CHAPTER-II

Review of Literature

2.1 The Management Process and the Role of Management Accounting

Nowadays, managerial accountants serve as internal business consultants working
side by side in cross-functional teams with managers from all area of the organization.
In many organizations, managerial accountants take on leadership roles in their teams
and are sought out for the valuable information they provide. They are treated as
advisors. They are more that just accountants; they are in fact very important business
partners. [Bajracharya, Ojha, Goet & Sharma, 2005:4]

In managing the resources, activities and people of the organization, the management
process involves the following activities. [Bajracharya, Ojha, Goet & Sharma,
2005:4-7]

1. Planning
Planning is the process of thinking in advance about future activities. It is a
forward thinking process that contemplates to manage the uncertainties and
risk. It is the fact of controlling an organization from deviating from its goal.
A well set plan is the key to success for an organization. Planning should be
such that it reflects the true picture and reality of the organization. Planning is
done at both strategic and operational level. Strategy itself is a plan to lead the
organization with a long term vision. Planning is developing a detailed
financial and operational description of anticipated operations.

2. Decision Making
Decision making is the process of selecting the best perceived alternative from
the available different options. It is to be done in all levels of management.
Decision making is all about choosing from among the available alternatives.
The management team often comes across situations where decisions need to
be taken considering the best interests of the organization.

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 3. Controlling
Controlling is the process which assures the management that the organization
is not deviating from its basic philosophy. It is applied basically in the
operational level because the actualization of the plans and strategies done in
this level.

2.2 Stewardship, Treasureship and Controllership Functions of Management

Accounting
1. Stewardship function:
Stewardship function is a traditional approach of accounting that places an
obligation on stewards or agents, such as directors, to provide relevant and
reliable financial information relating to resources over which they have
control but which are owned by others, such as shareholders. Not only are
stewards responsible for providing information, but they must also submit to
an audit. Stewardship functions follow proper accounting procedures which
satisfy legal and commercial needs but are less vigorous and detailed than the
professional practices of management or financial accounting. It is usually
applied to small businesses that do not need the more sophisticated techniques.
Owing to the popularity and practice of company businesses or corporations,
the stewardship function now is almost out of continuation.
[Bajracharya, Ojha, Goet & Sharma, 2005:11]

2. Treasure Ship Function

Treasureship is a financial manager in a staff position that is responsible for
managing organizations relationships with investors and creditors and
maintaining custody of the organizations cash, investment and other assets.
Management of capital and investment is a distinct area of treasureship
functions. It consists of major activities like financial planning, dealing with
capital and money markets, investment decision. Cash management, credit
management and so on. Value maximization of the organization is its prime
objective. [Bajracharya, Ojha, Goet & Sharma, 2005:11]

21
 3. Controllership function
Controller is top accountant in an organization. Controllership activities are
primary related to the accounting process. It consists of major activities
including financial record keeping and reporting, internal auditing, tax
planning, cost accounting, managerial accounting, profit planning, accounting
information system and so on. Maintaining financial discipline and profit
maximization are the prime objective of controllership functions.
Controllership functions basically focus on the management of revenues and
expenditures. [Bajracharya, Ojha, Goet & Sharma, 2005:11]

2.3 Management Accounting Tools

There are various MA tools and technique use to planning, controlling and decision
making process for management goals. That tools and technique are listed under.
1. Cost classification & cost estimation
2. Cost allocation
3. Profit measurement & recognition
4. Expenditure analysis
5. Budgeting for profit planning & control
6. Pricing decision
7. Long term investment decision
8. Statement of cash Flow
9. Analysis of financial statement

2.4 Limitation of Management Accounting

Management accounting suffers from some limitations which are mentioned below.
[Dangol, 2007:13]
1. Management accounting is prepared on the basis of financial account and cost
account. So its effectiveness is limited to the reliability of those sources.
2. A management accountant should have the knowledge of accounting, statistics,
economics, principle of management, engineering etc. and only then, the
application of management accounting will be useful. The imperfect
knowledge of stated discipline may lead to erratic decisions.

