 ph x 3 hrs) + 40.00
(Dept B: Rs 8 ph x 4 hrs)
Required Sale Price p.u. 233.67
Note: Alternatively, FOH of Rs 40 p.u. can also be excluded, since other products are also
produced using same plant and machinery.

(b) Computation of Sale Price

(i) If the product is well established in the (ii) If the product is launched for the first time in
market, the minimum sale price can range from the market, the minimum sale price can range
- from -
Total cost = Rs 215 Variable cost = Rs 175
Total cost + Profit margin = Rs 233.67 Total cost = Rs 215
So, Price Range = Rs 215.00 to Rs 233.67 So, Price Range = Rs 175.00 to Rs 215.00

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Answer to Question No. 10:

i) Profitability Statement of Surya Oil Limited

Harvesting division Processing division Packaging division
Output 2,000 kg. oilseeds 1,000 kg olive oil 500 packets Total
Sales (500 x 150) 75,000
Less: Cost
Variable cost 2,000 x 2.5 = 5,000 1,000 x 10 = 10,000 500 x 3.75 = 1,875 16,875
Fixed cost 2,000 x 5 = 10,000 1,000 x 7.5 = 7,500 500 x 8.75 = 4,375 21,875
Total 15,000 17,500 6,250 38,750
Profit 36,250

ii. Computation of Transfer Price:

a. Shared contribution in relation to variable costs method

From Harvesting division to Processing division
Variable cost = NPR5,000
Shared contribution of Harvesting division
in relation to variable cost = NPR. 17,222
Therefore, transfer pricing = NPR 22,222

From Processing division to Packaging division

Variable cost = NPR 10,000
Transfer price from Harvesting division to Processing division = NPR 22,222
Shared contribution of Processing division in relation to
variable cost = NPR 34,445
Therefore, transfer pricing = NPR 66,667

b. Market price method

From Harvesting division to Processing division
Market price of oilseeds transferred to Processing division = NPR. 12.50 / kg.
Oilseeds transferred = 2,000 kg.
Therefore, transfer pricing = 12.50 x 2,000 = 25,000

From Processing division to Packaging division

Market price of olive oil transferred to Packaging division = NPR. 62.50 / kg.
Olive oil transferred = 1,000 kg.
Therefore, transfer pricing = 62.50 x 1,000 = 62,500

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iii. Profitability Statement of transfer price

Under Shared Contribution Method
Harvesting Processing Packaging
Description division to division to division to
Processing Packaging Market
division division
Total Transfer Price 22,222 66,667 75,000
(NPR.)
Less:
1. Transfer Price from other
division ‘ - 22,222 66,667
2. Variable cost 5,000 10,000 1,875
3. Fixed cost 10,000 7,500 4,375
Profit 7,222 26,945 2,083

Under market price method

Harvesting division Processing Packaging
Description to Processing division to division to
division Packaging division Market
Total Transfer Price 25,000 62,500 75,000
(NPR.)
Less:
4. Transfer Price from
other division - 25,000 62,500
5. Variable cost 5,000 10,000 1,875
6. Fixed cost 10,000 7,500 4,375
Profit 10,000 20,000 6,250
Division managers of Harvesting division and Packaging division would like to use market pricing
method of transfer pricing as this would increase their profit by NPR. 2,778 (10,000 - 7,222) and
NPR.4,167 (6,250 – 2,083) respectively.

The division manager of the Processing division, however, would like to use shared contribution
method of transfer pricing as this would increase his profit by NPR. 6,945 (26,945 - 20,000).

Working notes:
1. Total contribution = Sales – Variable cost = = 75,000 – 16,875 = 58,125
2. Shared contribution amount in relation to variable cost:
Harvesting division = (58,125/16,875) x5,000 = 17,222
Processing division = (58,125/16,875) x 10,000= 34,445
Packaging division = (58,125/16,875) x 1,875 = 6,458

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Answer to Question No. 11:

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡+𝑇𝑎𝑟𝑔𝑒𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 (280,000+57,000)+50,000
1. Target Contribution Per Unit = =
𝑆𝑎𝑙𝑒𝑠 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 12,000 𝑢𝑛𝑖𝑡𝑠

=Rs 32.25 per Unit

2. Target Variable Cost Per Unit = New sale Price – Target Contribution pu

= Rs 64 – Rs 32.25 = Rs 31.75 Per Unit

3. Direct Materials + Direct Labor + VOH = Rs 16+ (H × Rs 8) + (H × Rs 1)

= Rs 31.75

Solving, we have 9H = 15.75.

So, H = 15.75 / 9 = 1.75 Hours per unit. Target labor time required is 12000×1.75= 21,000 hours

Answer to Question No. 12:

Relevant Costs Rs. Relevant Benefits Rs.

Annual costs of new system 300,000 Contribution Earned (Rs 36,000 172,800
(given) x 12 times x 40%)
Income lost on capital investment 36,000 Savings in Variable Costs: 200,000
(Rs 400,000 x 9%) (6,000 – 1,000) x Rs 40
Fixed Costs (Apportionment and Nil
not relevant)
Net Benefit (Balancing figure) 36,800
Total 372,800 372,800
Decision: Supreme Prakashan Ltd should implement the new system.

Answer to Question No. 13:

(i) Statement of Budgeted Life Cycle revenue and cost

Revenue (200,000 × 55 ) 11,000,000

Costs:

Pre-Manufacturing Cost Rs.

Research and design 800,000
Manufacturing costs:
Variable cost (25 x 200000) 5,000,000

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Batch (300 x 200000/250) 240,000

Fixed cost 1,200,000
Marketing costs:
Variable Costs (3.5 x 200000) 700,000
Fixed cost 800,000
Distribution cost
Batch (140 x 200000/100) 280,000
Fixed cost 460,000
Customer service (variable) 1.7 x 200000 340,000
Total cost 9,820,000
Operating Income 1,180,000

(ii) Budgeted product life cycle costs for R&D and design Rs 8,00,000

Total budgeted life cycle product costs Rs 98,20,000

Percentage of budgeted product life cycle cost incurred.
Till the R&D and design Rs 8,00,000/98,20,000 = 8.14%

(iii) Statement of Revised Budgeted Life Cycle revenue and cost

Revenue (2,16,000 × 52.50) 11,340,000

Costs:

Pre-Manufacturing Cost Rs.

Research and design 800,000
Manufacturing costs:
Variable cost (25 x 216000) 5,400,000
Batch (300 x 216000/270) 240,000
Fixed cost 1,200,000
Marketing costs:
Variable Costs (3.5 x 216000) 756,000
Fixed cost 800,000
Distribution cost
Batch (140 x 216000/108) 280,000
Fixed cost 460,000
Customer service (variable) 1.7 x 216000 367,200
Total cost 10,303,200
Operating Income 1,036,800
Since profit is lower, price should not be reduced.

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Answer to Question No. 14:

Let X1, X2 and X3 denote the number of GenNext, iLed and P4 computers respectively to be
manufactured by the company.
Profitability
GenNext iLed P4
Selling price (NPR.) 3,000 5,000 15,000
Material, Labor and other variable cost (NPR.) 2,000 4,000 8,000
Profit per unit (NPR.) 1,000 1,000 7,000

Since the company wants to maximize the profit, the objective function is given by;
Maximize Z = 1,000X1 + 1,000X2 + 7,000X3 – (15,000+3,000+1,500)

From the data given for time required for various models and the total number of hours available
for machine time and assembly time, we get the following constraints:
20X1 + 15X2 +12X3 ≤ 1,000 (Machine time restriction)
5X1 + 4X2 +3X3 ≤ 1,500 (Assembly time restriction)

The level of operation in the company is subject to the availability of cash next month. i.e. the
cash required for manufacturing various models should not exceed the cash available for the next
month. The cash requirements for X1 units of GenNext, X2 units of iLed and X3 units of P4
computers are:
2,000X1 + 4,000X2 + 8,000X3 ----------------------------------- (1)

The cash available for the next month from the balance sheet is as follows:
Cash availability = Cash balance – Loan to repay commercial bank – Interest on loan from
development bank and commercial bank – Interest on long-term loans – Salary to staff
= 210,000 – 50,000 – 1,500 – (200,000 x 18%/12) -15,000
= 140,500 ----------------------------------- (2)

Thus from (1) and (2) above, 2,000X1 + 4,000X2 + 8,000X3 ≤ 140,500

The company has also promised to deliver three units of GenNext, 2 units of iLed and five units
of P4 computers to M/s. Computech. Hence, X1 ≥ 3, X2 ≥ 2, X3 ≥ 5
Now, the linear programming formulation of the given problem will be as follows:

Maximize Z = 1,000X1 + 1,000X2 + 7,000X3 – (15,000+3,000+1,500)

Subject to the constraints:
20X1 + 15X2 +12X3 ≤ 1,000
5X1 + 4X2 +3X3 ≤ 1,500
2,000X1 + 4,000X2 + 8,000X3 ≤ 140,500
X1 ≥ 3, X2 ≥ 2, X3 ≥ 5
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X1, X2 and X3 can take only positive integral values.

