CHARTERED ACCOUNTANCY PROFESSIONAL III (CAP-III)

Revision Test Paper

Group II
June 2022

Education Division
The Institute of Chartered Accountants of Nepal

The Revision Test Papers are prepared by the institute with a view to
assist the students in their study. The suggested answers given here are
indicative and not exhaustive. Students are expected to apply their
knowledge and write the answer in the examinations taking the suggested
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Institute.
RTP CAP III June 2022 © The Institute of Chartered Accountants of Nepal

Contents
PAPER 5: Management Information and Control System ................................................................................ 3
PAPER 6: Advanced Taxation ........................................................................................................................ 35
PAPER 7: Advanced Cost and Management Accounting ............................................................................... 64
PAPER 8: Strategic Management and Decision Making Analysis................................................................ 101

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PAPER 5: Management Information and Control System

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Revision Questions:
Organizational Management and Information System
1. The Internal Auditor plays a key role in improving good Corporate Governance and a vibrant and agile internal
audit function can be an indispensable resource supporting sound Corporate Governance. In this regard define
the Corporate Governance and discuss its best practices.
2. You are appointed as a functional head of IT Department and are a member of IT Steering Committee also.
The IT Steering Committee provides overall direction to deployment of IT and information systems in the
enterprises. Discuss its key functions.

Types of Information System

3. PQR Company Pvt. Ltd. is looking for the possibility of using block chain technology in accounting work. The
Research & Development Department concluded that the use of block chain technology for accounting work
requires analysis of the related impact on the development of accounting information systems in terms of their
implementations and modules, with the need to complete transition in the design of accounting information
systems to electronic sophisticated programs and applications that are technologically advanced. As an
information system auditor, you are asking to recommend on the most important potential effects of the use of
block chain technology in accounting information systems.

4. ABC Co. Pv.t Ltd. is a wholesale garment business company manufacturing and selling the garment in the open
market. As whole industries are moving towards a real-time business model where transaction and information
sharing are near instantaneous, ABC Co. Pvt. Ltd. also want to adopt the Information technology in its business
model. What do you think are the impacts of Information Technology (IT) on business performance of ABC
Co. Pvt. Ltd.?

5. MWR Labs identified three Banking sector security risks facing the industry and two of these, are the data loss
prevention and identity & access management. Most of the concern for the company regarding security in
Management Information Systems was more of a technical nature. It was observed that the company’s dealings
with security in MIS focused mainly on the technical aspect of IT such as firewalls and anti-virus software
which rely more on technology. But the situation on data loss, unintentionally compromising the data storage
was not reduced. As an information system auditor, you realize that the human interaction with the MIS of the
firm is just as important as the technical aspect and that information security cannot be achieved solely through
these technological tools. Evaluating the risk of internal information security dilemmas explain the best way to
combat this issue?

Information Technology Strategy and Trends

6. Discuss the key management practices for assessing and evaluating the system of internal controls as
provided by the COBIT 5, the process “Monitor, Evaluate and Assess the System of Internal Control
(MEA)”
7. As a system auditor analyze and consider the security and privacy challenges pertinent to cloud computing
and point out the considerations that organizations should weigh when outsourcing data, applications, and
infrastructure to a cloud computing environment.

System Development Life Cycle- Acquisition, Development, Implementation, Maintenance and support
8. ABC Company is developing the system for its company but many times, objectives for development of
system are not achieved as desired. List down the various User-related and Developer related issues that
may arise and hinder in achieving the desired results.

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9. XYZ Company is a manufacturer of automobile parts with many branches in different cities of Nepal.
The management of company felt that existing information system does not meet its present requirements
and seek for a new system to streamline and integrate its operation processes and information flow to
synergize all its major resources. Mr. Anil, the IT head of the company is working on development of
new system following the best practices of System Development Life Cycle (SDLC). Briefly discuss
various activities to be performed by him during the phase of System Requirement Analysis.
10. TRP Company Ltd., is a popular marketing company, which has branches in many locations. It does all its business
activities on-line such as exchanging information relating to the buying and selling of goods, distributing information
and providing customer support. With the increase in business activities and increase in regulations, the company is
facing several problems with its existing Information System. It realizes that the existing Information System has to
be improved and proper controls have to be incorporated. It wishes to enhance the existing Information System and
put in sufficient measures to ensure security of data and protect the company against breaches caused by security
failures. The company has decided to use a third-party site for backup and recovery procedures. To develop the new
system the company formed a full-fledged System Development team. The team followed all the phases in the SDLC
and implemented the new system successfully. The company was also satisfied with the post-implementation audit
report. As a system development team member, explain the areas that should be studied in depth to understand the
present system.

E-Commerce and Inter organizational Systems

11. PQR Company allows its employee to bring their own device in the office premises for the better efficient and
performance of the work. The device brought by the employee allows access to corporate network, emails, client
data etc.; which is one of the top security concerns for enterprises. Discuss various risks to the PQR
associated with the provision of allowing access to corporate network by the employee own devices.

Protection of Information Assets

12. As a system auditor what are the areas that should be considered when implementing the security and safeguard
rule for the company?
13. Every organization maintains a document that describes its information security controls and activities.
Identify the document and discuss it in detail.
14. Operations management is responsible for the daily running of hardware and software facilities in an
organization. Discuss the different controls performed by Operations management on different functions.
15. ABC Company Ltd. has installed a new system in the organization. However, company is unaware about the
password parameter for the security. Describe the system wide security parameter for the password protection?
16. An Auditor Mr. A is a member of the system development team and suggested certain Boundary controls
that needed to be put in place in Information Systems of an organization to ensure authentication to access
computing resources. Discuss various techniques that can be used for Boundary Controls.

Disaster Recovery and Business Continuity Planning

17. XYZ Finance Ltd are looking at the possibility of going online. One of the main concerns of the top
management is to Business Impact Analysis when company goes online in the future. As an information
system auditor, explain what are the activities company should conduct for each activity within the scope of
Business continuity program. Further, while developing a Business Continuity Plan what are the key tasks
that should be covered in the second phase 'Vulnerability Assessment and General Definition of Requirement'?
18. Discuss the key areas that are emphasized upon in any Disaster Recovery Planning (DRP) document of an
organization.

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Auditing and Information Systems

19. MNO Company Ltd. is planning to conduct the information system audit of its organization. You are appointed
as the information system auditor of the MNO Company Ltd. Draft the audit program to assess the adequacy
of environmental, physical security, logical security, and operational controls designed to protect IS hardware,
software, and data against unauthorized access and accidental or intentional destruction or alteration, and to
ensure that information systems are functioning in an efficient and effective manner to help the organization
achieve its strategic objectives.
20. With respect to Top Management and IS management control, the major activities that the senior management
must perform are: Planning, Organizing, Leading and controlling in the Information System functions. Explain
the role of the IS auditor in any three of the above-mentioned activities.
21. Before proceeding with the audit, which type of the information an auditor is expected to obtain at the audit
location?

Ethics and legal Issues in Information Technology

22. Bik Bhusal while working at a call centre in NTC gained access to the credit card number of an American
national. He log on to the website of Sony Nepal Pvt. Ltd. called sonysambandh.com which targets Non-
resident Nepalese. The website enables NRNs to send Sony products to their friends and relatives in Nepal
after they pay for it online. The company undertakes to deliver the products to the concerned recipients. Bik
Bhusal logged onto the website under the identity of Barbara Campa and ordered a Sony Colour Television
set and a cordless headphone. He gave her credit card number for payment and requested the products to be
delivered to Bik Bhusal in Banepa. The payment was duly cleared by the credit card agency, and the transaction
was processed. After following the relevant procedures of due diligence and checking, the company delivered
the items to Bik Bhusal. Explain the offence committed by Mr Bik Bhusal and the penalty liable as per the IT
ACT 2074.
23. Miss M is a management trainee of the Bank and was engaged to be married. The couple exchanged many
emails using the company’s computers. After some time, the two broke up and the girl created fraudulent email
ids such as "brakeupassociations" and sent emails to the boy's foreign clients. She used the Bank’s computer
to do this. The boy's company lost a large number of clients and took the Bank to the court. The Bank was held
liable for the emails sent using the Bank's system. Explain the offence committed by Miss M and the penalty
liable as per the IT ACT 2074.
24. Mr X, the owner of a plastics firm was arrested and Rs 22 crore cash, was recovered from his house by sleuths
of the Nepal Police. They sought an explanation from him regarding the unaccounted cash within 10 days. The
accused submitted 6,000 vouchers, to prove the legitimacy of trade. After the careful scrutiny of vouchers and
contents of his computers, it was revealed that all of them were made after the raids were conducted. It was
later revealed that the accused was running five businesses under the guise of one company and used fake and
computerized vouchers to show sales records and save tax. . Explain the offence committed by Mr X and the
penalty liable as per the IT ACT 2074.

25. Mr Y hacked the DEP Network , after which he denied access to the authorized users by changing passwords
along with deleting and adding files. Making it look like he was authorized personnel, he made changes in the
computer database in their internet users’ accounts. He has been using the broadband Internet without any
authorization. The accused used to hack into the server from various cities like Biratnagar and Butwal, amongst
others. Explain the offence committed by Mr Y and the penalty liable as per the IT ACT 2074.

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Suggested Answers/Hints
1. Corporate Governance has been defined as the system by which business corporations are directed and
controlled. The corporate governance structure specifies the distribution of rights and responsibilities
among different participants in the corporation, such as, the Board, managers, shareholders and other
stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. Some of
the best practices of corporate governance include the following:
a. Clear assignment of responsibilities and decision-making authorities, incorporating a hierarchy of required
approvals from individuals to the Board of Directors;
b. Establishment of a mechanism for the interaction and cooperation among the board of directors, senior
management and the auditors;
c. Implementing strong internal control systems, including internal and external audit functions, risk
management functions independent of business lines, and other checks and balances;
d. Special monitoring of risk exposures where conflicts of interest are likely to be particularly great, including
business relationships with borrowers affiliated with the Bank, large shareholders, senior management, or
key decision-makers within the firm (e.g. traders);
e. Financial and managerial incentives to act in an appropriate manner offered to senior management, business
line management and employees in the form of compensation, promotion and other recognition; and
f. Appropriate information flows internally and to the public. For ensuring good Corporate Governance,
the importance of overseeing the various aspects of the corporate functioning needs to be properly
understood, appreciated and implemented.

2. The key functions of the IT Steering committee would include the following:
a. To ensure that long and short-range plans of the IT department are in tune with enterprise goals and
objectives;
b. To establish size and scope of IT function and sets priorities within the scope;
c. To review and approve major IT deployment projects in all their stages;
d. To approve and monitor key projects by measuring result of IT projects in terms of return on investment,
etc.;
e. To review the status of IS plans and budgets and overall IT performance;
f. To review and approve standards, policies and procedures;
g. To make decisions on all key aspects of IT deployment and implementation;
h. To facilitate implementation of IT security within enterprise;
i. To facilitate and resolve conflicts in deployment of IT and ensure availability of a viable communication
system that exists between IT and its users; and
j. To report to the Board of Directors on IT activities on a regular basis.

3. Blockchain is a free open general ledger to register ownership of a wide range of properties, from shares,
securities, real estate and vehicles to luxurious handbags and exquisite artwork. The integration of accounting
and Blockchain technologies has greatly contributed to the elimination of unnecessary manual effort, the
speeding up of payment settlement and the avoidance of financial reporting fraud. The creation of the
Blockchain-based accounting information system and the development of a model for the Blockchain-based
accounting information system in real-time accounting, helps to maintain the confidentiality of accounting,
continuous monitoring and auditing, and the detection of financial fraud. In short, this proposed system with
Blockchain technology can provide real-time accounting and reporting systems, prevent fraud in payments and
guarantee the security of privacy.

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The general benefit accounting department obtains from Blockchain technology has been described below:
a. Eliminate the time difference between the company's released financial statements. Time delays will be
completely eliminated if the company chooses to use a real-time accounting system that helps the general
public or at least key stakeholders to track the payment in real time. It is important to understand the kind of
assumptions that investors derive from the timing of the release of the financial statements in order to forecast
the implications in their absence.
b. Blockchain has the ability to increase the reliability of accounting of payments and resources and serve as a
mechanism of holding detailed accounts. This would provide clarification as to rights, responsibilities and
source that would, in essence, enable the accounting profession to expand its scope and disclose more modes
of practice than before, and to explore more than the economic reality underlying the transactions reported.
c. The use of Blockchain provides accountants with clarification about the ownership of property and the nature
of liabilities, and can significantly improve performance. Blockchain also has the ability to improve the
accounting profession by reducing the cost of follow-up by ensuring absolute certainty as to the identity and
ownership of properties.
d. Good Blockchain applications focus on the cost and timing advantages of removing central peripherals from
the system, increasing the security and certainty of a consensus system. Blockchain is not a single technique,
but a protocol - a way of doing things - to record transactions. Unlike the Internet, where data is shared,
Blockchain technique can be transferred from one party to another. It can also eliminate the need to reconcile
divergent ledgers. Any ledger participant can keep track of all previous transactions, allowing for greater
transparency and allowing for "self-review".
e. It is an alternative technique for bookkeeping. For example, in due diligence of mergers and acquisitions, a
common understanding among key figures allows more time to be spent in the areas of management. It also
allows greater transparency than a conventional ledger. This is important in cases where the type of asset is at
risk of corruption or embezzlement.
f. Smart contracts can be incorporated or replaced by operational and / or administrative functions that affect
internal and external reporting. It can translate performance goals and budgets to keep track of contracts for
smart performance versus actual results. New Blockchain performance management systems may also be
related to performance contracts, efficiency evaluations, and performance bonuses. Non-financial reporting,
such as environmental reporting, can also be encouraged. Eg, participants may access and monitor Blockchain
supply chain information from raw materials to finished products. Blockchain books will easily compile and
organize financial reports in real time, thereby reducing accounting gaps at the end of the month. Organizers
can have access to track payments in real time. Companies can provide investors with access keys that allow
them to access financial information in real time. This can make it easier for investors to transfer data to
financial models and require access to physical payment specifics. A significant notice may be that laws
banning selective reporting will remain unaffected and need to be enforced. Appropriate checks and protocols
on access keys should also be in place to allow regulators and others to decide who has access to information
and when. In fact, the rapid resolution of payments would reduce the time needed to liquidate assets between
third parties. Accounts receivable and credit account balances can be included in a new form of smart contract
that can be designed to automatically redirect funds once certain conditions have been met (for example, on
the basis of negotiated distribution receipts and payment schedules). Inventory may also be modified on the
basis of smart asset exchange contracts which respond to the Buyer's Inventory Management Program Purchase
Letter.
g. Intangible assets representing intellectual property rights can be shown as "digital property contracts" which
can be designed to funnel funds automatically. Disputes over property ownership can be settled through the
block time stamp function.
h. Financial capital may be reported on Blockchain. Ownership can be easily transferred in a similar manner to
the exchange of cryptocurrencies. New Blockchain books may be produced to document repairs and
maintenance. The full history of asset investment will also be available and transferable. This can be
demonstrated in the context of the insurance.
i. Corporate loans can be completely counted as "smart loan contracts" and released as soon as they are described
as Smart Blockchain contracts. Such debt obligations can be easily transferred and their maturity date can be
tracked automatically.
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4. Information Technology (IT) is among the relevant factor assisting the business to penetrate in a new market
for being innovative and generating new product and services which helps the growth of the business and the
company. The revolution of IT and internet facilitates the outstanding performance of the business sector,
through the exchanges of information by using internet and electronic devices facilitate accessibility of doing
business between companies globally. The impact of Information Technology (IT ) on the business of ABC
company Pvt. Ltd. is explained below:

(i) Online Business:

Information Technology (IT) has a role as a means of the transaction of online business, such as through
offering media facilities like the internet. The websites, apps, are given as an area for the company’s consumers
to select the items they want. These transactions also need other technologies to support the online business,
which is a telephone communication technology, Banks that enable consumer payment, media with producers,
shipping agents such as post office. These things are technologies that play a significant role and affect the
development of online business. The facilities offered due to the part and influence of IT makes online business
tremendous due to it is efficient, economical, and faster to both sides producers and consumer. Information
technology is broadly applied by people who see business opportunities due to the development of this
technology, such as online business. Globally online business is going to be usual. These have become common
place and have developed quite well. By using an online business, it is simple for customers to get the goods
and services they are searching. The increasing number and cheapness of internet connections in some
countries influence the development of online business. So this is beneficial for the advancement of online
business, compared with the offline business. The influence and role of IT on the development of online
business include:
1. IT facilitates the dissemination of information by developing the online business in various regions of the
world such as e-commerce used by companies selling books, music, videos, games and electronic goods.
2. The experts in the IT field also assist in expanding and growing online businesses on the internet. A
significant number of experts in the IT field lead to the improvement of many online business systems. Online
businesses are very vulnerable to credit card tapping, which causes consumers' disinterest in this business.
Nevertheless, with the amelioration of the system, the confidentiality of consumer identity, the product gain
the trust to buy needs they want online.
3. Online businesses are popular because of the flexibility. Seller does not need to be in the shop to wait for
customers, but with computers and connectivity, the seller can sell the products throughout the country and
outside. Purchasers do not have to tire out to buy their needs, because by only buying online, the purchased
goods is delivered directly to his address.

(ii) Improve Internal Performance:

Technological advancement in the computer sector influences the company's internal performance, especially
in administration. Database systems can easily classify company data in detail and accurately. Even this system
can also be used for employee absence. In general, the database system plays an essential role in the collection
of company inventory. The sophistication of the computer that previously doubted would decrease the number
of employed people now actually applies vice versa, such as increasing employment opportunities because
most of the large companies’ present time needs computer experts in the fields of data collection, informatics
(programming), and of course computer technicians. It is because of the importance of the presence of
technological resources that support the company's works. The capability of computers to handle complex
problems today is undeniably beneficial for the performance of the company’s employees. Processing various
variables that takes a long time to solve manually now is very easy and fast with a computer. Also, supported
by the progress of various analytical applications that are very diverse. Many choices for companies to use
applications suitable for company needs. Secure storage and back up is also a plus. Now company are no longer
needed to worry about missing data provided; the computer has no errors.

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(iii) Improve Inter-organizational functions and relationship:

Inter organizational function is a role that is unique because it is triggered by the spirit of globalization that
forces companies to collaborate or establish partnerships with other companies. The concept of a strategic
partnership or information technology-based partnerships, such as the implementation of Supply Chain
Management or Enterprise Resource Planning, makes the company make many significant breakthroughs in
designing the organizational structure of its information technology unit. Indeed, it is not uncommon to find
companies that tend to outsource several business processes related to information technology management to
other parties for the smooth running of their business. The type and function of the role of information
technology directly affect the design or structure of the company's organizational structure as a whole; and the
organizational structure of departments, divisions, or units related to information systems, information
technology, and information management.

(iv) Communication and exchange information:

Communication is the most talked-about field, easy to access due to the expansion of the internet network,
shifted the existence of tools such as facsimile, telegram, or post. E-mail facilities that are easy, inexpensive,
and fun with a variety of exciting features now become the foremost choice. The internet is also a powerful
weapon for marketing, given the increasing public consumption of the internet. Networks also facilitate
communication between employees and the Board of Directors. Informal relationships now are more needed
because they are considered to have a significant impact on strengthening relations. Aside from the internet,
TV and radio remain the most significant focus of public consumption that companies use mainly and
advertise. Increasingly diverse and quality TV programs now adding certain parties' interests. For instance,
Automotive events initiated by transportation companies now adorned many screens. The possibility of
exchanging resources within one another is minimal, but technological development makes it possible, even
though sometimes it expensive.

(v) The Monitoring and control function,

It implies that the existence of information technology is an inseparable part of the activity at the managerial
level embedded in each manager's function, so that the organizational structure of the unit associated with it
must be able to have a span of control or peer relationship that allows for effective interaction with managers
in related companies.

(vi) The Planning and decision function,

As information technology elevates to a more strategic role because of its existence as an enabler of a
company's business plan and is a knowledge generator for company leaders who are confronted with reality to
make some critical decisions every day, it is not uncommon for companies to ultimately choose to place the
information technology unit as part of the corporate planning and development function because of the strategic
functions mentioned above.

5. One important module of Management Information System (MIS) is the development and implementation of
the security component of MIS. Furthermore, this MIS Security structure needs to be monitored through the
Corporate Governance of the firm. We identified four key pillars of a model for MIS Security. These pillars are
Security Policy (e.g., set rules for employee behavior), Security Awareness (e.g., continued education of
employees), Access Control (e.g., access linked to employee job function), and Top Level Management Support
(e.g., engrain information security into the company’s culture).

Management Information Systems (MIS) are companywide Information Technology (IT) systems that
companies use to combine multiple business functions information into one data warehouse. MIS enable a
company to integrate the data used throughout its entire organization. The plethora of information
technologies developed and improved over the last few decades has made business decisions easier for
managers who now have all of the relevant information available from one access point without the fear of
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missing or overlapping information. A problem that results from this convenience is that all company
information is now available in one location. This centrality makes company’s intellectual property, one of
its core competitive advantages, more vulnerable. Security breaches (malicious or unintentional) can result in
continuity disruption, poor reliability of information, lowered effectiveness and efficiency of processes,
and can even have legal implications. The current events of external information security problems related
to information access is that the company must safeguard their employee access to the “keys to the kingdom”
(e.g., accounts and passwords).

There are currently many theories on the best way to combat these issues. These range from the importance
of cultivating an information security policy to significance of employee training and awareness. Following
are the frameworks to help companies secure their systems.

(i) Information Security Policy

An information security policy is the set of rules, standards, practices, and procedures that the company
employs to maintain a secure IT system. It has been said that the “credibility of the entire information
security program of an organization depends upon a well-drafted information security policy. Many experts
now think that the development of an information security policy is one of the most practical ways to preserve
protected systems. The development of an information security policy is the first step toward preparing an
organization against attacks from internal and external sources.” They actually developed an information
security policy process that companies can use to develop and analyze their current programs.

(ii) Employee Awareness

Creation and maintenance of security awareness include both individual and collective activities, i.e.
education and awareness-raising initiatives, e.g. emails, pamphlets, mouse pads, formal presentations, and
discussion groups. Many researchers now believe that employee awareness is one of the best ways to protect
company’s data. In fact, empirical research found that awareness creation is the most effective information
security measure. Security training and education programs should aim to make employees recognize the
legitimacy of information security policy to safeguard the firm.

(iii) Access Control

Access control is defined as the process a company takes to limit the access an employee has to various
functions of the business; particularly functions not relevant to their position or containing more information
than they should have access. Many companies now use Role Based Access Control (RBAC), which is a
way to limit employee access by permissions, roles, users, and constraints. Access control requirements
can be driven by a need for customer, stockholder, and insurer confidence; privacy of personal information;
prevention of unauthorized financial asset distribution and adherence to professional standards, among
others. In addition, so long as information is stored and consumed within one organization, security policy
and access controls can be optimized for internal use, and access by people from outside of the company can
be prevented. However, most Management Information Systems are connected to the internet, which can
blur the boundaries of enterprise information systems, leads organizations to face new attack threats.

(iv) Top Level Management Support

One important factor that MIS must be adhered to in policy development is the support of top-level
management. The best way to get employees to comply with information security policies is to engrain the
policy into the organizational culture of the company. The overarching objective of information security
management is to convert the organization’s security policy into a set of requirements that can be
communicated to the organization, measured, and imposed. Basically, the better the top management
support of information security, the greater the preventative efforts a firm (and its employees) will make.
Overall, top management support is essential to security governance success.

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(v) Corporate Governance

For information security, Corporate Governance is the way top level management and the Board decide to run
the IT department, and in turn, information system security. This is where the true decisions on how to attack a
possible weakness are made. Information Security Governance is now accepted as an integral part of good IT
and Corporate Governance. Information Security Governance is a subset of corporate governance that relates
to the security of information systems, and because the Board of Directors is ultimately in charge of Corporate
Governance, information security must start at the top.

(vi) Implementation
The careful selection and implementation of security policies, standards and procedures will determine if
the overall security program will support the organization’s mission. Ineffective implementation of security
policy leads to weaknesses in Management Information Systems security.

6. The key management practices for assessing and evaluating the system of internal controls in an enterprise
are given as follows:
• Monitor Internal Controls: Continuously monitor, benchmark and improve the IT control environment
and control framework to meet organizational objectives.
• Review Business Process Controls Effectiveness: Review the operation of controls, including a review
of monitoring and test evidence to ensure that controls within business processes operate effectively. It
also includes activities to maintain evidence of the effective operation of controls through mechanisms
such as periodic testing of controls, continuous controls monitoring, independent assessments, command
and control centers, and network operations centers. This provides the business with the assurance of
control effectiveness to meet requirements related to business, regulatory and social responsibilities.
• Perform Control Self-assessments: Encourage management and process owners to take positive
ownership of control improvement through a continuing program of self- assessment to evaluate the
completeness and effectiveness of management’s control over processes, policies and contracts.
• Identify and Report Control Deficiencies: Identify control deficiencies and analyze and identify their
underlying root causes. Escalate control deficiencies and report to stakeholders.
• Ensure that assurance providers are independent and qualified: Ensure that the entities performing
assurance are independent from the function, groups or organizations in scope. The entities performing
assurance should demonstrate an appropriate attitude and appearance, competence in the skills and
knowledge necessary to perform assurance, and adherence to codes of ethics and professional standards.
• Plan Assurance Initiatives: Plan assurance initiatives based on enterprise objectives and conformance
objectives, assurance objectives and strategic priorities, inherent risk resource constraints, and sufficient
knowledge of the enterprise.
• Scope assurance initiatives: Define and agree with management on the scope of the assurance initiative,
based on the assurance objectives.
• Execute assurance initiatives: Execute the planned assurance initiative. Report on identified findings.
Provide positive assurance opinions, where appropriate, and recommendations for improvement relating
to identified operational performance, external compliance and internal control system residual risks.

7. When considering a move to use cloud computing, organization must have a clear understanding of potential
security benefits and risks associated with cloud computing, and set realistic expectations with their cloud
provider. Consideration must be given to the different models of service delivery: Infrastructure as a Service
(IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS) as each model brings different security
requirements and responsibilities. While security and privacy concerns when using cloud computing services
are similar to those of traditional non‐cloud services, concerns are amplified by external control over
organizational assets and the potential for mismanagement of those assets. Transitioning to public cloud
computing involves a transfer of responsibility and control to the cloud provider over information as well as
system components that were previously under the organization’s direct control. The transition is usually
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accompanied by loss of direct control over the management of operations and also a loss of influence over
decisions made about the computing environment.
Despite this inherent loss of control, the cloud service organization still needs to take responsibility for their
use of cloud computing services in order to maintain situational awareness, weigh alternatives, set priorities,
and effect changes in security and privacy that are in the best interest of the organization. The organization
achieves this by ensuring that the contract with the provider and its associated Service Level Agreement
(SLA) has appropriate provisions for security and privacy. In particular, the SLA must help maintain legal
protections for privacy relating to data stored on the provider's systems. The consumer must also ensure
appropriate integration of the cloud computing services with their own systems for managing security and
privacy.
Cloud computing represents a very dynamic area at the present time, with new suppliers and new offerings
arriving all the time. There are a number of security risks associated with cloud computing that must be
adequately addressed:

• Loss of governance. For public cloud deployments, consumers necessarily cede control to the cloud provider
over a number of issues that may affect security. At the same time, cloud service level agreements (SLA) may
not offer a commitment to provide such capabilities on the part of the cloud provider, thus leaving gaps in
security defenses.

• Responsibility ambiguity. Given that use of cloud computing services spans across the c o n s u m e r and the
provider organizations, responsibility for aspects of security can be spread across both organizations, with the
potential for vital parts of the defenses to be left unguarded if there is a failure to allocate responsibility clearly.
The split of responsibilities between consumer and provider organizations is likely to vary depending on the
model being used for cloud computing (e.g. Iaas versus SaaS).

• Isolation failure. Multi‐tenancy and shared resources are defining characteristics of public cloud computing.
This risk category covers the failure of mechanisms separating the usage of storage, memory, routing and even
reputation between different tenants (e.g., so called guest‐hopping attacks).

• Vendor lock‐in. Dependency on proprietary services of a particular cloud provider could lead to the consumer
being tied to that provider. Services that do not support portability of applications and data to other providers
increase the risk of data and service unavailability.

• Compliance and legal risks. Investment in achieving certification (e.g., industry standard or regulatory
requirements) may be put at risk by migration to use cloud computing if the cloud provider cannot provide
evidence of their own compliance with the relevant requirements or if the cloud provider does not permit audit
by the cloud consumer. It is the responsibility of the cloud consumer to check that the cloud provider has
appropriate certifications in place, but it is also necessary for the cloud consumer to be clear about the division
of security responsibilities between the consumer and the provider and to ensure that the consumer's
responsibilities are handled appropriately when using cloud computing services.

• Handling of security incidents. The detection, reporting and subsequent management of security breaches is a
concern for consumers, who are relying on providers to handle these matters.

• Management interface vulnerability. Consumer management interfaces of a public cloud provider are usually
accessible through the Internet and mediate access to larger sets of resources than traditional hosting providers
and therefore pose an increased risk, especially when combined with remote access and web browser
vulnerabilities.
• Data protection. Cloud computing poses several data protection risks for cloud consumers and providers. The
major concerns are exposure or release of sensitive data but also include loss or unavailability of data. In some
cases, it may be difficult for the cloud consumer (in the role of data controller) to effectively check the data

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handling practices of the cloud provider and thus to be sure that the data is handled in a lawful way. This problem
is exacerbated in cases of multiple transfers of data, e.g., between federated cloud services.

• Malicious behavior of insiders. Damage caused by the malicious actions of insiders working within an
organization can be substantial, given the access and authorizations they may have. This is compounded in the
cloud computing environment since such activity might occur within either or both the consumer organization
and the provider organization.

• Business failure of the provider. Such failures could render data and applications essential to the consumer's
business being unavailable.

• Service unavailability. This could be caused by a host of factors, from equipment or software failures in the
provider's data center, through failures of the communications between the consumer systems and the provider
services.

• Insecure or incomplete data deletion. Requests to delete cloud resources, for example, when a consumer
terminates service with a provider, may not result in true wiping of the data. Adequate or timely data deletion
may also be impossible (or undesirable from a consumer perspective), either because extra copies of data are
stored but are not available, or because the disk to be deleted also stores data from other clients. In the case of
multi‐tenancy and the reuse of hardware resources, this represents a higher risk to the consumer than is the case
with dedicated hardware.