22
 3. Management accounting provides only information for helping the management in
collecting, analyzing and presenting the data. So, management accounting
should not be considered as alternative or a substitute for management.
4. The personal feeling and thinking of an interpreter may affect the decision
making, which may lead to same wrong decision.
5. Management accounting may not be beneficial for small organization, because it
is a very costly affair to install this system.
6. Management accounting is still in evolutionary stage and it has not been able to
reach the final stage.
7. The establishment of management accounting demands re-arrangement of
personal and their activities and hence there is a possibility of opposition from
some quarters or the others within the organization.
8. Conclusions or decisions derived by management accounting are insignificant
unless they are properly executed at all levels of business operations.

2.5 A Review of Management Accounting Tools

Management accounting is that branch of the accounting information system of
business firm, which uses accounting information for planning, controlling and
decision making to achieve organizational goal and objectives. Management must use
various tools and techniques of MA for organizational success. Those tools and
techniques are as follows

2.5.1 Cost Estimation

How does management go about actually estimating the fixed and variable of costs?
Management must have some way of estimating fixed and variety of cost behavior
pattern. Cost exhibits a variety of cost behavior pattern. Cost estimation is the process
of determining how a particular cost behaves. It is a process of determining the cost
for certain levels of outputs. Several methods or models are commonly used to
estimate the relationship between cost and activity and thereby have total mixed cost
for given level of activity. [Munaukarmi, 2002: 25]

2.5.2 Methods of Mixed Cost Segregations

Mixed costs should be separated into variable and fixed components before entering
into financial planning, decision making and controlling. Mixed cost separation

23
method are such as Graphic method, high-low point method, Analytical method,
average method and least square method which are describe as follows.
1. Graphical Methods (Scatter Diagram)
The graphical method of dividing mixed costs into their fixed and various
components makes use of all relevant past data pertaining to cost- volume
relationship. The data are plotted in a scatter graph. Each point in a chart
represents cost for a particular months/days in relation to number of units
produced or level of activity. [Khan, 2000: 5:11]

2. High-low Method (Two point Method)

As the name suggest, that method makes of two observations rather than all
the observation for drawing the cost line. The two points chosen are : (i) The
high cost point; and (ii) The low cost points corresponding to same specific
volume (may be number of units produced or any other measure of volume
such as labour-hours, machine-hours, telephone calls made, power consumed
and so on) The algebraic method will yield identical results which formula as
follows. [Khan, 2000: 5.12]
Y = a + bx
Difference in Cost ( CH – CL )
Variable Value (b) 
Difference in Level of Activity or Production (PH - PL)

In statistical terms, total cost (Y) is a function of (i) Fixed element, a, and (ii)
variable element, b, multiplied by number of units produced or level of
activity, X:

3. Least Square Method

Least square method is a statistical method. It follows regression equation to
segregate mixed cost into variable. It is an accurate and trusted method of
segregation fixed and variable cost from mixed cost. In this method, first of
all, variable cost per unit is calculated. Then fixed cost is calculated. [Dangol,
2007: 27]
N  xy –  x.  y
b
N  x2 –   x
2

24
 Ny – b  x 
a
N
Where, a = Fixed cost per unit/paper
b = Variable cost per unit
N = No. of observations
X = activity measures
Y = Total mixed cost

4. Analysis Method
This method also knows as “Degree of variability” techniques because the
genesis of this method lies in measuring the extent of variability of costs on a
careful analysis of each item to determine how for the cost varies with volume,
variable overheads under this method computed as follows: [Brown &
Howard, 1964: 149]
Variable overhead = Budgeted mixed overhead × Degree of variability

5. Average Method
Under this method, total cost is divided by total units for find out cost per unit.
Total cost may be cost of product and other indirect examples. So it is simplest
method for calculation.

2.5.3 Product Costing Method

Profits are the excess of revenue over expenses. For the purpose of profit
determination in business finished and semi-finished goods in a firm heed a true and
fair valuation. So income statement is prepared for the evaluation of the performance
of the organization. Income statement is prepared under two product costing method
for showing the detailed behavior and classification of overhead as follows.
1. Variable Costing
This method is also known as direct costing and marginal costing. This is a
method of separating cost between variable and fixed cost for product under
this method only variable manufacturing costs are charged on the product. The
components of variable manufacturing cost are direct material, direct labour
and manufacturing overhead. Fixed manufacturing costs are not included on
the cost of product. [Gyawali, Fago& Subedi, 2006: 3.3]