Answer to Question No. 15:

Transportation problem – Vogel's Approximation Method

Table - 1

Stores W X Y Z Total Supply Column Diff.

Warehouse
A 50 150 70 60 50 10
B 80 70 90 10 60 60
C 15 87 79 81 40 64
20 20
Total Demand 20 70 50 10 150
Row Difference 35 17 9

Table – 2

Stores W X Y Z Total Supply Column Diff.

Warehouse
A 50 150 70 60 50 10
×
B 80 70 90 10 60 60
× 50 10
C 15 87 79 81 40 2
20 20
Total Demand 20 70 50 10 150
Row Difference F 17 9 50

Table – 3

Stores W X Y Z Total Supply Column Diff.

Warehouse
A 50 150 70 60 50 80
× 20 30 ×
B 80 70 90 10 60 20
× 50 10
C 15 87 79 81 40 8
20 20 ×
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Total Demand 20 70 50 10 150

Row Difference F 17 9 F

Table - 4

K1 = 6, K2 = 150, K3 = 70, K4 = 90

Stores W X Y Z Total Supply

Warehouse
R1 = 0 A + - 50
20 30
R2= -80 B 60
50 10
R3 = 9 C 40
20 - 20
+
Total Demand 20 70 50 10 150

Finding R and K values

R and K store squares Corresponding

R 1 + K2 150
R1+K3 70
R2+K2 70
R2+K4 10
R3+K1 15
R3+K3 79
Taking,
R1 = 0
K2 = 150
K3 = 70
R2 = -80
K4 = 90
K1 = 6
R3 = 9

Whether,
R + K values & water Yes or No If Yes by how much
square > cost
R1+K1 = 6 > 50 No
R1+K4 = 90 > 60 Yes 30

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R2+K1 = -74 > 80 No

R2+K3 = -10 > 90 No
R3+K2 = 159 > 87 Yes 72
R3+K4 = 99 > 81 Yes 18

The home square is R3 K2 and the path traced is R3 K2 → R1 K1 → R1 K3 → R3 K3 → R3 K2, which

has been shown in the above table and the new assignment is as follows:

Stores W X Y Z Total Supply

Warehouse
A 50 50

B 50 10 60

C 20 20 40

Total Demand 20 70 50 10 150

Hence, minimum possible transportation cost

Cost of sending 50 units from warehouse A to store Y=50×70 = Rs. 3,500

50 units from warehouse B to store X = 50×70 = Rs. 3,500
10 units from warehouse B to store Z = 10×10 = Rs. 100
20 units from warehouse C to store W = 20 × 15 = Rs. 300
20 units from warehouse C to store X = 20×87 Rs. 1,740
Total minimum possible cost Rs. 9,140

Answer to Question No. 16:

Subtracting the minimum element of each row from every element of that row, we have
I II III IV V
A 30 0 45 60 70
B 15 0 10 40 55
C 30 0 45 60 75
D 0 0 30 30 60
E 20 0 35 45 70

Subtracting the minimum element of each column from every element of that column,
we have
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I II III IV V
A 30 0 35 30 15
B 15 0 0 10 0
C 30 0 35 30 20
D 0 0 20 0 5
E 20 0 25 15 15
We now assign zeroes by drawing rectangles around them. Thus, we get.
I II III IV V

A 30 0 35 30 15
B 15 0 0 10 0

C 30 0 35 30 20

D 0 0 20 0 5

E 20 0 25 15 15

Since the number of assignments is less than the number of rows (or columns), we proceed
from Step 5 onwards of the Hungarian method as follows:
i) we tick mark ( ) the rows in which the assignment has not been made. These are the
3rd and 5th rows.

ii) we tick mark ( ) the columns which have zeroes in the marked rows. This is the
2nd column.

iii) we tick mark ( ) the rows which have assignments in marked columns. This is the
1st row.

iv) again we tick mark ( ) the column(s) which have zeroes in the newly marked row.
This is the 2nd column, which has already been marked. There is no other such column.
So, we have

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I II III IV V
A 30 0 35 30 15

B 15 0 0 10 0

C 30 0
35 30 20

D 0 0 20 0 5

E 20 0 25 15 15

We draw straight lines through unmarked rows and marked columns as follows:

I II III IV V
A 30 0 35 30 15

B 15 0 0 10 0

0 20
C 30 35 30
0 5
D 0 20 0
0
E 20 25 15 15

We proceed as follows, as explained in step 6 of the Hungarian method:

i) We find the smallest element in the matrix not covered by any of the lines. It is 15 in
this case.
ii) We subtract the number ‘15’ from all the uncovered elements and add it to the
elements at the intersection of the two lines.
iii) Other elements covered by the lines remain unchanged. Thus, we have

I II III IV V

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A 15 0 20 15 0
B 15 15 0 10 0
C 15 0 20 15 5
D 0 15 20 0 5
E 5 0 10 0 0

We repeat Steps 1 to 4 of the Hungarian method and obtain the following matrix:

I II III IV V
A 15 0 20 15 0
B 15 15 0 20 0
C 15 0 20 15 5

D 0 15 20 0 5

E 5 0 10 0 0
Since each row and each column of this matrix has one and only one assigned 0, we obtain the
optimum assignment schedule as follows:

A → V, B → III, C → II, D → I, E → IV

Thus, the minimum distance is 200 + 130 + 110 + 50 + 80 = 570 km.

Answer to Question No. 17:

1. Paths Table
Path Normal Days Minimum Duration after Stage
Days
I II III
W-X-Y 12+15+10 = 37 9+14+8 = 31 37 days 37 days 37-1 = 36
days
T-U-V-Y 8+16+14+10=48 6+11+9+8 = 48 – 5 = 43 43-5 = 38 38-1 = 37
34 days days days

2. Slope Table, i.e. Crash Costs per Day

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Activity T U V W X Y
Crash Costs per day 250 175 150 250 1500 180
Note: Crash costs per day = (Crash costs – Normal costs) / (Normal Time – Crash Time)

3. Crashing Table
Stage Evaluation Decision & Crash Cumulative
Costs Crash Costs
I Critical Path is T-U-V-Y. Activity V has least Crash V for 5 days 750
slope and can be crashed for maximum 5 Cost: 5 x 150 = 750
days. Also, difference between the Paths = 48-
37 = 11 days
II Critical Path is T-U-V-Y. Activity U has least Crash U for 5 days 1,625
slope among the activities that have not been Cost: 5 x 175 = 875
crashed, and can be crashed for 5 days. Also,
difference in duration between the Paths = 43-
37 = 6 days
III Critical Path is T-U-V-Y. Activity Y has least Crash Y for 1 day 1,805
slope among the uncrashed activities and can Cost: 1 x 180 = 180
be crashed for maximum 2 days, but to meet
given requirement of crashing 11 days, it is
enough to crash Y by 1 day.

Answer to Question No. 18:

First order for 40 units:
Total costs 5,50,000
No. of units 40
Cost per units Rs. 13,750
Profit = 12% on price
13,750
Price Quoted = ×100 = Rs. 15,625
88
Second Order:
Learning Curve 90%
No. of Units Time Cumulative Time Per Unit
40 8,000 200
200 × 0.9 = 180
80 80 × 180 = 14,400 hrs.
160 160 × 162 = 25,920 hrs. 180 × 0.9 = 162

Time required for 120 units = 25,920 – 8,000 = 17,920 hrs.