While the above security risks need to be addressed, use of cloud computing provides opportunities for
innovation in provisioning security services that hold the prospect of improving the overall security of many
organizations. Cloud service providers should be able to offer advanced facilities for supporting security and
privacy due to their economies of scale and automation capabilities ‐ potentially a boon to all consumer
organizations, especially those who have limited numbers of personnel with advanced security skills.
As consumers transition their applications and data to use cloud computing, it is critically important that the
level of security provided in the cloud environment be equal to or better than the security provided by their
traditional IT environment. Failure to ensure appropriate security protection could ultimately result in higher
costs and potential loss of business thus eliminating any of the potential benefits of cloud computing.
The steps that should be taken by cloud consumers to evaluate and manage the security of their cloud
environment with the goal of mitigating risk and delivering an appropriate level of support are discussed as
follows:

Step 1: Ensure effective governance, risk and compliance processes exist

Security controls in cloud computing are similar to those in traditional IT environments. However, because of
the cloud service and operational models employed with the implied organizational division of responsibilities
and the technologies used to enable cloud services, cloud computing may present different risks to an
organization than traditional IT solutions. As part of the transition to cloud computing, it is critical that
organization understand their level of risk tolerance and focus on mitigating the risks that the organization cannot
afford to neglect.
The primary means a consumer of cloud service has to ensure their cloud hosted applications and data will be
secured in accordance with its security and compliance policies is to verify that the contract between the
consumer and the provider, along with an associated Service Level Agreement (SLA), contain all their
requirements. It is vital for a consumer to understand all the terms related to security and to ensure that those
terms meet the needs of the consumer. If a suitable contract and SLA is not available, then it is inadvisable for
an organization to proceed with the use of cloud services.
Often it is not understood that the type of service model being offered by the provider (i.e. IaaS, PaaS or SaaS)
has significant impact on the assumed "split of responsibilities" between the consumer and the provider to
manage security and associated risks. For IaaS, the provider is supplying (and responsible for securing) basic
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IT resources such as machines, disks and networks. The consumer is responsible for the operating system and
the entire software stack necessary to run applications, plus the data placed into the cloud computing
environment. As a result, most of the responsibility for securing the applications and the data organisation use
falls onto the consumer. In contrast, for SaaS, the infrastructure, software and data are primarily the
responsibility of the provider, since the consumer has little control over any of these features of the service.
These aspects need appropriate handling in the contract and SLA.
From a general governance perspective, cloud providers should notify consumers about the occurrence of any
breach of their system, regardless of the parties or data directly impacted. The provider should include specific
pertinent information in the notification, stop the data breach as quickly as possible, restore secure access to
the service as soon as possible, apply best‐practice forensics in investigating the circumstances and causes of
the breach, and make long‐term infrastructure changes to correct the root causes of the breach to ensure that it
does not recur. Due to the high financial and reputational costs resulting from a breach, consumers may want
the provider to indemnify them if the breach was their fault.
A fundamental design premise in cloud computing is that, as a consumer, your data can be stored by, processed
on and transmitted to any of the servers or devices the cloud service provider operates. In some instances,
servers hosting consumer data may be located in multiple data centers within different jurisdictions, either
because the service provider has multi‐jurisdictional operations or has subcontracted services to providers that
operate in other jurisdictions. This means that it may be difficult at any particular point in time to know where
your data actually resides, which regulators have jurisdiction and what regulations apply. This matters since
some regulations restrict the allowable locations for data.
The jurisdictional issue directly influences the protection of personally identifiable information (PII) and the
law enforcement access to this data. There is divergence across countries in the laws on investigation and
enforcement, including access to encrypted data and investigation of extraterritorial offences. A court can only
hear a matter if it has jurisdiction over the parties and the subject matter of the action, while law enforcement
agencies can only exercise their powers within their authorized jurisdictions.
Before migrating services to a cloud computing environment, it is important to understand precisely the
specific laws or regulations that apply to the services and what are the relevant duties or obligations imposed
(e.g. data retention, data protection, interoperability, medical file management, disclosure to authorities). This
allows consumers to identify the legal issues and the related legal risks, and consequently the impact these will
have on the services being migrated to cloud computing.
One useful approach to the security challenges of cloud computing is for a cloud provider to demonstrate that
they are compliant with an established set of security controls. Certification of the provider gives more
confidence in that provider to prospective consumers. There are a number of different certifications which can
be useful for cloud computing services ‐ which one is most appropriate depends to some extent on the cloud
service model (IaaS, PaaS, SaaS) and also depends on organizational regional and industry requirements.

Step 2: Audit operational & business processes

As a baseline, organisation should expect to see a report of the cloud provider's operations by independent
auditors. Unfettered access to essential audit information is a key consideration of contracts and SLA terms
with any cloud provider. As part of any terms, cloud providers should offer timely access to and self-
management of audit event, log and report information relevant to a consumer's specific data or applications.
Security compliance tends to be a significant element of any compliance framework. There are three significant
areas where the consideration of security methods for cloud computing are of particular interest to cloud
consumers and to auditors:
1. Understanding the internal control environment of a cloud provider, including risks, controls and other
governance issues when that environment touches the provision of cloud services.
2. Access to the corporate audit trail, including workflow and authorization, when the audit trail spans cloud
services.

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3. Assurance of the facilities for management and control of cloud services made available to cloud consumers
by cloud providers and how such facilities are secured.

Understanding the internal control environment of a cloud provider

Using the services of cloud providers creates the need for appropriate auditing of the activities of persons that
may be employed by the cloud provider or consumer (along with any consumer, customers and partners) to
ensure that the security controls meet the requirements of the consumers There are standards that can be used
as the basis for auditing a service provider, such as the ISO 27000 series. These standards aim to provide the
basis for assuring consumers about the nature of the control environment in place at the cloud provider's
organization.
Key controls that relate to cloud computing services include those which
• ensure isolation of consumer applications and data in shared, multi‐tenant environments
• provide protection of consumer assets from unauthorized access by the provider's staff
Auditors may be employed by the organisation or they may be employed by the provider ‐ but the key element
is that they should be independent. Auditors require access to information about the policies and procedures of
a cloud provider which relate to security controls. Auditors also require access to logs and records which show
whether the policies and procedures are being followed correctly ‐ and in some cases, the auditors may require
specific testing to take place to demonstrate compliance with the prescribed policies and procedures. Security
and authentication technologies, allied to event logging, in the cloud computing environment can help auditors
as they deal with issues related to workflow ‐ were those who entered, approved, changed or otherwise touched
data authorized to do so, on an individual, group or role‐related basis? Was that authorization appropriate on a
one‐time, periodic or ongoing basis?

Access to the corporate audit trail

It is vital for cloud service consumers to have appropriate audit access to cloud provider events, logs and audit
trails to prove enforcement of provider security controls. Auditors need to assure cloud c o n s u m e r s that all
the necessary information is being logged and stored appropriately by cloud providers, including authentication,
authorization and management information relating to the use of particular applications and data against all
security and compliance policies established by the provider or consumer.
For complete insight into security controls, as they relate to the consumer's applications and data, mechanisms
for the routine flow of audit information from the provider to the consumer is recommended. This flow may
include secure logs and reports against an agreed upon schedule. There should be more timely notification of
any exceptional security alerts, events or incidents ‐ and incident management processes should be documented
and audited. Any audit data should have the necessary associated information to enable forensic analysis to
understand how any particular incident occurred, what assets were compromised and what policies, procedures
and technologies need to be changed to prevent recurrence, along with any additional security controls that need
to be established.

Ideally, there should be automated, standards‐based, programmatic access to all of these audit facilities, to
ensure timely availability of required data and to remove cost burdens associated with human processing of
requests for information.

Assurance of the facilities for management and control of cloud services

In addition to controls which apply to cloud services themselves, there is also a need for providers to enable
consumers to self-manage and more closely monitor the usage of their cloud hosted applications and services.
These facilities may include: service catalogs, subscription services, payment processes, the provision of
streams of operational event data and logs, usage metering data, facilities for configuring services including
adding and removing user identities and the configuration of authorizations.

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These facilities are often more sensitive in security terms than the services and applications to which they apply,
since the potential for abuse and damage may be higher. A security audit must extend to these facilities as well
as to the main services of the provider.

Step 3: Manage people, roles and identities

Consumers must ensure that their cloud provider has processes and functionality that governs who has access
to the consumer's data and applications. This ensures access to their cloud environments is controlled and
managed.
Organizations manage dozens to thousands of employees and users who access their cloud applications and
services, each with varying roles and entitlements. Cloud providers must allow the cloud consumer to assign
and manage the roles and associated levels of authorization for each of their users in accordance with their
security policies. These roles and authorization rights are applied on as per resource, service or application
basis.
The cloud provider must have a secure system for provisioning and managing unique identities for their users
and services. This Identity Management functionality must support simple resource accesses and robust
consumer application and service workflows. A key requirement for moving a consumer application to the
cloud is assessing the provider's ability to allow the consumer to assign their user identities into access groups
and roles that reflect their operational and business security policies.
Any user access or interaction with the provider's management platform, regardless of role or entitlement,
should be monitored and logged to provide auditing of all access to consumer data and applications.

Step 4: Ensure proper protection of data and information

Data are at the core of IT security concerns for any organization, whatever the form of infrastructure that is
used. Cloud computing does not change this, but cloud computing does bring an added focus because of the
distributed nature of the cloud computing infrastructure and the shared responsibilities that it involves. Security
considerations apply both to data at rest (held on some form of storage system) and also to data in motion
(being transferred over some form of communication link), both of which may need particular consideration
when using cloud computing services.
Essentially, the questions relating to data for cloud computing are about various forms of risk: risk of theft or
unauthorized disclosure of data, risk of tampering or unauthorized modification of data, risk of loss or of
unavailability of data. It is also worth remembering that in the case of cloud computing, "data assets" may well
include things such as application programs or machine images, which can have the same risk considerations
as the contents of databases or data files. The type of cloud service is very likely to affect the key question of
who is responsible for handling particular security controls. For IaaS, more responsibility is likely to be with
the consumer (e.g. for encrypting data stored on a cloud storage device); for SaaS, more responsibility is likely
to be with the provider, since both the stored data and the application code is not directly visible or controllable
by the consumer.
Most of the security techniques and technologies involved are not new, although cloud computing can create
new considerations. For example, if encryption is used on some data, how are the encryption keys managed
and used? In addition, the way in which security is applied will most likely depend on the nature of the cloud
service being offered. For IaaS, much of the security responsibility is likely to lie with the consumer. For SaaS,
much more responsibility is likely to be placed onto the provider, especially since the data storage facilities may
be opaque as far as the consumer is concerned.

Step 5: Enforce privacy policies

Privacy is gaining in importance across the globe, often involving laws and regulations, relating to the
acquisition, storage and use of personally identifiable information (PII). Typically, privacy implies limitations

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on the use and accessibility of PII, with associated requirements to tag the data appropriately, store it securely
and to permit access only by appropriately authorized users. This requires appropriate controls to be in place,
particularly when the data is stored within a cloud provider’s infrastructure.
In many countries, numerous laws, regulations and other mandates require public and private organizations to
protect the privacy of personal data and the security of information and computer systems.
When data is transferred to a cloud computing environment, the responsibility for protecting and securing the
data typically remains with the consumer (the data controller in EU terminology), even if in some
circumstances, this responsibility may be shared with others. When an organization relies on a third party to
host or process its data, the data controller remains liable for any loss, damage, or misuse of the data. It is
prudent, and may be legally required, that the data controller and the cloud provider enter into a written (legal)
agreement that clearly defines the roles, expectations of the parties, and allocates between them the many
responsibilities that are attached to the data at stake.
It is critical that privacy issues are adequately addressed in the cloud contract and Service Level Agreement
(SLA). If not, the cloud consumer should consider alternate means of achieving their goals including seeking a
different provider, or not putting sensitive data into the cloud computing environment.
Enterprises are responsible for defining policies to address privacy concerns and raise awareness of data
protection within their organization. They are also responsible for ensuring that their cloud providers adhere to
the defined privacy policies. Consumers have an ongoing obligation to monitor their pro vi de r’s compliance
with its policies. This includes an audit program covering all aspects of the privacy policies including methods
of ensuring that corrective actions will take place.

Step 6: Assess the security provisions for cloud applications

Organizations need to proactively protect their business‐critical applications from external and internal threats
throughout their entire life cycle, from design to implementation to production. Clearly defined security
policies and processes are critical to ensure the application is enabling the business rather than introducing
additional risk.
Application security poses specific challenges to the cloud provider and consumer. Organizations must apply
the same diligence to application security as they do for physical and infrastructure security. If an application
is compromised, it can present liability and perception issues to both the cloud provider and the consumer,
especially if the ultimate end users of the application are customers of the consumer rather than employees.
In order to protect an application from various types of breaches, it is important to understand the application
security policy considerations based on the different cloud deployment models.
It should be noted that there is a cost to the consumer to ensure that these considerations are applied. The costs
are typically built into technology, resources, interventions, and audits. However, these costs will, likely, pale
in comparison to the potential liability damages and loss of reputation from an application security breach.
When developing and deploying applications in a cloud environment it is critical that consumers realize that
they may be forfeiting some control and have to design their cloud applications with that consideration in mind.
In addition, it is critical that consumers developing software use a structured methodology to engineer security
into their cloud applications from the ground up.

Step 7: Ensure cloud networks and connections are secure

A cloud service provider must attempt to allow legitimate network traffic and drop malicious network traffic,
just as any other Internet‐connected organization does. However, unlike many other organizations, a cloud
service provider will not necessarily know what network traffic its consumers plan to send and receive.
Nevertheless, consumers should expect certain external network perimeter safety measures from their cloud
providers.

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Cloud computing includes a number of resources that are not shared in a traditional data center. One of these
resources is the cloud provider's internal network infrastructure, such as the access switches and routers used to
connect cloud virtual machines to the provider's backbone network.
Internal network security differs from external network security in that we postulate that any attackers have
already made it through the external defenses, either via an attack or, more commonly, because the attackers
are legitimately authorized for a different part of the network. After a user is allowed access to a portion of the
cloud service provider's network, the provider has a number of additional responsibilities with respect to internal
network security.
The primary categories of internal network attacks that consumers should be concerned with include:
1. Confidentiality breaches (disclosure of confidential data)
2. Integrity breaches (unauthorized modification of data)
3. Availability breaches (denial of service, either intentional or unintentional)

Consumers must evaluate the cloud service provider's internal network controls with respect to their
requirements and any existing security policies the consumer may have. Each consumer's requirements will be
different, but it is recommended that consumers evaluate the internal network controls of a service provider

Step 8: Evaluate security controls on physical infrastructure and facilities

An important consideration for security of any IT system concerns the security of physical infrastructure and
facilities. In the case of cloud computing, these considerations apply, but it will often be the case that the
infrastructure and facilities will be owned and controlled by the cloud service provider and it is the responsibility
of the cloud consumer to get assurance from the provider that appropriate security controls are in place.
A brief description of the security controls that should apply to the physical infrastructure and facilities of a
cloud provider includes:

• Physical Infrastructure and facilities should be held in secure areas.

• Protection against external and environmental threats.
• Control of personnel working in secure areas.
• Equipment security controls.
• Supporting utilities such as electricity supply, gas supply, and water supply should have controls in place.
• Control security of cabling
• Proper equipment maintenance.
• Control of removal of assets.
• Secure disposal or re‐use of equipment.
• Human resources security.
• Backup, Redundancy and Continuity Plans.

Step 9: Understand the security requirements of the exit process

The exit process or termination of the use of a cloud service by a consumer requires careful consideration from
a security perspective.
From a security perspective, it is important that once the consumer has completed the termination process,
"reversibility" or "the right to be forgotten" is achieved ‐ i.e. none of the consumer's data should remain with the
provider. The provider must ensure that any copies of the data are wiped clean from the provider's environment,
wherever they may have been stored (i.e. including backup locations as well as online data stores).
Clearly, there is the opposite problem during the exit process itself ‐ the consumer must be able to ensure a
smooth transition, without loss or breach of data. Thus the exit process must allow the consumer to retrieve
their data in a suitably secure form, backups must be retained for agreed periods before being eliminated and
associated event logs and reporting data must also be retained until the exit process is complete.
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8. Various User-related and Developer-related issues are as follows:

User Related Issues: It refers to those issues where user/customer is reckoned as the primary agent. Some
of the aspects with regard to this problem are mentioned as follows:
a. Shifting User Needs: User requirements for IT are constantly changing. As these changes accelerate, there
will be more requests for Information System development and more development projects. When these
changes occur during a development process, the development team faces the challenge of developing
systems whose very purpose might change since the development process began.
b. Resistance to Change: People have a natural tendency to resist change, and information systems
development projects signal changes - often radical - in the workplace. When personnel perceive that the
project will result in personnel cutbacks, threatened personnel will dig in their heels, and the development
project is doomed to failure.
c. Lack of Users’ Participation: Users must participate in the development efforts to define their
requirements, feel ownership for project success, and work to resolve development problems. User
participation also helps to reduce user resistance to change.
d. Inadequate Testing and User Training: New systems must be tested before installation to determine that
they operate correctly. Users must be trained to effectively utilize the new system.
Developer Related Issues: It refers to the issues and challenges regarding the developers. Some of
the critical bottlenecks are mentioned as follows:
e. a. Lack of Standard Project Management and System Development Methodologies: Some
organizations do not formalize their project management and system development methodologies, thereby
making it very difficult to consistently complete projects on time or within budget.
b. Overworked or Under-Trained Development Staff: In many cases, system developers often lack
sufficient educational background and requisite state of the art skills. Furthermore, many companies do a
little to help their development personnel stay technically sound, and more so a training plan and training
budget do not exist.

9. Every system is built to meet some set of needs, for example, the need of the organization for lower
operational costs, better information for managers, smooth operations for users or better levels of services
to customers. To assess these needs, the analysts often interact extensively with people, who will be
benefited from the system in order to determine ‘what are their actual requirements’. Various fact-finding
techniques/tools that are used by the system analyst for determining these needs/requirements are
documents including manuals, input forms, diagrams of how the current system works, organization
charts etc., questionnaires, interviews and observation approach. Various activities to be performed by
Mr. Anil during the phase of System Requirement Analysis of Systems Development Life Cycle (SDLC)
are as follows:
(i) Analysis of the Present System: Detailed investigation of the present system involves collecting,
organizing and evaluating facts about the system and the environment in which it operates. There should
be enough information assembled so that a qualified person can understand the present system without
visiting any of the operating departments. The survey of existing methods, procedures, data flow, outputs,
files, input and internal controls should be intensive in order to fully understand the present system and
its related problems. The areas studied in depth should include reviewing historical aspects, analyzing
inputs and outputs, reviewing data files, methods and internal controls, procedure and data
communications, modeling the existing system and undertaking overall analysis of the existing system.
(ii) System Analysis of Proposed Systems: After a thorough analysis of each functional area of the present
information system, the proposed system specifications must be clearly defined, which are determined
from the desired objectives set forth at the first stage of the study. Likewise, consideration should be
given to the strengths and short comings of the present system. The required systems specifications should
be in conformity with the project's objectives articulated and in accordance with the following:
• Outputs are produced with great emphasis on timely managerial reports that utilize the management
by exception' principle.
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• Databases are maintained with great accent on online processing capabilities.

• Input data is prepared directly from original source documents for processing by the computer
system.
• Methods and procedures that show the relationship of inputs and outputs to the database, utilize
data communications as, when and where deemed appropriate.
• Work volumes and timings are carefully considered for present and future periods including peak
periods.
(iii) System Development Tools: Many tools and techniques including structured English, Flowcharts, Data
Flow Diagrams, Decision Trees etc., have been developed to improve current information systems and to
develop new ones. Such tools help end users and systems analysts primarily for the following:

a. To conceptualize, clarify, document and communicate the activities and resources involved in the
organization and its information systems;
b. To analyze present business operations, management decision making and information processing
activities of the organization; and
c. To propose and design new or improved information systems to solve business problems or pursue
business opportunities that have been identified.

(iv) Preparation of Systems Requirement Specification: At the end of the analysis phase, the systems analyst
prepares a document called Systems Requirement Specifications (SRS). A well - documented SRS may
normally contain the following sections:
a. Introduction: Goals, Objectives, Software context, Scope and Environment of the computer-based
system.
b. Information Description: Problem description; Information content, flow and structure; hardware,
software, human interfaces for external system elements and internal software functions.
c. Functional Description: Diagrammatic representation of functions; Processing narrative for each
function; Interplay among functions; Design constraints.
d. Behavioral Description: Response to external events and internal controls.
e. Validation Criteria: Classes of tests to be performed to validate functions, performance and
constraints.
f. Appendices: Data flow/Object Diagrams; Tabular Data; Detailed description of algorithms charts,
graphs and other such material.
g. SRS Review: The development team makes a presentation and then hands over the SRS document
to be reviewed by the user or customer. The review reflects the development team’s understanding
of the existing processes. Only, after ensuring that the document represents existing processes
accurately, the user should sign the document. This is a technical requirement of the contract between
users and development team/organization.

10. As a System development team member, following areas should be studied to understand the present
system:
• Reviewing Historical Aspects: The historical facts of an organization enable the system analyst to
identify the major turning points and milestones that have influenced its growth. A review of annual
reports and organization charts can identify the growth of management levels as well as the development
of various functional areas and departments. The system analyst should investigate ‘what system changes
have occurred in the past including operations’ that have been successful or unsuccessful with computer
equipment and techniques.
• Analyzing Inputs: A detailed analysis of present inputs is important since they are basic to the
manipulation of data. Source documents are used to capture the originating data for any type of system.
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The system analyst should be aware of various sources from where the data are initially captured,
keeping in view the fact that outputs for one area may serve as an input for another area. The system
analyst must understand the nature of each form, ‘what is contained in it’, ‘who prepared it’, ‘from
where the form is initiated’, ‘where it is completed’, the distribution of the form and other similar
considerations.
• Reviewing Data Files: The analyst should investigate the data files maintained by each department,
noting their number and size, where they are located, who uses them and the number of times per given
time interval, these are used. Information on common data files and their size will be an important factor,
which will influence the new information system. The system analyst should also review all on-line and
off-line files, which are maintained in the organization as it will reveal information about data that are
not contained in any outputs.
• Reviewing Methods, Procedures and Data Communications: Methods and procedures transform
input data into useful output. A procedure review is an intensive survey of the methods by which each
job is accomplished, the equipment utilized and the actual location of the operations. Its basic objective
is to eliminate unnecessary tasks or to perceive improvement opportunities in the present information
system. A system analyst also needs to review and understand the present data communications used by
the organization. S/he must review the types of data communication equipment including data interface,
data links, modems, dial- up and leased lines and multiplexers. The system analyst must understand how
the data-communications network is used in the present system so as to identify the need to revamp
the network when the new system is installed.
• Analyzing Outputs: The outputs or reports should be scrutinized by the system analysts in order to
determine “how well they will meet the organization’s needs”. The analysts must understand what
information is needed and why, who needs it and when and where it is needed. Additional questions
concerning the sequence of the data, how often the form reporting is used, how long it is kept on file,
etc. must be investigated.
• Reviewing Internal Controls: A detailed investigation of the present information system is not
complete until internal control mechanism is reviewed. Locating the control points helps the analyst to
visualize the essential parts and framework of a system. An examination of the present system of internal
controls may indicate weaknesses that should be removed in the new system. The adoption of advanced
methods, procedures and equipment might allow much greater control over the data.
• Modeling the Existing System: As the logic of inputs, methods, procedures, data files, data
communications, reports, internal controls and other important items are reviewed and analyzed in a
top- down manner; the processes must be properly documented. The flow charting and diagramming of
present information not only organizes the facts, but also helps to disclose gaps and duplication in
the data gathered. It allows a thorough comprehension of the numerous details and related problems in
the present operation.
• Undertaking Overall Analysis of the Existing system: Based upon the aforesaid investigation of the
present information system, the final phase of the detailed investigation includes the analysis of the
present work volume; the current personnel requirements; the present costs-benefits of each of these
must be investigated thoroughly.

11. PQR company allowing employee to bring their own device in the office premises and allowing access to corporate
networks can poses serious risk to the company Overall, these risks can be classified into four areas as outlined
below:
a. Network Risks: It is normally exemplified and hidden in “Lack of Device Visibility”. When company-
owned devices are used by all employees within an organization, the organization’s IT practice has complete
visibility of the devices connected to the network. This helps to analyze traffic and data exchanged over the
Internet. As employees are permitted to carry their own devices (smart phones, laptops for business
use), the IT practice team gets unaware about the number of devices being connected to the network. As
network visibility is of high importance, this lack of visibility can be hazardous. For example, if a virus hits
the network and all the devices connected to the network need be scanned, it is probable that some of the
devices would miss out on this routine scan operation. In addition to this, the network security lines become

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blurred when BYOD is implemented.

b. Device Risks: It is normally exemplified and hidden in “Loss of Devices”. A lost or stolen device can
result in an enormous financial and reputational embarrassment to an organization as the device may hold
sensitive corporate information. Data lost from stolen or lost devices ranks as the top security threats as
per the rankings released by Cloud Security Alliance. With easy access to company emails as well as
corporate intranet, company trade secrets can be easily retrieved from a misplaced device.
c. Application Risks: It is normally exemplified and hidden in “Application Viruses and Malware”. A related
report revealed that most employees’ phones and smart devices that were connected to the corporate network
weren’t protected by security software. With an increase in mobile usage, mobile vulnerabilities have
increased concurrently. Organizations are not clear in deciding that “who is responsible for device security
– the organization or the user”.
d. Implementation Risks: It is normally exemplified and hidden in “Weak BYOD Policy”. The effective
implementation of the BYOD program should not only cover the technical issues mentioned above but
also mandate the development of a robust Implementation policy. Because corporate knowledge and data
are key assets of an organization, the absence of a strong BYOD policy would fail to communicate
employee expectations, thereby increasing the chances of device misuse. In addition to this, a weak policy
fails to educate the user, thereby increasing vulnerability to the above-mentioned threats.

12. The Safeguards Rule requires companies to develop a written information security plan that describes their
program to protect customer information. The plan must be appropriate to the company’s size and complexity,
the nature and scope of its activities, and the sensitivity of the customer information it handles. As part of its
plan, each company must:

• designate one or more employees to coordinate its information security program;

• identify and assess the risks to customer information in each relevant area of the company’s operation,
and evaluate the effectiveness of the current safeguards for controlling these risks;
• design and implement a safeguards program, and regularly monitor and test it;
• select service providers that can maintain appropriate safeguards, make sure your contract requires them
to maintain safeguards, and oversee their handling of customer information; and
• evaluate and adjust the program in light of relevant circumstances, including changes in the firm’s
business or operations, or the results of security testing and monitoring.
The requirements are designed to be flexible. Companies should implement safeguards appropriate to
their own circumstances. The Safeguards Rule requires companies to assess and address the risks to
customer information in all areas of their operation, including three areas that are particularly important
to information security: Employee Management and Training; Information Systems; and Detecting and
Managing System Failures. Depending on the nature of their business operations, firms should consider
implementing the following practices:

▪ Employee Management and Training:

a. Checking references or doing background checks before hiring employees who will have access to
customer information.
b. Asking every new employee to sign an agreement to follow your company’s confidentiality and
security standards for handling customer information.
c. Limiting access to customer information to employees who have a business reason to see it. For
example, give employees who respond to customer inquiries access to customer files, but only to the
extent they need it to do their jobs.
d. Controlling access to sensitive information by requiring employees to use “strong” passwords that
must be changed on a regular basis. (Tough-to-crack passwords require the use of at least six characters,
upper- and lower-case letters, and a combination of letters, numbers, and symbols.)
e. Using password-activated screen savers to lock employee computers after a period of inactivity.

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f. Developing policies for appropriate use and protection of laptops, PDAs, cell phones, or other mobile
devices. For example, make sure employees store these devices in a secure place when not in use. Also,
consider that customer information in encrypted files will be better protected in case of theft of such a
device.
g. Training employees to take basic steps to maintain the security, confidentiality, and integrity of
customer information, including:
i. Locking rooms and file cabinets where records are kept;
ii. Not sharing or openly posting employee passwords in work areas;
iii. Encrypting sensitive customer information when it is transmitted electronically via public networks;
iv. Referring calls or other requests for customer information to designated individuals who have been
trained in how your company safeguards personal data; and
v. Reporting suspicious attempts to obtain customer information to designated personnel.
h. Regularly reminding all employees of your company’s policy — and the legal requirement — to keep
customer information secure and confidential. For example, consider posting reminders about their
responsibility for security in areas where customer information is stored, like file rooms.
i. Developing policies for employees who telecommute. For example, consider whether or how
employees should be allowed to keep or access customer data at home. Also, require employees who
use personal computers to store or access customer data to use protections against viruses, spyware, and
other unauthorized intrusions.
j. Imposing disciplinary measures for security policy violations.
k. Preventing terminated employees from accessing customer information by immediately deactivating
their passwords and user names and taking other appropriate measures.

▪ Information Systems. Information systems include network and software design, and
information processing, storage, transmission, retrieval, and disposal. Here are some suggestions
on maintaining security throughout the life cycle of customer information, from data entry to
data disposal:
a. Know where sensitive customer information is stored and store it securely. Make sure only authorized
employees have access. For example:
i. Ensure that storage areas are protected against destruction or damage from physical hazards, like fire
or floods.
ii. Store records in a room or cabinet that is locked when unattended.
iii. When customer information is stored on a server or other computer, ensure that the computer is
accessible only with a “strong” password and is kept in a physically-secure area.
iv. Where possible, avoid storing sensitive customer data on a computer with an Internet connection.
v. Maintain secure backup records and keep archived data secure by storing it off-line and in a
physically-secure area.
vi. Maintain a careful inventory of your company’s computers and any other equipment on which
customer information may be stored.
b. Take steps to ensure the secure transmission of customer information. For example:
i. When you transmit credit card information or other sensitive financial data, use a Secure Sockets Layer
(SSL) or other secure connection, so that the information is protected in transit.
ii. If you collect information online directly from customers, make secure transmission is automatic.
Caution customers against transmitting sensitive data, like account numbers, via email or in response to
an unsolicited email or pop-up message.
iii. If you must transmit sensitive data by email over the Internet, be sure to encrypt the data.

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c. Dispose of customer information in a secure way and, where applicable for example:
i. Consider designating or hiring a records retention manager to supervise the disposal of records
containing customer information. If you hire an outside disposal company, conduct due diligence
beforehand by checking references or requiring that the company be certified by a recognized industry
group.
ii. Burn, pulverize, or shred papers containing customer information so that the information cannot be
read or reconstructed.
iii. Destroy or erase data when disposing of computers, disks, CDs, magnetic tapes, hard drives, laptops,
PDAs, cell phones, or any other electronic media or hardware containing customer information.

▪ Detecting and Managing System Failures. Effective security management requires your
company to deter, detect, and defend against security breaches. That means taking reasonable
steps to prevent attacks, quickly diagnosing a security incident, and having a plan in place for
responding effectively. Consider implementing the following procedures:
a. Monitoring the websites of the software vendors and reading relevant industry publications for news
about emerging threats and available defenses.
b. Maintaining up-to-date and appropriate programs and controls to prevent unauthorized access to
customer information. Be sure to:
i. check with software vendors regularly to get and install patches that resolve software vulnerabilities;
ii. use anti-virus and anti-spyware software that updates automatically;
iii. maintain up-to-date firewalls, particularly if you use a broadband Internet connection or allow employees
to connect to your network from home or other off-site locations;
iv. regularly ensure that ports not used for your business are closed; and
v. promptly pass along information and instructions to employees regarding any new security risks or possible
breaches.
c. Using appropriate oversight or audit procedures to detect the improper disclosure or theft of customer
information. It’s wise to:
i. keep logs of activity on your network and monitor them for signs of unauthorized access to customer
information;
ii. use an up-to-date intrusion detection system to alert you of attacks;
iii. monitor both in- and out-bound transfers of information for indications of a compromise, such as
unexpectedly large amounts of data being transmitted from your system to an unknown user; and
iv. insert a dummy account into each of your customer lists and monitor the account to detect any
unauthorized contacts or charges.
d. Taking steps to preserve the security, confidentiality, and integrity of customer information in the
event of a breach. If a breach occurs:
i. take immediate action to secure any information that has or may have been compromised. For example,
if a computer connected to the Internet is compromised, disconnect the computer from the Internet;
ii. preserve and review files or programs that may reveal how the breach occurred; and
iii. if feasible and appropriate, bring in security professionals to help assess the breach as soon as possible.
e. Considering notifying consumers, law enforcement, and/or businesses in the event of a security
breach. For example:
i. notify consumers if their personal information is subject to a breach that poses a significant risk of
identity theft or related harm;
ii. notify law enforcement if the breach may involve criminal activity or there is evidence that the breach
has resulted in identity theft or related harm;

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iii. notify the credit bureaus and other businesses that may be affected by the breach.
iv. check to see if breach notification is required under applicable state law.