25
2. Absorption Costing
This is a system of separation cost between manufacturing and non
manufacturing. The valuation of inventories includes the costs of
manufacturing ( variable manufacturing and fixed manufacturing) like direct
material, direct labour, variable manufacturing overhead, fixed manufacturing
overhead etc. this system includes fixed manufacturing overhead on considers
over absorbed or under absorbed of fixed manufacturing overhead on the basis
of production volume. [Gyawali, Fago& Subedi, 2006: 3.3]

3. Use of Variable and Absorption Costing

Absorption costing is more widely used than variable costing. However, the
growing use of the contribution approach in performance measurement and
cost analysis has led to increasing use of direct costing for internal reporting
purpose. Over half the major firms in the United States use direct costing for
some internal reporting, and nearly a quarter uses it as the primary internal
format, in contrast neither the public accounting profession nor the internal
revenue services approves of direct costing for external reporting or tax
purpose. Thus all firms use absorption costing for there a report to
shareholder’s and tax authorities. [Horngren, 1991: 538-539]

Product costs and period costs are calculated by the variable as well absorption
costing based. They are;

Under Absorption Costing

Product costs: = direct material + direct labour + variable
manufacturing costs + fixed manufacturing costs.
Period costs: = General and administration costs + selling and distribution
costs.

Under Variable Costing

Product costs = direct material + direct labour + variable manufacturing costs.
Period costs = foxed manufacturing cost + general administrative costs +
selling and distribution costs.
[Bajracharya, Ojha, Goet & Sharma, 2005:144]

26
2.5.4 Inventory System
Either the period inventory system or the perpetual inventory system may be used to
account following for inventory management.
1. Perpetual Inventory System
Under a perpetual inventory system, the book figure for me ending inventory
is a balancing figure on the accounts, which may be verified periodically by
actually counting the items. This counting is referred to as “taking a physical
inventory”. [Goyal, 1992: 689]

2. Periodic Inventory System

Under a periodic inventory procedure, where a perpetual inventory is not
maintained, physical inventory is taken periodically and the cost of material
used is the balancing figure in accounts. In this case, the cost of material, used
is perhaps more accurately described as the cost of materials which are
assumed to have been used. [Mohan & Goyal, 1992: 690]

2.5.5 Inventory Valuation Method

There are some inventory valuation methods such as FIFO, LIFO, Weighted Average
and specific Items. There are describing as follows:
1. First in First out (FIFO Method)
The FIFO method assumes that the items of inventor which were purchased
first are sold or consumed first, and consequently the items remaining in
inventory at the end of the period are those most recently purchase or
produced. [Bajracharya, Ojha, Goet & Sharma,2005: 175]

2. Last in First out (LIFO Method)

Under the LIFO method, on the other hand, the cost of goods sold and the
value of closing inventory can be determined only after the final lot of the year
has been received. This is because of the assumption underlying the
calculation of inventory, according to this method, as the name LIFO suggests,
the use of inventory is valued in the basis of the inverse sequence of receipts.
[Khan & Jain, 1992: 6.21]

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 3. Weighted Average Method (End- of-the Months Average Cost Method)
Under this method, the materials issued during the month are generally costed
at the weighted average unit cost (total cost of units divided by number of
units) as the end of the previous months. Since the weighted average unit costs
at end of the previous month are available during the current period for costing
requisitions, this method can be used with either a perpetual or periodic
inventory system [Mohan & Goyal, 1992: 695]

4. Identification of Specific Items

The cost of inventories of items that are not ordinarily interchangeable and
goods or service produced and segregated for specific project should be
assigned by using specific identification of their individual costs are attributed
to identify items of inventory. This is an appropriate treatment for items that
are segregate for a specific project, regardless of whether they have been
bough or produced. However, specific identification of costs id inappropriate
when there are a large number of items that remain in inventories could be
used to obtain pre determined effects on the net profit or loss for the period.
[Bajracharya, Ojha, Goet & Sharma, 2005:174]