Cost Sheet:
Direct Materials
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200,000 600,000
= 500 × 120
40
Direct Labor
17,920 hrs. × 20 358,400
Variable overheads
17,920 hrs. × 10 179,200
Special Tools – (re-useable) Hence Nil
Fixed overheads – Idle capacity
No opportunity cost Nil
Total Cost 1,137,600
Cost/unit (1,137,600/120) Rs. 9,480
Price offered Rs. 11,000
Profit per unit Rs. 1,520
Total Profit 1,520 × 120 Rs. 182,400

Decision : The order should be accepted

Answer to Question No. 19:

Random Allocation Table
Time Arrival Arrivals Random Time Service Service Random
(in (Probability) Cumulative No. (Probability) Cumulative No.
minutes) Probability Allocated (Probability) Allocated

1 0.05 0.05 00-04 1 0.10 0.10 00-09

2 0.20 0.25 05-24 2 0.20 0.30 10-29
3 0.35 0.60 25-59 3 0.40 0.70 30-69
4 0.25 0.85 60-84 4 0.20 0.90 70-89
5 0.10 0.95 85-94 5 0.10 1.00 90-99
6 0.05 1.00 95-99

Simulation of Trials
Arrival Time Waiting Time
Finish
R. No. (in Time Start R. No. (in Clerk Passenger
Time
minutes) minutes)
60 4 9.04 9.04 09 1 9.05 4 -
16 2 9.06 9.06 12 2 9.08 1 -
08 2 9.08 9.08 18 2 9.10 - -
36 3 9.11 9.11 65 3 9.14 1 -

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38 3 9.14 9.14 25 2 9.16 - -

07 2 9.16 9.16 11 2 9.18 - -
08 2 9.18 9.18 79 4 9.22 - -
59 3 9.21 9.22 61 3 9.25 - 1
53 3 9.24 9.25 77 4 9.29 - 1
03 1 9.25 9.29 10 2 9.31 - 4
Total 6 6

In the above ten trial, the clerk was idle for 6 minutes and the passengers had to wait for 6
minutes.

Answer to Question No. 20:

a) Importance of random numbers in Monte Carlo Simulation:
▪ Random number is a number in a sequence of numbers whose probability of occurrence is
the same as that of any other number in that sequence.
▪ In Monte Carlo Simulation method, it helps to solve the problems:
- Depend upon probability
- Where physical experimentations is not possible
- Where creation of mathematical formula is not possible.

b) Following are the limitations of Learning Curve Theory:

a) All activities of a firm are not subject to learning effect. Following types of activities are
subject to learning effect:
i. Those that have not been performed in this present operational mode.
ii. Those, which are being performed by new workmen, new employee or others not
familiar with the particular activity. In contrast, activities being performed by
experienced workmen, who are thoroughly familiar with those activities, will not be
subject to learning effect.
iii. Those involving utilization of material not used by firm so far.
b) It is correct that learning effect does take place and average time taken is likely to reduced.
But in practice it is highly unlikely that there will be regular consistence rate of decrease,
as exemplified earlier. Therefore, any cost predictions based on conventional learning
curves should be viewed with caution.
c) Considerable difficulty arises in obtaining valid data that will form basis for computation
of learning effect.
d) Even slight change in circumstances quickly renders the learning curve obsolete. While the
regularity of conventional learning curves can be questioned, it would be wrong to ignore
learning effect all together in predicting future cost for decision purposes.

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c) Simulation means imitation. It a quantitative technique model which imitate real world
situations, there are large numbers of mathematical models available for managerial decision-
making. However, in a real-life situation, decisions cannot be taken purely based on these
mathematical techniques and in such situation simulation becomes a most popular
computational technique.
Simulation utilizes a computerized mathematical model in order to represent actual decision-
making under conditions of uncertainty for evaluating alternative course of action based on
facts and assumptions. It is process of experimenting and noting the results. In a business
context, experimenting process includes trying different input values and observing the
resulting output values.
Simulation is an appropriate tool for solving a problem when experimenting on the real system
will be impossible or too expensive. Similarly, when a mathematical model is too complex,
simulation is a convenient tool to provide information on all important decision making
process. In such a situation, the number of uncertain variables will be large and the probability
analysis will not provide a realistic impression of possible variations in outcome. Moreover,
the resulting output value of such mathematic technique may also not be realistic.
Complex mathematics technique also warrants huge number of personnel to analyze the input
variables for ensuring realistic resulting output values. Simulation attempts a trial-and-error
method towards the optimal solution. Therefore, it is more convenient to use as compared to
complex mathematical system in such situation.

d) There is no unanimity of opinion among Cost Accountants regarding the disposition of

variances. The following are commonly used methods for their disposition.
(i) Transfer all variances to Profit and Loss Account. Under this method, stock of work-in-
progress, finished stock and cost of sales are maintained at standard cost and variances
arising are transferred to profit and loss account.
(ii) Distributing variances on pro-rata basis over the cost of sales, work-in-progress and
finished goods stocks by using suitable basis.
(iii) Write off quantity variance to profit and loss account and spread price variance over to
cost of sales, work in progress and finished goods. The reason behind apportioning
variance to inventories and cost of sales is that they represent costs although they are
derived as variances.

e) Backflushing requires no data entry of any kind until a finished product is completed. At that
time the total amount finished is entered into the computer system, which multiples it by all
the components listed in the bill of materials for each item produced. This yields a lengthy list
of components that should have been used in the production process and which is subtracted
from the beginning inventory balance to arrive at the amount of inventory that should now be
left of hand. Back the entire production process. Given the large transaction volumes
associated with JIT, this is an ideal solution to the problem.

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The following problems must be corrected before it will work properly:

(i) Production reporting
(ii) Scrap reporting
(iii) Lot tracing
(iv) Inventory accuracy.

f) The customer costing is a new approach to management. The central theme of this approach
is customer satisfaction. In some service industries, such as public relations, the specific
output of industry may be difficult to identify and even more difficult to quantify. Further
there are multiple customers, identifying support activities i.e. common costs with particular
customer may be more problematic. In such cases it is important to cost customer. An ABC
analysis of customers profitability provides valuable information to help management in
pricing customer. Consider a banking sector. A bank’s activities for customer will include the
following types of activities. These are:

(i) Stopping a Cheque

(ii) Withdrawal of Cash

(iii) Updating of Passbook

(iv) Issue of Duplicate Passbook

(v) Returning a Cheque because of Insufficient Funds

(vi) Clearing of a Customer Cheque

Different customers or categories of customers use different amount of these activities and so
customer profiles can be built up and customer can be charged according to the cost to serve
them.

Customer profile is important in analyzing cost under the following categories-

(i) Customer Specific Costs: These are the direct and indirect cost of providing service to
customer plus customer related cost assigned to each customer. For example: cost of
express courier service to a client who requests over-night delivery of some agreement.

(ii) Customer – Line Categories: These are the costs which are broken into broad
categories of customers and not individual customers.

(iii) Company Costs: These are those costs which are not allocated to either customer line
or individual customers but charge to company. The example is the cost of
advertisement to promote sale of service.

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Section 3: Exam tips to students:

Tip 1. Understand the Syllabus:

Understanding the syllabus in depth is the foundation of your exam preparation. It's essential to
know what specific topics will be covered in the exam. This involves not only reading the syllabus
but also grasping the depth and breadth of each topic. Some topics may be more heavily weighted
than others, so prioritize your study time accordingly.

Tip 2. Organize Your Study Space:

Creating an organized study space is crucial for maintaining focus and productivity. Ensure that
your study environment is free from distractions, well-lit, and comfortable. Having all your study
materials within arm's reach, including textbooks, notebooks, and stationery, eliminates the need
for frequent interruptions and keeps you in a study mindset.

Tip 3. Create a Study Schedule:

A study schedule is a roadmap that guides your preparation. It should be specific, realistic, and
tailored to your strengths and weaknesses. Allocate sufficient time to each topic based on its
complexity and your familiarity with it. Setting clear goals for each study session helps you
measure your progress and stay motivated.

Tip 4. Review Lecture Notes and Textbooks:

Reviewing lecture notes and textbooks is fundamental to mastering the course material. Go
through your class notes or self-study books systematically, ensuring that you understand the
concepts discussed during lectures. While reading textbooks, actively engage with the material by
highlighting key points and creating concise summaries or flashcards for quick revision.

Tip 5. Practice Problems:

Cost and Management Accounting often involve numerical calculations and problem-solving.
Practice is essential to become proficient in applying concepts. Start with basic problems and
gradually move to more complex ones. Work on a variety of problems to ensure a comprehensive
understanding of different scenarios and calculations.

Tip 6. Use Additional Resources:

Sometimes, you may encounter topics that are challenging to grasp from your primary materials.
In such cases, don't hesitate to seek out additional resources. Online tutorials, other Institute's
material, video lectures, or study guides can provide alternative explanations and examples that
might resonate better with your learning style.

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Tip 7. Study in Groups:

Studying in groups can be highly beneficial. Explaining concepts to others and engaging in
discussions can reinforce your understanding. It also allows you to learn from your peers, as they
may have different insights and approaches to solving problems. Collaborative learning can be
particularly useful for challenging topics. Tip 8. Past Papers and Sample Exams: Past exam papers
and sample exams are invaluable resources for exam preparation. They provide insight into the
format, structure, and types of questions that you can expect on the actual exam.

Solving these papers under timed conditions helps you practice time management and refine your
exam strategy.