13. An Information Security Policy is a document that describes an organization’s information security controls
and activities. It is defined as the statement of intent by the management about how to protect a company’s
information assets. It is a formal statement of the rules, which give access to people to an organization's
technology and information assets, and which they must abide.
• The policy does not specify technologies or specific solutions; it defines a specific set of intentions and
conditions that help protect a company’s information assets and its ability to conduct business. An
Information Security Policy is the essential foundation for an effective and comprehensive information
security program.
• It is the primary way in which management’s information security concerns are translated into specific
measurable and testable goals and objectives. It provides guidance to the people, who build, install, and
maintain information systems. Information Security policy invariably includes rules intended to:
o Preserve and protect information from any unauthorized modification, access or disclosure;
o Limit or eliminate potential legal liability from employees or third parties; and
o Prevent waste or inappropriate use of the resources of an organization.
• An information security policy should be in written form. It provides instructions to employees about
“what kinds of behavior or resource usage are required and acceptable”, and about “what is unacceptable”.
• An Information Security policy also provides direction to all employees about how to protect organization’s
information assets, and instructions regarding acceptable (and unacceptable) practices and behavior.
• The policy does not need to be extremely extensive, but clearly state senior management's commitment to
information security, be under change and version control and be signed by the appropriate senior manager.
The policy should at least address the following issues:
o a definition of information security,
o reasons why information security is important to the organization, and its goals and principles,
o a brief explanation of the security policies, principles, standards and compliance requirements,
o definition of all relevant information security responsibilities; and
o Reference to supporting documentation.
The auditor should ensure that the policy is readily accessible to all employees and that all employees are
aware of its existence and understand its contents.

14. Operations management is responsible for the daily running of hardware and software facilities. Operations
management typically performs controls over the functions as below:
(a) Computer Operations: The controls over computer operations govern the activities that directly support
the day-to-day execution of either test or production systems on the hardware/software platform available.
Three types o f controls fall under this category:
• Operation controls: These controls prescribe the functions that either human operators or automated
operations facilities must perform.
• Scheduling controls: These controls prescribe how jobs are to be scheduled on a hardware/software
platform.
• Maintenance controls: These controls prescribe how hardware is to be maintained in good operating
order.
(b) Network Operations: This includes the proper functioning of network operations and monitoring the
performance of network communication channels, network devices, and network programs and files. Data
may be lost or corrupted through component failure. The primary components in the communication sub-
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systems are given as follows:

• Communication lines - twisted pair, coaxial cables, fiber optics, microwave and satellite etc.
• Hardware – ports, modems, multiplexers, switches and concentrators etc.
• Software – Packet switching software, polling software, data compression software etc.
• Due to component failure, transmission between sender and receiver may be disrupted, destroyed or
corrupted in the communication system.
(c) Data Preparation and Entry: Irrespective of whether the data is obtained indirectly from source
documents or directly from, say, customers, keyboard environments and facilities should be designed to
promote speed and accuracy and to maintain the well- being of keyboard operators.
(d) Production Control: This includes the major functions like- receipt and dispatch of input and output;
job scheduling; management of service-level agreements with users; transfer pricing/charge-out control;
and acquisition of computer consumables.
(e) File Library: This includes the management of an organization’s machine-readable storage media like
magnetic tapes, cartridges, and optical disks.
(f) Documentation and Program Library: This involves that documentation librarians ensure that
documentation is stored securely; that only authorized personnel gain access to documentation; that
documentation is kept up-to-date and that adequate backup exists for documentation. The documentation
may include reporting of responsibility and authority of each function; Definition of responsibilities and
objectives of each function; Reporting responsibility and authority of each function; Policies and
procedures; Job descriptions and Segregation of duties.
(g) Help Desk/Technical support: This assists end-user to employ end-user hardware and software such as
micro-computers, spreadsheet packages, database management packages etc. and provide the technical
support for production system s by assisting with problem resolution.
(h) Capacity Planning and Performance Monitoring: Regular performance monitoring facilitates the
capacity planning wherein the resource deficiencies must be identified well in time so that they can be
made available when they are needed.
(i) Management of Outsourced Operations: This has the responsibility for carrying out day-to-day monitoring
of the outsourcing contract.

15. The number and types of customizable operations parameters for the password will vary greatly, depending
on the type of application and the user requirements specified during the design stage. The number and types
of customizable system security parameters will also vary by application, depending on the risk of the
applications and the financial and human resources available during system design and development. System
security parameters should be customizable on a system-wide basis and on an individual user basis. Five
common customizable system-wide security parameters include:

1. Minimum password length. The system should reject any user attempts to enter passwords with fewer
characters than the parameter setting. For most commercial business systems, a minimum password length of
eight characters is sufficient. However, if the system in question supports a highly risky process, more
characters will be warranted, even into the 20-plus range. With long passwords, passphrases are usually
necessary. A passphrase is simply a statement that is typed instead of just a single word. Passphrases can be
highly effective because they require an unauthorized user to guess a concept statement rather just a single
word. They are also effective against dictionary “cracking” software. Some systems have a parameter that
enables system security administrators to require users to include one or more numbers or special characters
in their passwords.

2. Password expiration period. When the password expiration period has elapsed, the system should prompt
each user to enter the old password as well as a new password two consecutive times. For most commercial
applications, a password expiration period of 60 days is sufficient. Again, in the case of a highly risky system,
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more frequent changes of passwords may be necessary. Keep in mind that if the system enables users to enter
a new password, then immediately change their password back to their old password, the effectiveness of
frequent password changes is eliminated.

3. Number of consecutive unsuccessful sign-on attempts allowed before suspending a user ID. If the number
of unsuccessful consecutive sign-on attempts has been reached, the system should suspend the user ID.
Suspension means that the user ID is unusable until a system security administrator resets the user ID back to
an active status. This is an excellent control to prevent a hacker or hacking system from trying to sign on an
unlimited number of times. In most cases, suspending user IDs after three consecutive unsuccessful sign-on
attempts is sufficient for operational and security purposes.

4. Time of day and day of week that users can sign on. The system should reject any user attempts to access
the system during times of the day or days of the week that are outside the parameter settings. This control
helps prevent unauthorized access attempts during nonbusiness hours by persons who have physical access to
a facility (e.g., a custodian or security guard).

5. Period of inactivity allowed before a user is automatically signed off. When a user ID has been inactive for
the period specified in the parameters, the system should automatically save and close any files that are still
active, terminate the application, and sign off the user. This control reduces the risk of unauthorized access
when users leave their workstations and forget or choose not to sign off. The most appropriate session time-
out period must be determined based on a balance between operational and security needs. Initially, a session
time-out period of 10 minutes or less should be recommended.

16. Major Boundary Control techniques to be implemented in Information System are as follows:
a. Cryptography: It deals with programs for transforming data into cipher text that are meaningless to
anyone, who does not possess the authentication to access the respective system resource or file. A
cryptographic technique encrypts data (clear text) into cryptograms (cipher text) and its strength depends
on the time and cost to decipher the cipher text by a cryptanalyst. Three techniques of cryptography
are transposition (permute the order of characters within a set of data), substitution (replace text with
a key-text) and product cipher (combination of transposition and substitution).
b. Passwords: User identification by an authentication mechanism with personal characteristics like name,
birth date, employee code, function, designation or a combination of two or more of these can be used as
a password boundary access control. A few best practices followed to avoid failures in this control
system are minimum password length, avoid usage of common dictionary words, periodic change of
passwords, hashing of passwords and number of entry attempts.
c. Personal Identification Numbers (PIN): PIN is similar to a password assigned to a user by an institution
a random number stored in its database independent to a user identification details, or a customer selected
number. Hence, a PIN may be exposed to vulnerabilities while issuance or delivery, validation,
transmission and storage.

d. Identification Cards: Identification cards are used to store information required in an authentication
process. These cards are to be controlled through the application for a card, preparation of the card,
issue, use and card return or card termination phases.
e. Biometric Devices: Biometric identification e.g. thumb and/or finger impression, eye retina etc. are also
used as boundary control techniques.

17. Business Impact Analysis (BIA) is essentially a means of systematically assessing the potential impacts
resulting from various events or incidents. The process of BIA determines and documents the impact of a
disruption of the activities that support its key products and services. It enables the business continuity team
to identify critical systems, processes and functions, assess the economic impact of incidents and disasters
that result in a denial of access to the system, services and facilities, and assess the "pain threshold, "that
is, the length of time business units can survive without access to the system, services and facilities. For
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each activity supporting the delivery of key products and services within the scope of its BCM program,
the enterprise should:
a. assess the impacts that would occur if the activity was disrupted over a period of time;
b. identify the maximum time period after the start of a disruption within which the activity needs to be resumed;
c. Identify critical business processes;
d. assess the minimum level at which the activity needs to be performed on its resumption;
e. identify the length of time within which normal levels of operation need to be resumed; and
f. Identify any inter-dependent activities, assets, supporting infrastructure or resources that have also to be
maintained continuously or recovered over time.
The enterprise should have a documented approach to conduct BIA. The enterprise should document its
approach to assessing the impact of disruption and its findings and conclusions. The BIA Report should
be presented to the Top Management. This report identifies critical service functions and the time frame
in which they must be recovered after interruption. The BIA Report should then be used as a basis for
identifying systems and resources required to support the critical services provided by information
processing and other services and facilities. Developing the BCP also takes into account the BIA process.
Following key tasks should be covered in the second phase ‘Vulnerability Assessment and General
Definition of Requirements’ while developing a Business Continuity Plan (BCP).
 A thorough Security Assessment of the computing and communications environment including
personnel practices; physical security; operating procedures; backup and contingency planning; systems
development and maintenance; database security; data and voice communications security; systems
and access control software security; insurance; security planning and administration; application
controls; and personal computers.
 The Security Assessment will enable the project team to improve any existing emergency plans and disaster
prevention measures and to implement required emergency plans and disaster prevention measures where
none exist.
 Present findings and recommendations resulting from the activities of the Security Assessment to the
Steering Committee so that corrective actions can be initiated in a timely manner.
 Define the scope of the planning effort.
 Analyze, recommend and purchase the recovery planning and maintenance software required to support
the development of the plans and to maintain the current plans following implementation.
 Develop a Plan Framework.
 Assemble Project Team and conduct awareness sessions.

18. The Disaster Recovery Planning (DRP) document may include the following areas:
a. The conditions for activating the plans, which describe the process to be followed before each plan, are
activated.
b. Emergency procedures, which describe the actions to be taken following an incident which jeopardizes
business operations and/or human life. This should include arrangements for public relations management
and for effective liaising with appropriate public authorities e.g. police, fire, services and local government.
c. Fall-back procedures, which describe the actions to be taken to move essential business activities or support
services to alternate temporary locations, to bring business process back into operation in the required
time-scale.
d. Resumption procedures, which describe the actions to be taken to return to normal business operations.
e. A maintenance schedule, which specifies, how and when the plan will be tested‟, and the process for
maintaining the plan.
f. Awareness and education activities, which are designed to create an understanding of the business

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continuity, process and ensure that the business continues to be effective.

g. The responsibilities of individuals describing who is responsible for executing which component of the
plan. Alternatives should be nominated as required.
h. Contingency plan document distribution list.
i. Detailed description of the purpose and scope of the plan.
j. Contingency plan testing and recovery procedure.
k. List of vendors doing business with the organization, their contact numbers and address for emergency
purposes.
l. Checklist for inventory taking and updating the contingency plan on a regular basis.
m. List of phone numbers of employees in the event of an emergency.
n. Emergency phone list for fire, police, hardware, software, suppliers, customers, back- up location, etc.
o. Medical procedure to be followed in case of injury.
p. Back-up location contractual agreement, correspondences.
q. Insurance papers and claim forms.
r. Primary computer center hardware, software, peripheral equipment and software configuration.
s. Location of data and program files, data dictionary, documentation manuals, source and object codes and back-
up media.
t. Alternate manual procedures to be followed such as preparation of invoices.
u. Names of employees trained for emergency situation, first aid and life saving techniques.
v. Details of airlines, hotels and transport arrangements.

19. Audit program to assess the adequacy of environmental, physical security, logical security, and operational
controls designed to protect IS hardware, software, and data against unauthorized access and accidental or
intentional destruction is given below:
a. Assess the adequacy and effectiveness of the organization’s IS security policy. In addition, assess
whether the control requirements specified in the organization’s IS security standards adequately protect
the information assets of the organization. At a minimum, the standards should specify the following
controls and require them to be applicable to all information systems:
i. The visitor password should be changed after the system is installed.
ii. There is a minimum password length of eight or more characters.
iii. Passwords require a combination of alpha and numeric characters.
iv. The password is masked on the screen as it is entered.
v. The password file is encrypted so nobody can read it.
vi. There is a password expiration period of 60 days or less.
vii. Three or fewer unsuccessful sign-on attempts are allowed, then the user ID is
suspended.
viii. User sessions are terminated after a specified period of inactivity (e.g., five minutes
or less).
ix. Concurrent sign-on sessions are not allowed.
x. Procedures are in place to remove user IDs of terminated users in a timely manner.
xi. Users are trained not to share or divulge their passwords with other users, post them
in their workstations, store them in electronic files, or perform any other act that could
divulge their passwords.
xii. Unsuccessful sign-on attempts and other logical security-related events (e.g., adding
and deleting users, resetting passwords, restarting the system) are logged by the
system, and the log is reviewed regularly by system security staff.
xiii. Fully developed and tested backup and recovery procedures exist to help ensure
uninterrupted business resumption in the event of a full or partial disaster.

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xiv. New information systems are required to be designed to enable the aforementioned
controls to be implemented by system security administrators. New systems include
those developed in house, those purchased from vendors, and third-party processor
systems. In the case of software vendors and third-party processors, the above control
requirements should be specified as requirements in the contract.

b. For service organization applications, examine the most recent report on the policies and
procedures placed in operation at the vendor’s data processing site
i. Assess the adequacy of controls described in the report and determine whether
applicable control recommendations have been implemented at the organization.
ii. If applicable, determine whether another type of security or privacy certification exists
(e.g., TruSecure, SysTrust, WebTrust, BBBOnline, TRUSTe).

c. If the system was purchased from and supported by a vendor, assess the financial stability of the
system vendor using the most recent audited financial statements prepared by the vendor’s
external auditors. (Optimally, this step should be performed prior to when the decision is made
to purchase the system. Otherwise, significant resources could be wasted on a system for which
the vendor will no longer exist.)
i. Select a sample of recent invoices from the system vendor and determine whether
costs have been properly recorded and classified on the financial statements of your
organization. Costs should normally be amortized over the expected useful life of the
system.
ii. For IS development projects, determine whether applicable internal development
costs (e.g., programmer hours) have been capitalized and amortized over the estimated
useful life of the internal use system in accordance with generally accepted accounting
principle.

d. Examine the vendor software license agreement and any agreements for ongoing maintenance
and support to ensure that they are current, address service needs, and do not contain or omit
any wording that could be detrimental to your organization. Where applicable, the agreements
should also require that a copy of the programming source code of the current version of the
software be stored in escrow by an independent third party so that it is available to your company
in the event the vendor goes out of business or another stipulated event occurs (e.g., breach of
contract; software no longer supported by vendor).
e. Assess the adequacy of physical security over the computer system hardware and storage media.
f. Determine whether an adequately trained backup system security administrator has been
designated.
g. Assess the adequacy and effectiveness of the written business resumption plan, including the
results of mock disaster tests that have been performed.
i. Assess the adequacy of backup procedures for system software and data. The
procedures should include periodic backups as necessary (daily, weekly, monthly),
off-site storage at a secure location, and rotation of backup media.
ii. Verify that at least one alternative set of processes exists for each key assumption
(transportation, communications, staffing, processing facilities, etc.).
h. Assess the adequacy of insurance coverage over the hardware, operating system, application
software, and data. Hardware should be covered at replacement cost. The costs of re-creating
any lost software and data should be covered. Optimally, coverage should include lost revenues
directly resulting from hardware failure and loss of the operating system, application software,
and data during covered events.
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i. Determine whether the visitor password for the system has been changed and whether controls
exist to change it on a periodic basis in conformity with the computing system security policy,
standards,
j. Observe the system security administrator sign on and print a list of current system users and
their access capabilities. Alternatively, obtain the list of users independently if appropriate
system access can be obtained.
i. Assess the reasonableness of the access capabilities assigned to each user.
ii. Confirm that user IDs of terminated employees are suspended in a timely manner.
iii. Confirm that system access capabilities of transferred employees are adjusted
accordingly.
k. Document and assess the reasonableness of the default system security parameter settings. The
settings should conform to the organization’s computing system security policy, standards, or
guidelines
l. Test the functionality of the logical security controls of the system (e.g., password masking,
minimum password length, password expiration, user ID suspended after successive invalid
sign-on attempts, log-on times allowed, and session time-outs).
m. Determine whether the file containing user passwords is encrypted and cannot be viewed by
anyone, including the system security administrator.
n. Determine whether sensitive data, including passwords, are adequately encrypted throughout
their life cycles, including during storage, transmission through any internal or external network
or telecommunications devices, and duplication on any backup media.
o. Assess the adequacy of procedures to review the log of system security- related events (e.g.,
successive invalid sign-on attempts, system restarts, changes to user access capabilities and user
parameter settings).
p. Assess the adequacy of remote access controls (e.g., virtual private networks [VPNs], token
devices [CRYPTOCard, SecurID, etc.], automatic dial-back, secure sockets layer [SSL]).
q. Determine whether duties are adequately segregated in the operating areas supporting the
information system (e.g., transactions should be authorized only by the originating department,
programmers should not have the capability to execute production programs, procedures should
be adequately documented, etc.).
r. Determine whether there have been any significant software problems with the system. Assess
the adequacy, timeliness, and documentation of resolution efforts.
s. Assess the adequacy of controls that help ensure that IS operations are functioning in an efficient
and effective manner to support the strategic objectives and business operations of the
organization (e.g. system operators should be monitoring CPU processing and storage capacity
utilization throughout each day to ensure that adequate reserve capacities exist at all times).

20. With respect to Top Management and Information Systems Management Control, the major activities that the
senior management must perform are Planning, Organizing, Leading and controlling in the Information System
functions. The Role of Information Systems (IS) auditor at each activity is discussed below:
 Planning: Auditors need to evaluate whether top management has formulated a high-quality
Information System’s plan that is appropriate to the needs of an organization or not. A poor-quality
information system is ineffective and inefficient leading to losing of its competitive position within the
marketplace.
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 Organizing: Auditors should be concerned about how well top management acquires and manages staff
resources for three reasons:
▪ The effectiveness of the IS function depends primarily on the quality of its staff. The IS staff need to
remain up to date and motivated in their jobs.
▪ Intense competition and high turnover have made acquiring and retaining good information system staff
a complex activity.
▪ Empirical research indicates that the employees of an organization are the most likely persons to
perpetrate irregularities.
 Leading: Generally, the auditors examine variables that often indicate when motivation problems exist
or suggest poor leadership – for example, staff turnover statistics, frequent failure of projects to meet
their budget and absenteeism level to evaluate the leading function. Auditors may use both formal and
informal sources of evidence to evaluate how well top managers communicate with their staff. The formal
sources include IS plans, standard documents and policies whereas the informal sources of evidence
include interviews with IS staff about their level of satisfaction with the top management. Auditors
must try to assess both the short-run and long-run consequences of poor communications within the
information systems function and to assess the implications for asset safeguarding, data integrity, system
effectiveness, and system efficiency.
 Controlling: Auditors should focus on subset of the control activities that should be performed by top
management – namely, those aimed at ensuring that the information systems function accomplishes its
objectives at a global level. Auditors must evaluate whether top management’s choice to the means of
control over the users of IS services is likely to be effective or not.

21. Before proceeding with the audit, the auditor is expected to obtain the following information at the
audit location:
a. Location(s) from where Investment activity is conducted.
b. IT Applications used to manage the Insurer’s Investment Portfolio.
c. Obtain the system layout of the IT and network infrastructure including: Server details, database details,
type of network connectivity, firewalls and other facilities/ utilities.
d. Are systems and applications hosted at a central location or hosted at different office?
e. Previous Audit reports and open issues / details of unresolved issues from:
i. Internal Audit,
ii. Statutory Audit, and
iii. Inspection
f. Internal circulars and guidelines .
g. Standard Operating Procedures (SOP).
h. List of new Products/funds introduced during the period under review .
i. Scrip wise lists of all investments,
j. IT Security Policy.
k. Business Continuity Plans.
l. Network Security Reports pertaining to IT Assets

22. Section 73 of ITA has criminalized the act of commission of computer fraud. If any person with an intention to
obtain the benefit, acquires the sensitive information of any other person such offender shall be liable to the
punishment with a fine not exceeding two hundred thousand rupees or with an imprisonment not exceeding six
months or with both.
In the above case Bik Bhusal obtains the identity of Barbara Campa and purchase a sony color television set and
cordless headphone, so he shall be liable to the punishment with a fine not exceeding two hundred thousand
rupees or with an imprisonment not exceeding six months or with both.

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23. Section 74 of ITA has criminalized the act of commission of computer fraud. If any person using the computer
system gives fraudulent information with an intention to spread hatred, loss or discomfort to other person such
offender shall be liable to the punishment with a fine not exceeding fifty thousand rupees or with an imprisonment
not exceeding one month or with both.
In the above case Miss M created a fraudulent email id and sent email to boy’s foreign client. Boy’s company
lost a large number of clients by this act, so she shall be liable to the punishment with a fine not exceeding fifty
thousand rupees or with an imprisonment not exceeding one month or with both

24. Section 73 of ITA has criminalized the act of commission of computer fraud. If any person with an intention to
obtain the benefit, uses computer system to produce fraudulent documents such offender shall be liable to the
punishment with a fine not exceeding two hundred thousand rupees or with an imprisonment not exceeding six
months or with both.
In the above case Mr X produced fake computerize voucher to show sales record and save tax by using a computer
system, so he shall be liable to the punishment with a fine not exceeding two hundred thousand rupees or with
an imprisonment not exceeding six months or with both.

25. Section 71 of ITA has criminalized the act of unauthorized access in computer material. If any person with an
intention to have access in any program, information or data of any computer, uses such a computer without
authorization of the owner of or the person responsible for such computer or even in the case of authorization,
performs any act with an intention to have access in any program, information or data contrary to from such
authorization, such a person shall be liable to the punishment with the fine not exceeding one hundred thousand
rupees or with imprisonment not exceeding three months or with both depending on the seriousness of the
offence.
In the above case Mr Y has been using the broadband Internet without any authorization. He used to hack into
the server from various cities like Biratnagar and Butwal, amongst others. Mr Y shall be liable to the punishment
with the fine not exceeding one hundred thousand rupees or with imprisonment not exceeding three months or
with both depending on the seriousness of the offence.

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PAPER 6: Advanced Taxation

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Revision Questions
Income Tax
Question No. 1
Based on the following information from financial statement of M/s Pathivara Industries Ltd., a
special industry with 900 Nepali employees and 50 Indian employees for the financial year 2077/78,
calculate income tax liability of the company considering the relevant provisions of Income Tax Act,
2058 and relevant Finance Act:
Profit and Loss Account
For the year ending Asadh 31, 2078
Particulars Amount (Rs.) in ‘000
Sales of goods-Domestic 525,000
Sales of goods- Abroad 225,000
Sales of scrap 1,000
Interest income 800
Rental income from rent of one manufacturing plant 1,200
Dividend income (net of tax) 400
Foreign exchange gain 650
Provision written back 250
Miscellaneous income 600
Total Income 754,900
Expenditure:
Cost of goods sold for domestic sales 393,750
Cost of goods sold for export sales 157,500
Employee benefits expenses 15,000
Interest expenses 950
Depreciation 5,800
Repair and maintenance 300
Provision for doubtful debt 850
Loss on sale of old plant 200
Other expenses 7,200
Total expenses 581,550
Profit before tax and bonus 173,350
Provision for bonus 17,335
Profit before tax 156,015
Additional information:
• Exchange gain includes Rs. 300,000 against revaluation of creditors at year end.
• Provision written back includes provision amount Rs.200,000 not allowed to deduct in tax 2 years
ago.
• Cost of goods sold-domestic include commission given to the sales agents Rs. 50,000 on which
no TDS has been deducted and transportation expenses of Rs.250,000 without PAN/VAT bills.
• Employee benefit expenses include provision for gratuity and leave encashment of amount
Rs.2,200,000. The amount deposited for gratuity in that year is Rs.1,500,000. Employee benefit
expenses includes Rs.60,000 for personal use of Managing Director.
• Interest Expenses of Rs. 90,000 has been charged as expenses against a loan taken for purchase
of Accounting Software. The loan has been taken on Baisakh 2078, and the assets was put to use
on 1st Shrawan 2078.
• Other expenses include Provision for CSR amounting Rs.18 lakh, donation given to tax exempt
hospital Rs.500,000 and Rs.200,000 to private school, expenses pertaining to telecommunication
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bills of previous year of Rs.100,000 and promotional expenses of Rs.35,000 not related to
business.
• Out of provision for Bonus of last year, Rs.500,000 remained undistributed.
• Information about Assets
Assets Building Office Vehicles Plant and
equipment Machinery
Opening Depreciation Base 7,500,000 1,500,000 4,800,000 25,000,000
Additions upto Poush 5,00,000 7,000,000
Addition Magh to Chaitra 2,700,000
Addition from Chaitra to Asadh 180,000
Sales 600,000
Repair and Maintenance 170,000 60,000 70,000 2,500,000
• Repair and maintenance of plant and machinery is included in cost of goods sold.

Question No. 2
Below is the budgeted/estimated information of Sunrise Industries Pvt. Ltd., a special industry started
commercial operation on FY 2075/76 and located at less undeveloped area pertaining to fiscal year
2078/79 by considering the relevant provision of Income Tax Act, 2058 and relevant Finance Act.
Sales 200,500,000
Other income 1,500,000
Cost of materials consumed 150,000,000
Cost of manufacturing expenses 30,000,000
Research and development expenditure 2,000,000
Administrative expenses 4,000,000
Employee expenses 7,500,000
Budget for donation to tax exempt entity 150,000
To provide seed money to one startup company based on the 200,000
proposal submitted
Unsettled loss of previous year 820,000
• Asset opening WDV
Assets Factory Office Vehicles Plant and
Building equipment Machinery
Opening WDV 5,000,000 2,500,000 2,000,000 6,800,000
• Budgeted repair expenses
Factory Building Office equipment Vehicles Plant and Machinery
1,00,000 2,00,000 400,000 1,000,000
• It is budgeted to prepare a new factory shed for Rs.1,000,000 in first quarter, add a machinery of
Rs.1,500,000 in that shed in second quarter and to purchase a transport vehicle Rs.1,800,000 in
third quarter and add furniture in CEO’s room of Rs.300,000 in fourth quarter.

i. Calculate the installment tax to be submitted for FY 2078/79. If TDS withheld by other party is
Rs.45,000 found out in Asadh 2079, what would be third installment?
ii. What is the implication of non-submission of estimated tax return and installment tax?
iii. Can the estimated tax return once submitted be revised?

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Question No. 3
a) Apex Bank Ltd. issued a loan to a client with NPR 25 lakhs Loan limit. Instalment amount has
been calculated of NPR 5,74,018 and rate of interest is assumed to be 10%. Please prepare the
repayment schedule showing the principal and allowable interest portion as per Income Tax Act
2058 of payment for each year.

b) Mukesh and Dinesh are colleagues at work. They decided to jointly invest their savings Rs.
6,000,000 and Rs.5,000,000 respectively. They bought a plot at Budhanikantha for Rs.10,000,000
and spent Rs.500,000 for registration and other expenses. They spent further Rs.400,000 for land
filling and development so that they can get proper resale value. The government expenses for
the road recognition in paper for the plot came Rs.100,000. After one and half year they sold the
plot for Rs. 160,000,000 out of which, they spent Rs.800,000 for commission of middleman and
other expenses. Calculate their taxable income in this transaction as per Income Tax Act, 2058?

c) PQR Company Limited had purchased a plot of land for Rs.40 Lakhs on 2075/04/15. It had
investment in secondary market in the shares of a general insurance for Rs.8 lakh at the rate of
Rs. 400 per share on 2077/11/20 and a hydropower for Rs.11 lakhs at the rate of Rs.200 per shares
on 2078/05/01. Now, for the expansion of the business, the company wants to sell these assets.
As on 2078/12/25, the market value of the plot of land is Rs.1.5Crores and selling expenses is
estimated to be 2 lakh and the market price of the shares of general insurance is Rs.650 per share
and of hydropower is Rs.550 per share. Estimated brokerage fees is 0.5%. Explain the tax
implication of the above sales under the provisions of the Income Tax Act, 2058.

Question No. 4
a) M/S Sustainable Nepal Construction Company has taken contract for the construction of road for
Nepal Government through an international bidding for Rs.30 million to be constructed within
four years commencing from the year 2074-75. The company has recognized the profit of
Rs.900,000 from the contract during the year 2074-75, Rs.1,200,000 during 2075-76 and
Rs.500,000 on the basis of estimations at that time. But due to price rocketing of construction
materials and not having provision of compensation for price escalation in the contract, the
company occurred a net loss of Rs.2,800,000 in this contract on final year. By stating the relevant
provision of the income tax act, suggest whether the loss can be carried back.
What would be case if the company had taken the contract through national competitive bidding?

b) S.N. Crafts is a proprietorship firm dealing in handicrafts manufacturing works. Total sales in
fiscal year 2077/78 is Rs. 3 crore. Export sales out of total sales is 50%. The net profit margin is
15% in export sales and 12% in domestic sales. Mr. Som, the proprietor of S.N. Crafts, is
handicapped. Calculate the tax liability of S.N. Crafts for FY 2077/78. What would be the tax rate
for FY 2078/79 in this case?

Question 5
Safe Money Transfer Private Limited has shareholding pattern on 1 Shrawan 2077 as mentioned
below:
Shareholder % of shareholding
ABC Investment Company 80%
Damodar Pandey 10%

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Saraswoti Pandey 5%
Jay Prakash Adhikari 5%
Total 100%
ABC Investment Company is owned by Mr. Hari Joshi and Damodar Pandey where the shareholding
is 70% and 30% respectively. Mr. Hari Joshi decided sold all of his shares to Mr. Punkaj Tiwari on
1, Baisakh 2078.
Below is detail of transactions of Safe Remit Private Limited for the income year 2077/78:
Particulars Upto 1 Baisakh From 1 Baisakh 2078
2078 to 31 Ashadh 2078
Commission income 8,000,000 3,500,000
Interest income 150,000 35,000
Agent’s commission expenses 4,000,000 1,800,000
Employee Cost 1,800,000 1,000,000
Interest Expenses 250,000 100,000
Other expenses 1,500,000 600,000
Total carried forward accumulated loss pertaining to last income year is Rs. 908,000 as on 1 Shrawan
2077 as per Income Tax Return.
Detail of Assets and Liabilities are as below:
Particulars Book Value Market Value Book Value As Market Value As
As On 1 As On 1 Baisakh On 31 Ashadh On 31 Ashadh 2078
Baisakh 2078 2078 2078
Depreciable 2,500,000 2,600,000 2,250,000 2,300,000
Fixed Assets
Investment 1,000,000 1,200,000 1,000,000 1,100,000
Receivable 3,500,000 3,000,000 3,000,000 2,500,000
Payable 5,000,000 4,850,000 4,500,000 4,000,000
Foreign 3,500,000 3,650,000 1,200,000 1,260,000
Currency
Balance
Bank Balance 1,000,000 1,000,000 1,600,000 1,600,000

Compute the Total Tax Liability of Safe Money Transfer Private Limited for the income year
2077/78.