2.5.6 Managerial Application of the Cost-Volume Profit Analysis

Management must be doing CVP analysis for find out business standing position.
CVP analysis helps the management to make strategies for success. However, CVP
analysis used by some method/ approach which are described as follows:
1. Contribution Margin Analysis
Contribution margin is the excess of sales price of a unit of output over its
variable cost i.e. (S-V). It is the difference between the profits of rupees that is
left after variable expenses are deducted. It had to be remembered that “V” is
the sum of unit manufacturing costs and the unit marketing and administrative
costs. [Gyawali, Fago& Subedi, 2006: 4.2-4.3]

Symbolically,
Contribution Margin = Selling Price – Variable Cost
= Fixed Cost + Profit
Profit/Loss = Contribution Margin – Fixed Cost/Expenses

28
2. Break- Even Analysis
At break- even sales, the company just break even i.e. recovers all of its costs.
In other words, break even sales volume is that level of sales volume in which
a company neither makes a profit nor suffers losses. It will just be able to
recover its cost. To put break even point in other words, that is a point at
which a company breaks the loss (minus) zone and enters into profit zone.
Break even analysis helps the management to know whish sales volume will
only recovers its cost and after which it starts giving profit. Therefore, it can
provide management some insight into profit planning. There are four
approaches of calculating break even point. [Akshay, Goet &Bhattri,
2005:12.2]
a. Algebraic Equation Method
BEP Sales in Rs. – Variable Cost – Fixed Cost = 0
b. Formula Method
Fixed Cost
BE Sales (Units) 
CMPU
Fixed Cost
BE Sales (Rs.) 
CM Ratio
c. Income Statement Method
Sales revenue (BE sales in Rs.) xx
Less: Variable cost xx
Contribution margin xx
Less: Fixed cost xx
Nil

29
 d. Graphical Method

Sales Revenue
Y

Profit Area

VC
Loss Area

FC

O X

BEP (Units)

Sales units
Figure No. 2-1
3. Margin of Safety
Margin of safety (MOS) is a cushion available to a business firm to protect
itself against the future business happenings. The large is the margin of safety,
the greater is the chances for the firm to earn profit or vice versa. Margin of
safety is also defined as excess of actual or budgeted sales over and above the
break even sales. In others words, it is the difference between actual or
budgeted sales and break even sales. [Akshay, Goet & Bhattarai, 2005: 12.4]

Symbolically,
Margin of safety (MOS) = Actual Sales Volume – BE Sales Volume
Margin of Safety
Margin of Safety Ratio 
Actual Sales

2.5.7 Pricing of the Product

Price is the value of goods and services. Setting price for goods or service in an
important function of the manager of an organization. It is the most crucial and
difficult decision of a manger. Pricing is always determined for making profit. There
is some technique for pricing of product which is described as follows:
1. Variable Cost Pricing

30
 Some firms use variable cost pricing system for determination of selling price
of the products. Under this system, mark up is added either on total variable
manufacturing cost or total variable costs. This method is also known as
marginal cost pricing system or contribution margin pricing system. Using
variable cost pricing system, the firm sets its price to maximize contribution to
cover fixed cost and profit margin. [Fago, Subedi & Gyawali, 2006: 9.5-9.6]
Calculated price under this system is,
Selling Price = Total variable Cost Per Unit + (Mark Up%  Total Variable
Cost Per Unit)
Total Profit  Fixed Manufacturing Cost  Fixed Selling and Administrative Cost
Mark Up %   100%
Total Variable Cost
Target Profit = Capita Employed  Return on Investment (ROI)

31
2. Full Cost Pricing /Absorption Cost Pricing
Under this system of pricing, selling price is determined by adding certain
percentage of mark up on total production cost of goods and service. The total
cost includes all variable manufacturing cost as well as fixed manufacturing
cost for determination of selling price. In long run, price must cover all costs
and normal profit margin. Full cost pricing system covers all variable costs,
fixed cost as well as required level of mark up. It provides a just able price that
tends to be perceived as equitable by all parties. Consumers generally
understand that a company must make a profit on its product or service in
order to remain in business. Justifying a price as total case of production, sales
and administrative activities plus a reasonable profit margin, seems reasonable
to buyers. The selling price is determined under full cost pricing system as
follows. [Fago, Subedi & Gyawali, 2006: 9.2]
Selling Price = Total Cost Per Unit + (Mark Up%  Total Cost Per Unit)
Target Profit
Mark Up%   100%
Total Cost
Target Profit = Capital Employed  Return on Investment (ROI)