Tip 9. Time Management:

Effective time management during the exam is crucial. Allocate a specific amount of time to each
section or question based on its weight and complexity. Stick to your time allocations to ensure
you have ample time to address all questions. If you get stuck on a particular question, make a note
to return to it later rather than dwelling on it excessively.

Tip 10. Take Breaks:

Studying for extended periods without breaks can lead to burnout and reduced productivity.
Schedule short, regular breaks during your study sessions. These breaks provide an opportunity to
recharge, clear your mind, and maintain focus when you return to your studies. A balanced study-
rest cycle is more sustainable in the long run. These tips, when followed diligently, can
significantly enhance your preparation for a Cost and Management Accounting exam. Remember
that consistent effort, effective study techniques, and a well-structured plan are the keys to
achieving success in your exams.

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Paper 8 – Strategic Management and

Decision-Making Analysis

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SECTION 1: QUESTIONS

Chapter 1 - Concept of Strategy

Question No. 1

What do you mean by Strategy? It is said that professional accountants should be aware of the
importance of strategic thinking. Give a proper justification for this concept.

Question No. 2

Write short notes on:

a. Corporate Level Strategy
b. SWOT analysis

Chapter 2 - Strategic Management

Question No. 3

Strategic management is a managerial process of formulating strategies, implementing strategies,

controlling strategic performance and making corrective strategic adjustments. Discuss the statement.

Chapter 3 - Environmental Analysis

Question No. 4

Imagine you are the CEO of a thriving tech startup, "InnoTech Solutions," specializing in developing
cutting-edge software solutions. What factors do you consider while scanning the environment to make
informed business decisions for InnoTech Solutions?

Chapter 4 - Internal Analysis

Question No. 5

Write short notes on:

a. Characteristics of Unique resources
b. Primary activities under value chain

Question No. 6

Examine the process of preparing a Strategic Advantage Profile and its role in facilitating strategic
implementation within organizations.

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Chapter 5 - Strategic Options

Question No. 7

How can businesses strategically evaluate the various options presented in the Strategic Clock
framework in dynamic market environments?

Question No. 8

Write short notes on:

a. Reasons for Diversification

b. Market Development

Chapter 6 - Strategy Formulation and Strategic Choice

Question No. 9

What are the different approaches for strategic choice, and how do they influence decision-making
processes within organizations?

Chapter 7 - Strategy Implementation

Question No. 10

ABC Co. operates exclusively in the furniture business. You have been appointed as a consultant for
the company. Provide your suggestions to the company's manager regarding the proper design of
organizational structure for strategic implementation, along with its advantages and disadvantages.

Question No. 11

Explain the concept of Reengineering in strategy implementation. What are the steps followed in
reengineering?

Chapter 8 - Strategy Evaluation

Question No. 12

When strategy drives, the evaluation is likely to be more effective. In light of this statement, explain
the major characteristics of strategy evaluation.

Question No. 13

Compare between strategic evaluation and operational evaluation.

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Chapter 9 – Strategic Change Management

Question No. 14
Describe the various types of strategic change and what circumstances would each type be most
appropriate for an organization seeking strategic change? Provide examples to illustrate your
answer.

Question No. 15

As the IT expert at XYZ Company responsible for migrating from conventional to contemporary
technology solutions, critically evaluate the impact of technology-based approaches on strategic
change management processes within the organization.

Chapter 10 - Role of Chief Executive in Strategy

Question No. 16

As the Chief Executive Officer of an organization, what are your key roles in strategy formulation?
Discuss.

Chapter 11 - Decision Making Process and Techniques

Question No. 17

Critically evaluate the effectiveness of each stage of strategic decision-making process.

Question No. 18

Describe the different techniques used in strategic decision making.

Chapter 12 - Strategic Management and Decision-Making Practices in Nepal

Question No. 19

In the context of Nepal's strategic management, critically examine the barriers to effective strategy
implementation outlined in organizational structures, management systems, resource allocation, and
cultural norms.

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Chapter 13 - Case Studies

Question No. 20

Read the following case carefully and answer the questions given below:

XYZ Company, a multinational manufacturing organization established in the 1980s, initially

specialized in industrial machinery and equipment. The Company experienced rapid growth and
success in its initial years, becoming a prominent player in its sector.

However, recent years brought a multitude of challenges for XYZ Company. Diversification into
various sectors like automotive components, electronics, and consumer goods lacked strategic
planning, resulting in substantial expenses without corresponding revenue growth. Intensified
global competition, particularly in the traditional industrial machinery sector, squeezed profit
margins as rivals offered similar products at lower prices. Moreover, uncertain economic
conditions led to sluggish consumer spending and operational disturbances.

The turning point arrived with the appointment of Ramesh Sharma as the new CEO. Under his
leadership, XYZ Company embarked on a comprehensive strategic service to address its financial
challenges. Through rigorous cost-cutting measures and operational reform, the company managed
to reduce expenses significantly while driving revenue growth. In the past fiscal year alone, XYZ
Company saw a remarkable 15% increase in revenue, marking a substantial improvement from
previous years. Additionally, operational efficiency improvements led to a 10% reduction in
expenses, bolstering profitability and financial stability.

Recognizing the imperative of environmental sustainability, CEO Ramesh Sharma prioritized

investments in green technologies and eco-friendly practices across XYZ Company's operations.
This strategic move not only aligns with evolving consumer preferences but also underscores the
company's commitment to corporate social responsibility. Moreover, a renewed focus on
innovation through investment in research and development has positioned XYZ Company to
develop cutting-edge products and solutions tailored to meet the evolving needs of consumers and
market demands.

CEO Ramesh Sharma's strategic vision emphasizes stability as a cornerstone of XYZ Company's
growth strategy. By consolidating existing market share and identifying core operations, the
company aims to navigate market fluctuations and economic uncertainties adeptly. Furthermore,
targeted investments in research and development aim to tap into growth opportunities in new
geographic regions and market segments.

In summary, under CEO Ramesh Sharma's leadership, XYZ Company has experienced a
remarkable financial turnaround. Improved revenue growth, cost reduction, and employee
satisfaction underscore the company's renewed vitality and strategic foresight, positioning it for
sustained success in the dynamic global marketplace.

Questions:
a. Critically examine the strategy option made by CEO Ramesh Sharma.
b. Analyze the external environment of XYZ Company in terms of economic environment.
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SECTION 2: ANSWERS

Answer to Question No. 1:

A strategy is defined as a unified, comprehensive, and integrated plan that relates the strategic
advantages of the firm to the challenges of the environment which is designed to ensure that the basic
objectives of the enterprise are achieved through proper execution by the organization. In general,
strategy is long-term focused; action-oriented, helps adapt to a changing environment, and satisfies
stakeholder expectations.

In today's dynamic business landscape, strategic thinking skills are imperative for professionals across
all sectors, including professional accountants. This is particularly relevant in Nepal, where the
accounting environment is undergoing significant transformations due to the adoption of international
standards such as IFRS, ISA, and the new Commercial Code. Professional accountants are involved in
diverse roles, including auditing, consultancy, and managerial positions, both in public and private
sector organizations. Moreover, globalization, liberalization, and technological advancements are
reshaping the accounting profession on a global scale. Strategic thinking serves as a navigational tool,
offering a roadmap for long-term objectives and guiding action plans. Professional accountants should
indeed be aware of the importance of strategic thinking due to several compelling reasons:

i. Long term Horizon: Professional accountants need to look forward for 5 to 20 years in future.
This is essential for their survival and growth in the age of growing competition. Strategic
thinking is must to look forward. Professional accountant in the corporate world cannot succeed
without strategic thinking.
ii. Strategic Decisions: Professional accountants are required to make strategic decisions. They
are needed to define the scope of their activities, products and markets. Strategic thinking is
needed to make strategic decisions. They need to strategically manage their business.
iii. Environmental Adaptation: External environment is fast changing. Professional accountants
need to adapt their resources and activities to the changing forces in the environment. Strategic
thinking is needed to match resources with opportunities of advantage in the changing
environment.
iv. Risk Management: Strategic thinking empowers accountants to anticipate and mitigate
potential risks that may impact the financial health of the organization. By analyzing market
trends, regulatory changes, and other external factors, accountants can identify potential risks
early on and develop strategies to manage or mitigate them effectively, safeguarding the
organization against financial losses.
v. Consultancy Services: Professional accountants are providing a variety of consultancy services
that are related to long term future such as Investment proposals, Feasibility studies, Tax
planning for future years, Management consultancy, etc.
vi. Competitive Advantage: Strategic thinking creates competitive advantage for the professional
accountants. They can outperform their competitors. Resources are effectively utilized.
vii. Change Management: Professional accountants should understand the philosophy of change
or die strategy. Strategic thinking is needed to manage change. It guides the firm successfully to
respond to all types of changes.