Question No.6
Explain the followings with relevant provision of Income Tax Act, 2058 and relevant Finance Act.
a) Tax provision on Indirect payments.
b) Tax provision against arrangement made for reduction of dividend tax.
c) Tax assessment notice.

Question No. 7
Mention the applicable tax to following entities/income as per Income Tax Act and Finance Act.
i. Amounts earned by water supply and sanitation consumer organization registered as per Water
Resources Act 2049, in pursuance of its objective.
ii. Income earned by carrying on an agricultural business by getting registered as company,
partnership, and corporate body.
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iii. Casino established with an investment of more than one billion rupees and providing direct
employment to more than five hundred.
iv. Telecommunication Company listed in securities board.
v. Income earned by any entity by construction and operation of cable car.
vi. A health institution operated by a community institution.
vii. Industry which produces a new product only by recycling used materials that directly affects the
environment.
viii. Income earned from sale of locally manufactured raw material or ancillary raw material to special
industry.
ix. Income earned sale of dairy production by Dairy Industry dairy having transaction in milk
products.
x. Microenterprises run by women.

Question No. 8
a) In what case the taxpayer needs to submit the income tax return other than the due time-limit of
three months of expiration of an income year?

b) How can a person set off the loss occurred in business as per income tax act?

Question No. 9
Mr. Prahlad Neupane was retired from Nepal Telecommunications Ltd. from the post of Deputy
Manager on Jestha 1, 2077. He went to Canada on Bhadra 15, 2077 on immigrant VISA and currently
residing there. He received following income as pension holder from Nepal Telecommunications Ltd.
in FY 2077/78:
Monthly pension Rs. 45,000
Dashain allowance Rs.45,000
He had paid annual premium of Rs. 30,000 for that year and had contributed Rs.60,000 in CIT. He
had donated Rs. 15,000 to tax exempt NGO on his birthday on Shrawan 28, 2077. He incurred medical
expenses of Rs.7,500 till his stay in Nepal in that year.
Compute the taxable income and tax liability for FY 2077/78.

Question No. 10
On the basis of following details of income of Mr. Radhe Sharma, calculate the Income Tax Liability
for FY 2077/78.
Particulars Amount (Rs.)
Pension income from Government School 160,000
Income from sale of wheat and corn harvested from own land 100,000
Amount remitted by her daughter from Australia. 1,500,000
Income from own tuition center 120,000
Income as part time teacher in Secondary School 72,000
Question setting Income 15,000
Income from copy checking 20,000
Income earned from guest lectures at colleges 6,000
Gain on sale of securities listed in NEPSE 200,000
Dividend received from investment made in Nepalese company 50,000
Income of wife from profit of her stationery shop 320,000
Gain on disposal of House and Land of village that he owned and 4,000,000

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lived for 25 years.

Prize won on lottery 50,000
He has paid Rs. 29,000 for his life insurance. He incurred medical expenses of Rs.4200 for his
treatment in that year. He has insured his new home and paid premium of Rs.5,500 for that year.
Assume he opts couple for tax purpose.

Double tax avoidance agreement (DTAA) and international taxation

Question No.11
Mr. Hem Rana is resident of both Nepal and India in FY 2077/78. Nepal has Double Taxation
Avoidance Agreement with India. He has residential house in both countries. He earned income of
Rs.36 lakhs from his own Restaurant business in foreign country during that year. Mr. Rana has no
permanent establishment of business carried in Nepal. However, he has earned rental income of Rs.3
lakhs from the house situated in Kathmandu, Nepal. He stays in the house of Kathmandu during his
visit to Nepal. Determine with reasons whether the business income of Mr. Rana in foreign country
is taxable in Nepal.

Question No. 12
OECD member countries and other countries have adopted arm’s length principle to arrive at the
appropriate transfer pricing range between associated enterprises. However, there are many practical
hurdles while applying arm’s length principle. Describe.

Value Added Tax

Question No. 13
a) If a taxpayer does not pay the VAT within the specified time period, an additional fee at the rate
of Ten percent per annum shall be imposed on the amount of tax due. Under what situations such
additional fee can be waived or not imposed?

b) Mention the provision regarding refund of tax paid in excess under contract provided in VAT
Act?

Question No. 14
a) M/S Mart Bazaar wants to install accounting and billing software which generates electronic
invoice to its customers. What are the procedures to issue electronic invoice? What will be the
implication on sales book and purchase book?

b) A taxpayer was found selling under invoiced goods. What are the provisions regarding actions
against under invoicing of goods?

Question No. 15
a) M/S Everest Grill and Kitchen, a VAT registered company, has could not survive harsh situations
brought by Covid and lockdown, and hence its operation was closed for 1.5 years. The company
decided for closure of the business now. The company seeks your assistance in this regard.
Answer the following information:
Below is the detail of its assets and liabilities:

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Account head Closing balance (Rs.) Market value on date of

cancellation (Rs.)
Items on Items on Total Items on Items on Total
which which which which
VAT VAT VAT VAT
input was was not input was was not
claimed claimed claimed claimed
Inventory 8 lakh 2 lakh 10 lakh 10 lakh 2.5 lakh 12.5
lakh
Damaged 1 lakh 1 lakh 0.05 lakh 0.05
goods lakh
Equipment 12 lakh 1 lakh 13 lakh 6 lakh 0.2 lakh 6.2 lakh

Computer and 1.0 lakh 0.25 lakh 1.75 0.25 lakh 0.1 lakh 0.35
accessories lakh lakh
Vehicle - 4 32 lakh 32 lakh 25 lakh 25 lakh
Wheeler
Vehicle – 2 2.5 lakh 2.5 lakh 1.5 lakh 1.5 lakh
Wheeler
Sundry 1.25
Debtors lakh
(10% is
bad
debts)
Sundry 2.6 lakh
Creditors (all
payable)

As per VAT return filed for the previous VAT period, it has opening credit of Rs.147,000.
What shall be the tax implication on the above items on the date of cancellation? Assume if there
is no sales for the month.

b) M/s All Nepal Limited, which deals with local and export sales, has shown the following total
sales and purchases excluding VAT. Calculate the amount of credit and refund that can be claimed
in each month by mentioning the relevant provision of the act.
Month 2078 Purchase Sales Export percentage
Shrawan 1900,000 2,500,000 25%
Bhadra 1800000 3000000 30%
Ashwin 3000,000 4000000 40%
Kartik 2000000 3500000 45%
Mangsir 3300000 2500000 35%
Poush 2200000 3200000 42%
Magh 1800000 3400000 25%
Falgun 2400000 4000000 35%
Chaitra 2800000 4200000 40%

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The company bought of delivery van worth Rs.1,100,000 in the month of Kartik 2078. The
Purchase of Shrawan 2078 includes bill of amounting Rs.150,000 dated Ashad 2077, which was
omitted to claim.

Question No. 16
M/S Malika Foods Productions has following transactions for the month of Poush to Chiatra 2078.
The company submitted the VAT return for these months only on Baisakh 20, 2079.

Particulars Poush Magh Falgun Chaitra

Opening VAT receivable 8,000
Local Sales 3,500,000 3000000 3,800,000 4,000,000
Sales to Industry in SEZ 500,000 1,000,000 300,000 400,000
Purchase of materials 2,500,000 2,000,000 5,000,000 2,500,000
Purchase of Bus for staffs 2,500,000
Purchase of Petrol for Vehicle 20,000 10,000 10,000
Purchase of Truck for goods transport 6,500,000
on bank loan
Diesel for vehicle 5,000 15,000 18,000
AMC of Software acquired from 500,000
Singapore
Consultancy Service 50,000 100,000
Office supplies 25,000 35,000 15,000 20,000
Import of Plant and machinery used 600,000
only for production of vat attractive
foods
Out of total production, 80% is VAT attractive.
All of the above items are exclusive of VAT
Purchase of materials in Falgun and Chaitra includes purchase of raw materials Rs.150,000
and Rs.500,000 respectively from farmers directly.

Compute the VAT payable for each month.

Excise Duty
Question No. 17
a) Mention the process of levying the excise duty as per Excise Act and Rules.

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

Question No. 18
a) The excise officer on physical examination found the discrepancies in stock of liquor at ABC
Brewery (Pvt.) Ltd. and some damaged excise duty stickers by water leakage. Write the
provisions regarding the shortages of stock and write off damaged stickers as per Excise Act and
Rules.

b) Mention whether the excise duty is applicable on following or not:

i. Buses with capacity of more than 25 seats
ii. Scooter to be used by differently abled person
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iii. Bus with 25 seats capacity to carry students imported by community school
iv. Stick noodles manufactured through local technology
v. Ambulance
vi. Ice cream
vii. Cards
viii. Furniture and Fixture
ix. Digital camera
x. Smart Watch

Customs Duty
Question No. 19
a) ABC enterprises has imported some perishable goods from India and the goods have arrived at
Birgunj Custom Office? The proprietor wants to clear the goods without the examination of goods
by Customs Officer or at least he wants the goods to be examined in his presence. Is this possible?
What are the provisions relating to examination of goods?

b) Explain the provision of imposition of custom duty on gold brought to Nepal by travelers while
returning from abroad?

Question No. 20
a) Ms. Dami Kapada Udhyog manufactures various textiles and fabrics materials. It has contract to
sell all materials to Ms. Vastra Garments Industries which uses them as raw materials to
manufacture readymade garments for export to overseas. Dami Kapada Udhyog imports 80% of
its raw materials i.e. thread from India. It also imports some packing materials from China which
are not available in Nepal. Can the industry get bank guarantee facility in the import such of raw
materials and packing materials? Examine citing the provisions of Customs Act and Rule.

b) Sun Nepal Pvt. Ltd. deals with export of garments to various countries. He had exported goods
worth 2 crore to a party in Germany two months ago and it reached safely to the party’s location.
However, the goods were returned by the party after reaching there condemning that the quality
of the goods was inferior. The goods have reached customs office Birgunj. The custom officer
refused to release the goods without paying custom duty on such goods. Give your opinion.

c) Health life Bioscience Technologies Pvt. Ltd. manufactures different vaccines for mankind. The
company wants to get quality certification for its productions from renowned Lab Center of Africa
so that it can sale its products abroad as well. The company wants to send the sample vaccines to
Africa for quality test. How can he send the samples and what is the custom duty implication if
the value of such vaccines if Rs.100,000. What will happen if the samples could not get returned
within three months?

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Suggested Answers/Hints
Income Tax
Answer No. 1
Calculation of taxable Income of Pathivara Industries Ltd. for income year 2077/78

Export Rs Other Rs Total Rs

Particulars Remarks
(‘000) (‘000) (‘000)
Domestic sales 525,000 525,000
Export sales 225,000 225,000
Sales of scrap 1,000 1,000
Interest income 800 800
Assumed Rent is
Rental income 1,200 1,200
gross
Assuming dividend
received from
resident company
Dividend income - -
and is final
withholding
income
excluding
Foreign exchange gain 350 350
revaluation gain
excluding provision
Provision written back 50 50
not deducted earlier
Miscellaneous income 600 600
Undistributed Bonus 500 500
Total 225,000 529,500 754,500
Deductions
Cost of goods sold 156,750 391,750 548,500 Refer WN 1
interest on software
to be capitalized,
Interest expenses 258 602 860
remaining in
proportion to sales
Employee cost 4,272.00 9,968.00 14,240 WN 2
Depreciation 6,458.95 2,768.12 9,227.07 WN 3
Repair and improvement 749.4 1748.6 2,498 WN 3
Not allowed
assuming
Provision for doubtful debt - - - conditions of
Sec. 40 (3) (ga) not
met
Adjusted while
Loss on sale of assets - - - computing
depreciation
Other expenses 1,369.50 3,195.50 4,565 WN 4
Bonus 5,200.50 12,134.50 17,335
Total expenditure 175,058.35 422,166.72 597,225.07
Assessable Income from 49,941.65 107,333.28 157,274.93
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Business
lower of 5% of ATI
Less: Donation 30 70 100
or 100,000 or actual
Taxable income 49,911.65 107,263.28 157,174.93
Tax Rate 12% 15%
Tax 5,989.40 16,089.49 22,078.89

Working Notes
1. Cost of materials sold

Particulars Export Rs (‘000) Domestic Rs (‘000)

Cost of materials consumed 157,500.00 393,750
less: Repair -750 -1750
less: Transportation expenses without
PAN/VAT bills -250
Total 156,750 391,750

2. Employee Cost

Particulars Amount Rs ‘000

Employee Cost 15,000
less: Provision for gratuity and leave -2200
Add: Deposit for gratuity and leave 1500
less: Personal expenses -60
Total 14,240

3. Computation of Depreciation and Allowable Repair

Assets Block A Block B Block C Block D Total
Opening WDV 7,500,000 1,500,000 4,800,000 25,000,000
Addition 100% 500,000 7,000,000
Addition 2/3 1,800,000
Addition 1/3 60,000
Less: Sales proceeds
(600,000)
Depreciation base 7,500,000 2,060,000 6,600,000 31,400,000 47,560,000
Depreciation rate for
special industry 6.67% 33% 27% 20%
Depreciation 500,250 686,598 1,760,220 6,280,000 9,227,068
Repair and maintenance
7% of Depreciation
525,000 144,200 462,000 2,198,000
base
Actual Repair 170,000 60,000 70,000 2,500,000
Allowable Repair 170,000 60,000. 70,000 2,198,000 2,498,000

4. Other Expenses
Particulars Amount Rs. ‘000
Other expenses 7,200
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Less: Provision for CSR -1,800

Less: Donation -700
Less: Previous period exp -100
Less: Promotion Not related to business
-35
Total 4,565

5. Identification of Applicable Tax Rate

Particulars Domestic Export Remarks
Normal for special industry 20% 20%
Option 1: For manufacturer exporter - 12% Section 11(3nga)
Option 2: Effective rate after Concession due 15% 15% Section 11(3)(ka)
to employment (75% of applicable rate)
Lower tax rate 15% 12%

Answer No. 2
i. Calculation of Estimated Tax liability for FY 2078/79

Particulars Amount Rs. Remarks

Sales 200,500,000
Other income 1,500,000
Total inclusion 202,000,000
Deductions:
Cost of trading stock 180,000,000
Administrative expenses 4,000,000
Employee expenses 7,500,000
Depreciation 3,750,223 WN1
Repair 1,080,700 WN1
Total expenditure 196,330,923

Adjustable Taxable Income 5,669,077

Less: Research and Development 2,000,000 lower of 50% of ATI
or actual
Less: Donation under section 12 100,000 lower of 5% of ATI or
100,000 or actual
allowed upto
Less: Expenses of investment in startup Rs.100,000 per
100,000
under section 12Ga company upto 5
company
Assessable income 3,469,077
Less: Prior period loss 820,000
Taxable income 2,649,077
tax rate 6% Section 11 (3) (kha)
tax liability 158,944.62
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Tax Instalment
Within Poush end- 40% 63,577.85
Within Chaitra end-70% less deposited in Poush 47,683.39
Within Ahsad end-100% less deposited in Poush and Chaitra 47,683.39
Total 158,944.62

If advance tax is 45,000 found out in Asadh 2079, it would be deducted from the third installment
and the figure will be Rs. 2,683.39.

Working Note:
WN 1: Computation of Depreciation and Repair
Assets Block A Block B Block C Block D Total
Opening WDV 5,000,000 2,500,000 2,000,000 6,800,000
Addition 100% 1,000,000 1,500,000
Addition 2/3 1,200,000
Addition 1/3 10,000
Less: Sales proceeds - - - -
Depreciation base 6,000,000 2,510,000 3,200,000 8,300,000 20,010,000
Depreciation rate for
6.67% 33% 27% 20%
special industry
Depreciation 400,200 836,583 853,440 1,660,000 3,750,223

7% of Depreciation 420,000 175,700 224,000 581,000

Base
Repair actual 100,000 200,000 400,000 1,000,000 1,700,000
Allowable Repair 100,000 175,700 224,000 581,000 1,080,700

ii. As per section 95, Each person who has to pay installment in any income year has to submit to
estimated tax return within Poush end.
If any person who has to pay installment of tax does not submit an estimate in any income year,
Department may make an estimate of the estimated tax of the person to be submitted in that year
on the basis of the tax required to be paid by him in the last income year.

As per section 117, If the estimated income return of any income year has not been submitted,
fees of five thousand rupees or 0.01 percent of the assessable amount of income mentioned in the
income return, whichever is higher is charged.

As per section 118, If, with respect to the amount of installment tax to be paid by any person in
any income year, the amount paid pursuant to clause (b) becomes higher than that of clause (a),
interest shall be charged on such more amount at the general interest rate of each month and
portion of the month for the following period from the date for submission of the installment of
that year till the date for submission of income return:
(a) Amount of each installment paid by such person in any income year,
(b) Estimated amount or amount of revised estimate, if correct, and, if not correct, ninety percent
tax amount of each installment period in such income year to be submitted by the person
mentioned in clauses (a) and (b) of Section 3.

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iii. Yes it can be revised by the tax payer on submission of each installment. Likewise, it can be
revised by Department if department is not satisfied of the submitted estimate.

Answer No. 3
a) Repayment schedule
Opening Balance Total Interest Closing Balance
Years of Principal Due Installment Portion Principal Portion of Principal Due
1 2,500,000.00 574,018.00 250,000.00 324,018.00 2,175,982.00
2 2,175,982.00 574,018.00 217,598.20 356,419.80 1,819,562.20
3 1,819,562.20 574,018.00 181,956.22 392,061.78 1,427,500.42
4 1,427,500.42 574,018.00 142,750.04 431,267.96 996,232.46
5 996,232.46 574,018.00 99,623.25 474,394.75 521,837.71
6 521,837.71 574,018.00 52,183.77 521,837.71 (0.00)

b) As per Section 29 of the Income Tax Act, 2058, the amount to be included or deducted for
determining income from investment of two or more persons shall be performed on the basis of
the ratio of their contribution i.e. contribution ratio. In the given case, Mukesh and Dinesh shall
calculate their taxable income by dividing the overall income and expenses in the ratio 6:5 i.e
their investment ratio
Particulars Total Rs For Mukesh Rs. For Dinesh Rs.
Cost of land 10,000,000.00
Registration and other expenses 500,000.00
Land filling and development charge 400,000.00
Government expenses for road 100,000.00
Total outgoings (A) 11,000,000.00 6,000,000.00 5,000,000.00
Selling price 16,000,000.00
Less: Commission and other expenses 800,000.00
Total incomings (B) 15,200,000.00 8,290,909.09 6,909,090.91
Net gain (B-A) 4,200,000.00 2,290,909.09 1,909,090.91

c) The tax liability is calculated below:

Particulars Rs. Lacs
a) Gain on sale of land:
Net Sale Price 148
Cost 40
Gain on sale of land 108
b) Gain on sale of share
Sale Price of shares of general insurance (2,000 shares at Rs 650) 13.00
Sale Price of hydropower (5500 shares at Rs 550) 30.25
Total sales 43.25
Cost of shares 19
Gross Gain 24.25
Broker fee at 0.5% 0.22
Gain on sale of shares 24.03

Total Gain 132.03

Tax Rate 25%
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Tax Amount 33.01

Less: Advance tax collected on sale of land 2.25
Less: TDS on sale of shares@10% 2.40
Net Tax Payable 28.36

Answer No. 4
a) As per section 20(4) of the act, if any person suffers a loss in an income year when a long-term
contract obtained by any person by making competition of the business at the international level
was completed or when a disposal was made in any other manner or a loss which was not deducted
and the liability whereof is allowed to be carried forward in the coming year pursuant to clause
(b) of sub-section (1) is related with a long-term contract, the Department may, by a notice in
writing, give permission to deal with that loss as follows.-
(a) The loss may be carried backward in last income year or years, and
(b) The loss may be treated as not deducted only to the extent of the excess where, in computing
the income of the business related with that long-term contract, the amounts to be included in the
incomings exceed the amounts to be included in the outgoings.

In the given case, since the contract is taken through international bidding, if IRD gives the
permission, then the loss could be carried back.
Final figure of net loss Rs.2,800,000
Less: Profit recognized in 2074-75 Rs. 900,000
Less: Profit recognized in 2075-76 Rs. 1,200,000
Less: Profit recognized in 2076-77 Rs. 500,000
Net loss to be set off or carried forward Rs. 200,000
A credit of tax is allowed to the company for Rs.900,000, Rs.1 200,000 and Rs.500,000 at the
average rate of the tax paid by the company during the year of profit recognition.

But if Sustainable Nepal Construction Company has taken the contract through national bidding,
IRD shall not allow the company to enjoy the facility of carry backward of loss. The profits
recognized in earlier income years shall not be amended and the loss of Rs.2,800,000 could be set
off from any other income from business or investment of the company or could be carried
forward for 7 years for set off.

b) Calculation of tax liability for FY 2077/78

Particulars Export (Rs) Local (Rs) Total (Rs)
Gross Taxable Business Income 2,250,000.00 1,800,000.00 4,050,000.00
Deduction to the handicapped
200,000.00 200,000.00
(50% of the basic exemption limit)
Taxable Business Income 2,250,000.00 1,600,000.00 3,850,000.00
Computation of Tax Liability:
Upto Rs. 400,000 @ 0% (Being business
- -
income)
Next Rs. 100,000 @ 10% 10,000.00 10,000.00
Next Rs. 200,000 40,000.00 40,000.00

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Next upto Rs. 20,00,000

@ 20% on balance taxable local income of
Rs. 900,000 (Manufacturing Nature) 180,000.00 225,000.00
45,000.00
@11.25% on Export income from
Manufacturing of Rs.400,000
Balance Rs.1,850,000
@ 11.25% on balance Export Income of Rs. 208,125.00 208,125.00
1,850,000
Total Tax Liability 253,125.00 230,000.00 483,125.00

For FY 2078/79, there is no change in tax rate for manufacturing income of resident natural person
but the tax rate for export income from manufacturing of resident natural person would be 9.75% as
per section 11(3nga).

Answer No.5
There is change in control of entity by 56% (80% of 70%) in Safe Money Transfer Private Limited
through ABC investment as there is 70% change in control in ABC Investment.
Transactions up to 1 Baisakh 2078 is considered to be the transactions before the transfer of shares
of Hari Joshi in ABC Investment and the transactions from 1 Baisakh 2078 to 31 Ashadh 2078 is
considered to be the transactions after the transfer of shares of Hari Joshi. Asset deemed to be disposed
off at market value on date of share transfer under section 57.

Computation the Tax Liability of Safe Money Transfer upto 1 Baisakh 2078
Particulars Amount Rs.
Revenue from commission 8,000,000
Interest income 150,000
Add: Balancing charge 100,000
Add: Foreign exchange gain 150,000
Less : commission expenses -4,000,000
Less : Employee Cost -1,800,000
Less: Interest Expenses -250,000
Less : Other expenses -1,500,000

Net Profit 850,000

Carried Forward Loss -908,000
Net Taxable Profit -58,000
Income Tax Nil

Net Gain under section 36

gain under section 37 350,000.00
loss under section 37 500,000.00
Net gain under section 36 -150,000.00
Tax Nil

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There is no tax liability on Baisakh 1, 2078. The unrelieved loss of Rs.58,000 under section 20 and
Rs.150,000 under section 36 and is not allowed to forward after Baisakh 1, 2078

Computation of Tax Liability of Safe Money Transfer from 1 Baisakh 2078 to Asadh end 2078
Particulars Amount Rs. Remarks
Revenue from commission 3,500,000
Interest income 35,000
Add: Foreign exchange gain 60,000
Less : commission expenses -1,800,000
Less : Employee Cost -1,000,000
Less: Interest Expenses -100,000
Less : Other expenses -600,000
Less: Bad debts 0 Not allowed
Net Profit 95,000
Balance Carried
Carried Forward Loss 0 Forward Loss not
Allowed u/s 57
Net Taxable Profit 95,000
Income Tax @ 30% 28,500

Answer No. 6
a) According to section 29 of Income Tax Act, if any person gets indirect benefit from the payments
made by the payer or a person associated with him or specify other person to receive the payment,
the Department may, by issuing a notice in writing, treat such other person or specified person as
the recipient of payment.
b) Section 58 of Income tax has provision restricting reduction of dividend tax. Accordingly, an
arrangement made by any entity upon maintaining all of the following arrangements shall be
deemed to be an arrangement made for reducing dividend tax:
(a) Where profit of such entity is reserved, current or expected,
(b) Where any person who acquires an interest of the entity and the recipient of the interest or his
associated person makes any payment to the present or previous beneficiary of the entity or his
associated person irrespective of whether or not it is related to the acquisition of interest and
whether or not it is made at the time of acquisition of interest,
(c) Where the payment is fully or partly reflected in the profits of the entity, and
(d) Where the entity distributes dividends to the recipient of interest and the profits cover the
dividends fully or partly.

If dividends are distributed by any entity under an arrangement reducing dividend tax made as
above, the arrangement shall be deemed to be as follows:
(a) Payment made by the recipient of interest or his or her associated person shall not be deemed
as payment made by that person but as distribution by that entity of dividends to the previous or
present beneficiary referred to in clause (b).
(b) Dividends distributed by that entity to the recipient of interest shall be deemed as equal to a
sum to be set by subtracting the amount of payment said to have been made from the dividends
referred to in clause (a).

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c) In making amendment to tax assessment pursuant to Section 101 of the act, the Department has
to give that person a notice in writing clearly setting out the grounds for such amendment and a
time limit of fifteen days for the submission of proof and evidence for defense on such assessment
of tax. The Department shall give the person, whose tax is assessed, a written notice of tax
assessment made pursuant to sub-section (2) of Section 100 or Section 101 setting out the
following matters:
(a) The assessed tax to be paid and due and payable by the person for the income year or period
related with assessment of tax,
(b) The method of computation of tax in the tax assessment,
(c) The reason why the Department has to assess the tax,
(d) The time for payment of the assessed tax due and payable, and
(e) The time, place and mode for making a petition if one is not satisfied with the assessment of
tax.

Answer No. 7
i. According to section 10, this amount is tax exempt.
ii. According to Section 11 (1), tax concession of 50% of the applicable tax rate i.e. effective tax
rate is 50% of 25% = 12.5%
iii. No tax concession i.e. Normal tax rate of 25%
iv. No tax concession i.e. Normal tax rate of 30%
v. According to section 11(3cha), tax concession of 60% of applicable tax rate i.e. effective tax
rate is 60% of 25% =15% upto 10 years and normal rate of 25% thereafter.
vi. According to section 11(3Ana), 20% concession on applicable tax rate i.e. effective tax rate is
80% of 25%=20%
vii. According to section 11(3fa) 50% tax concession on applicable tax rate i.e. effective tax rate is
50% of 25%=12.5% for first 3 years from the start of the transaction and 25% tax concession
on applicable tax rate i.e. effective tax rate is 75% of 25%=18.75% for next 2 years and normal
rate of 25% thereafter.
viii. According to section 11(3Dha), 20% tax concession on applicable tax rate i.e. effective tax
rate is 80% of 25%=20%
ix. According to section 11(3Ddha), 50% tax concession on applicable tax rate i.e. effective tax
rate is 50% of 25%=12.5%
x. According to section 11(3Ta), 100% tax exemption for first 10 Years and normal tax rate of
25% thereafter.

Answer No.8
a) According to section 95(5) of Income tax Act, the Department may, in the following
circumstances, require any person to submit the income return of an income year or any part of
the income year within the time-limit mentioned in the written notice given by it to such person
prior to the due time-limit of three months of expiration of an income year for submission of the
income return of the income year:
(a) If that person becomes bankrupt, insolvent or is dissolved,
(b) If that person is to leave Nepal for an uncertain period of time,
(c) If that person is leaving the act being carried out by him in Nepal, or
(d) If the Department otherwise thinks it proper.
Similarly, Section 96 of the Act has provision that if any person who has to submit an income
return pursuant to Section 96 makes an application in writing, within the time limit for the

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submission of such return, to the Department for the extension of the time-limit, the Department
may extend the time-limit for submission of the income return if the reason is reasonable. The
Department may extend, at one time or several times, the time-limit for a period not exceeding
three months to submit the income return. In that case, the taxpayer needs to submit the income
tax return within the extended time limit.

b) According to section 20 of the act, person can set off the loss from business as follows:
• For the purposes of computing the income earned by any person from any business in any
income year, such person may deduct the loss as mentioned below:
(a) Loss suffered by that person from any other business and not deducted in that year, and
(b) Loss suffered by that person from any business and not deducted in the last seven income years
but in the case of a project of building and operation of any public infrastructure, which is then
transferred to the Government of Nepal, a project on construction of powerhouse and generation and
transmission of electricity, and an entity conducting petroleum work pursuant to the Nepal Petroleum
Act, 2040 (1983), loss not deducted in the last twelve income years.

• Any loss suffered by any person in respect of the foreign source and not deducted may be
deducted only in computing the income earned by that person from his foreign source, and
the loss suffered in earning any non-taxable income and not deducted may be deducted only
in computing non-taxable income of that person.
• If any person suffers a loss in an income year when a long-term contract obtained by any
person by making competition of the business at the international level was completed or
when a disposal was made in any other manner or a loss which was not deducted and the
liability whereof is allowed to be carried forward in the coming year is related with a long-
term contract, the Department may, by a notice in writing, give permission to deal with that
loss as follows.-
(a) The loss may be carried backward in last income year or years, and
(b) The loss may be treated as not deducted only to the extent of the excess where, in computing the
income of the business related with that long-term contract, the amounts to be included in the
incomings exceed the amounts to be included in the outgoings.

Answer No. 9
Mr. Prahlad Neupane is non-resident for FY 2077/78. The taxable income and tax liability is
computed as follows:
Particulars Amount Rs. Remarks
Pension 540,000.00
Dashain Allowance 45,000.00
Assessable income 585,000.00
Less: Contribution to Approved Lower of 1/3 of assessable
Retirement Fund 60,000.00 income or 300,000 or actual
Adjustable income 525,000.00
Lower of 5% adjustable income
Less: Donation 15,000.00 or 100,000 or actual
Less: Investment insurance premium - Not allowed for non-resident
Taxable Income 510,000.00
Tax rate 25% Tax rate for non-resident
Tax liability 127,500.00
Less: Medical Tax credit - Not allowed for non-resident
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Answer No.10
Computation of Taxable Income of Mr. Radhe Sharma for Income Year 2077/78

Particulars Amount (Rs.)