3. Transfer Cost Pricing

A transfer price is the price on submit of an organization charges for products
or services supplied to another subunit of the same organization. The transfer
price creates revenue for the selling subunit and a purchase cost for the buying
subunit, affecting operation income numbers for both subunits. The operating
income can be used to evaluate the performance of each subunit and to
motivate managers. [Horngren, Foster and Datar, 1999: 377]

The transfer pricing methods are broadly classified cost pricing are as follows.
[Fago, Subedi & Gyawali, 2006:9.31]
a) Market based transfer pricing
b) Cost based transfer pricing
i) Full cost transfer pricing
ii) Variable cost transfer pricing
c) Negotiable transfer pricing
d) General formula approach transfer pricing

32
 4. Activity Based Cost Pricing
It is a technique of allocating manufacturing overheads to products using
multiple application rates and variety of costs drivers in multi product firm. It
maintains the relationship between overhead costs and the activities that
causes them. The manufacturing costs are based up on certain costs drivers
and the increasing and decreasing ratio of costs depends upon the quantity of
cost drivers. The following steps in taken for making pricing decision under
ABC pricing system.
a) Identifying the major activities in the organization
b) Determine the cost driver for each major activity
c) Determine the cost driver rate
d) Calculate total cost based on cost driver
e) Add mark up total cost and determine selling price
[Gyawali, Fago& Subedi, 2006: 9.13]

2.5.8 Budgeting for Profit Planning & Control

2.5.8.1 Concept of Budgeting
Planning is the key to good management. This is true for individuals, small family
owned companies, new high technology companies, large corporations, government
agencies, and non profit organization, for example most successful students who earn
good grades, finance their education, and finish their degrees in a reasonable amount
of time do so because they plan their time, their work, and their recreation. These
students and budgeting their scare resources to make the best use of their time money,
and energy. Owners of successful companies who survive and grow even in different
economic times carefully plan or budget their inventory purchase and their expansion
of facilities so that they do not overextend themselves financially but are still able to
meet customer's needs. A budget-a formal, quantitative expression of plans (whether
for an individual, business, or other organization)- provides a benchmark against
which to measure actual performance. A budget can be much more than a limit on
expenditure. Although government agencies too often use a budget merely as a limit
on their spending, business and other organization generally use budget to focus on
operating or financial problems. Thus a budget is a tool that helps managers both plan
and control operations.[Horngren, Sundrem & Stration, 2002:253-254]

33
 A budget is a detailed plan expressed in quantitative terms that specifies how
resources will be acquired and used during the specifies period of time. The
procedures used to develop a budget constitute a budgeting system. [Hilton, 2000:74]

Planning is a primary function of the management process. Planning is the process of

setting goals and objectives and translating them into activities and resources required
for the accomplishment within a specified time horizon. A budget is a quantitative
expansion of a plan of action and an aid to co-ordination and control. Budgets may be
formulated for the organization as a whole or for a subunit. Budgets, basically, are
furcated financial statements-formal expression of managerial plans. They are targets
that encompass all phases of operations including sates, production, purchasing, and
manpower & financing. The annual budgets may be broken down into months, weeks
and days of operation. [Bajracharya, Ojha, Goet & Sharma,2005: 403]

2.5.8.2 Essential of Budgeting

A successful budget depends on many factors. The essentially for successful
budgeting are as follows.
 Support of top management
 Clear and realistic goals and objectives
 Assignment of authority and responsibility
 Creation of responsibility center
 Adaptation of accounting system
 Full participation
 Effectives communication
 Budget education
 Flexibility [Gyawali, Fago& Subedi, 2006: 5.2]

2.5.8.3 Objectives of Budgeting

The objectives purpose pf budgeting are as follows.
[Fago, Subedi & Gyawali 2006:5.2]
 To determine future expectations and goals in clear and formal forms for
avoiding confusion and facilitating their attainability.
 To communicate expectations to all concerned so that they are under stood,
supported and implemented.

34
  To provide detail plan of action for reducing uncertainty and for the proper
direction of individual and group efforts to achieve goals.
 To coordinate the activities and efforts in then way those resources are used
efficiently and effectively.
 To provide a means of measuring and controlling performance of individual or
unit and to supply in formation on the but is of which, necessary action can be
taken.