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Hence, strategic thinking is crucial for professional accountants because it enables them to align
financial activities with organizational goals, manage risks effectively, make informed decisions, drive
innovation, and collaborate effectively with stakeholders.

Answer to Question No. 2 (a):

Corporate level strategy is concerned with the overall purpose and scope of an organization and how
value will be added to the different parts of the organization. It is overall strategy for the organization.
It steers the organization towards success. It provides long-term direction and scope to the organization
as a whole. It seeks to determine what business the organization should be in. It involves strategic
decisions about choice of businesses, products and markets.

Corporate level strategy can be:

i. Concentration: In single business. For example, fast foods.
ii. Expansion: New segments to be served in new areas added.
iii. Diversification: It can be of products, services, and business units from current markets.
iv. Growth and Stability: It can be through merger, acquisition, reengineering, downsizing,
rightsizing, strategic alliances etc.

Answer to Question No. 2 (b):

SWOT stands for Strengths, weaknesses, opportunities and threats. It is the process of analyses of
internal and external forces to identify the strengths, weakness, opportunities and threats of the
company. SWOT analysis provides the comprehensive information to the company. A SWOT analysis
is done to identify external opportunities and internal strengths of the organization. It is analysis of
strengths, weaknesses, opportunities and threats. It is based on assessment of internal and external
environmental forces.

By conducting a SWOT analysis, organization gains valuable insights into their current position in the
market and develop strategies to leverage strengths, address weaknesses, capitalize on opportunities,
and mitigate threats. SWOT analysis serves as a foundation for strategic planning, guiding decision-
making and resource allocation to achieve organizational objectives and maintain a competitive edge
in the marketplace.

Answer to Question No. 3:

Strategic management is defined as the art and science of formulating, implementing, and evaluating
cross-functional decisions that enable an organization to achieve its objectives. Strategic management
is the process whereby managers establish an organization’s long-term direction, set specific
performance objectives, develop strategies to achieve these objectives in the light of all relevant
internal and external circumstances, and undertake to execute the chosen action plans.

These processes can be classified as follows:

i. Strategy Formulation
ii. Strategy Implementation

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iii. Strategic Evaluation

iv. Feedback

Strategy Strategy Strategic

Formulation Implementation Evaluation

Feedback

Process of Strategic Management

i. Strategy formulation:

It includes developing a vision and mission, establishing long-term objectives, generating alternative
strategies, and choosing particular strategies to pursue. In this process, environmental scanning is done
and SWOT analysis (Strengths, weaknesses, opportunities, threats) is done to identify
external opportunities and internal strengths of the organization. Strategy-formulation issues include
deciding what new businesses to enter, what businesses to abandon, how to allocate resources, whether
to expand operations or diversify, whether to enter international markets, whether to merge or form a
joint venture, and how to avoid a hostile takeover. This step also involves making strategic choices
from among strategic alternatives that serves as the fundamental for formulating different
strategies i.e. corporate, business and functional level strategy. Strategy-formulation decisions
commit an organization to specific products, markets, resources, and technologies over an extended
period of time.
.
ii. Strategy implementation:

This is important stage in the strategic management process. It involves developing an implementation
plan and then doing whatever it takes to make the new strategy operational and effective in achieving
the organization's objectives. The strategies that are formulated are implemented through a series of
administrative and managerial actions. This step involves turning strategies into action. It is concerned
about implementation of strategies. Implementing strategy means mobilizing employees and managers
to put formulated strategies into action. This process involves:
a. Structure design: The structure for strategic management is determined. It establishes
reporting relationships, span of control and chain of command. Authority and responsibility
relationships are clearly defined.
b. Resources planning: Resource plans enable success of strategies. They allocate financial
resources to various strategic business units and functions.
c. Management System: Proper implementation of strategy requires the good management
system. In this process, competent human resources are acquired, developed and managed.
Information is managed. Leadership is provided. Enabling organization culture is shaped. The
change process is managed. Barriers to change are overcome.

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iii. Strategy evaluation:

This step of strategic management is concerned with monitoring and evaluation of performance results.
Corrective actions are taken to resolve performance problems. Strategy is adjusted to environmental
changes. The strategic evaluation element includes performing strategic evaluation, exercising
strategic control and reformulating strategies.

iv. Feedback

It provides information for revision of strategies as needed. Evaluation serves as the source of
performance information. Environmental changes necessitate revision of strategies.

Hence, strategic management is a dynamic process that involves formulating, implementing,

controlling, and adjusting strategies to achieve organizational objectives in a constantly evolving
business environment. It requires a systematic approach, continuous monitoring and the flexibility to
adapt to changing circumstances in order to ensure long-term success and sustainability.

Answer to Question No. 4

In today's dynamic business landscape, companies are constantly challenged to stay ahead of the curve
by effectively scanning and understanding their external environment. Environment scanning is the
process by which organizations monitor their relevant environment to identify opportunities and threats
affecting their business for the purpose of taking strategic decisions.

As the CEO of InnoTech Solutions, a leading tech startup, conducting a comprehensive environmental
scan is crucial in our strategic planning to maintain competitiveness and adaptability in the dynamic
marketplace of cutting-edge software solutions. We consider the following factors for scanning the
environment:

i. Market Trends and Dynamics: We closely monitor shifts in market demand, emerging
technologies, and competitor strategies to identify opportunities for innovation and anticipate
potential threats. Impact of globalization is also considered.

ii. Economic Conditions: Assessing macroeconomic indicators such as GDP growth, inflation rates,
and consumer spending patterns helps us adapt our pricing strategies and forecast market demand
accurately.

iii. Regulatory and Legal Environment: Industry regulations, compliance requirements, and policy
changes ensures that we operate within legal boundaries and proactively mitigate regulatory risks.

iv. Technological Innovations: We continuously evaluate advancements in software development,

cyber security, and other relevant technologies to capitalize on new opportunities and maintain our
competitive edge.

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v. Social and Cultural Factors: Understanding societal trends, consumer preferences, and
demographic shifts enables us to tailor our products and marketing strategies to resonate with target
audiences effectively.

vi. Nature of Competition: Strengths and weaknesses of competitors including their position as
leader, follower are properly assessed and modified our actions accordingly.

vii. Customer Needs: Changes in needs and preferences of target customers and their buying behavior
are also considered.

viii. Product Offerings: Product differentiation, positioning and product portfolios are thoroughly
studied. Threat from substitute products is also analyzed.

By analyzing these factors, we can make informed decisions that drive InnoTech Solutions forward in
a dynamic and competitive market landscape.

Answer to Question No. 5(a)

Unique resources are Critical Success Factors (CSF) for the organization. They provide strengths to
take advantage of opportunities and avoid threats. Following are the characteristics of unique
resources:
i. Valuable: They provide value to sustain strategic advantage. They fulfill customer’s needs better
than competitors.
ii. Rare: Competitors do not possess them. They are scarce and in short supply. They are better than
competitor’s resources.
iii. Costly to Imitate: They are difficult and costly to imitate. Competitors cannot easily copy or acquire
them.
iv. Non-substitutable: The unique resources have no substitutes. The organization possessing them is
able to exploit them for its advantage.

Answer to Question No. 5 (b)

Value chain analysis identifies two activities- primary and support activities. Primary activities are
directly related to the creation or delivery of the product to the customer. These consist of following
activities:

i. Inbound Logistics: Receiving and storing raw materials; material handling, stock control, material
transport.
ii. Operations: Converting raw materials into finished products; manufacturing, packaging,
assembling, testing.
iii. Outbound Logistics: Order processing and physical distribution; collect, store and distribute
products to customers.
iv. Marketing and Sales: Pricing, Promotion and selling products to satisfy customer needs.

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v. Service: Installation, repairs, spares and training. They enhance or maintain value of product.

Answer to Question No. 6

Strategic advantage refers to those market-place benefits that exert a decisive influence on an
organization's likelihood of future success. Strategic advantage is gaining advantage over competitors
in terms of unique resources and core competencies. It results from blending of unique resources, core
competencies, superior efficiency and superior quality. Preparing a Strategic Advantage Profile
involves several key steps aimed at identifying and leveraging an organization's unique strengths to
gain a competitive edge.