Pension income from Government School 160,000
Income from part time teaching 72,000
Assessable income from employment 232,000

Income from own tuition center 120,000

Income of wife from profit of her stationery shop 320,000
Assessable income from Business 440,000

Gain on sale of securities listed in NEPSE 200,000

Assessable income from Disposal of NBCA 200,000

Total Assessable income 872,000

Less: Life Insurance Premium Paid (Minimum of Rs. 25,000 and actual
premium paid i.e. Rs. 29000 25,000
Taxable income 847,000

Calculation of tax liability

Tax Taxable Tax amount
Particulars
rate amount (Rs.) (Rs.)
first 450,000
from Employment except Pension 1% 72,000.00 720.00
from Pension 0% 160,000.00 -
from Business 0% 218,000.00 -
Gain on Disposal of Securities listed in
5% 200,000.00 10,000.00
NEPSE
next 100,000 10% 10,000.00
100,000.00
remaining upto 200,000 20% 97,000.00 19,400.00
Total tax liability 847,000.00 107,097.51
Less: Medical tax credit
630.00
15% of 4200 or 750 the lower
Net tax liability 106,467.51

Note
1. Income from sale of wheat and corn harvested from own land is exempted as per section 11(1).
2. Amount remitted by her daughter from Australia is not included in taxable income.
3. Income earned from question paper setting, copy checking and guest lecture and dividend
received from investment made in Nepalese company and prize won on lottery are final
withholding income.
4. Gain on disposal of House and Land of village that he owned and lived for 25 years is not NBCA
and no tax is required to pay.
5. As per schedule 1 section 9ka, where any resident natural person has a pension income, tax shall
be computed only on the amount remaining balance after subtracting an additional twenty-five

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percent of i.e. Rs. 400,000 for the natural person or Rs.450,000 for the spouse from the taxable
income with applicable from FY 2078/79 as per Finance act 2078. However, this provision had
been removed by Finance Act 2077 for FY 2077/78.

Double tax avoidance agreement (DTAA) and international taxation

Answer No.11
Section 73(4) shall be e applicable if any international agreement contains a provision under which
Nepal has to exempt income or payment or has to apply the reduced tax rate to income or payment.
Where, Nepal has entered Double Taxation Avoidance Agreement with foreign country, the provision
of that agreement shall be applicable.
In the given case, Mr. Hem Rana is resident of both Nepal and India. As per Article 4 of DTTA with
India, where an individual is resident of both Contracting States, then he shall be deemed to be
resident only of the State in which he has a permanent home available to him; if he has a permanent
home available to home in both States, he shall be deemed to be a resident only of the state with
which his personal and economic relations are closer (center of vital interests). Mr. Rana has
residential houses in both in Nepal and India means he has permanent home available in both
Contracting States. Mr. Rana derives business income from his own restaurant business in India but
there is not permanent establishment in Nepal. Therefore, his personal and economic and relations
with India are closer since India is the place where residential house is located and the permanent
establishment has been setup. Thus, he shall be resident of India for FY 2077/78 and the business
income shall not be taxable in Nepal. However, Mr. Rana should submit Tax Residency Certificate
declaring his residence in India from Government of India.

Answer No. 12
There are many significances and benefits of applying arm’s length principle such as promotion of
international trade, determination of real profit and economic contribution, minimization of double
taxation. However, some practical hurdles in applying arm’s length principle are described as follows:
i. Difficulty in true comparison: the commercial and financial conditions governing a transaction
between independent enterprises differ from those existing between associated enterprises
resulting in difficulty in true comparison. The economies of scale and integration of various
business activities of the associated enterprise may not be truly appreciated by arm’s length
principle. Further, associated enterprises may enter into transactions which independent
enterprises may not enter into for example licensing of valuable intangible assets or sharing the
benefits of results. Further there is no risk to the overall group’s profit from a transaction of this
kind between members of Multinational Companies Group. Thus, arm’s length principle becomes
difficult to be applied.
ii. Lack of availability of data and reliability of data: It may be difficult to get adequate and reliable
information and data required to apply arm’s length principle. The comparison of controlled and
uncontrolled transactions between associated and independent enterprises usually requires a large
quantum of data. The relevant and required information may be difficult to obtain due to
geographical constraints or secrecy and confidentiality aspects. While information about an
independent enterprise which could be relevant may not exist at all.
iii. Absence of market price: There must be reasonably reliable and comparable uncontrolled market
price. The arm’s length principle does not meet this condition because of the nature of market
price. A market place is an outcome of unique negotiations. It may be possible to know the price
range but it is very difficult to know the actual market price unless a market transaction actually
takes place.

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iv. Absence of comparable market price for intangible transactions: the arm length’s principle
reaches comparable uncontrolled market price that is reasonably reliable for standard transactions
where the price range is narrow and market price is certain. However, the arm length’s principle
generally fails to achieve a comparable market price for transactions involving intangibles
because they are unique. The unique nature of these transactions creates a very wide price range.
v. Administrative burden: In certain cases, the arm’s length principle may result in an administrative
burden for both the taxpayer and the tax administration of evaluating significant numbers and
types of cross-border transactions.
vi. Time lag: Although an associated enterprise normally establishes the conditions for transaction at
the time it is undertaken, at some point the enterprise may be required to demonstrate that these
are consistent with the arm’s length principle. The tax administration may also have to verify
perhaps some years after the transactions have taken place. It may be costly for taxpayer and tax
administration. It is also difficult to appreciate the business realities which prevailed at the time
of transactions were entered into. This may lead to bias against the tax payer.

Value Added Tax

Answer No. 13
a) In section 19(4) of the act, there is the provision that If a taxpayer submits an application to the
Director General for the waiver of the additional fee imposed on the amount of tax due not
submitted within specified time stating that the reason for the failure to make a timely payment
was caused by extraordinary circumstances beyond the taxpayer's control (force majeure), the
Director General may, if finds the reason reasonable, waive such fee. According to Rule 36 of the
VAT Rule, for the waiver of the additional fees, an application, in the format set forth in Schedule
-13, shall be filed to the Director General within thirty days from the expiry of time-limit
prescribed for payment of tax.
Similarly, section 19(6) provides that in cases where, in assessing the tax of any taxpayer pursuant
to Section 20, it appears that the amount of tax which he/she could get refunded exceeds the tax
recoverable from him/her in that tax period, additional fee and interest shall not be recovered in
assessing his/her tax in that tax period.

b) Section 25 (Ga1) of the VAT Act has provision regarding refund of tax paid in excess under
contract as follows:
(1) While making the payment by the public entity as per the prevailing laws concerning public
procurement or by the entity having full or partial ownership of Nepal Government to the
concerned contractor or supplier against the goods or services or goods and services supplied
under a contract agreement or contract, the amount deposited as tax can be adjusted with the tax
amount payable by such contractor or supplier.
(2) If the amount deposited remains excess upon regular adjustment in four months, as per sub
section (1), the contractor or the supplier, if wishes to get refund of such excess amount deposited,
may file an application to the Tax Officer.
(3) Tax officer shall refund such claimed amount within 60 days if anybody file application as
per subsection (2), whether the claim is found valid.
(4) Contractor or supplier could not adjust such tax amount in other months after they have filed
refund application as per sub section (2).

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Answer No.14
a) As per section 14ka of the VAT Act, taxpayer may issue electronic invoice upon obtaining prior
approval of the Department. Department may by publishing a notice, order taxpayers specified
in the notice to compulsorily issue invoice through electronic medium and affiliate such electronic
medium with Central Billing Monitoring System (CBMS) of Department. Department shall
prepare and implement procedure regarding security and credibility of the software or device used
to issue invoice through electronic medium. Such procedure shall be followed by concerned
producers, distributors and users. In this regards, Department has formulated procedure regarding
electronic invoice according to which taxpayer needs to follow the standards and conditions
mentioned in that procedure.
As per Rule 25 of VAT Rules, taxpayer who has obtained approval to issue invoice from
electronic medium shall not be required to certify their sales book if the sales book is prepared
automatically by the electronic medium of the taxpayer.

b) As per section 23Ga of the Act, notwithstanding anything contained in the prevailing laws, if a
person under invoices and sells any goods by reflecting its sales price at a price lower than the
prevailing market value, the Tax Officer may suspend the goods in stock which are similar to
under invoiced goods and Tax Officer may either purchase it or cause to purchase it at the under
invoiced value. While purchasing or causing the purchase of such goods by the Tax Officer if
such person refuses to sell the goods, the Tax Officer may take such goods in their possession and
shall make payment by calculating the amount as per the under invoiced value when such person
comes to collect the payment. The goods purchased or caused to be purchased may be sold or
caused to be sold at the price and as per the procedures prescribed by the Director General.
Similarly, as per section 29, tax officer may impose in the event of under invoicing the sales price,
a fine of Two Thousand Rupees for each invoice or the fine of cent percent of the amount of tax
payable whichever is higher or an imprisonment up to six months or both

Answer No.15
a) As per section 11(1), the Tax Officer shall cancel the registration of a registered person in the
case of body corporate, if the body corporate is closed down, sold or transferred or if the body
corporate in any manner ceases to exist or If the taxpayer files for zero return or does not file
return at all within a consecutive period of twelve months.
As per Section 11(3), in case the registered person has certain stock of inventories or capital goods
at the time of cancellation, on which tax credit facility was availed earlier, it has to pay the tax on
the stock of taxable goods as these are disposed off at that time at their market rate.
So, M/S Everest Grill and Kitchen needs to pay VAT on stock of goods & Fixed Assets on which
VAT credit facility was availed earlier.
Calculation of VAT payable on cancellation of registration is as follows:
Account Head Stock of items on Market value of items VAT Payable
which VAT credit in which VAT credit (Rs)
was claimed earlier was claimed earlier
Inventory 800,000 1,000,000 130,000
Damaged Goods 100,000 5,000 650
Equipment 1,200,000 600,000 78,000
Computer and accessories 100,000 25,000 3,250
Vehicle- 4 Wheeler 3,200,000 2,500,000 325,000
Vehicle – 2 Wheeler 250,000 150,000 19,500
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Total 556,400
Less: Opening VAT credit 147,000
VAT payable 409,400
VAT is not applicable on sundry debtors and creditors.

Thus, the needs to pay VAT of Rs. 409,400 at the time of cancellation of registration.

b) As per section 24(4) of the act, any registered person, whose export sales for a month are forty
percent or more of his/her total sales for that month, then the VAT credit is eligible for VAT
refund. But once the person applies for the refund of tax, it cannot claim for set off against the tax
payable in next month.

VAT
Payable
Purchases Local Output Input Credit
Month Sales Rs. Export (Credit
Rs. Sales Tax Tax Refund
with
cumulation)

Shrawan 1,750,000 25%

2,500,000 1,875,000 243,750 227,500 16,250
*
Bhadra 30%
3,000,000 1,800,000 2,100,000 273,000 234,000 39,000
Ashwin 40% 78,000
4,000,000 3,000,000 2,400,000 312,000 390,000 (78,000)

Kartik 3,100,000 45% 152,750

3,500,000 1,925,000 250,250 403,000 (152,750)
**
Not
Mangsir 35%
3,300,000 2,500,000 2,145,000 278,850 325,000 (46,150) available
Poush 42% 90,870
3,200,000 2,200,000 1,856,000 241,280 286,000 (90,870)
Magh 25%
3,400,000 1,800,000 2,550,000 331,500 234,000 97,500
Not
Falgun 38%
3,800,000 2,400,000 2,356,000 306,280 312,000 (5,720) available
Chaitra 40%
4,200,000 2,800,000 2,520,000 327,600 364,000 (42,120) 42,120

*After Deducting purchase of more than one year old which is not allowed for offset.
** Including purchase of delivery van in which 100% vat can be claimed.

Answer No. 16
Particulars Poush Magh Falgun Chaitra
VAT on local sales -80% 364,000 312,000 395,200 416,000
VAT on sales to SEZ (zero rate as per schedule 2) - - - -
Total VAT collected 364,000 312,000 395,200 416,000

VAT credit:
Vatable purchase of raw materials (excluding
260,000 208,000 504,400 208,000
from farmers)
Purchase of Bus for staffs 104,000

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Purchase of Petrol for Vehicle (not allowed as per

- - - -
Rule 41)
Purchase of Truck for goods transport on bank
676,000
loan (100% allowed as per Rule 41)
Diesel for vehicle (not allowed) - - - -
AMC of Software acquired from Singapore (if
reverse VAT has been deposited, it allowed to 52,000
claim)
Consultancy Service 5,200 10,400
Office supplies 2,600 3,640 1,560 2,080
Import of Plant and machinery used only for VAT
78,000
attractive foods (no proportionate basis)
Total credit 397,800 887,640 505,960 324,480
VAT payable (receivable) for the month (33,800) (575,640) (110,760) 91,520
Opening VAT receivable (8,000) (41,800) (617,440) (728,200)
Net VAT Payable/(Receivable) (41,800) (617,440) (728,200) (636,680)

In the above case, the company has no VAT payable for these months.

Excise Duty
Answer No. 17
a) Rule 16 of the excise Rules mentions the provision of process of levying the excise duty.
Accordingly, the removal of alcohol, spirit, Molases (Khudo) and beer shall be allowed under
Physical Control System such that excise duty is levied and recovered at the time of removal after
production. Any excisable goods and services other than these shall be allowed to be removed
under Self-Removal System. However, cigarette, tobacco (surti), khaini, gutkha, pan masala with
or without nicotine or other similar Tobacco Products shall be allowed to be removed only upon
depositing the excise duty amount applicable on the removal and getting the requisition form
approved.
In case of goods under Physical Control System, on which excise duty is levied and collected at
the time of removal, the Excise Duty Officer shall calculate the total production of the producer
in that financial year and the excise duty amount to be paid on such production and require the
producer to make advance deposit of such amount. If the amount so deposited is less that the
amount payable as excise duty, then the Excise Duty Officer may require the producer to deposit
the shortfall amount and refund the excess amount.
In case of goods and services to be removed under Self-Removal System, the excise duty shall be
deposited pursuant to Section (3) of the Act upon recovering it as per the invoice set forth in
Schedule 13.
The goods under Physical Control System shall be removed by issuing the invoice as set forth in
Schedule 13 even after getting the requisition form approved.

b) Following are the provisions regarding sales and distribution of alcohol:

ii. As per Rule 16 of Excise 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).
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iii. As per section 4Gha of Excise 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.
iv. As per Rule 29(1) of Excise 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.
v. As per Rule 29(2) of Excise 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 t/he
Department and all the due and payable revenues shall be paid up prior to producing such a new
brand.
vi. As per Rule 21 of the Excise 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.

Answer No. 18
a) According to Rule No. 23 liquor reduced due to vaporization, pilferage, in course of bottling etc.
can be exempted up to 1%. Likewise, Rule No. 24 stipulates that the beer manufacturer can get
exemption for reduction of beer up to 1.5% while bottling and 2% after bottled. Any excess loss
beyond the ceilings shall be taxed. Accordingly, the losses found shall be taxed for excess of the
ceilings.
In case of damaged stickers, as per Rule 30, If the excise duty sticker is torn, damaged or is less
during the course of use, Office shall replace such excise duty sticker on the basis of certification
of such loss or damage upon physical examination by the Excise Duty Officer or the employee
deputed by such Officer. The concerned Office shall destroy such torn and damaged excise duty
stickers based on the statement (muchulka) as per the process prescribed by the Department.

b)
i. Buses with capacity of more than 25 seats – 5%
ii. Scooter to be used by differently abled person -Nil
iii. Bus with 25 seats capacity to carry students imported by community school - Yes
iv. Stick noodles manufactured through local technology- Nil
v. Ambulance – No
vi. Ice cream – Yes, but not levied if manufactured in Nepal
vii. Cards- yes
viii. Furniture and Fixture- Yes
ix. Digital camera- Yes, 5%
x. Smart Watch – Yes, 15%

Customs Duty
Answer No. 19
a) According to section 28 of the Customs Act, the Customs Officer may open and examine, or give
order to any of his or her sub-ordinate employees to open and examine, each and every
consignment or packet of any goods whatsoever to be exported or imported or open and examine
them randomly and casually or open and examine only a certain percentage of the same. In making
examination pursuant to sub-section (1), the examination of live animals, perishable goods and
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such other goods as the Customs Officer considers necessary shall be made first. If there is a
suspicion about any consignment or packet examined or not examined or any information is
received about the same, the Customs Officer shall give order to any of his or her sub-ordinates
to examine such consignment or packet if it has not been examined or to re-examine the same if
it has already been examined. While examining or causing examination pursuant to this Section,
the Customs Officer may examine or cause examination only upon collection of the duty
chargeable on the basis of declaration.
If any Importer or exporter wishes to get the goods examined in his or her presence, that exporter
or importer shall give information thereof in writing to the Customs Officer. Where information
is so given, the Customs Officer may examine or cause to be examined the goods in presence of
such Importer or exporter provided that if such Importer or exporter is not present at the time
specified by the Customs Officer, nothing shall bar the examining of goods in the absence of such
exporter or importer.

b) As per Nepal Gazettee published on 2077/02/15, individuals can bring upto 100 grams of raw
gold while returning from abroad on payment of custom duty as follows and gold brought above
that quantity shall be seized.
• Custom duty of Rs 9,500 per 10 grams for up to 50 grams and
• Custom duty of Rs 10,500 per 10 grams for imports of above 50 grams and up to 100 grams.
In case of gold ornaments, the custom duty is exempt on gold ornaments upto 50 grams brought
for personal use. The custom duty is levied at the rate of Rs 10,500 per 10 grams for imports of
above 50 grams and upto 100 grams of gold ornaments and Rs. 12,000 for additional import of
up to 100 grams. Gold ornaments brought above that quantity shall be seized.

Answer No. 20
a) Rule 11 of the Custom Rule provides that If the Nepali textile industry intends to sale its product
to the export-oriented garment industry, the yarn needed for the production of such product may
be allowed to import by furnishing bank guarantee equivalent to the chargeable Customs duty on
the recommendation of Textile Industry Association.
As per Rule 9, The industry with bonded warehouse facility can import the packing materials not
produced in Nepal on the recommendation of the Department of Industry stating that the packing
materials are not produced in Nepal with the furnishing of the bank guarantee equivalent to the
chargeable Customs duty for the purpose of producing goods for export or sale in Nepal in
convertible foreign currency. The bonded warehouse facility can be availed by Industry exporting
garment to foreign country, Industry exporting its product to third country or exporting at least
fifty percent of its production to India.
In the given case, Dami Kapada Udhyog cannot avail bonded warehouse facility. Thus, it can
import raw materials furnishing bank guarantee equivalent to the chargeable Customs duty on the
recommendation of Textile Industry Association. But the bank guarantee facility is not available
on import of packing materials.

b) As per section 6 of the Custom Act 2064, If any person re-imports any goods which have been
manufactured or finished in Nepal and exported, such goods shall be subject to such duty as is
chargeable on the importation of the goods of similar kind or to the same value, which have been
manufactured or finished in a foreign country. However, no customs duty shall be charged on the
goods which have been returned back as follows:
(a) Having been exported through parcel by post but could not be delivered to the concerned
person and thus returned back, or
(b) Having been returned back because the concerned person has refused to take delivery after
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clearance made by the Customs Office or after having arrived abroad, or

(c) Having been returned back because of being unable to meet standard quality due to an accident
or natural calamity
Also, Where the raw materials and subsidiary raw materials of the goods returned back were
imported without paying duty, the duty chargeable on the quantity of the raw materials or
subsidiary raw materials used in such goods shall also be recovered.
In the given case, the goods were retuned back because of being lower quality and refused to take
delivery by the party, hence the exemption is not applicable, and the goods are subject to custom
duty. Hence, the custom officer is correct.

c) As per Rule 8(23) of Custom Regulation, in case it becomes necessary to export the goods,
produced in Nepal, for quality test, the chief of the Custom Office may allow to export by keeping
a deposit which shall be five percent of the value of such goods. As per Rule 8(24), if the goods,
exported for quality test is returned back within three months, previously deposited amount shall
be refunded after imposing the chargeable duty on the expenses involved in such testing.
According to Rule 8(25), If the goods, exported for the quality test, is returned back after three
months, the duty shall be imposed as imported as new goods.
In the given case, the company can export the sample vaccines worth Rs. 100,000 taking the
permission from the chief of the Custom Office and should keep deposit of Rs.5,000. It the
samples could be returned within three months the custom duty shall be imposed on those
vaccines as new imported goods.

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PAPER 7: Advanced Cost and Management Accounting

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Revision Questions
Standard costing
Question No.1
KGF is a chemical processing company that produces sprays used by farmers to protect their
crops. One of these sprays 'Agrofresh' is made by using either chemical A or chemical B. To
produce one litre of Agrofresh spray they have the option to use either 12 litres of chemical A or
12 litres of chemical B. During the financial year, the purchase department of KGF has planned
to use chemical B as it appeared that it would be the cheaper of the two and their plans were based
on a cost of chemical B of `15 per litre.
Due to subsequent market movement during the year the actual prices changed and if the concerned
department had purchased efficiently, the cost would have been:

Chemical A Rs 15.40 per litre

Chemical B Rs 16.00 per litre
Production of Agrofresh spray was 1,000 litres and the usage of chemical B was 12,800 litres at
a cost of `2,09,920.
You are the CEO of KGF and the management accountant has sent to you the following suggestions
through e-mail:
"I feel that in our particular circumstances the traditional approach to variance analysis is of
little use as for some of our products we can utilize one of several equally suitable chemicals and
we always plan to use such chemical which will lead to cheapest production costs. However due
to sharp market movements, we are frequently trapped by the sharp price changes which lead to
the choice of expensive alternative at the end."
Required
To check the reality in the content of the mail, you asked, the management accountant of the
company:
(i) To CALCULATE the material variances for Agrofresh by using
-Traditional Variance Analysis
-Planning and Operational Variances
(ii) To ANALYSE how planning and operational variances approached the variances.
(iii) To ANALYSE how the advanced variances are useful to your organization.

Life Cycle costing

Question No. 2
Damber International Ltd. (DIL) has developed a new product ‘ α3 ’which is about to be launched
into the market. Company has spent Rs. 30,00,000 on R&D of product ‘ α3 ’. It has also bought a
machine to produce the product ‘ α3 ’ costing Rs.11,25,000 with a capacity of producing 1,100 units

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per week. Machine has no residual value. The company has decided to charge price that will change
with the cumulative numbers of units sold:

Cumulative Sales (units) Selling Price Rs. per

unit
0 to 2,200 750
2,201 to 7,700 600
7,701 to 15,950 525
15,951 to 59,950 450
59,951 and above 300
Based on these selling prices, it is expected that sales demand will be as shown below:
Weeks Sales Demand per week
(units)
1-10 220
11-20 550
21-30 825
31-70 1,100
71-80 880
81-90 660
91-100 440
101-110 220
Thereafter NIL
Unit variable costs are expected to be as follows:

Rs. per unit

First 2,200 units 375
Next 13,750 units 300
Next 22,000 units 225
Next 22,000 units 188
Thereafter 225
DIL uses just-in-time production system. Following is the total contribution statement of the
product ‘ α3 ’ for its Introduction and Growth stage:

Introduction Growth
Weeks 1 - 10 11 – 30
Number of units Produced and 2,200 5,500 8,250
Sold
Selling Price per unit (Rs.) 750 600 525
Variable Cost per unit (Rs.) 375 300 300
Contribution per unit (Rs.) 375 300 225
Total Contribution (Rs.) 8,25,000 16,50,000 18,56,250
Required:
(i) PREPARE the total contribution statement for each of the remaining two stages of the
product’s life cycle.
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(ii) DISCUSS Pricing Strategy of the product ‘ α3 ’.

(iii) FIND possible reasons for the changes in cost during the life cycle of the product ‘ α3 ’.

Note: Ignore the time value of money.

Target Costing
Question No. 3
Radio Eastern Appliances Ltd. (REAL) manufactures consumer durable products in a very highly
competitive market. REAL is considering launching a new product ‘Kitchen Care’ into the market
and gathered the following data:
Expected Market Price Rs. 5,000 per unit
Direct Material Cost Rs. 1,850 per unit
Direct Labour Cost Rs. 80 per hour
Variable Overhead Cost Rs. 1,000 per unit
Packing Machine Cost (specially to be purchased for this product Rs. 5,00,000)
REAL expects the selling price for the new product will continue throughout the product’s life and a
total of 1,000 units can be sold over the entire lifetime of the product.
Direct labour costs are expected to reduce as the volume of output increases due to the effects of 80%
learning curve (index is -0.3219). The expected time to be taken for the first unit is 30 hours and the
learning effect is expected to end after 250 units have been produced. Units produced after first 250
units will take the same time as the 250th unit.
Required
(i) CALCULATE the expected total labour hours over the lifetime of the product ‘Kitchen Care’.
(ii) CALCULATE profitability of product ‘Kitchen Care’ that REAL will earn over the lifetime of
the product.
(iii)CALCULATE average target labour cost per unit over the lifetime of the product if REAL
requires average profit of ` 800 per unit, to achieve its long-term objectives.
(iv) Implementation of the target costing technique requires intensive marketing research. Why
intensive marketing research is required to implement target costing technique? COMMENT.
Note: 250 -0.3219 = 0.1691, 249 -0.3219 =0.1693

Pareto Analysis
Question No. 4
Cosmos Technologies Ltd. develops cutting-edge innovations that are powering the next revolution
in mobility and has nine tablet smart phone models currently in the market whose previous year
financial data is given below:
Model Sales (Rs.’000) Profit-Volume (PV) Ratio
Tab - A001 5,100 3.53%
Tab - B002 3,000 23.00%
Tab - C003 2,100 14.29%
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Tab - D004 1,800 14.17%

Tab - E005 1,050 41.43%
Tab - F006 750 26.00%
Tab - G007 450 26.67%
Tab - H008 225 6.67%
Tab - I009 75 60.00%
Required
(i) Using the financial data, carry out a Pareto ANALYSIS (80/20 rule) of Sales and
Contribution.
(ii) DISCUSS your findings with appropriate RECOMMENDATIONS.

Pricing Strategy
Question No. 5
Time Pharmaceuticals Ltd. is a leading Nepali Pharmaceutical company which is a fully integrated,
global healthcare provider. With in-depth domain expertise in the field of healthcare, it has strong
capabilities across the spectrum of the pharmaceutical value chain. Time has earned reputation
worldwide amongst pharmaceutical companies for providing comprehensive and complete healthcare
solutions.
One of the drugs, Rifmn is an antibiotic used to treat contagious disease “Tbis”. Rifmn is a patented
medicine. The patent for which is now going to expire, and several other competitors are expected to
enter in the market for selling the medicine using the same components of chemicals, under different
other name. In order to reposition itself in the market, the company is reviewing its pricing policy
considering the market change and other threat.
The market research for Rifmn indicates that for every Rs 4 decrease in price, demand would be
expected to increase by 8,000 batches, with maximum demand for Rifmn being one million batches.
Each batch of Rifmn is currently made of using chemical salts: Salt X: 367.50 gm at Rs 0.08 per gm
Salt Y: 301.50 gm at Rs 0.40 per gm
Each batch of Rifmn requires 30 minutes of machine time to make and the variable running costs for
machine time are Rs 40 per hour. The fixed production overhead cost is expected to be Rs 35 per
batch for the period, based on a budgeted production level of 3,00,000 batches.
The skilled workforce who has been working on Rifmn until now are being shifted onto the
production of Time company’s new antiviral drug (injection) for Viral Disease-19 which costs
millions to develop. Time has obtained patent for this revolutionary drug and it is expected to save
millions of lives all across the world. The launch of this drug is excitedly anticipated all over the
world, while its demand in unknown and no other similar specific drug exists. The average labor cost
(outsourcing) of each batch of Rifmn is Rs 38.60.
The management of Time considers that pricing decision of Rifmn should be based on each batch.
Required
(i) CALCULATE the optimum (profit-maximizing) selling price for Rifmn and the resulting
annual profit which Time will make from charging this price.

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(ii) RECOMMEND the pricing strategy for launching of new antiviral drug.
[Note– If P = a - bQ, then MR = a - 2bQ]

Budget & Budgetary Control

Question No. 6
Established in the year 1997, Crimson Private Limited (CPL) is one of the distinguished
manufacturers and suppliers of an unlimited array of Wooden Furniture Items. Product compilation
comprises of Modular Furniture, Workstations, and Cafeteria Furniture. Moreover, it is also engaged
in presenting Furniture Services that include Interior Fit Out, Office Interiors and Corporate Interior
Designing. Since inception, it has strived to proffer an excellent blend of optimum quality and price,
and successfully established the company as the preferred choice of customers in the past years. This
is the reason that its products and services are applauded in the industry for its flawlessness.
At CPL, a world-class infrastructure is set up with different types of latest technology-based machines
and equipment, which provide great support in hassle-free production and storage of the proffered
assortment. Besides the spacious workspace, it has recruited a team of skilled and experienced
professionals, who are magnificently trained to understand and meet the diverse client requirements
within the committed time period. It aims to attain complete client satisfaction and put in its best
efforts to achieve the same by offering outstanding product range & feasible services.
CPL’s Budgeting Process for Sales
1) Each salesgirl makes a customer-wise listing of sales for the last few years. Based on this
information and her knowledge about customer’s requirements, she determines an overall sales goal.
2) The sale manager, W Robert, gathers all this information and modifies it a bit. Particularly, W
looks at variance in sales growth and modifies low projections to be in line with the average. He, of
course, discusses this correction with the concerned salesgirl. The usual approach is to hold up the
other forecasts and attribute lack of sales growth to lower talent.
3) W then meets with J Donald, Managing Director. By this time, J already back out of his sales
expectations for next year based on his desired profit. J discusses the overall target with the W. The
usual result is a 7% to 10% increase in projected sales, which the W allocates among the salesgirls
based on their past performance.
4) Of course, J desires that the W discuss and negotiate any alteration with the sales force. He believes
that with appropriate logics, not high but attainable targets for his sales team can be met
Required
(i) DISCUSS the participative nature of the sales budgeting process at CPL.
(ii) ADVISE on best approach from CPL’s perspective that may be adopted.

Decision making
Question No. 7
Xiomi, China based firm, has just developed ultra-thin tablet S-5 with few features like the ability to
open two apps at the same time. This tablet cost Rs. 5,00,000 to develop; it has undergone extensive
research and is ready for production. Currently, the firm is deciding on plant capacity, which could
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cost either Rs. 35,00,000 or Rs. 52,00,000. The additional outlay would allow the plant to increase
capacity from 500 units to 750 units. The relevant data for the life cycle of the tablet at different
capacity level are as under:

Expected Sales 500 units 750 units

Sale Price Rs. 79,600 per unit Rs. 69,600 per unit
Variable Selling Costs 10% of Selling Price 10% of Selling Price
Salvage Value - Plant Rs. 6,25,000 Rs. 9,00,000
Profit Volume Ratio 40%
Required
ADVISE Xiomi, regarding the ‘Optimal Plant Capacity’ to install. The tablet’s life cycle is two years.
Note: Ignore the time value of money.

Stimulation
Question No. 8
A car rental agency has collected the following data on the demand for five- seater vehicle over the
past 50 days.
Daily Demand 4 5 6 7 8
No. of days 4 10 16 14 6

The agency has only 6 cars currently.

1. Use the following 5 random numbers to generate 5 days of demand to the rental agency.
Random Nos. 15, 48, 71, 56, 90.
2. What is the average number of cars rented per day for the 5 days?
3. How many rentals will be lost over the 5 days?

Value Chain Analysis

Question No. 9
Shah-inn Fabric & Clothing (SFC) is manufacturer of clothing fabrics to be made up into dresses and
suits. SFC established long ago back and presently enjoys the reputation as producer of quality fabric.
SFC producing fabrics from high quality synthetic yarns with all standard features which other fabric
manufacturer offers. Designs of fabric are old fashioned (traditional in nature) as SFC was established
long ago.
Management team at SFC shown believe in integration (vertical and horizontal) and diversification
(product range or market reach) as tool of risk reduction and value enhancement (profit too). SFC
opts for un-organic forward integration to gain control over value chain by acquiring ‘Skylark
Designer Clothing’ (SDC). SDC is operating in designing and weaving of fabric into fashion wears.
SDC is targeting the customers who are in age group from 40 to 60 years and belongs to price sensitive
income group. SFC in this way is able to reach to end consumer through retailers by manufacturing
cloth themselves. Acquisition of SDC by SFC remains largely successful as result in relative high
increase in sales and profits, both.