2.5.8.4 Budgeting Over Time

Budgeting over time is an important consideration in planning. Budget range over a
time spectrum that runs from the current day to a period some time as for as twenty-
five year in the future, so, various plan are consideration for budgeting as described
under.

1. Strategic Long-Range Plans

A strategic long range plan is prepared for more than a year (for 5,7 or 10
year) when plans are prepared on a five to ten years basis, they are called long-
term or strategic planning. Strategic long-range planning is not concerned with
day- to- day operations, although the strategic plan will be the foundation on
which short-term planning based
[Bajracharya, Ojha, Goet & Sharma, 2005:347]

2. Tactical Short-Range Plan or Budget

Tactical short-range plan or budget is usually prepared for one year; divided
into months and quarters. Certainly, the most common from of budget is the
annual operating budget. Budget of this kind can be prepared more accurately
than can long range forecasts, because they deal with more nearly as certain
able facts and probable conditions.
[Bajracharya, Ojha, Goet & Sharma, 2005:347]

3. Medium Term Plans

A medium term planning is prepared for more than one year but not more man
3 years. So, it takes 3 years plans only. Medium term plans are prepared for
medium target or objectives. In Nepal government interim budget is prepared
fro 2007 to 2010 year for peace process period and 24% poverty alleviation
target is the objective of interim budget.

35
2.5.8.5 The Budgeting Process
The main objective of a business firm is to make and excess of revenue over expenses
so as to maximize profits. But it is not a matter of dream or chance. There are no
magic formulas of boosting the figure of profit overnight. Budgeting, if followed
properly, can increase the chances of making profits within the given environment. A
systematic budgeting should encompass the following procedures. [Bajracharya,
Ojha, Goet & Sharma, 2005: 349-350]
1. Evaluating the business environment
2. Setting objectives
3. Setting specific goals
4. Identify potential strategies
5. Communicating the planning guidelines
6. Developing the long-term and short term plans
7. Implementation of budgets
8. Periodic performance reporting and follow-up

2.5.8.6 Master Budget

The terms used to describe assorted budget schedules vary from organization to
organization, however, most master budget have common elements. The usual master
budget for a Manufacturing & Non-manufacturing company has the following
components.
Master Budgeting

Manufacturing Non-Manufacturing
Company Company

Sales Budget Sales Budget

Production Budget Merchandise Purchase Budget
Material Used Budget Operating Expenses Budget
Direct Labour Budget Cash Budget
Manufacturing Overhead Budget Budget Income Statement
Cost of Goods Manufactured Budget Budgeted Balance Sheet
Cost of Goods Sold Budget
Operating Expenses Budget
Cash Budget
Budgeted Income Statement
Budget Balance Sheet

Figure No. 2-2

However, a master budget can be divided into two part/groups. That is operational
budget and financial budget.

36
2.5.8.6.1 Operational Budget
Operating budgets are concern with the process of preparing the budgets of each
operations/activity like production, sales, purchase etc. of the organization. It
includes.
1. Sales Budget
Sales budget is the starting point in the preparation of the comprehensive
master budget. All the other plans and budgets are dependent upon the sales
budget. The budget is usually presented both in units and dollars of the sales
revenue or sales volumes. The preparation of a sales budget is based upon the
sales forecast. A variety of methods are used to forecast the sales for the
planning period. [Bajracharya, Ojha, Goet & Sharma, 2005: 363]

2. Production Budget
Production planning is the second step of budgeting. Production budget is
concern with determining the quantity of the product to be produced and unit
of time production budget is prepared to coordinate the sales budget and
inventory policy of organization. Production on budget can be expressed in
following formula.

Production Unit = Planned Sales + Closing Stock – Opening Stock

3. Material Usage Budget

Under this budget, the quantities of raw material and parts needed for
production goods as per production budget are determined. It is the raw
material quantity budget developed to know the material for production.
Material usage/consumption budget can be computed by following equation.
Material usage budget = Production budget X Standard Raw Material usage
rate per unit

4. Cost of Material Usage Budget

This budget reports the estimated cost of the materials planned for in the
materials budget. Observe that the material budget cannot be costed until the
planned cost of purchase. Materials budget is prepared by classifying the types

37
 of raw materials, by user responsibility, by interim period, and by types of
finished goods.