The process is as follows:

i. Identify key strategic factors: All key internal factors that provide competitive advantage are
identified. They are crucial to the success of organization. Organizations begin by conducting a
comprehensive internal analysis to identify their core competencies, unique resources, and
distinctive capabilities. This involves assessing factors such as technological expertise, intellectual
property, brand reputation, and employee skill sets.

ii. Identify importance of key strategic factors: The importance of relevant strategic factors is
identified. It is in terms of their contribution in achieving objectives.

iii. Assess strengths and weaknesses of relevant key strategic factors: Organizations benchmark
their strategic advantage against competitors to understand their relative position in the market. This
involves analyzing competitors' strengths and weaknesses and identifying areas where the
organization can differentiate itself. The overall contribution of each key factor in key results areas
is assessed.

iv. Prepare strategic advantage profile (SAP): A profile is prepared showing the strengths and
weaknesses of each strategic factor. Strengths in key strategic factors are used to formulate strategy.
Once strategic advantages are identified, organizations align their business strategies and objectives
to leverage these advantages effectively. This involves ensuring that all aspects of the organization's
operations, including marketing, sales, product development, and customer service, support the
strategic advantage.

The role of the Strategic Advantage Profile in facilitating strategic implementation is crucial. The roles
are as follows:

i. Strategic Advantage works with top management teams in entrepreneurial companies to help them
develop and implement strategic plans that achieve the company's long-term vision.
ii. By providing a clear understanding of the organization's unique strengths and competitive
positioning, the profile guides decision-making and resource allocation.
iii. Facilitating strategic and operational planning sessions.
iv. Helping companies design, evaluate and implement new growth strategies,
v. Conducting industry, competitor, and customer analysis to identify new growth/market
opportunities.
vi. Evaluating internal operations and helping companies develop core competencies.

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Answer to Question No. 7

Strategic options are identified at corporate level, business level and functional level that identifies
future opportunities of strategic advantage and matches them with the resource strengths of the
organization to achieve a certain objective. Business strategies are concerned with strategic business
units (SBU). Each SBU consists of separate market segment, separate competitors, separate manager
and separate plan. Among the business level strategies, strategic clock level is one of them.

The business level strategies can be analyzed in terms of a “Strategic Clock. The Strategic Clock
framework, developed by Cliff Bowman, provides a strategic tool for businesses to evaluate their
competitive position in dynamic market environments. It is based on price and perceived added value.
Price is money customers pay for the product. Perceived added value is benefits perceived by the
customer. These strategies focus on perceived value added as the basis of competitive advantage.

Here's how businesses can strategically evaluate the various options presented in the Strategic Clock
framework in dynamic market environments:
Fig: Strategic Clock-oriented Market-based Generic Strategies

i. No Frills Strategy: It combines low price with low perceived added value. It focuses on price-
sensitive market segment. Quality is not a concern.

ii. Low Price Strategy: It combines low price and similar perceived added value relative to
competitors. It focuses on low price without loss of quality.

iii. Hybrid Strategy: It combines low price with differentiation relative to competitors. It requires
a low-cost base which competitors cannot match. Customers should perceive high added value.
It requires greater sales volume, focused market segment, and core competencies.

iv. Differentiation Strategy: It provides products of unique dimensions with high perceived added
value. It can be through:
• Uniqueness or improvements in products.
• Marketing through power of brand or aggressive promotion.
• Core competencies that provide competitive advantage.

v. Focused Differentiation Strategy: It combines high price with high perceived added value It
focuses on a selected market segment. Customers are willing to pay premium price.
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vi. Increased Price with Standard Value Strategy: This strategy combines high price with standard
perceived added value. This is found in monopoly situations. It has risk of losing market share.

vii. Increased Price with Low Value Strategy: This strategy combines high price with low
perceived added value. This is also possible in monopoly situations. It is destined to fail.

viii. Standard Price with Low Value Strategy: This strategy combines standard price with low
perceived value added. It leads to loss of market share. It is also destined to fail.

By strategically evaluating the various options presented in the Strategic Clock framework and
adapting accordingly, businesses can enhance their competitive advantage in dynamic market
environments.

Answer to Question No. 8 (a)

Diversification refers to the strategic expansion of a business into new products, services, markets, or
industries. Following are the reasons for diversification.
i. Environmental adaptation is facilitated.
ii. Resources and core competencies can be exploited in new arenas.
iii. Market saturation necessitates diversification.
iv. Expectations of dominant stakeholders drive diversification.
v. Top management’s desire to increase powerbase drives diversification.
vi. Entrepreneurial spirit of managers drives diversification.

Answer to Question No. 8 (b)

Market development means offering existing products in new markets. This is required when there are
no further opportunities in existing markets. The organization has excess production capacity. The
current market is saturated. The organization has resources to tap new markets.

The market development option includes:

• New segments: Existing products are offered to new market segments.
• New uses: New uses are developed for existing products.
• New territories: Geographical spread is done, either nationally or internationally.
• New competencies: Market development usually requires product development plus
competency development.

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Answer to Question No. 9

Strategic choice involves strategic decision making. The approaches that can be used for making a
strategic choice can be:
i. Planned Approach: This approach involves formal appraisal of the relevant strategic option for
suitability, acceptability and feasibility. The appraised options are ranked in terms of their
potential for objectives achievement. The choice of the best option is made. It is suitable for
complex large organizations.
ii. Enforced Choice Approach: An organization has various stakeholders. The dominant
stakeholders play an important role in strategic choice.
iii. Experience-based Approach: Strategist managers possess an experience curve. Past experience
of managers in strategy implementation serves as a guideline for strategic choice.
iv. Command Approach: The strategic choice is based on the command of top management. It is
top-down approach.
v. Entrepreneurial Approach: The strategic choice is based on search for new opportunities. The
risk is high. The judgment is subjective. It is suitable for business ventures.

Each of these approaches influences decision-making processes within organizations differently. The
choice of approach depends on factors such as organizational structure, culture, industry dynamics,
and the nature of the strategic decision at hand. Some approaches may prioritize input from various
stakeholders, while others may rely more heavily on the expertise and vision of top management.
Additionally, the level of risk tolerance, quickness, and innovation within the organization can
influence the suitability of different approaches. Ultimately, organizations must carefully consider
these factors to determine the most appropriate approach for making strategic choices that align with
their goals and objectives.

Answer to Question No. 10

There is strong relationship between the strategy and structure. Structure is the way the activities are
organized which is a means to implement strategy. It defines the levels and roles in an organization.

In the given case, ABC co. deals only in the furniture business. As a consultant for the company, I
would recommend functional structure to match with company’s strategy and its different functional
activities such as sales, marketing, production and finance etc. These are strategically important
considerations for single-business organizations, dominant-product enterprises, and vertically
integrated firms, and account for why they usually have some kind of centralized, functionally
specialized structure.

Advantages of Functional Structure:

i. There is clear definition of authority, responsibility, roles and tasks. Functional expertise is
developed.
ii. Efficiency is achieved through specialization. Specialists manage senior and middle levels.
Professionalism develops.

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iii. There is direct supervision and control by chief executive.

iv. Career development of functional managers is facilitated.
v. It is simple and inexpensive.
vi. Delegation of authority is possible.

Disadvantages of Functional Structure:

i. Mangers are over burden with routine matters. They neglect strategic issues. Narrow
specialization is promoted. Functional goals are emphasized.
ii. Coordination is poor between functions. Accountability is not clear. Conflict arises.
iii. It is difficult to cope with diversity due to functional focus of managers.
iv. It does not adapt with environmental changes.
v. Decision delays are common due to functional rivalry and conflicts.

Answer to Question No. 11

Reengineering is a management tool for strategy implementation. It is radical redesign of jobs and
work processes. It aims to achieve gains in cost, quality, service and speed. It involves change in
structure, technology and people. Old policies, rules and procedures are changed. Decentralization and
information sharing is done. The focus is changing the ways the work is carried out. The work is
designed around products and outputs. It is concerned with employee and customer well-being.

Managers also use E-engineering for reengineering implementation. The way of doing business is
reinvented to take full advantage of internet. It can be in terms of attracting and serving customers,
dealing with suppliers and distributing and promoting products.

Overall, reengineering plays a crucial role in strategy implementation by transforming business

processes to better support strategic objectives, enhance competitive advantage, and drive sustainable
growth.

Steps in Reengineering:
The steps followed in reengineering typically include:
i. Develop objectives and strategy for reengineering.
ii. Ensure strong leadership and commitment by top management for directing reengineering
efforts.
iii. Ensure employee participation by creating a sense of urgency for reengineering.
iv. Start with a new schedule to:
• Recreate organization structure by organizing around outcomes.
• Reassess work processes; change old policies, rules, procedures.
• Link parallel activities.
• Build cross-functional and self-managed teams.
• Identify competitive advantage.
• Develop information networks.