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Problem Point
But the sale & profit are not growing at same old rate now, top and bottom line witness the slowdown,
which may be due to exhaust of synergy benefits. Retail stores through which SFC sold its material
also find it difficult to make reasonable amount of sale. SFC starts exploring new retailers. But due
to presence of large number of supplier (of manufactured cloth), buying power of retailers is high;
resultantly SFC has to rest at unacceptable low margins.
Down the Line
SFC is considering of acquisition of one of cloth retail chain, named ‘Paridhaan’ in order to deliver
fabrics to the customers directly and eliminate retailers in order to boost its profit margins.
Required:
(i) DRAW Value Chain and EXPLAIN briefly.
(ii) What do you mean by competitive advantage and how it can be attained? EXPLAIN.
(iii) IDENTIFY strategy SDC opted to gain competitive advantage.
(iv) DISCUSS ‘value chain effect’ of forward integration (acquisition of SDC) on SFCs‘
competitive ability and cost competency’.
(v) EVALUATE possible acquisition of cloth retail chain ‘Paridhaan’ by SFC.

Just in Time Approach

Question No. 10
Zixer Bikes (ZB) is large national bike manufacturing company established in the year 2003. The
company has a strong position in the market and has also traditionally achieved a good market share
however facing tough competition. The Board of ZB recognises that it needs to make fundamental
changes to its production approach in order to combat increased competition from foreign
manufacturers. ZB is now being seen as non-lucrative, pollutive and with less safety features in
comparison to the foreign bikes. The Board plans to address this by improving the quality of its bikes
as well as financial performance.
The components are sourced directly by ZB. Suppliers are located worldwide. Suppliers are evaluated
on an ongoing basis, including an assessment of whether to utilise new or alternative suppliers to
improve capacity and performance. The company is having lot of components piled up in stock and
few of them are becoming obsolete. There is lots of reworking as both internal and external failure
are more, so the wastage of resources in reworking needs to be controlled. The Board is convinced
that Lean Manufacturing is the best approach to be adopted.
In ZB, production process is grouped by function and production teams comprised a number of
permanent members, who had acquired their positions through seniority and a few newly selected
specialist staff who had yet to discuss their position in any team.
The process of making a bike can be roughly divided into stamping, welding, painting, assembly and
inspections, which takes about 11-12 hours in total. The standard time to manufacture a similar bike
in industry is 8-9 hours. The nature of end product demand is unstable due to economic factors.
However, ZB forecasts demand based on its internal policies and historical trends. ZB sells its bikes

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in retail stores located in over 10 metro cities. It focuses on building close relationships with retailers,
working with them to sell its bikes in a compelling manner.
Enclosed Annexure
Required
You are newly appointed to Management Accounting Department of ZB, Chief Management
Accountant asked you to draft a report for CEO, containing–
(i) ANALYSIS of quality costs and ADVISE on two measures to reduce the non- conformance
cost,
(ii) ADVISE on implementation of just-in-time purchasing and production.
Annexure
Statement Showing ‘Total Quality Costs’
Particulars of Costs Rs.
Prevention Costs
Supplier Review 2,50,000
Appraisal Costs
Equipment Testing (Rs.36 × 1,600 hrs.) 57,600
Internal Failure Costs
Down Time 15,40,000
Manufacturing Rework (Rs.456 × 3,200 bikes) 14,59,200
External Failure Costs
Customer Complaints (Rs.70 × 2,000 hrs.) 1,40,000
Warranty Repair (Rs.3,120 × 2,600 bikes) 81,12,000
Total Quality Costs 1,15,58,800

Performance measurement
Question No. 11
CSE is a medium sized Chartered Accountancy firm having five branches in Nepal. Their major
revenue segments are statutory compliances, taxation practice, audit & assurance and consulting
services. Their founder partner, in a recently organized year end closing meeting with all working
partners, has given the following vision statement for the next year:
‘The next financial year, CSE should use results and determinants-based framework for each revenue
segment and the current rewards scheme to be remodeled to a clear result oriented one’.
Required:
(i) DESCRIBE management strategy, the founder partner of the firm referring to.
(ii) LIST some performance measures that might be used.
Question No.12
Mother Co. Ltd has two business units, viz. a BPO unit engaged into telemarketing, and a KPO unit
focusing on business analytics. Recently the CEO was reviewing the half yearly financial data which
had the following key indices:

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Turnover of BPO unit at 90% capacity utilization Rs. 250 Lakhs

Turnover of KPO unit at 60% capacity utilization Rs. 550 Lakhs
Profit Margin of BPO and KPO units respectively 18% and 15% respectively
Present number of shared employees from the BPO 10 employees
unit to the KPO unit on requirement basis
Number of hours required on cross training of one Approx.10 hours at Rs. 3,000
employee and the rate per hour per hour
The CEO’s next half year overall target for the company is Rs.1,200 Lakhs with a profit margin of 18% for
the company as a whole. However, the BPO unit head has told categorically to the CEO that he cannot spare
any additional employee as the BPO is working at optimum capacity. The KPO unit head, on the
other hand, finds it cost effective to cross train employees of the BPO for specific tasks instead of
hiring directly from the market.
Required:
(i) Analyze the strategic problem that Mother Co Ltd is facing.
(ii) LIST few suggestions in brief.

Assignment Problem
Question No. 13
FAMA Pharmaceuticals Ltd. has taken the third floor of a multistoried building for rent with a view
to locate one of their zonal offices. There are five main rooms in this floor to be assigned to five
managers. Each room has its own advantages and disadvantages. Some have windows; some are
closer to the washrooms or to the canteen or secretarial pool. The rooms are of all different sizes and
shapes. Each of the five managers were asked to rank their room preferences amongst the rooms 301,
302, 303, 304 and 305. Their preferences were recorded in a table as indicated below.
Manager
M1 M2 M3 M4 M5
302 302 303 302 301
303 304 301 305 302
304 305 304 304 304
301 305 303
302
Most of the managers did not list all the five rooms since they were not satisfied with some of these
rooms and they have left off these from the list. Assuming that their preferences can be quantified by
numbers, find out as to which manager should be assigned to which rooms so that their total
preference ranking is a minimum.

Transportation problem
Question No.14
The Cost per unit of transporting goods from the factories X, Y, Z to destinations A, B and C, and the
quantities demanded and supplied are tabulated below. As the company is working out the optimum

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logistics, the Govt.; has announced a fall in oil prices. The revised unit costs are exactly half the costs
given in the table. You are required to evaluate the minimum transportation cost.
Destinations A B C Supply

Factories
X 15 9 6 10
Y 21 12 6 10
Z 6 18 9 10

Demand 10 10 10 30

Transfer Pricing
Question No. 15
FAMA Limited is a pharmaceutical company that has many divisions. One of its divisions (Division
A) produces chemical vials that can be used for storage of medicines. These chemical vials have both
internal and external market. Division B is another department of the same company, uses these vials
to package some of the medicines it produces.
Following is the information regarding production at Division A:
- Annual Capacity: 35,00,000 chemical vials.
- Actual annual production: 25,00,000 chemical vials
- Internal transfer to Division B (annual): 10,00,000 chemical vials per year.
- Annual External sales: 15,00,000 chemical vials per year.
Division A incurs a variable cost of production Rs.800 per vial. The fixed cost of production of
Division A is Rs. 50 crores. Out of this, Rs.15 crore is for machinery and production infrastructure
for the internal sales to Division B. This has been procured to produce (modify) vials exactly as per
the specifications of Division B.
As per the company’s current procurement policy, since Division A is operating at less than full
capacity, Division B has to purchase its entire annual requirement from Division A. Division A
Charges Division B at full cost plus 2% as its transfer price. This is in tune with the company’s overall
transfer pricing policy that is used for inter departmental transfers. Performance assessment of each
departmental manager gives emphasis on the overall financial performance of the department.
Recently, the manager of Division B has received a proposal from an external vendor where chemical
vials can be procured for Rs. 1,050 per vial. The product specifications would be suitable for the
requirements of Division B and hence they are comparable with the customized production that
Division A makes for Division B.
Required
The manager of Division B would like to purchase vials from the external vendor. You are required
to:
(i) CALCULATE the internal transfer price based on full cost plus 2% mark up.
(ii) DISCUSS the current transfer pricing methodology (pros and cons).

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(iii) Should the management permit Division B to procure chemical vials from the external
vendor? ADVISE.

Basic Concepts
Question No. 16
Pluto Ltd. manufactures and sells 4 Valve Engine (DTK-I). Company appoints Mr. Watson to
coordinate shipments of the DTK-I from the factory to distribution warehouses located in various
parts of the Nepal so that goods will be available as orders are received from customers. Pluto Ltd. is
unsure how to classify his annual salary of Rs. 24,00,000 in its cost records. The company’s cost
analyst says that Mr. Watson’s salary should be classified as manufacturing cost; the finance
controllers says that it should be classified as selling cost; and the managing director says that it does
not matter which way Mr. Watson’s salary cost is classified
Required
Which view point is correct? COMMENT.
Question No. 17
Choudhary Heavy Machinery Ltd produces engines for the cars. Variable cost per engine is Rs.4,200.
Market research has indicated that at a selling price of Rs.7,400, no order will be received, but the
demand for the engines will be increased by two units for every Rs.400 reduction in the unit selling
price below 7,400.
You are required to DETERMINE the unit selling price per engine that will maximize the profit
of the company.

Theory of Constraints
Question No. 18
IAKA produces two types of products Z and D at its manufacturing plant. Both the products are
produced using the same materials, machinery, and skilled labour. Machine hours available for the
year is 4,000 hours.
Information relating to products are as follows:
Particulars Z D
Selling Price per unit Rs.16,000 Rs.4,000
Material Costs per unit Rs.7,000 Rs.1,200
Machine Hours per unit 1.6 hrs. 0.8 hrs.
Maximum Annual Demand 2,000 units 1,600 units
Online Booking (already accepted for) 400 units 1,200 units
Due to poor productivity levels, late order and declining profits over recent years, the CEO has
suggested the introduction of throughput accounting in the company.
The total of all factory costs is Rs.1,42,60,000, excluding material.
Required
(i) Using throughput accounting, PREPARE statement to determine the optimum production
mix and maximum profit for the next year.

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(ii) CALCULATE the amount of profit lost due to acceptance of online booking of the
products.
(iii) RECOMMEND the options to be followed in order to avoid any loss of profit.
(iv) LIST various ways through which price customization could be done.
(v) Given that products Z and D are respectively in ‘maturity stage’ and ‘introduction stage’
of their life cycle. STATE the most appropriate pricing policy that could be followed by
the IAKA for Z and D as per their life cycle.

Competitive Advantage
Question No. 19
The following are the income statements of two firms in the same industry.
Firm KD Firm DK
(Rs.) (Rs.)
Revenues 20,00,000 40,00,000
Less: Variable costs 9,00,000 24,00,000
Contribution margin 11,00,000 16,00,000
Less: Fixed costs 7,00,000 12,00,000
Profit before taxes 4,00,000 4,00,000
Required
IDENTIFY the strategy (cost leadership vs. differentiation) followed by two firms. JUSTIFY your
classification.

TQM & TPM

Question No. 20
Discuss the Connection Between Total Quality Management & Total Productive Maintenance.

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Suggested Answers/Hints:
Standard costing
Answer No.1
(i) Traditional variances
Usage variance = (12,000 lt. – 12,800 lt.) × Rs 15.00
= Rs 12,000 (A)

Price Variance = (Rs 15.00 – Rs 16.40) × 12,800 lt.

= Rs 17,920 (A)

Total Variance = Rs. 12,000 (A) + Rs.17,920 (A)

= Rs. 29,920 (A)
Operational Variances
Usage Variance = (12,000 lt. – 12,800 lt.) × Rs.16.00
= Rs. 12,800 (A)

Price Variance = (Rs.16.00 – Rs.16.40) × 12,800 lt.

= Rs. 5,120 (A)

Total Variance = Rs.12,800 (A) + Rs.5,120 (A)

= Rs.17,920 (A)

Planning Variances
Controllable Variance = (Rs.15.40 – Rs.16.00) × 12,000 lt.
= Rs.7,200 (A)

Uncontrollable Variance = (Rs. 15.00 – Rs.15.40) × 12,000 lt.

= Rs.4,800 (A)

Total Variance = Rs. 7,200 (A) + Rs. 4, 800 (A)

= Rs.12,000 (A)

Reconciliation = Rs.17,920 (A) + Rs. 12,000 (A)

= Rs. 29,920 (A)

Direct Material Usage Operational Variance using Standard Price, and the
Direct Material Price Planning Variance based on Actual Quantity can also
be calculated. This approach reconciles the Direct Material Price Variance
and Direct Material Usage Variance calculated in part.

(ii) Traditional variance analysis is applied based on the assumption that whole of the variance is due
to operational deficiencies and the planning associated with setting the original standard is
perfectly correct. But this assumption is not practical. When the conditions are volatile and
dynamic, traditional variances need to be analyzed into planning and operational variances.
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Planning variances try to explain the extent to which the original standard needs to be adjusted to
reflect changes in operating conditions between the current situation and that imagined when the
standard was originally derived. Planning variances are generally not controllable and may need
to revise to cater the changes due to environmental/ technological changes at a later stage. In
certain situation planning variances can be considered controllable as well. Whereas operational
variances explain the extent to which adjusted standards have been achieved. Operational variances
are calculated after the planning variances have been established and are thus a realistic way of
assessing performance. So, it indicates a reality check of traditional variance analysis.
In KGF, as per traditional approach total variances are Rs.29,920 (adverse), out of which Rs.17,920
(adverse) accounts for total operational variance and Rs. 12,000 (adverse) is for total planning
variance. It is necessary to analyze planning variances further. The planning variance of Rs.12,000
(adverse) can be divided into an uncontrollable adverse variance of Rs. 4,800 and a controllable
adverse variance of Rs. 7,200. Similarly, total operational variance can be sub classified as adverse
price variance of Rs. 5,120 and adverse usage variance of Rs.12,800. This analysis gives a clearer
indication of the inefficiency of the purchasing function by the concerned department.
Performance of the staff of the purchasing department should be evaluated/ rewarded based on
variances which are controllable. If an adverse uncontrollable variance of Rs. 4,800 is reported in
the performance reports this is likely to lead to dysfunctional motivation effects to the purchase
department.
In today’s cutthroat competition, managers must react quickly and accurately to the changes in
technology, price fluctuation, consumer tastes, laws and regulations, economic conditions,
political conditions, and international conditions etc. which are changing rapidly and dramatically.
Accordingly, management accountant should be able to provide necessary inputs by a proper
analysis of the things that pertains to his/her area like effect of changes in price. The unique features
of advanced variance analysis are that, it considers different market conditions and changes in the
dynamic environment
Moreover, advanced variances classify variances into controllable and uncontrollable variances
and help the management to find out reasons for adverse variances so that corrective action can be
taken. Similarly, if any adverse variances have arrived, because of changes in the market condition
like inflation, it has to be differentiated from the other variances.
KGF is a type of organization where management of performance can be done only through
advanced variance analysis. Advanced variance analysis of KGF shows that it has adverse planning
variance as well as adverse operational variance. Further, the emergence of controllable and
uncontrollable variances makes it a perfect case of advance variance analysis in KGF. In KGF,
sharp price changes which lead to the choice of expensive alternative and efficiency of purchase
department need to be analyzed, reported, and dealt separately by the joint effort of the
management accountant and the top management. Hence, advanced variance analysis in KGF is
an absolute necessity.

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Life Cycle Costing/Cost Management Techniques

Answer No.2

(i) Total Contribution Statement

“Total Contribution- for remaining two stages”
Particulars Maturity Decline
Weeks 31 - 50 51 - 70 71 - 110
Number of units Produced and Sold 22,000 22,000 22,000
Selling Price per unit (Rs.) 450 450 300
Less: Unit Variable Cost (Rs.) 225 188 225
Unit Contribution (Rs.) 225 262 75
Total Contribution (Rs.) 49,50,000 57,64,000 16,50,000
(ii) Pricing Strategy for Product α 3

DIL is following the skimming price strategy that’s why it has planned to launch the product α3 initially with
high price tag.
A skimming strategy may be recommended when a firm has incurred large sums of money on
research and development for a new product.
In the problem, DIL has incurred a huge amount on research and development. Also, it is very
difficult to start with a low price and then raise the price. Raising a low price may annoy potential
customers.
Price of the product α3 is decreasing gradually stage by stage. This is happening because DIL wants
to tap the mass market by lowering the price.
(iii) Possible Reasons for the changes in cost during the life cycle of the product ‘ α3 ’
Product life cycle costing involves tracing of costs and revenues of each product over several calendar
periods throughout their entire life cycle. Possible reasons for the changes in cost during the life cycle
of the product are as follows:
DIL is expecting reduction in unit cost of the product α3 over the life of product as a
consequence of economies of scale and learning / experience curves.
Learning effect may be the possible reason for reduction in per unit cost if the process is labour
intensive. When a new product or process is started, performance of worker is not at its best and
learning phenomenon takes place. As the experience is gained, the performance of worker improves,
time taken per unit reduces and thus his productivity goes up. The amount of improvement or
experience gained is reflected in a decrease in cost.
Till the stage of maturity, DIL is in the expansion mode. The DIL may be able to take advantages of
quantity discount offered by suppliers or may negotiate the price with suppliers.
Product α3 has the least variable cost `188 in last phase of maturity stage; this is
because a product which is in the mature stage may require less marketing support than a product
which is in the growth stage so, there is a saving of marketing cost per unit.
Again, the cost per unit of the product α3 jumps to `225 in decline stage. As soon as
the product reaches its decline stage, the need or demand for the product disappear and quantity
discount may not be available. Even DIL may have to incur heavy marketing expenses for stock
clearance.

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Workings
Cumulative Sales along with Sales Price and Variable Cost

Weeks Demand Total Cumulative Selling Price Variable Cost

per week Sales Sales per unit per unit
(Rs.) (Rs.)
1 - 10 220 2,200 2,200 750 375
11 - 20 550 5,500 7,700 600 300
21 - 30 825 8,250 15,950 525 300
31 - 50 1,100 22,000 37,950 450 225
51 - 70 1,100 22,000 59,950 450 188
71 - 80 880 8,800 68,750 300 225
81 - 90 660 6,600 75,350 300 225
91 - 100 440 4,400 79,750 300 225
101 - 110 220 2,200 81,950 300 225

Target Costing
Answer No. 3
(i) Calculation of ‘Total Labour Hours’ over the Lifetime of the Product ‘Kitchen Care’
The average time per unit for 250 units is
Yx = axb
Y250= 30 × 250 -0.3219
Y250 = 30 × 0.1691
Y250 = 5.073 hours
Total time for 250 units = 5.073 hours × 250 units = 1,268.25 hours
The average time per unit for 249 units is
Y249 = 30 × 249–0.3219
Y249 = 30 × 0.1693
Y249 = 5.079 hours
Total time for 249 = 5.079 hours × 249 units = 1,264.67
units hours
Time for 250th unit = 1,268.25 hours – 1,264.67 hours = 3.58
hours
Total Time for = (750 units × 3.58 hours) + 1,268.25
1,000 units hours
= 3,953.25 hours
(ii) Profitability of the Product ‘Kitchen Care’

Particulars Amount (Rs.) Amount (Rs.)

Sales (1,000 units) 50,00,000
Less: Direct Material 18,50,000
Direct Labour (3,953.25 hours × Rs.80) 3,16,260
Variable Overheads (1,000 units × Rs.1,000) 10,00,000 31,66,260
Contribution 18,33,740
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Less: Packing Machine Cost 5,00,000

Profit 13,33,740
(iii) Average ‘Target Labour Cost’ per unit
Particulars Amount (Rs.)
Expected Sales Value 50,00,000
Less: Desired Profit (1,000 units × Rs.800) 8,00,000
Target Cost 42,00,000
Less: Direct Material (1,000 units × Rs.1,850) 18,50,000
Variable Cost (1,000 units × Rs.1,000) 10,00,000
Packing Machine Cost 5,00,000
Target Labour Cost 8,50,000
Average Target Labour Cost per unit (Rs.8,50,000 ÷ 1,000 units) 850

(iv) Target cost is the difference between estimated selling price of a proposed product with
specified functionality and quality and the target margin. This is a cost management technique that
aims to produce and sell products that will ensure the target margin. It is an integral part of the product
design. While designing the product, the company needs to understand what value target customers
will assign to different attributes and different aspects of quality. This requires use of techniques like
value engineering and value analysis. Intensive marketing research is required to understand customer
preferences and the value they assign to each attribute and quality parameter. This insight is required
to be developed must before the product is introduced. The company plays within the space between
the maximum attributes and quality that the company can offer and the minimum acceptable to target
customers. Therefore, in absence of intensive marketing research, the target costing technique cannot
be used effectively.

Pareto Analysis
Answer No. 4
“Pareto Analysis”
Model Sales % of Total Cumulative Model Cont. % of Total Cumulative
(Rs.’000) Sales Total (Rs.’000) Cont. Total %
Pareto Analysis Sales Pareto Analysis Contribution
A001 5,100 35.05% 35.05% B002 690 30.87% 30.87%
B002 3,000 20.62% 55.67% E005 435 19.47%* 50.34%
C003 2,100 14.43% 70.10% C003 300 13.42% 63.76%
D004 1,800 12.37% 82.47% D004 255 11.41% 75.17%
E005 1,050 7.22% 89.69% F006 195 8.73%* 83.90%
F006 750 5.15% 94.84% A001 180 8.05% 91.95%
G007 450 3.09% 97.93% G007 120 5.37% 97.32%
H008 225 1.55% 99.48% I009 45 2.01% 99.33%
I009 75 0.52% 100.00% H008 15 0.67% 100.00%
14,550 100.00% 2,235 100.00%
(*) Rounding - off difference adjusted

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“Diagram Showing “Sales and Contribution”

Recommendations
Pareto Analysis is a rule that recommends focus on most important aspects of the decision making in
order to simplify the process of decision making. The very purpose of this analysis is to direct
attention and efforts of management to the product or area where best returns can be achieved by
taking appropriate actions.
Pareto Analysis is based on the 80/20 rule which implies that 20% of the products account for 80%
of the revenue. But this is not the fixed percentage rule; in general business sense, it means that a few
of the products, goods or customers may make up most of the value for the firm.
In present case, four models namely A001, B002, C003, D004 account for around 80% (82.47%) of
total sales whereas around 80% (83.90%) of the company’s contribution is derived from five models
namely B002, E005, C003, D004 and F006.
Models B002 and E005 together account for 50.34% of total contribution but having only 27.84%
share in total sales. So, these two models are the key models and should be the top priority of
management. Both C003 and D004 are among the models giving 80% of total contribution as well as
80% of total sales so; they can also be clubbed with B002 and E005 as key models. Management of
the company should allocate maximum resources to these four models.
Model F006 features among the models giving 80%of total contribution with relatively lower share
in total sales. Management should focus on its promotional activities.
Model A001 accounts for 35.05% of total sales with only 8.05% share in total contribution. Company
should review its pricing structure to enhance its contribution.
Models G007, H008 and I009 have lower share in both total sales as well as contribution. Company
can delegate the pricing decision of these models to the lower levels of management, thus freeing
themselves to focus on the pricing decisions for key models.

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Pricing Strategy
Answer No. 5
(i) Demand function

b = change in price/change in quantity b = ₹4/8,000 units = 0.0005

The maximum demand for Rifmn is 10,00,000 units, so where P = 0, Q = 10,00,000, so ‘a’ is
established by substituting these values for P and Q into the demand function:
0 = a – (0.0005 × 10,00,000)
0 = a – 500
Therefore, a = 500
Demand function is therefore: P = 500 – 0.0005Q
Marginal cost
Total Rs.
Salt X 367.50g × Rs.0.08 29.40
Salt Y 301.50g × Rs. 0.40 120.60
Labour Given in ques 38.60
Machine running cost (30/60 × Rs. 40.00) 20
Total marginal cost per batch 208.60

Marginal revenue function: MR = a – 2bQ

Equate MC and MR and insert the values for 'a' and 'b' from the demand function in step 1
⇒ 208.60 = 500 – (2 × 0.0005 × Q)

Solve the MR function (to determine optimum quantity, Q)

⇒ 208.60 = 500 – 0.001Q
⇒ 0.001Q = 291.4
⇒ Q = 291,400 batches

Calculate the optimum price

⇒ P = 500 – (0.0005 × 291,400)
⇒ P = Rs. 354.30

Calculate Profit

Particulars Amount in Rs.

Revenue (2,91,400 batches × ₹354.3) 10,32,43,020
Less: Variable costs (2,91,400 batches × ₹208.60) 6,07,86,040
Less: Fixed costs (3,00,000 batches × ₹35) 1,05,00,000
Profit 3,19,56,980
(ii). Firms often use different pricing strategies when their products are first launched into the market.
The most two common approaches are price skimming and penetration pricing.
In penetration pricing, low price is charged initially, thought behind this is that low price will make
the product accessible to large number of buyers, so high sales will compensate the low price being
charged getting the benefits of economy of scale. This approach works best when customers are price
sensitive, R & D and marketing expenses are low, or when competitors will quickly enter the market.
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In this case, medicines are highly inelastic in nature so any reduction in price will not increase the
demand of the drug, which clearly indicates that market penetration pricing will not help.
Skimming Pricing refers to charging high price initially than lower the prices. High price in the early
stage of the product’s life cycle is expected to generate high initial cash flows, which will help the
company to recover high development cost. This would enable the company to take advantage of
unique nature of the product.
In present case, the unique nature of drug, entry barrier (since company has taken patent) requires
huge initial investment and considering this market skimming pricing strategy would be more
favorable pricing strategy. However, this strategy only works as long as drug is protected by patent.
In addition, a drug firm is required to consider the expected reactions from national price controllers
who in turn may be influenced by political factors and public opinion.

Budget & Budgetary Control

Answer No. 6
(i) In participative budgeting, subordinate managers create their own budget and these budgets
are reviewed by senior management. Such budget communicates a sense of responsibility to
subordinate managers and fosters creativity. This is also called bottom up approach (sometime
referred as participative approach).
As the subordinate manager creates the budget, it might be possible that the budget’s goals become
the manager’s personal goal, resulting in greater goal congruence. In addition to the behavioral
benefits, participative budgeting also has the advantage of involving individuals whose knowledge of
local conditions may enhance the entire planning process.
The participative budget described here appears participative in name only. In virtually every
instance, the participative input is subject to oversight and discussion by sales manager. Some amount
of revision is also common. However, excessive and arbitrary review that substitutes a top-down
target for a bottom-up estimate makes a deceit process. Such a gutting appears to be the case in CPL.
J’s statement indicates a very autocratic style. The revision process also seems to be arbitrary and
capricious. There is little incentive for the salesgirls to spend much time and effort in projecting the
true expected sales because they know that the target would be revised again and J’s estimate will
prevail. This situation creates an interesting discussion about the costs and benefits of participative
budgeting and gives rise to game playing and slack.

(ii) In top down approach, budget figures will be imposed on sales personnel by senior
management and sales personnel will have a very little participation in the budget process. Such
budget will not interest them since it ignores their involvement altogether. While in bottom-up
approach, each sales person will prepare their own budget. These budgets will be combined and
reviewed by seniors with adjustment being made to coordinate the needs and goals of overall
company. Proponents of this approach is that salespersons have the best information of customer’s
requirements, therefore they are in the best position in setting the sales goal of the company. More
importantly, salespersons who have role in setting these goals are more motivated to achieve these
goals.
However, this approach is time-intensive and very costly when compared with top-down approach.
In order to achieve personal goals, participants may also engage in politics that create budgetary slack
and other problems in the budget system.

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Since both top down and bottom-up approaches are legitimate approaches, so CPL can use
combination of both. Seniors know the strategic direction of the company and the important external
factors that affect it, so they might prepare a set of planning guidelines for the salesgirls. These
guidelines may include forecast of key economic variables and their potential impact on the CPL,
plans for introducing and advertising a new product and some broad sales targets etc. With these
guidelines, salesgirls might prepare their individual budget. These budgets need to be reviewed to
validate the uniformity with the CPL’s objectives. After review, if changes are to be made, the same
should be discussed with salesgirls involved.

Decision making
Answer No. 7
Advice
Based on the above ‘Expected Profit’ statement which is purely based on financial considerations
firm may go for high price – low volume i.e. 500 units level. However, non- financial considerations
are also given due importance as they account for actions that may not contribute directly to profits
in the short run but may contribute significantly to profits in long run. Here, it is important to note
that life cycle of product is two years and there is no significant difference between the profits at both
levels. In this scenario firm may opt the plant having high capacity not only to increase its market
share but also to establish a long-term brand image.
Workings
Statement Showing “Variable Manufacturing Cost per unit”

Particulars Rs / unit
Sales 79,600
Less: Contribution (40%) 31,840
Variable Cost 47,760
Less: Variable Selling Costs (Rs. 79,600 × 0.1) 7,960
Variable Manufacturing Cost 39,800
Statement Showing “Expected Profit”
(‘000) Rs. / unit
Particulars 500 units 750 units
Sales 39,800 52,200
(Rs. 79,600  500) (Rs. 69,600  750)
Less: Variable Mfg. Cost 19,900 29,850
(Rs.39,800  500) (Rs.39,800  750)
Less: Variable Selling Cost 3,980 5,220
(Rs. 39,800  0.1) (Rs. 52,200  0.1)
Add: Salvage Value 625 900
Less: Cost of Plant 3,500 5,200
Net Profit 13,045 12,830
Development cost is sunk and is not relevant.

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Stimulation
Answer No. 8
Daily Days Probability Cumulative Random Day Demand Rented Rental
demand Probability No. lost
4 4 0.08 0.08 00-07 1 5 5
5 10 0.20 0.28 08-27 2 6 6
6 16 0.32 0.60 28-59 3 7 6 1
7 14 0.28 0.88 60-87 4 6 6
8 6 0.12 1 88-99 5 8 6 2
50 1 29 3

Average no. of cars rented=29/5=5.8

Rental lost=3

Value Chain Analysis

Answer No. 9
(i) Value chain (suggested by Michael E Porter*) describe those activities of organization, those
add value to input before it become output. Value Chain can be expressed as way of assessing and
explaining current competitive advantage while identifying cost drivers.
*Note - Michael E Porter, in 1980 wrote a book ‘Competitive Strategy; Techniques for analyzing
industries and competitor’ in which he explained value chain. In 1985 he along- with Miller

suggested value chain as part of bigger network i.e., Value System. It split down company’s
activities between those which are ‘primary (Those result in production of goods/rendering
services)’, and those which ‘support (assist in such production)’ these primary activities (as shown
in figure below)–
Concept of Value
Successful organization able to create value for its customer (end user) either by offering
differentiation (more utility through customized/unique product/services at same price) or cost
competitiveness (same utility at par to competitor, but at lower price).