Cost of Material Used = Planned Production Units  Standard Material

Usage per Unit  Price per Unit of Raw Material

5. Material Purchase Budget

Purchase budget is the process of determining the quantity of raw materials
and to be purchase to meet materials consumption and inventory. In other
words, purchase budget determines the quantity and price of materials that
should be purchased to meet the raw materials for production and inventory
level for seasonal variation. It can be expressed in equation of follows.
[Gyawali, Fago& Subedi, 20065:5.5]

Material Purchase Budget = Material Usages + Closing Store of Raw

Materials – Opening Stock of Raw Materials

6. Merchandise Purchase Budget

In trading company, instead of making budgets like direct materials, direct
labours, manufacturing overhead, cost of production and cost of good sold
budget, it prepares the merchandise purchase budget.

Purchase Budget = Cost of Good Sold + Closing Stock – Opening Stock

Where,
Cost of Good Sold = Sales – Gross Margin

The purchase quantity should be depended upon the inventory level & policy.

Management policy with respect to purchase and inventory should be

specified. The two basic timing factor for purchase policy are (a) How much
to purchase at a time (b) whom to purchase. (Welsch, Hilton & Gorden, 2000:
244-245)

38
 a) EOQ Technique
EOQ is a purchase volume of goods in an order and also be considered
the minimize cost which is computed as formula way under.
2 AO
EOQ =
C

Where,
EOQ= Economic order quantity
A= Annual quantity to be purchased
O= Average cost of placing an order
C= Annual carrying cost of carrying one unit in inventory
The level where a purchase is made is called the reorder point.

Reorder point= Average usage X Average lead time + Safety Inventory

b) Just In Time (JIT) Purchasing

A recent development in materials and parts inventory is called just in
time (JIT). Purchasing and manufacturing. In this approach, materials
and parts are not purchased until they are needed for production,
thereby minimizing the inventory holding cost. In such an approach, it
is important to anticipate exactly when the materials and parts will be
needed for production so that the acquisition can be reflected in the
materials and parts budget for purpose of profit planning and control.
[Bajracharya, Ojha, Goet & Sharma, 2005: 372]

7. Materials Inventory Budget

This budget reports the planned level of raw material inventory in terms of
quantity and material inventory in terms of quantity and costs. The difference
in units between material requirements as specified in materials budget and the
purchase budget is reflected as an increase or decrease in the inventory budget.
[Singh, Ojha & Acharya, 2004:20.12)

This budget specifies the planned level of raw material in terms of quantities
and cost for each product and in total. [Goet, Bhattarai & Gautam, 2005: 4.3]

39
8. Direct Labour Budget
Direct labour cost occupies a significant portion of total production. Therefore,
it requires systematic planning an control. The labour budget refers the area of
personal needs, recruitment, training, job description and evaluation,
performance evaluation, union negotiations and wages and salary
administration. The basic objective of direct labour budget is to provide
information about direct labour requirement, numbers of direct labour,
employees needed, labour cost of each product and investment. [Gyawali,
Fago& Subedi,2006:5.5]
Direct labour cost = production X standards usage rate X wage rate

9. Manufacturing Overhead Budget

Manufacturing overhead budget includes all the expenses incurred other than
direct labour and direct material. Therefore, manufacturing overhead may be
variable of fixed overhead. Both costs should be considered as a part of
manufacturing cost.

10. Cost of Good Sold Budget

The costs of good sold budget clearly distinguish the total costs of goods
manufactured and cost of goods sold from the value of inventory. Indeed, it
tells us how much of the costs of goods manufactured should be expressed this
year and how much cost should be carried to the next year with the inventory.
The cost of goods sold budget facilities the making of the income statement
and the balance sheet. The cost of goods sold is the making cost of the sold
units. In case of manufacturing business the cost of good sold include the
direct material, direct labour and the variable manufacturing costs.
[Bajracharya, Ojha, Goet & Sharma, 2005: 379]

11. Operating Expenses Budget

Operating expenses budget represents the all those expenses that are incurred
to sell goods and services. It includes selling and distribution expenses,
administrative expenses, advertisement, promotion and other expenses. The
budget of all these expenses can be prepared jointly or severally. [Gyawali,
Fago& Subedi, 2006:5.6]