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Answer to Question No. 12

Strategic evaluation is the process of determining the effectiveness of a given strategy in achieving the
organizational objectives and taking corrective actions wherever required. When strategy drives, the
evaluation is likely to be more effective.
The major characteristics of strategy evaluation are as follows:
i. Right Direction: Strategy evaluation ensures that the strategy is moving in the right direction.
Strategy should help in achieving the target goals set by organizations.
ii. Proactive: Strategy evaluation is an early warning system of control. It pro-acts by
continuously questioning the direction of strategy. It has flexibility to adapt to environmental
changes and make corrections.
iii. Future-oriented: Strategy evaluation aims to steer the future direction of strategy.
iv. Focus: Strategy evaluation focuses on forces and events in the external environment. It should
have strategic focus on key performance areas.
v. Time Horizon: Strategy evaluation has a long-term time horizon.
vi. Responsibility: Strategy evaluation is the responsibility of top management.
vii. Cost Effective: Benefits should justify the costs of strategy evaluation.
viii. Techniques: Strategy evaluation is based on premises reexamination, implementation review,
strategic surveillance, and special alert.

Answer to Question No. 13

Following are the comparison between strategic evaluation and operational evaluation:
Attribute Strategic Evaluation Operational Evaluation
1. Basic question Are we moving in the right How are we performing?
direction?
2. Aim Proactive; questioning of Allocation and use of
Strategic direction. Resources.
3. Main concern Steering future direction Action control
4. Focus External environment Internal organization
5. Time horizon Long-term Short-term
Top management; supported by Middle management;
6. Locus of control other levels Directed by top management.
Environmental scanning; Budgets;
Information gathering; Schedules;
7. Techniques Questioning and review Management by objectives (MBO)

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Answer to Question No. 14

Organization needs to manage the strategic changes to gain the competitive advantage. The change
situation needs to be carefully diagnosed. For this, nature and scope of strategic change need to be
identified. Following are the types of strategic change with examples as shown in fig:

Fig: Types of Change

i. Adaptation: This change in strategy occurs incrementally. It can be accommodated within

existing strategies or practices in response to external or internal changes.. It is suitable
when the organization's current strategy remains relevant, but minor modifications are
required to maintain alignment with evolving conditions. For example, a retail chain might
adapt its marketing strategies to incorporate digital channels in response to shifting
consumer preferences.

ii. Reconstruction: This change is strategy occurs rapidly. Reconstruction addresses

fundamental issues requiring structural change. But it does not lead to fundamental change
in paradigm. For example, structural change or cost-cutting program to deal with changing
market situations.

iii. Evolution: This change in strategy is incremental. It requires paradigm change. It is

transformational change. Evolution is ideal for organizations seeking continuous
improvement. Learning organizations continually change their strategies to environmental
changes. An example of evolution is a technology company regularly releasing updates
and enhancements to its products to stay ahead of competitors and meet changing customer
needs.

iv. Revolution: This change in strategy occurs with a big bang. It requires fundamental change
in paradigm. Revolution is necessary when drastic transformation is imperative for survival
or growth. For example, significant decline in profit may require revolutionary change in
strategy.

Answer to Question No. 15

Technology based approaches involve change in technology. Technology is changing fast. As an

IT expert tasked with implementing modern technology at XYZ Company, migrating from
traditional technology, it's essential to understand how technology-based approaches can
significantly contribute to strategic change management. Technology-based approaches consist of
the following levers:

i. New Technology: The strategic change can be based on adoption of new technology. New
technology solutions streamline business processes, automate tasks, and optimize workflows.
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By implementing modern tools such as cloud computing, robotics, nanotechnology, advanced

analytics, and digital collaboration platforms, XYZ Company can improve operational
efficiency and productivity, enabling a smoother transition during strategic changes.
ii. Change in Processes and Methods: Production processes and methods of doing work are
changed. For example, assembly lines can be changed to teams. Manual processes can be
automated.
iii. Change in Tactics: Tactics facilitate the execution of strategic change process. They can be:
• Timing: The right timing should be chosen to promote change.
• Windows of Opportunities: They should be provided by the change process.
• Job Losses: They should be carefully planned. Retraining, counseling, outplacement,
and redeployment approaches can be useful to manage strategic change.
With the adoption of above levers, it has following impacts:

• It enables XYZ Company to collect, analyze, and leverage data more effectively. With
advanced analytics tools and business intelligence systems, the company can gain valuable
insights into market trends, customer behavior, and internal operations,
• It allows XYZ Company to deliver personalized and seamless customer experiences.
• It facilitates seamless communication and collaboration among employees, teams, and
stakeholders.
• The company can respond more quickly to changing market conditions, regulatory
requirements, and customer demands, facilitating smoother transitions during strategic
changes.

Thus, by technology-based approaches, XYZ Company can effectively manage strategic changes,
drive operational excellence, foster innovation, and achieve sustainable growth in today's dynamic
business environment.

Answer to Question No. 16

The chief executive officer of organization is responsible to formulate the strategies required to
organization. As the Chief Executive Officer of an organization, my key roles in strategy
formulation include:

i. Key Strategist Role: Role of chief architect in defining vision, mission and objectives of
the organization. Also conceptualizes and crafts strategies to achieve objectives.
ii. Decision Making Role: Another role is in decision making that includes analysis and
organizes information and makes strategic decisions related to strategy formulation. This
role involves risk-taking.
iii. Resource Planning Role: This role involves coordinated allocation of significant
resources through action plans. Such plans can be organization-wide or related to strategic
business unit or function. Resources can be people, money, technology, time and
information. The roles include environmental scanning, identifying opportunities of
competitive advantage and setting of standards of performance.

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iv. Negotiator Role: Strategy must fulfill the expectations of various stakeholders of the
organization. The role includes balances their conflicting interests by negotiating disputes.

Answer to Question No. 17

Strategic decisions are normally about trying to achieve some advantage for the organization over
competition. Strategic decisions are concerned with the future scope of activities. They affect
operational decisions in organizations. The basic thrust of strategic decision making, in the process of
strategic management, is to make choice regarding the course of action to adopt. Each stage of strategic
decision-making process is equally vital in the process of strategic management.

The process of strategic decision-making process is as follows:

a. Awareness of strategic issues

Strategic decision maker must have awareness of strategic issues. Such awareness can result from
previous experience, deviations in sales, profit performance, or productivity, Budget variances, and
customer reaction on quality, price and service. Regular market research and environmental scanning
processes are in place, however, there is a tendency to focus more on immediate operational issues
rather than long-term strategic considerations.

b. Formulation of strategic issues

In this stage, Strategic decision maker should formulate and define strategic issues. It can be based on:
• Information gathering and analysis about strategic issues.
• Debate and discussion of issues with stakeholders.
• Making sense of information, debate and discussion about strategic issues.
• Formulation of key strategic issues.

The formulation stage may lack depth and creativity, resulting in a limited range of strategic options
so cross-functional collaboration to generate a diverse set of strategic options is important.

c. Solution development
Alternative solutions for strategic issues are developed. They can be based on:
• Known and tried solutions in the past which serve as precedents.
• Drawing on judgement and experience of the decision maker.
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• Collective wisdom of management and key employees.

• Strategic workshops to develop alternative solutions.
Promote interdisciplinary teamwork and knowledge sharing to ensure holistic solution development.

d. Solution selection
Solution selection is made from among the alternative solutions. It can be based on:
• Judgement: Experience, hunch and rule of thumb of managers.
• Negotiation: With stakeholders of the organization.
• Bargaining: With various SBUs and functions of the organization.

Implement mechanisms to reduce biases and promote objectivity in decision-making, such as

structured decision frameworks or decision support tools.

Hence, strategic decision-making forms the core of strategic management and by addressing the
identified weaknesses and implementing the recommended enhancements, the company can enhance
its strategic decision-making capabilities.

Answer to Question No. 18

Decision making is the fundamental part of strategy management as it requires choosing among
alternative course of action for the long-term future of the organization. The techniques used in
strategic decision making are as follows:

a. Entrepreneurial Mode
This mode of decision is made by one powerful individual such as entrepreneur or powerful chief
executive officer who has entrepreneurial qualities of vision, inspiration, creativity and risk taking and
achievement-orientation.

The main features of this strategic decision-making mode are:

• The focus is on opportunities.
• Decision making is guided by the decision maker’s own vision of direction.
• Large and bold decisions are made by the decision maker.
• The dominant goal of decision making is the growth of the organization.

b. Adaptive Mode
This mode of strategic decision making is based on “muddling through”. Its main features are:
• Decision making is characterized by reactive solutions to existing problems. It does not take a
proactive approach to search new opportunities.
• Priority of objectives is not clear. It is decided through bargaining.
• Decision making is fragmented.
• The decision maker reviews and adapts decisions to changes in the environment.

c. Planning Mode
This mode of strategic decision making is based on systematic gathering of appropriate information
for situation analysis. The main features of this mode are:

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• It includes proactive search for new opportunities.