(ii) Competitive Advantage is ability to generate more economic value than competitor. There
are three generic strategies, suggested by Michael E Porter (In another book which he wrote in
1985 on ‘Competitive Advantage – Creating and Sustaining Super Margin’) through which an
organization could achieve competitive advantage–
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Competitive Advantage can be obtained

Scope/Scale of Strategy through
Lower Cost Uniqueness
Broad Target Overall Low Cost
Competitive (Industry Wide) Differentiation
Leadership
Scope can be
Narrow Target
(Particular Segment) Cost Focus Differentiated Focus
a) Cost Leadership, where there is great emphasis on keeping costs down. This opens up the
profit margin by lowering costs, ideally more than any competitor can.
b) Differentiation, where a better product or service is sold. This opens up the profit margin by
raising selling prices.
c) Additionally, an organisation can choose a focus strategy, where the organisation
concentrated on a small segment of the market. Within the focus strategy, the organisation
must choose whether or not to become a cost leader or a differentiator.

(iii) Strategy at SDC

Since SDC targeting the customers who are in age group from 40 to 60 years, and belongs to price
sensitive income group, hence strategy opted to gain competitive advantage can be considered as
Cost Focus.

(iv) Value Chain Effect at SFC

Acquisition of SDC by SFC can be termed as forward vertical integration. Any forward vertical
integration can be justified because it ensures increase in profit, effective control over market as
well on pricing and finally brand building by reaching to target group. SFC’s main objective
behind SDC acquisition was getting control over value chain and increase in profit. SFC has
precluded the possibility of other ways of increasing fabric sales for e.g., exporting.

SFC extends the value chain. Earlier it was restricted up-till sale of fabric to garment manufacturer,
but now SFC reach out to retailers to sell the in manufactured garments. Scope of value addition to
end user increased but value system become more complex reason being two systems now
merged into one value chain.
SDC (which is acquired by SFC) is believing in focus strategy by restricted its market to the 40-60
years aged and price sensitive income market. This may be a sensible strategy for a company
engaged in designing of cloths, but surely not for a manufacturer of fabric.
Effects of forward integration on competitive ability and cost competency (Importance from cost
perspective)
a) Post integration SFC has to operate two production lines (different set of Men - Workforce,
Machine and Methods - product and production layout). One being spinning the fabric and
being manufacturing of cloths. Resultantly transfer pricing will be cost aspect which need
to be decided.
b) Since the operation is sequential in nature, first weaving then stitching; hence any mismatch
in capacity, lead/run time of both the production lines may result into increased cost of
either warehousing or idle capacity. (may result in additional working capital required or
loss of contribution)

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c) Carrying Cost (warehousing cost) will also increase on account of manufacturing of cloth
ahead of retail demand. (again, additional working capital may be required)
d) For SFC, it may become difficult to compete with other fabric manufacturer; because due
to diversion of management focus in two production line (may lose cost competitiveness)
and SFC is now directly impacted by customer/ consumer who has verity of option apart
from SFC’s cloths to choose between.
e) Since design of fabric (manufactured by SFC) are fit for traditional wear, but expertise of
SDC is in fashion wear; so designer at SDC may resent the lack of freedom.(integration of
objective and culture is essential to overcome)
(v) Although, the intention is to earn more of the value in the value system, but possible acquisition
of retail chain ‘Paridhaan’ (forward vertical integration into retail outlets) has its own pros and
cons for competitive advantage.
Expected Benefits
a) SFC will have full control over the production, pricing and marketing. So, acquisition of Paridhaan
will give strength to SFC for keep relying upon differentiation strategy.
b) Since SFC will reach to end consumer directly, hence will have access to entire customer related
data. Such data can help SFC to understand customer specification and do customization in product
as per requirement of specific customer group.
c) Since post acquisition of Paridhaan, SFC will have exclusive retail chain; hence reduce the
competition from other brands whose products are lying along-with SFC products at selling shelves
of retails.
Anticipated Drawbacks
a) Managing retail chain will open another area of operation for SFC (Own retail chain is capital
intensive business rather labour intensive – high amount of capital will be invested in properties –
even then outcome depends upon location of stores) and increase operating as well as financial risk
too.
b) Since SFC manufactures fabric, which is good for traditional clothing only, hence limited range
of products may be available for sale at exclusive showroom/retails shops of SFC (through acquisition
of Paridhaan); so, may not be able to attract requisite number of clients to cover the fixed cost.
c) In order to complete product range SFC may have to complement its product with product of
another manufacturers; this may be not possible in cost effective manner.
Conclusion
SFC should acquire retail chain ‘Paridhaan’, mainly as a response to reduce the competition from
other brands whose products are lying along-with SFC products at selling shelves of retails and to
reach end consumer directly to understand their needs. However, acquisition would not be so easy
due to the high amount of capital investment is required. In addition, cultural changes are also
essential to from overcome the traditional shell.
Overall, the benefits of acquiring retail chain do, however, need to be compared to the financial cost
and other qualitative factors.

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Just in Time Approach

Answer No. 10

Addressed to: Office of CEO, Zixer Bikes

Dated –06th May 2020
Analysis of Quality Costs
The reporting of quality costs highlights the cost of quality activities at ZB. The total quality costs
statement clearly displays the relationship between conformance costs (prevention and appraisal
costs) and non-conformance costs (internal failure and external failure costs) and the drivers of a
reduction in the overall spending on quality. Statement indicates that only 2.16% of the total quality
cost is the cost of preventing quality problems while 0.50% is the cost of appraisal activities. Thus,
prevention and appraisal costs make up only 2.66% of total quality costs. In contrast, 97.34% of
quality control costs are incurred for internal and external failure costs.
Two measures to reduce nonconformance cost
Total Productive Maintenance (TPM) is a system of maintaining and improving the integrity of
production and quality system through keeping all equipment in top working condition so as to avoid
breakdowns and delays in manufacturing processes. It involves identifying machines in every division
(including planning, manufacturing, maintenance) and then planning & executing a maintenance
programme covering their entire useful life.
In this case, TPM will help in reducing internal failure cost (i.e., downtime and manufacturing rework
cost), which constitutes 25.95% of total quality cost, by keeping all equipment in good working
conditions so that there is no downtime or machine breakdown and ensuring that all equipment run
smoothly. If machines work properly, the chances of rework will reduce, ultimately will also reduce
chances of warranty repair and customer complaints (comprising 71.39% of total quality cost which
is a major part of total quality cost).
Total Quality Management (TQM) aims at improving the quality of organizational output,
including goods and services, through continual improvement of internal practices. Its objective is
to eradicate waste and increase efficiency without compromising with the quality. It requires
maintaining quality standards in all aspects of business by ensuring that things are done right the first
time so that defects and waste are eliminated from operations.
It appears that ZB is not a TQM company at present, due to huge disparity between conformance
costs and non-conformance costs. In order to make ZB to be successful, all staff at ZB must be
engaged in the improvement process and share in the continuous improvement ethos. In order to
establish a reputation as a high- quality bike manufacturer ZB must ensure, staff is having attitude
towards the importance of conformance activities, for instance, ZB can conduct third party inspection
of components at supplier’s workplace leading to maintenances of quality standards.
Overall, while applying above two measures, in the ZB, consideration must therefore be given to the
optimum balance between the costs of conformance and the costs of non-conformance.
Implementation of Just in Time
Just in time purchasing and production technique will put an end to the harrowing task of inventory
management. In this form of pull system, purchasing of components and production of bikes will be

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based on customer demands and ZB will have to accordingly coordinate with its suppliers to supply
the right quantity of components required at the right time. JIT inventory
management calls for having the inventory as and when needed also taking care of massive holding
cost suffered related to large build ups. In this environment, ZB will also be able to reduce the
manufacturing time around 3 hours by streamlining the flow of information in entire supply chain.
Zixer is assessing alternative suppliers on continuous basis to improve capacity and performance. It
means it is changing sources of material regularly or using multi-suppliers. In contrast, JIT is based
on reduced number of supplier and move towards single sourcing. It is easier to develop long term
cooperative relationships with a smaller number of suppliers. The quality of internal services and an
organization’s ability to provide quality products or services to its customers depends upon this
relationship. However, this relationship is obviously missing in ZB.
ZB has close relationship with the retailers but relationship with suppliers is equally important.
It appears that firm is also importing its requirements from abroad. In JIT environment, it is important
that suppliers are, to the extent practical, located in close proximity to the manufacturing plant.
Carefully selected suppliers are capable of delivering high quality materials in a timely manner,
directly at the shopfloor, reducing the material receipt time. Therefore, selection of right supplier
located in close proximity to the manufacturing plant is vital for the proper implementation of JIT.
It is also important to note that every supplier is different, but the ZB has to be able to view each as
one of its part only. The supplier’s network must be able to call up and communicate directly with
the ZB’s network, obtaining manufacturing schedules and product specification in real time. ERP and
other sources of electronic data interchange between supplier and ZB will act as backbone in
supporting the JIT activity.
On the whole, ZB’s management has to treat suppliers as partners with significant influence on the
success of the organization.
The functional division is less appropriate in JIT environment. JIT production requires multi- skilled
teams. In ZB, teams need to be formed to work by product i.e., type of bike rather than by the type of
work performed. In addition, staff will need training to work in the new teams, measures surrounding
the amount and effectiveness of training will be required. A JIT system works best when employees
pitch in with suggestions for improvements. The performance can be measured by computing the
number of ideas per worker, the number of ideas suggested in total, the number of ideas implemented,
or the proportion of ideas suggested that are implemented.
ZB forecasts demand based on its internal policies and historical trends. Today demand in every
sector of the market changes by leaps and bounds, so using historical data is not at all recommended.
Demand forecasts should be pulled by current market trends and prediction of future market
sentiments. However, in case of ZB, demand is unstable. In this case, in order to prevent stock-outs,
inventory managers can only increase the Kanban numbers of each product; the greater are the
variations, the greater is the need of Kanban cards and, thus, the higher is stock level and need more
working capital per rupee of sales.
Conclusion
The Board desires to improve the quality as well as financial position which can be achieved through
successfully implementation of quality control and lean system. However, the factors discussed above
should be taken care of. It is worthwhile to note that any return on investment in proposed system

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must be viewed long term rather than short term since optimum results may not be realized until the
system has been in place for some time.
Further details can be tabled on requisition basis.
Closure of Report

Chief Management Accountant

(For Management Accounting Department)
Zixer Bikes

Performance Measurement
Answer No. 11
(i). The management strategy that the founder partner of the firm referring to is the ‘Building Block
Model’ as proposed by Fitzgerald and Moon. The model was proposed as a solution to performance
measurement in service industry but can also be extended manufacturing field to evaluate business
performance. The model requires the establishment of results and determinants-based framework,
wherein ‘determinants’ are the performance areas and the ‘results’ reflects the success or failure of
the determinants. This model also requires setting the fair standards against which performance will
be measured and linking the same to controllable factors in order to motivate the staff.
(ii). Some performance measures that might be used in CSE are as follows:
Financial Performance in CSE can be measured through computing gross/ net profit margin, margin
per partner, change/ increase in revenue over previous year.
Growth in revenue, success rate in converting enquiries into revenue, retention rate of clients, relative
market share and position are measures of competitiveness.
Statutory compliances segment will be having characteristics of recurring work, and strict adherence
to return filing timelines; hence it is essential to ensure optimum and effective resource utilization.
In order to measure the productivity of the staff, hour charged as percentage of total available hour/
total hour paid can be computed. This ratio will also signify the peak and off period.
Consulting Services segment will be having characteristics of analytical skills, inter-personal skills
and ability to close on prospective clients; therefore, quality of services is critical factor for success.
Customer rating and proportion of number of errors/ defects to number of compliances submitted
can be taken as KPI for quality of services.
Flexibility is important from the prospective from delivery of service, the manner and timing of
delivery. Some performance measures that might be used for this dimension are number of returns
submitted on time to total returns, actual number of visits to number of visits planned for specific
assignment, number of technical areas like accounting, auditing, taxation handled by each team
member.
Although the scope of innovation is not much available in accounting firms, but still use of IT tools
can improve the utility for client. Moreover, innovation can be seen, as offering new range and

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category of services. Number of new services offered with in the previous year or three years can be
a performance measure of innovation.
Answer No. 12
(i). The present position of the units and the overall company is as under

BPO KPO Combined

Turnover (Rs. In Lakhs) 250 550 800
Capacity 90% 60% 67%
Turnover at full capacity (Rs. In lakhs) 278 916 1,194
Profit Margin 18% 15% 16%
Present Profit (Rs. In Lakhs) 45 83 128
Profit at full capacity (Rs. In Lakhs) 50 138 188
In Mother Co. Ltd., both unit heads are focusing only on their respective unit performances rather
than strategizing on the company’s performance growth as a whole.
Calculations revealed that the BPO unit is a low margin high manpower-oriented unit as its overall
contribution is just 35% share of the overall company, whereas the KPO is a high margin low
manpower-oriented unit as its share is 65%.
It is clear that the strategic problem being faced by Mother Co. Ltd is concerned with divisional
performance measures in terms of goal congruence. The CEO’s target for the next half yearly is really
ambitious, and this can be achieved only if goal congruence is met by the heads of both units.
(ii) Few brief suggestions are given below:
• Overall revenue target of 1,200 thousand to be achieved by cranking up the utilization for
each division at 100% (still there will be a gap of 6 thousand).
• Company’s profit margin of 16% calculated at full capacity, to be increased by 2% through
means of cost cutting techniques.
• Cross training can be helpful in proper utilization of work force.
• The KPO should focus on further cost reduction and improve its % of profit margin.

Assignment Problem
Answer No. 13

Step 1: Formulating the preference ranking assignment problem

Rooms No. Managers
M1 M2 M3 M4 M5
301 - 4 2 - 1
302 1 1 5 1 2
303 2 - 1 4 -
304 3 2 3 3 3
305 - 3 4 2 -

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Step 2: Row Subtraction: Subtracting the minimum element of each row from all elements of that
row. Since there is zero in each column, there is no need for column subtraction. Drawing the
minimum number of lines to cover all zeros.
Rooms No. Managers
M1 M2 M3 M4 M5
301 - 3 1 - 0
302 0 0 4 0 1
303 1 - 0 3 -
304 1 0 1 1 1
305 - 1 2 0 -

Since number of lines =5 and order of matrix=5, the above matrix will provide optimal solution.
Step 3: Assignment: Selecting a row containing exactly one unmarked zero and surrounding it by
green and draw a vertical line through the column containing this zero. Repeating this process
till no such row is left; then selecting a column containing exactly one unmarked zero and
surrounding it by green and draw a horizontal line through the row containing this zero and
repeating this process till no such column is left.
Rooms No. Managers
M1 M2 M3 M4 M5
301 - 3 1 - 0
302 0 0 4 0 1
303 1 - 0 3 -
304 1 0 1 1 1
305 - 1 2 0 -

Computing the minimum ranking

Ranking
M1 - Room No. 302 1
M2 - Room No. 304 2
M3 - Room No. 303 1
M4 - Room No. 305 2
M5 - Room No. 301 1
7
Thus, the total minimum ranking is 7.

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Transportation Problem
Answer No. 14
The problem may be treated as an assignment problem. The solution will be the same even if prices
are halved. Only at the last stage, calculate the minimum cost and divide it by 2 to account for fall in
oil prices.
A B C
X 15 9 6
Y 21 12 6
Z 6 18 9

Subtracting Row minimum, we get

A B C
X 9 3 0
Y 15 6 0
Z 0 12 3

Subtracting Column minimum

A B C
9 0 0
15 3 0
0 9 3
No of lines required to cut Zeros = 3
Cost/u Units Cost Revised
Cost being 50%
Allocation: X→B 9 10 90 45
Y→C 6 10 60 30
Z→A 6 10 60 30
210 105

Minimum cost = 105 Rs.

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Transfer Pricing
Answer No. 15
(i) Calculation of transfer price at full cost plus 2%

Sr.No Cost Component Annual Cost (Rs.) Cost per Vial (Rs.)
1 Variable Cost per vial 800
2 Annual Fixed Cost
A Special Equipment for Division B 15,00,00,000 150
(Rs.15,00,00,000 / 10,00,000 units) Note 1
B Remaining Fixed Cost (Rs.35,00,00,000 / 35,00,00,000 140
25,00,000 units)
Total Fixed Cost (A)+(B) 50,00,00,000 290
3 Total Cost per Vial (1) + (2) 1,090
4 Markup @2% 21.80
5 Total Internal Transfer Price (3)+(4) 1,111.80

Note 1
The fixed cost related to the cost of special equipment should be borne only by Division B. They need
to be spread over the number of units produced at Division B that is 10,00,000 per year. The remaining
fixed cost will be absorbed by the entire annual production that is 25,00,000 per year, production for
both the internal and external market.
(ii). Pros and cons of full cost plus 2% internal transfer price policy.
The full cost plus 2% internal transfer price policy is a uniform policy followed throughout FAMA
Ltd. Performance assessment of department managers is based partly on financial results.
Allowing for a 2 % mark up over full cost has the following advantages:
(a). Charging based on full cost allows the supplying division (Division A) to recoup its entire cost
of production.
(b). The supplying division has an incentive to cater to internal sales since the 2% mark-up will reflect
in the profits earned by the department. Financial performance is considered during the
performance assessment of the manager of Division A. The mark-up on internal sales will also
be perceived as a means of earning profits that can bolster the department’s performance.
Therefore, Division A will not perceive it as an activity yielding no income.
The problem with full cost-plus mark-up costing are as follows:
(a). The method allows the entire cost incurred by Division A to be absorbed by the total units
produced by it. As per the transfer pricing policy, Division A can recoup the entire cost it incurs
plus earn a markup. Thus, the financial performance would always reflect a profit in the books
of Division A. There is no incentive for Division A to attempt to reduce any of its cost
components, either variable or the fixed costs.
Division A is not producing at its full capacity, it is currently operating at 71% of its capacity
(25,00,000 units of actual production / 35,00,000 units total capacity). The total annual cost of
production is Rs. 250 crores per year, comprising of variable cost of Rs. 200 crores per year

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(25,00,000 units of vial produced per year × Rs. 800 per vial) plus fixed cost of Rs. 50 crores per
year.
Out of the fixed cost of Rs. 50 crores, cost specific to Division B is Rs. 15 crores absorbed by
the production of vials for Division B alone. The balance Rs. 35 crores of fixed cost is absorbed
by all the vials produced both internal and external sales. This component of Rs. 35 crore fixed
costs (14% of total costs - Rs. 35 crore / Rs. 250 crore) would partly include costs related to idle
capacity, example depreciation of underutilized machinery, rental for factory building that is not
completely utilized, under-utilized storage space etc. However, this cost is being passed on to
both Division B and the external customers. Division A is not taking any steps to lower the fixed
costs since it is able to pass on the cost and earn a mark up on it too! Therefore, there will be no
attempt by Division A to keep the costs at the optimal level, that might be comparable to external
market vendors of similar vials. Thus, cost- competitiveness, which is an essential part of product
pricing is lost.
(b) Division B would view the transfer price of Rs.1,111.80 per vial as variable. This may be
considered as a packaging / material cost for the medicines it produces that is variable per vial. In
reality, as explained above, the transfer price of Division A has components that are fixed in
nature that partly relate to the idle / under-utilized capacity of Division A. The cost of this under-
utilization is borne by Division B, which distorts cost structure for Division B’s financial
performance.
(iii) Consideration of producing in-house versus outsourcing procurement of chemical vials for
Division B.
The external vendor is offering a similar vial at Rs. 1,050 while Division A is charging Rs.
1,111.80 per vial. The cost is more by Rs. 61.80 per vial. Overall, for 10,00,000 vials per year,
Division B pays Rs. 6.18 crores extra just to have the vials produced internally by Division A.
Keeping the long run business interest in mind, the management of FAMA Ltd. should direct
Division A to find ways of optimizing its cost and make it cost competitive with the external
market. If there is no expectation that the idle capacity would utilize in the long run future,
Division A has to scale down its operations to only that much capacity that can be utilized
optimally. The management of FAMA Ltd. can even think of outsourcing the procurement of
vials to external vendors.
While re-evaluating the transfer price with respect to the external market price, the company
should also adjust the price for costs that are not typically incurred for internal sales. Adjustments
may be required for a variety of costs that may be incurred at a much lower price for internal
sales, namely packing costs, storage and transportation costs, administrative costs, practically no
selling and distribution costs etc. Adjustment should also be made to give effect to the estimate
profit margin the external vendor earns from sale of the vial at `1,050 per vial. Given these
adjustments, the transfer price should be made competitive as compared to the external market
price for a similar vial.
If Division A is able to achieve cost reduction and make it competitive as compared to the market,
the management may continue its current policy of internal procurement.

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Basic Concepts
Answer No. 16

Selling Costs would include all costs necessary to secure customer orders and get the finished
product into the hands of customers.
The responsibility of Mr. Watson as described in the problem is coordination of shipments of
DTK-I from the factory to distribution warehouses and same would appear to fall in this class.
Accordingly, the finance controller is correct in his view point that the salary cost should be
classified as selling cost.

Answer No. 17
P = a – bQ
P = 7,400 – (400 / 2) × Q
Revenue (R) = Q × [7,400 – 200 × Q]
= 7,400 Q – 200 Q2
Marginal Revenue (MR)= a – 2bQ
= 7,400 – 2 × (400 / 2) × Q
= 7,400 – 400 Q
Marginal Cost (MC) = 4,200
Profit is Maximum where Marginal Revenue (MR) equals to
Marginal Cost (MC) 7,400 – 400 Q = 4,200

Q = 8 units
By Putting the Value of ‘Q’ in Price Equation, Value of ‘P’
is obtained P = 7,400 – (400/ 2) × Q

= 7,400 – 200 × 8 units

= 5,800
At Selling Price of Rs. 5,800 Profit will be Maximum

Theory of Constraints
Answer No. 18
(i) Statement Showing Machine Hours
Product Maximum Machine Total Machine
Demand Hours/ Unit Hours
Z 2,000 units 1.6 3,200
D 1,600 units 0.8 1,280
Total machine hours required to meet maximum demand 4,480
Machine hours available 4,000
Shortage of machine hours 480
‘Machine hours’ is the bottleneck activity.
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Statement of Ranking
Particulars Z D
Selling Price per unit Rs.16,000 Rs.4,000
Less: Material Costs per unit Rs.7,000 Rs.1,200
Throughput per unit Rs.9,000 Rs.2,800
Machine Hour Required per unit 1.6 0.8
Throughput Return per hour Rs.9,000/1.6 Rs.2,800/0.8
= Rs.5,625 = Rs.3,500
Throughput Accounting (TA) Ratio 5,625/3,565 3,500/3,565
(Throughput return per hour/ cost per factory =1.58 =0.98
hour)
Ranking I II
Cost per factory hour = Rs.1,42,60,000/ 4,000 hrs. = Rs.3,565

Optimum Production Plan

Product No of Machine hr. Total T/P per Total T/P
units per unit Machine hrs. hr. Rs. Rs.
Z (online orders) 400 1.6 640 5,625 36,00,000
D (online orders) 1,200 0.8 960 3,500 33,60,000
Z 2,400/1.6 1.6 2,400 5,625 1,35,00,000
=1,500 (b/f)
Total 2,04,60,000
Less: Total Factory Costs 1,42,60,000
Profit 62,00,000

(ii). Had there been no online booking first product Z should be produced = 2,000 units using 3,200
machine hours (2,000 × 1.6). Because of online booking already accepted for 1,200 units of
product D, unfulfilled demand of product Z = 2,000 - 1,900 = 100 units.

Machine Hrs. Required for 100 units of Z (100 × 1.6) 160 hrs.
Throughput Lost for Product Z (160 hrs. × 5,625) Rs. 9,00,000
Throughput Return Earned for Product D (160 hrs. × 3,500) Rs. 5,60,000
Throughput lost Rs. 3,40,000
(iii) Recommendation
Option-1
Throughput accounting ratio is the throughput return earned in an hour divided by the factory cost
(labour and overheads) incurred by the factory in one hour. Factory cost is generally fixed in
nature. A ratio above 1 signifies that the throughput return is greater than the factory cost and
therefore the product is profitable. Product Z has a throughput accounting ratio of 1.58 while
Product D has a throughput accounting ratio of 0.98, this indicates that hourly return from Product
A can cover the hourly factory cost,, it is profitable. Product D does not yield enough hourly
return to cover the hourly factory cost, it is not profitable. Therefore, IAKA should consider ways
of improving throughput accounting ratio of Product D (i.e. above 1.0). TA ratio could be
improved by:
• Increasing the selling price of the Product D but the demand may fall.
• Reducing the material cost per unit as well as operating costs. However, there
may be quality issues.

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• Improving efficiency e.g. increase number of units that are made in each
bottleneck hour.
• Raising up bottleneck so that more hours are available of bottleneck resource.
Option-2
IAKA has to prioritize production of Product Z since it is more profitable than Product D. As
per the throughput accounting ratio, Product D does not yield sufficient return per hour to cover
the hourly overhead cost therefore, gets second priority over Product Z.
Since machine hours are the bottleneck, if production for entire 4,000 hours is focused on Product
Z, return yielded would be sufficient to cover the factory overheads. However, Product Z has a
maximum demand of 2,000 units, that requires 3,200 machine hours (2,000 units × 1.6 hours per
unit of production). Remaining 800 machine hours can be devoted to Product D, during which
1,000 units can be produced (800 machine hours / 0.8 hours per unit). Maximum demand for
Product D is 1,600 units. Therefore, the balance demand of 600 units of Product D will remain
unsatisfied.
However, to meet unsatisfied demand of Product D, IAKA may consider the option of sub-
contracting either a part of whole of the production of Product D. This way it can meet the entire
demand for Product D for 1,600 units. If it subcontracts the entire production of Product D, it
can also scale down its in-house capacity. Sub-contracting decision requires suitable cost benefit
analysis. Moreover, the risk associated with outsourcing like unsatisfactory quality and service
or failure of supplier cannot be ignored.
Overall, to enhance profitability or avoid any type of loss of profit, IAKA may consider the
options recommended above with a long-term perspective.
(iv). Pricing of a product is sometimes customized keeping taste, preference, and perceived value of
a customer into consideration. Price customization is done in the following ways:
• Based on product line: When products are customized as per the customer’s
requirements, pricing can be adapted based on the customer’s specifications. Standard
products can have a base price, to which the company can top-up charges to any
additional customization.
• Based on customer’s past behavior: Customers with good payment record have
established their credit-worthiness. To sustain business, they may be extended additional
discounts as compared to other customers.
• Based on demographics: Different pricing strategies may be adopted based on age or
social status. For example, railway fare discounts for senior citizens or concessional price
tickets for military personnel.
• Based on time differential: Different price for different time periods. If a customer
extends a long-term contract, an additional discount may be extended since business is
contracted for a longer period of time. Example, discounted price for data usage provided
by a broadband service provider if subscription paid for six months or more.
Apart from the above accounting principles, other macroeconomic and legal factors should
also be given importance while chalking out a pricing strategy.
(v). The life-cycle of a product has 4 stages namely Introductory stage, Growth stage, Maturity stage
and Decline stage.
Product Z is given to be in the maturity stage. This third stage of product life cycle is
characterized by an established market for the product. After rapid growth in sale volume in the
previous stages, growth of sales for the product will saturate. Competition would be high due to
large number of rivals in the market, this may lead to decreasing market share. Unit selling price
may remain constant since the market is well established. Occasional offers may be used to tempt
customers, otherwise this stage will mark consolidation of the market.
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Product D is in the introduction stage, the first stage of product life cycle. Penetration pricing is
adopted to charge a low price in the initial stage for penetrating the market as quickly as possible.
For a new product this low-price strategy will popularize the product. Once the market is
established, the price may be increased. Penetration pricing will be suitable when:
(i). Demand for the product is elastic, more demand when prices are low.
(ii). Large scale production of the product yields economies of scale.
(iii). Threat of competition requires prices to be set low. It serves as an entry barrier to
prospective competitors as well.
However, if Product D is a highly innovative product, it may adopt Skimming price policy. The
product with unique features will differentiate it from other products leading to a revolutionary impact
on market and customer behavior. Customers may not mind paying a premium for the unique product
offering. Focus may be on promoting the product to gain market share. Skimming price policy may
work when:
(i) There seem to be no competitors providing similar products.
(ii) Demand is inelastic.
Over time, competitors can reverse engineer and offer similar products. Therefore, the price may be
lowered in the long run to retain market share.

Competitive Advantage
Answer No. 19
Higher contribution margin ratio exhibited by firm KD indicates that firm KD is following a
differentiation strategy while firm DK appears to be more focused on cost leadership. This is also
substantiated by higher fixed costs i.e. R&D, innovation etc. for each sale ` in firm KD.
Innovation allows a firm to command premium prices and earn more contribution per sales `.
However, innovation is expensive.
Firm KD Firm DK
Contribution margin/ Sales 0.55 0.40
Fixed costs/ Sales 0.35 0.30
Profit margin/ Sales 0.20 0.10

TQM & TPM

Answer No. 20
Discussion- The aims of both TQM and TPM are to improve the efficiency of resources (man/
machine) which can only be attained by minimizing waste through total employee involvement and
providing quality service to customers. TPM is maintenance approach while TQM is total quality
control. Employee empowerment is a tool used in TQM implementation, while TPM uses
optimization. The connection between TQM and TPM are summarized below:
• TQM and TPM make company more competitive by reducing costs, improving customer
satisfactions and slashing lead times.
• Involvement of the workers into all phases of TQM and TPM is necessary.
• Both processes need fundamental training and education of participants.
• TPM and TQM take long time to notice sustained tangible benefits.
• Commitment from top managements is necessary for success of the implementation.

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PAPER 8: Strategic Management and Decision Making Analysis

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Revision Questions
Chapter 1: Concept of Strategy
1. Write a note on strategic planning and characteristics of strategic planning.
2. Describe the role of resource planning in activating strategies.
Chapter 2 Strategic Management
1. Define strategic management. Why situation analysis is considered a major element of the
strategic management process?
2. Evaluate the strategic management practices in Nepal.

Chapter 3 Environment Analysis

1. ‘The organization and environment are in reality more unpredictable, uncertain and non-linear’.
Explain
2. Discuss various elements of external environment.

Chapter 4 Internal Analysis

1. What is core competency? How can the organization identify core competencies?
2. Write a note on cost effectiveness analysis

Chapter 5 Strategic Options

1. Why are enterprises, especially in fast changing industries, making strategic alliances a core part
of their overall strategy?
2. Explain the Porter’s alternative business strategies and their implications.

Chapter 6 Strategy Formulation and Strategic Choice

1. Explain the project portfolio management highlighting the key factors of its success.
2. Discuss the criteria used for evaluation of strategic alternatives.

Chapter 7 Strategy Implementation

1. Discuss the role of organizational structure in strategy implementation.
2. State and explain different reasons for the failure of strategic implementation

Chapter 8 Strategy Evaluation

1. Describe various types of strategy evaluation after explaining its concept.
Chapter 9 Strategic Change Management
1. What are the necessary processes carried out while managing strategic change?
Chapter 10 Role of Chief Executive in Strategic Management
1. "The chief executive officer is the catalyst in strategic management". Explain

Chapter 11 Decision making process and technique

1. What is strategic decision? Explain the process of strategic decision making
Chapter 12 Strategic Management and Decision-Making Practice in Nepal
1. Describe the trends of strategic orientation in Nepalese organizations.