• It involves reactive solution of existing problems.
• It gathers information to generate alternatives as well as their consequences.
• Decision is based on rational choice. Logical facts are carefully considered in decision making.
The decision maker behaves rationally.

d. Logical Incrementalism
It is a synthesis of planning, adaptive and entrepreneurial modes. Strategic decisions develop out of a
series of small incremental choices over time in a changing environment. The main features of this
mode are:
• Top management has clear idea of mission and objectives.
• Decisions are not made at one go. It is based on small incremental choices.
• Decision is allowed to emerge out of debate, discussion and experimentation.
• It pushes organization in one direction.

Answer to Question No. 19

Strategic management is the cornerstone of organizational success, serving as a roadmap for achieving
long-term objectives in dynamic environments. In the context of Nepal, where businesses face unique
challenges and opportunities, effective strategic management is important for sustainable growth and
competitive advantage. In Nepal, several barriers including impact of political, economic, socio-
cultural and technology hinder the effective implementation of strategic formulation. These barriers
span organizational structures, management systems, resource allocation practices, and cultural norms
which are explained as follows:

a. Organizational Structures: The organization structure for strategy implementation is not

strategy friendly. The prevalent use of outdated, tall hierarchical functional structures hinders
strategy implementation. These structures are often rigid and bureaucratic, lacking agility and
adaptability required for effective execution. Furthermore, authority-responsibility
relationships are often unclear, missing of accountability leading to poor decision-making.

b. Management Systems: Weak management systems have impacted implementation. Frequent

changes in top management disrupt continuity and strategic alignment. Human resource
management tends to be traditional, lacking performance-based evaluation and motivation
mechanisms. Decentralization efforts are often limited. Additionally, leadership ignores
participative approaches, leading to limited employee engagement and ownership of strategic
goals. Conflicts and personality clashes constrain effective implementation.

c. Resource Allocation: Resource allocation practices in Nepalese organizations often lack

alignment with strategic priorities. Program budgeting has proven ineffective, while the
absence of zero-based budgeting further brings resource misallocation. As a result, critical
strategic initiatives may be stopped, leading to delays.

d. Cultural Norms: The organizational culture in Nepal may inhibit initiative and self-
expression, posing significant barriers to effective strategy implementation. Hierarchical
cultural norms discourage upward communication and innovation, hindering creativity and
adaptive capacity. No proper coordination among the staff for implementing strategy.
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Hence, addressing these barriers requires a comprehensive approach that requires restructuring
organizations for enhancing management practices to foster accountability and participation,
realigning resource allocation processes with strategic priorities, and developing a culture of innovation
and collaboration.

Answer to Question No.20

a.
CEO Ramesh Sharma's strategy options for XYZ Company exhibit a balanced approach that
addresses various aspects of the company's business operations. The strategy option can be
examined as follows:
i. Stability Strategy

Prioritizing stability allows XYZ Company to consolidate its market position and focus core
operations, mitigating risks associated with market fluctuations and economic uncertainties. This
approach fosters operational efficiency and enhances profitability in the short term. Consolidation
is achieved through stability. Profitability is sustained. However, overemphasis on stability may
hinder innovation and may not be able to capitalize on growth opportunities.

ii. Market Expansion and Geographic Diversification

Pursuing growth opportunities in new geographic regions and market segments diversifies XYZ
Company's revenue streams and reduces dependency on specific markets. It positions the company
for long-term growth and strengthens its global presence. Market expansion initiatives require
careful planning and execution to mitigate risks associated with cultural differences, regulatory
compliance, and market volatility.

iii. Focus on Innovation and Research & Development (R&D)

Prioritizing innovation through R&D investments enables XYZ Company to develop cutting-edge
products and solutions, enhancing competitiveness and market differentiation. It fosters long-term
growth and strengthens the company's position as an industry leader which has been adopted by
CEO.

iv. Investment in Green Technologies and Sustainability

Another strategy adopted by CEO is in investing in green technologies which aligns with consumer
preferences for eco-friendly products and regulatory mandates for environmental sustainability. It
enhances XYZ Company's corporate social responsibility image and may lead to long-term cost
savings through energy efficiency and resource conservation.

Thus, balancing stability with innovation, sustainability, and strategic expansion is essential for
XYZ Corporation in the competitive environment and achieve sustainable growth in the long run.

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b.
Based on the above case, the economic environment that can impact the performance of XYZ
Company can be explained as follows:
i. Global Economic Conditions:

Opportunity: XYZ Company operates in a global market, presenting opportunities for expansion and
revenue growth in emerging economies with robust economic growth.

Threat: Economic downturns and recessionary trends in key markets can impact consumer spending
behavior, affecting demand for XYZ Company's products and services.

ii. Currency Fluctuations:

Opportunity: Favorable currency exchange rates can enhance XYZ Company's competitiveness in
international markets, potentially increasing export revenues.

Threat: Adverse currency fluctuations can increase the cost of imported raw materials and components,
impacting profitability and pricing strategies

iii. Trade Policies and Tariffs:

Opportunity: Favorable trade agreements and reduced tariffs can facilitate market access and lower
operating costs for XYZ Company.

Threat: Tariffs and trade barriers imposed by governments can disrupt supply chains, increase costs,
and hinder international trade, affecting XYZ Company's profitability and competitiveness.

iv. Emerging Market Expansions:

Opportunities: XYZ Company can leverage economic development opportunities in emerging markets
by targeting into growing consumer demand and expanding its presence in these regions. The company
can introduce tailored product offerings and adapt its business model to cater to the unique needs and
preferences of consumers in emerging economies.

Threats: However, entering emerging markets comes with risks such as political instability, regulatory
uncertainties, and cultural differences. XYZ Company must conduct thorough market research and
develop robust market entry strategies to mitigate these risks effectively.

v. Monetary Policy

Opportunities: Low interest rates set by the central bank can stimulate borrowing and investment,
encouraging XYZ Company to expand operations, invest in new technologies, or undertake capital
projects at a lower cost. This can spur economic growth and increase demand for XYZ's products.

Threats: if interest rates rise, borrowing costs increase, potentially reducing consumer spending and
business investment. This may lead to decreased demand for XYZ Company's products and services,
impacting its revenue and profitability.

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vi. Government Spending:

Opportunities: Increased government spending on infrastructure projects or subsidies for certain

industries can create opportunities for XYZ Company to win contracts or benefit from increased
demand for its products and services.

Threats: Reduced government spending or austerity measures may lead to decreased demand for XYZ
Company's products if public sector projects are delayed or canceled. This could adversely affect the
company's revenue and profitability.

vii. Taxation Policies

Opportunities: Tax incentives or reductions in corporate taxes can lower XYZ Company's tax burden,
which assist further funds for investment in research and development, expansion, or innovation.

Threats: Increases in corporate taxes or changes in tax regulations may reduce XYZ Company's
profitability, limiting its ability to invest in growth initiatives or impacting its competitiveness relative
to rivals in lower-tax jurisdictions.

viii. Regulatory Framework:

Opportunities: A supportive regulatory environment that encourages innovation, investment, and
competition can create opportunities for XYZ Company to thrive. Clear regulations and streamlined
processes can facilitate market entry and expansion.

Threats: Bureaucratic hurdles may increase compliance costs and hinder XYZ Company's ability to
innovate or adapt to changing market conditions. This could slow down growth and limit profitability.

In summary, by proactively responding to external challenges, XYZ Corporation can position itself for
sustainable growth and competitiveness in the dynamic global marketplace.

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Section 3: Exam tips to students:

Tip 1:
Understand and familiarize yourself with the format of exam paper. Go through past year questions
and suggested answers while preparing for the exam.

Tip 2:
This paper requires effective writing. Understand the structure and tone required for writing the
answer. Regularly review your notes and reflect on what you've learned. Identify areas where you
need improvement and adjust your study strategies accordingly.

Tip 3:
Practice time management skills during your study sessions. Set specific time limits for each topic
or chapter to ensure you cover all the material within your study schedule. Pay attention to
grammar, punctuation, and clarity of expression.

Tip 4:
Carefully read and follow the instructions provided in the exam paper. Ensure that your responses
meet the specific requirements of each question.

Tip 5:
Manage your time well during the exam. Allocate sufficient time to each section or question, and
don't spend too much time on a single question if you're stuck.

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