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Chapter 13 Case Studies

1. Tea industry in Nepal is growing rapidly due to the active participation of the private sector. Now,
Nepal is self-sufficient in CTC tea. There is a huge international market for Orthodox tea.
According to Nepal Tea and Coffee Development Board, 20 million kg of tea is produced in the
country annually. Out of this, only four million kg is orthodox type. About eight million kg of tea
produced in the country is consumed domestically and the rest 12 million kg are exported.
International demand for tea produced in Nepal was hit hard in Europe and USA when a test in
Germany few months ago revealed that it contained a harmful chemical called 'anthraquinone'.
However, the situation has improved. Recently, a Chinese businessman contacted to make a
recurring deal of 200,000 kg organic tea per year. Chinese are also among the major customers of
Nepali organic tea. Nepal produces varieties of high-quality teas that cater to the varied needs of
global customers. Quality tea is sold at €100 per kg in foreign markets.
The organic feature of the tea has become a minimum quality acceptable in Western markets.
Western customers have started seeking other standards in tea production, such as eco-friendliness
and bio-friendliness. In the past few weeks, Indian tea producers and traders have been seeking
ban on import of non-organic orthodox tea from Nepal in their country.
Keeping health issues in mind, some organic tea producers in the country have demanded the
government to make all the production of tea organic in Nepal. They have argued that this step
not only have health benefits for consumers, but also helps the economy grow.
However, those in opposition say that the move could do more harm than good. Organic
production takes at least three years to complete. And with the lengthy time, the production can
be affected by fertilizers shortage and other challenges, according to non-organic tea producers.
Frequent strikes by the workers, effect of climate change, low labor productivity, poor support
from the government, high cost of capital, use of modern technologies, competition with Indian
tea, and promotion at international market, etc. are some of the major issues confronting the
Nepalese tea industries.
Questions:
a) Identify the components of the task and general environments that Nepalese tea industries
are facing in light of the probable opportunities and threats they create.
b) In view of the growing globalization, what strategies should Nepalese tea industries adopt
to remain competitive in the market?

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Suggested Answers/Hints:
Chapter 1: Concept of Strategy
1. Strategic planning is the process of determining the long-term objectives of an organization and
deciding the strategies to achieve these objectives. It is the formulation of future direction aimed
to achieve strategic advantage. It is concerned with appraising the environment in relation to the
company. It is the framework within which future activities of the organization are expected to
be carried out. Strategic planning is concerned with the long-term development of the
organization, involves long-term decision making and enables the management to face with
environmental changes.
The features of strategic planning are:
• Strategic planning is concerned with appraisal of environments to identify opportunities
and threats of a company.
• Strategic planning is also concerned with the appraisal of company strength and weakness.
So, it is the appraisal of strength and weakness, opportunity and threats (SWOT).
• Strategic planning guides the choice among the broad directions in which the company
seeks to move.
• Strategic planning is helpful to identify strategic alternatives and selection of the best
alternatives with the best interest of company and personal value of top management.
• Strategic planning is prepared by top management.

2. Money and the way that it is managed can be a key determinant of strategic success. The whole
process of strategic management is meant for success. Strategies are developed for
implementation. Implementation activates strategies. The implementation process demands the
support of structure and resources. Nothing really happens until resources are allocated to tasks
for the accomplishment of objectives. For this purpose, an organization needs resource plans. The
resource plan plays vital role in identification of the critical factors for success of a particular
strategy. It activates the strategies with setting priorities and allocating resources.
• Critical success factors are those aspects of strategy in which an organization must excel
to perform. They are underpinned by core competences in specific activities. Critical
success factor analysis underlines the important relationship between resources,
competences and choice of strategies. It is important while implementing strategies that
the responsibilities for each of the activities from the critical success factor are properly
identified.
• A resource plan sets out what resources and competences need to be created and disposed
of. This may well be in the form of a budget expressed as a sequence of actions or a
timetable of priorities in a written plan. Network analysis can be useful in detailed
planning of implementation. It is a technique for planning projects by breaking them down
into their component activities and showing these activities and their interrelationships in
the form of a network. The network can be used for scheduling materials and other
resources and for examining the impact of changes in one sub area of the project on others.
• Identifying the appropriate resources to support strategy implementation is important but it should
be followed by resource allocation. The resource plan helps the activation of strategies by
distributing the resources within the organization to different strategic business units, functions
and tasks. The main instrument for resource allocation is budget. It should be remembered that

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resource allocation as expressed in the budget needs to be carefully linked to strategy. The
question of who gets the most money from the budget has a major effect on the process of resource
allocation. The factors could be objectives preference of dominant managers, internal policies and
external influence.
Chapter 2 Strategic Management
1. Strategic management is defined as the set of decisions and actions that result in the formulation
and implementation of plans designed to achieve an organization's objectives. It is thus all about
identification and description of the strategies to achieve better performance and competitive
advantage for the organization. Strategic management can also be defined as a bundle of decisions
and acts which a manager undertakes and which decides the result of the firm’s performance. The
strategic management process is made up of four elements: situation analysis, strategy
formulation, strategy implementation, and strategy evaluation.

Situation Analysis
A situation refers to the general position or context in which an organization is operating at a
specific point in time. In other words, a situation refers to the general state of things; the
combination of circumstances occurring at a given time.
Situation analysis is a systematic collection and evaluation of past and present economic, political,
social, and technological data, aimed at
• identification of internal and external forces that may influence the organization's
performance and choice of strategies, and
• assessment of the organization's current and future strengths, weaknesses, opportunities, and
strengths. Situation analysis is thus the first step in any strategic management process. It
provides the information necessary to create a company mission statement. Situation analysis
also involves scanning and evaluating the external environment and the organizational
environment This analysis can be performed using several techniques. Observation and
communication are two very effective methods.

2. The Nepalese scenario presents an encouraging picture of the development of strategic

management. We find that almost all management education programs have a component in the
curriculum devoted to strategic management. But research in strategic management is still
unknown in different organizations. The process of liberalization, globalization and privatization
has provided a boost to the adoption of strategic management. Nepalese organizations generally
lack long term strategic orientation. Most of them lack vision, mission, and strategy statements.
Nepalese organizations state their objectives in terms of desired outputs but the growing presence
of global enterprises has compelled them to think of capturing market share and survival as the
main objectives too.
Strategic planning is not important for Nepalese managers. But some selected organizations have
formulated strategic plans in respective areas of activities. And multinational companies working
in Nepal do prepare strategic plans. Effective SWOT analysis is lacking for strategic planning
exercises in Nepal. Environmental canning is poorly done. In public sector, Chief Executive
Officers postpone decisions making for tomorrow. They survive in their positions by creating and
managing crisis. Strategic management is not in their priority.
Resources provide internal strengths and weaknesses to Nepalese organizations. They can be
human, physical, financial and intellectual. Unique resources provide strategic advantage.
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Nepalese organizations have not been able to gain strategic advantage over competitors. The
cheap imports from China, India and overseas have already affected Nepal’s industrial growth
and survival. Nepalese organizations suffer from inefficient and ineffective utilization of
resources. Cost efficiency is neglected. Functions that can be outsourced are being performed by
armies of employees.
The lack of strategic orientation has resulted in very little attention to strategic options by
Nepalese organizations. Most Nepalese organizations give little consideration to generic
strategies, such as stability, expansion, retrenchment and combination. Market based generic
strategies, such as low-cost leadership, and product differentiation are somewhat considered as
options.
Strategy formulations are not effective in Nepalese organization. SWOT analysis, strategic
options identification and evaluation, and strategic choice are not effectively done. Portfolio
analysis for resource allocation to strategic business units are missing. Even big houses are not
practicing portfolio analysis exercises.
The management systems for strategy implementation are weak in Nepalese organization.
Frequent changes in top management distort strategy implementation. Human resource
management is not performance based. Motivation is lacking. So is decentralization. Leadership
does not give proper consideration to participative approach. Conflicts and personality clashes
constrain effective implementation. The organizational structure for strategy implementation is
not strategy friendly.

Chapter 3 Environment Analysis

1. The environment of any organization is the aggregate of all conditions, events and influences that
surround and affect it. Since, the environment influences an organization in many ways, its
understanding is of crucial importance. Industries and companies are quite interested in knowing
about trends that affect their business in multifarious ways. The environment consists of a number
of factors, events, conditions and influences arising from different sources. All these do not exist
in isolation, but interact with each other to create entirely new sets of influences. It is difficult to
comprehend at once what factors constitute a given environment. All in all, environment is a
complex phenomenon- and relatively easier to understand parts but difficult to grasp in its totality.
The environment is constantly in changing in nature. Due to many and varied influences, there is
dynamism in the environment causing it to continuously change its shape and character. What
shape and character an environment assumes depends on the perception of the observer? A
particular change in the environment, or a new development, may be viewed differently by
different observers. This is frequently seen when the same development may be welcomed as an
opportunity by one company while another company perceives it as a threat. The environment
has a far-reaching impact on organizations. The growth and profitability of an organization
depends critically on the environment in which it exists. Any environmental change has an impact
on the organization. The environment is complex, dynamic, multi-faceted and has a far-reaching
impact.

2. There are large numbers of factors which affect the organization in each sector of the environment.
In its working, the organization interacts with different factors and forces. Those forces lying
outside of the organization are commonly known as external environment. The external
environment is beyond the direct influence and control of the organization but it exerts powerful
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influence over its functioning. Before an organization begins strategy formulation, it must scan
the external environment to identify possible opportunities and threats.
The general environmental forces are external variables. The general environmental forces have
an important effect in determining the resources available for inputs and processes. Various
characteristics of such factors may be favorable or unfavorable for the growth of the organization.
The various elements of general environment can be classified as political, economic, socio-
cultural, technological and demographic. The political environment includes such factors as the
general state of political development, the degree of politicization of business, the law-and-order
situation, political stability, the political ideology and practices of the ruling party, the efficiency
of government agencies, the extent and nature of governmental intervention in the economy.
The economic environment includes general economic situation in the nation and conditions in
resource markets. Fiscal and monetary policy of the government, interest rates, devaluation and
evaluation of the currency in relation to other currencies, balance of payment and inflationary or
deflationary trend are the elements of economic environment. Socio-cultural environment
consists of factors related to human relationships and impact of social attitudes and cultural
values. The technology and business are highly interrelated. Demographic factors are age profile,
sex ratio and population growth rate.
The task environment includes those elements or groups that directly affect the organization and
in turn, are affected by it. These are suppliers, competitors, customers, creditors, special interest
groups and communities. An organization's task environment is typically the industry within
which that firm operates. An industry can be conceived of as a set of firms which are in
competition with one another for customers for their goods and services and which rely upon
others for supply of critical inputs. Customers have their own needs, desires or requirements. It
might be affected by demographic and geographic elements. As suppliers provide capital, labor
and materials it affects the cost. New entrants and substitutes are elements that affect competitive
environment. Thus, various elements constitute external environment.

Chapter 4 Internal Analysis

1. Competencies are capabilities represented by collective and accumulated knowledge, learning
and experience of the organization and its staff. Core competence is the capability that is most
fundamental to the successful operation of the enterprise. It represents activity that the
organization must be good in performing or be excellent in achieving its objectives. Companies
operating in competitive market can-not survive without the appropriate competencies. Although
the organizations need to achieve a threshold level in all its activities, only some will be core
competences. These are the competences which underpin the organization's ability to outperform
competition. A competence can be defined as bundle of skills and techniques but a core
competency represents the sum of learning across individual skill sets and organizational units.
Core competency resides in a small team. Core competencies also comprise the coordination,
integration, and management of structure, technologies, innovation capabilities, understanding of
markets and capacities to manage change. The core competency of the organization provides basic
capability. Every organization should identify its core competency and should give attention
towards strategy development accordingly.
Customer value, competitive uniqueness and extended ability are the means to identify core
competency of the organization. Core competency will make a significant contribution to the
customer benefits and value of the product. It satisfies the customer requirements. The greater the

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contribution of the core competency creating customer value, the greater will be the competitive
advantage provided by that core competency. Another important test of its identification is
competitive uniqueness. A core competency should be competitively unique and difficult for
competitors to imitate. These unique features should provide key sources of product or service
differentiation in the market place. It comprises a complete integration and harmonization
between staff skills, knowledge, technologies, operational capabilities and network of
relationship. A core competency provides increasing or extended access to a wide variety of
applications and markets. The core competency is a key source of new applications, new
technologies, new products and new processes. A core competency is core when it forms the basis
for entry into new product markets and provides long term advantage.

2. Cost efficiency is a means of strategic capability. It involves both appropriate resources and
competences to manage costs. It benefits the customers in terms of lower prices or more product
features for the same price. It is becoming a threshold strategic capability for two reasons.
Customers do not value product features at any price. Hence, costs have to be kept as low as
possible commensurate with the value to be provided. Otherwise, the customers may switch the
product. Since competitors constantly try to lower down their costs, cost efficiency becomes a
requirement for survival in a market becoming a threshold resource.
There are different ways of analyzing cost.
1. Economies of scale
2. Supply cost
3. Product process and design
4. Experience

Chapter 5 Strategic Options

1. The primary reason why firms enter into strategic alliances is to enhance their organizational
capabilities and thereby gain competitive or strategic advantage. For this to happen, they
continually strive to gain access to new markets and new supply sources. They also wish to
become more profitable by using the latest technology and making optimum utilization of
resources. When the firms find that it is not feasible to either create resources internally or to
acquire them; they rely on strategic alliances to create a network of beneficial relationships.
There are different reasons for use of strategic alliances. They are:
i. Entering new markets
A company that has a successful product or service may wish to look for new markets. Doing so on
one’s own capabilities may seem to be difficult. This is especially true in case a company wishes to
explore foreign markets. Here, it is better to enter into a partnership with a local firm which
understands the market better. This is one of the reasons why multinational corporations have entered
into strategic alliances with developing countries
ii. Reducing manufacturing costs
Strategic alliances are used to pool resources to gain economic scale or make better utilization of
resources in order to reduce manufacturing costs. This is especially true of precompetitive alliances
where a long-term relationship is developed with suppliers and buyers.
iii. Developing and diffusing technology
Strategic alliances may be used to develop technological capability by leveraging the technical
expertise of two or more firms, an act which may be difficult to perform if these firms act

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independently. Strategic cooperation is a much –favored approach for new technological

development. Whenever industries are experiencing high- velocity technological change in many
areas simultaneously, firms find it virtually essential to have cooperative relationships with other
enterprises to stay on the leading edge of technology and product performance in their own area of
specialization.

2. There are 4 alternative business strategies as devised by M.E. Porter’s

Competitive Advantage
Lower Cost Differentiation
Competitive Broad Target Cost Leadership Differentiation
Scope strategy
Narrow target Cost Focus Differentiation
Strategy focus Strategy
Broad Target
When the business strategy does not segment market but adopts mass marketing Under this
approach, there are 2 sub strategies: cost leadership strategy and differentiation strategy
1. Cost leadership strategy
Hence, cost leadership strategy aims at broad mass market sets out to become the low (i.e.
lowest) cost producer in the industry.
• So the SBU must exploit all resources optimally and has to have all sources of
cost advantage, reap scale of economy, efficient scale facilities, cost reduction
from experience.  Such SBU typically sells a standard quality product.
• The SBU has to drive down cost throughout the value chain.
• This strategy allows profit even during heavy competition.
• For example: Wal-Mart, Almo Rent- A- Car, Southwest Airlines, Timex,
Gateway 2000 have been found to have followed cost leadership strategy time and
again.
2. Differentiation Strategy
Differentiation strategy aims at broad mass market sets out to become the unique or
different in the industry. The SUB‟s products are assumed as different in the whole
industry. This is the mass marketing approach as there is no market segmentation in this
strategy.
• It seeks to be unique in the industry on some dimensions & attributes that are
widely valued by buyers, i.e. providing unique & superior value to the buyer in
terms of product quality, special features or after sale service. Broad scope
differentiator bases its strategy on “widely valued attributes” E.g., Walt Disney
productions, Maytag Appliance, Nike athletic shoes, Apple computer, Mercedes
Benz automobiles, IBM all have adopted this strategy.
• Differentiation based strategy is rewarded for its uniqueness with a premium price
compared with that of competitors.
A Focus Strategy
Contrary to broad target strategy, in focus strategy, a particular segment is selected to be
served. There are 2 sub strategies: cost focus strategy and differentiation focus strategy.
3. Cost Focus Strategy
Cost focus strategy focuses on a particular segment or niche, i.e. buyer group or
geographical market, and in this segment, the SBU is the lowest cost producer, i.e. not in
the whole industry. The firm seeks cost advantage in its target segment and becomes the
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lowest cost producer in the particular segment. This strategy is more possible alternative
as compared to cost leadership, i.e. in one industry there may be as many cost focusers as
there are segments.
4. Differentiation Focus
The SBU seeks differentiation action in its target segment, i.e. the SBU differentiates to
meet the particular requirements of the segment in a way that allows the firm to charge
premium price. In contrast to broad scope differentiator, focus differentiator looks for
segments with special needs and meets them better.

Chapter 6 Strategy Formulation and Strategic Choice

1. Projects are managed concurrently under a single umbrella and it may be either related or
independent of one another. The key to portfolio management is realizing that a firm‘s projects
share a common strategic purpose and the same scarce resources. The concept of project portfolio
management holds that firms should not manage projects as independent entities, but rather
should regard portfolios as unified assets. There may be multiple objectives, but they are also
shared objectives. In a project-oriented company, project portfolio management poses a constant
challenge between balancing long-term strategic goals and short-term needs and constraints.
Project management does not mean only selection of a project in competition with other projects.
In reality organization should maintain portfolio of projects and keep a proper balance among this
portfolio.
Managers must be aware of the questions all the time what projects are good to fund and does the
organization has the resources to support them. The project must be complementary to other
company projects with good business sense. Project portfolio management is the process of
bringing an organization’s project management practices into line with its overall corporate
strategy. By creating complementarity in its project portfolio, a company can ensure that its
project management teams are working together rather than at cross-purposes. Portfolio
management is also a visible symbol of the strategic direction and commercial goals of a firm.
Taken together, the projects that a firm chooses to promote and develop send a clear signal to the
rest of the company about priorities, resource commitment, and future directions. Finally,
portfolio management is an alternative method for managing overall project risk by seeking a
continuous balance among various families of projects, between risks and return trade-offs, and
between efficiently run projects and nonperformers. As more and more organizations rely on
project management to achieve these ends, it is likely that more and more firms will take the next
logical step: organizing projects by means of portfolio management.
The successfully managed project portfolios usually reflect the following factors, which are keys
to success:
• Flexible structure and freedom of communication: Restrictive layers of bureaucracy and
narrow communication channels create constrains. When project teams are allowed to improve
and experiment on existing product lines, innovative new product ideas are likely to emerge.
• Low-cost environmental scanning: Successful organizations should constantly build and test
new projects prior to full-scale development with low cost as a routine work. It is not necessary
all the time devote a lot of money struggling to take new market.
• Time-paced transition: Successful organizations use project portfolio planning routinely to
develop long lead times and plan ahead in order to make the smoothest possible transition from
one product to another. Accurate predictions of the likely life cycle of current products are
necessary keys.

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2. Strategic alternatives should be carefully evaluated for making strategic choice. The criteria used
for evaluation of strategic alternatives or options are suitability, acceptability and feasibility. The
evaluated strategic options are ranked in terms of their potential strategic advantage for objective
achievement.
Suitability is concerned with environmental fit of the strategic option. The strategic option should
address the circumstances in which the organization is operating. It should fit with the future
trends and changes in the environment. The strategic option should be suitable from the viewpoint
of exploiting opportunities and avoiding threats, capitalizing on strengths and avoiding
weaknesses and addressing stakeholder expectation. Ranking, decision trees and scenarios are
screening methods for suitability
Acceptability is concerned with the expected performance outcome of a strategic option. Return,
risk and stakeholder reactions are the criteria for acceptability of a strategic option. The
approaches used for analyzing return are profitability, cost/benefit and shareholder value analysis.
The approaches for analyzing risk are financial ratio projection, sensitivity analysis, simulation
modeling, heuristic models and decision matrices. Stakeholders have a stake in the outcomes of
the organization. The methods for analyzing stakeholder reactions are stakeholder mapping and
game theory.
Feasibility is concerned with availability of resources and competencies to deliver a strategic
option. It determines an option’s workability in practice. It assesses the organization’s capability
to make the strategic option succeed. The methods available to analyze feasibility are fund flow,
breakeven and resource deployment analysis. Fund flow analysis forecasts the funds required and
the likely sources of funds for a strategic option. Break Even analysis studies cost-volume-profit
relationships to assess financial feasibility. Resource deployment analysis identifies needs for
resources and competencies for a specific strategic option.

Chapter 7 Strategy Implementation

1. Organizational structure specifies the work to be done and how to do it in regard to the strategy
or strategies. It influences how managers work and the decisions resulting from that work.
Organizational structure determines the processes used to complete organizational tasks to
support the implementation of strategies. When the strategy is modified, it demands changes in
organizational structure.
Strategy and structure are closely related to each other. This relationship shows
interconnectedness between strategy formulation and strategy implementation. More precisely,
changes to the firm’s strategy demand changes in structure. Similarly, the existing structure may
require a particular strategy to be pursued. However, strategy has a much more important
influence on structure than the reverse. It is important that matching each strategy with a structure
enables the use of current competitive advantages as well as provides flexibility required to
develop future advantages. The following points show how and why strategy demands structure.
• New strategy is formulated
• New administrative problem emerges
• Organizational performance decreases
• Organizational performance improves
• A new organizational structure is established.

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2. The reasons for failure of strategic implementation are termed as pitfalls. Following are some of
the important reasons, i.e., pitfalls of strategic implementation:
Lack of ownership:
If the people involved in strategic implementation process fail to accept and realize the ownership
of strategy, implementation process will be affected and hence its effectiveness gets decreased.
Lack of commitment of top-level management also frustrates the middle and lower-level
employees to bear the ownership of strategy implementation.
Poor communication:
If the strategy or the plan is not properly and timely communicated to concerned stakeholders,
they may resist or the problem may be created during the implementation. They do not understand
how they contribute in strategy implementation process.
Over involvement in daily activities:
Strategic implementation demands continuous monitoring, evaluation and control. If the owners
and top-level managers are involved in day-to-day activities, then they lose their vision and
concern for long term goals. This negatively affects effectiveness of the strategy implementation.
Poor integration of plan:
The strategy or plan should be integrated with organizational goals and objectives. Sometimes,
strategies and plans are treated as something separate and removed from the management process
which could be the cause for poor implementation of strategy.
Lack of prioritization:
If the strategies or plans are prepared with too numerous options or lack to prioritize, fail to make
tough choices to eliminate non-critical actions then the employees do not know from where to
begin. This also leads to poor implementation of the strategy.
Lack of regular monitoring:
For effective implementation of strategy, implementation process should be monitored, traced
and reported regularly for feedback. The plan should measure what’s easy, what is important and
so on. If there is no regular tracking of progress, no one feels any forward momentum.
Implementation becomes less effective in such situation.
Poor accountability:
Accountability and high visibility help drive change. This means that each measure, objective,
data source, and initiative must have an owner. If no one and none of the managers in the
organizational structure is accountable for implementation process, implementation becomes less
effective
Lack of empowerment:
Although the accountability provides strong motivation for improving performance, employees
must also have the authority and responsibility to the relevant measures. Otherwise, they may
resist involvement and ownership because of which the implementation becomes less effective.

Chapter 8 Strategy Evaluation

1. Strategy evaluation continually assesses the changing environment to uncover events that
significantly affect the course of the strategy. Top management exercises strategy evaluation. It
is long term oriented. It focuses on external environment. It is proactive and provides early
warning about the performance of the strategy. Strategy evaluation involves reexamination of
assumptions, measuring performance and appropriate corrective measures. Assumptions made
while formulating a strategy may no longer be valid and relevant as the environment is dynamic.

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So, the strategy evaluation takes into account the changing assumptions. Strategy evaluation
continually evaluates the implementation performance of a strategy and gaps are identified.
Appropriate measures are taken to adjust the strategy with due consideration to changing
assumptions and implementation gaps. Strategy evaluation can be strategic and operational.
Strategic evaluation can be of four types: premise evaluation, implementation evaluation, strategic
surveillance evaluation and special alert evaluation. Premise evaluation involves reexamination
of the validity of premises to make necessary changes at the right time. It is concerned with
keeping track of changes in premises and assessing their impact on strategy implementation.
Implementation evaluation
evaluates whether the plans, program, projects and budget are guiding the organization towards
objective achievement. It involves strategic rethinking. Strategic surveillance monitors a broad
range of events inside and outside the organization, which threaten the course of action. It can be
selective surveillance or organizational surveillance. Special alert control is triggered by detection
of a crisis. It provides rapid response through immediate reassessment of strategy during crisis
situation.
Operating evaluation controls the allocation and use of resources through performance evaluation
of strategic business units. It is a cyclical process of four steps: setting standards of performance,
measure actual performance, evaluate performance and taking corrective actions. Standards in the
form of planned or budgeted performance are set for implementation. Then actual performance is
measured and compared against performance standards. Corrective actions are taken to bring
performance in line with the standards.

Chapter 9 Strategic Change Management

1. It is a matter of truth that a formulated and implemented strategy is not adopted forever by an
organization. Strategy is dynamic like the environment, which is changing. Strategy basically
depends on the assessment of external environment which is not static. Therefore, change of
strategy is unavoidable to achieve the objectives. But change of strategy in an organization
depends on the extent to which people change their behavior. It is concerned with the beliefs and
assumptions that they hold and the processes in the organization.
Flow of managing strategic change process of an organization.
1. UNDERSTANDING TYPES OF STRATEGIC CHANGE
2. DIAGNOSING STRATEGIC CHANGE NEEDS
3. MANAGING STRATEGIC CHANGE PROCESS
4. LEADERSHIP AND CHANGE AGENCY

There are mainly two ways to change the strategies.

• Incremental i.e. change of strategy in an increasing process. In this way, the skills,
routines, and beliefs of those in the organization will build up so that change is efficient
and likely to win their commitment
• Transformational i.e. complete change which cannot be handled within the existing
paradigm and organization routine. There are also two types of changes.
(i) Proactive i.e. controlling a situation by making things happen rather
than waiting for things and
(ii) Reactive i.e. showing a reaction or response.

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Increment change approach suggests that organizations can change by mutually reinforcing and
amplifying stimuli within their system. Change takes place in the gradual manner in the current way
of doing things. Increment change might therefore be seen as an adaptive process in a continually
changing environment. If such incremental strategic change lags behind environmental change, the
organization may get out of line with its environment.

Chapter 10 Role of Chief Executive in Strategic Management

1. The chief executive officer is the catalyst in strategic management. This individual is most closely
identified with and ultimately accountable for a strategy’s success. In most firms, particularly in
larger ones, CEOs spend up to 80 percent of their time developing and guiding strategy.
The nature of the CEO’s role is both symbolic and substantive in strategy implementation. First,
the CEO is a symbol of the new strategy. This individual’s actions and the perceived seriousness
of his or her commitment to a chosen strategy, particularly if the strategy represents a major
change, exert a significant influence on the intensity of subordinate manager’s commitment to
implement the strategy. Second, the firm’s mission, objectives and strategy, are strongly
influenced by the personal goals and values of its CEO. CEO’s time and personal values are
important source for clarification, guidance, and adjustment during implementation of strategy.
Major changes in strategy are often preceded or quickly followed by a change in CEO. The timing
suggests that different strategies require different CEO if they are to succeed. A successful
turnaround strategy will require almost without exception either a change in top management or
a substantial change in the behavior of the existing management team. Clearly, successful strategy
implementation is directly linked to the characteristics, orientation, and actions of the CEO.

Chapter 11 Decision Making Process and Technique

1. Strategic decision making involves choices regarding the courses of action for the long-term
future of the organization. It is based on the consideration of strategic alternatives. Strategic
decisions are made by the top management. They are made in the context of uncertain decision-
making environment. Strategic decisions aim for competitive advantage in the long term. They
are concerned with matching organization’s internal strengths with future opportunities in the
environment. They define the scope of business activities. They identify markets to be served,
products to be offered, resources to be committed, and capabilities to be enhanced.
The process of strategic decision making consist of:
Awareness of strategic issues: Strategic decision maker must have awareness of strategic issues.
Such awareness can result from previous experience and gut feeling of decision makers,
deviations in sales, profit, performance, productivity, budget variances, and customer reaction on
quality, price and services.
Formulation of strategic issues: Strategic decision maker should formulate key strategic issues. It
can be based on information gathering, analysis about strategic issues, debate and discussion of
issues with stakeholders, and making sense of information.
Solution development: Alternative solutions for strategic issues are developed. They can be based
on known and tried solutions in the past, drawing on judgment and experience of the decision
maker, collective wisdom of managers and key employees, and strategic workshops to develop
solutions.
Solution selection: Solution selection is made from among the available alternative solutions. It
can be based on judgment, negotiation, and bargaining.

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Chapter 12 Strategic Management and Decision-Making Practice in Nepal

1. Nepalese organizations generally lack long- term strategic orientation. They lack a long-term
vision of what they aspire to become. Similarly, they are unclear about why do they exist in terms
of mission. Many of them are confused about their future strategic direction and scope. They
prepare annual budgets and strictly follow the provisions of the budget. Managers resort to for
crisis management and decisions they take depend on the events and situation.
Most organizations have profit as their objectives. They aim at maximizing profit in short term.
The growing competition from globalization, together with the growth of big business houses,
has made market share an important objective in recent years. The growing presence of global
enterprises has made survival an important objective for Nepalese organizations.
Most organizations lack strategic perspective in decision making. This has led to suboptimization
and lack of synergistic effects. Strategic decision-making process is not based on careful
development of strategic issues and solution alternatives. Similarly, many organizations lack
strategy formulation at corporate and business unit levels.
The growing presence of global enterprises has been gradually bringing consciousness about the
importance of strategy in Nepalese organizations to survive in the competitive market.

Chapter 13 Case Studies

a) Each and every business is environment specific. This equally applies to the tea industry. The
operating or task environment is composed of the factors that are directly related to the
competitive position of a business. It consists of different stakeholders who have direct or indirect
interest in the performance of the business. The general environment is composed of the factors
that are broad and affect the industries and the firms competing each other. The general
environmental forces should be scanned, monitored, forecasted, and assessed to determine their
effects on the firm in terms of opportunities and threats.
The general environmental components of Nepalese tea industry are;
• Political environment: Instable leading to policy instability and political risks
• Economic environment: Increasing purchasing power of the people
• Legal environment: Favorable legislations of the government emphasizing the private sector
• Technological environment: Low investment in R & D and low level of technology employed
• Socio-cultural environment- Exists tea culture
• Global environment- Poor integration with global economy
The task environment of Nepalese tea industry consists of;
• Customer: High bargaining power
• Supplier: Moderate bargaining power
• Competitiveness: High with domestic and Indian products
• Substitution: High due to presence of different coffee brands, other drinks.
• New entrants: Moderate possibility

b) Globalization is a gradual process of integrating the world. Economic globalization views the
whole world into an economic unit. All the business organizations are affected by the trend of
globalization. Nepalese tea industry is not an exception.
Nepalese tea industry should follow expansion strategy at corporate level and differentiation
strategy at business level to compete successfully in the global market. It should pursue the
expansion strategy through product as well as market development. Product line development and
product innovations are possible long-term actions of Nepalese tea industry to take competitive

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advantage at international level. Likewise, the limited market coverage of Nepalese tea in the
world should be expanded as much as possible. Nepalese tea should be exported in large quantity
in diversified countries.
At the business level, Nepalese tea industry should follow differentiation strategy. Nepalese tea
has its unique features due to climatic favorableness and organic way of production. However,
cost leadership strategy may be followed for the products that are likely to be sold at domestic
products. These ways, Nepalese tea can compete with the foreign products (especially Indian).

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