40
2.5.8.6.2 Financial Budgets
Financial budget are the budgets that are concerned with the financial implication of
operating concern i.e., cash inflows, cash out flows, financial position and operating
results. Manufacturing & Non-manufacturing Company has common financial
budgets i.e. cash budget, budgeted income statement and budgeted balance sheet.
1. Cash Budget
Cash budgeting focuses on cash inflows, cash outflows and related financing.
Cash budgeting is an attractive way to plan and control the cash flows, assess
cash needs and effectively uses of excess cash. Therefore, it is very important
in all type enterprises. The cash budget is a forecast of expected cash receipts
and payments for a future period. A cash budget shows the planned cash
inflow, outflow and ending position by interim periods for a specific period.
So, a cash budget contains four sections that is the receipts section, the
disbursement section, the cash excess or deficiency section and the financing
section.

The receipts section consists of beginning balance of cash added to whatever

is expected in the way of cash receipts during the budget period. The major
sources of receipts and the sales. The disbursement section consists of cash
payment that is planed for the budget period; these payments will include raw
materials purchase, direct labour payments, manufacturing overhead cost, and
so on. Other cash disbursements are income tax, capital equipment purchase,
dividend payment, etc. The cash excess or deficiency section totals and the
cash disbursement section totals. If deficiency exists; the company will need to
arrange for borrowed funds from its bank. If an excess exists, funds borrowed
in previous periods can be repaid or the idle funds can be placed in short-term
investment. The financing section provides a detailed account of the
borrowing and repayments projected to take place during the budget period. It
also includes a detail of interest payment that will be due on money borrowed.
[Bajracharya, Ojha, Goet & Sharma, 2005: 381]

2. Budgeted Income Statement

Planned income statement is concerned with determining the total income of
the planned period. It is to be prepaid under accrual basis rather that cash basis
of other preceding budgets. [Gyawali, Fago& Subedi, 2006:5.8]

41
 3. Budgeted Balance Sheet
The balance sheet is the final document in the master budget and even in
financial record keeping. It is concerned with forecasting total assets &
properties, capital and liabilities of the company by time period. It shows the
final or ending balances of all the account titles.

2.5.9 Zero-Base Budgeting

Under zero base budgeting, the budget for virtually every activity in the organization
is initially set to zero. To receive funding during the budgeting process, each activity
must be justified in terms of its continued usefulness. The zero base budgeting
approach forces management to rethink each phase of an organization's operations
before allocating.[Hilton, 1997:427]

Zero-base budgeting has received great attention recently as a new approach to the
budget process. It is a method of budgeting in which manager are required to start
from zero level every year and to justify all costs as if the programs involved were
being initiated for the first time. By this, it means that no costs are viewed as being
ongoing in nature: The manger must start at the ground level each year and present
justification for all costs in the proposed budget, regardless of the type of cost involve.
This is done in a series of "decision packages" in which manager rank all the activities
in the department according to relative importance, going form essential to least
importance. Presumably, this allows top management to evaluate each decision
package independently and to pare back in those areas that appear less critical or that
do not appear to be justified in terms of the cost involved. So, it is also known as
priority based budget. [Goet, Bhattarai & Gautam, 2005:14:1]

2.5.10 Activity Based Budgeting

To manage costs more effectively organizations that have implemented Activity-
based Costing (ABC) have also adopted Activity Based Budgeting (ABB). The aim of
ABB is to authorize the supply of only those resources that are need to perform
activities required to meet the budgeted production and sales volume. Where as ABC
assigns resource expenses to activities and then uses activity costs drivers to assign
activity costs to cost objects such as products, service or customers), ABB is the
reverse of this process. Cost objects are the starting point. Their budgeted output

42
 determines the necessary activities which are then used to estimate the resources that
are required for the budget period ABB involves the following stages:
1. Estimate the production and sales volume by individual products and
customers.
2. Estimate the demand for organizational activities
3. Determine the resources that are required to perform organization activities.
4. Estimate for each resources the quantity that must be supplied to meet the
demand.
5. Take action to adjust the capacity of resources to match the projected supply.
[ Drury, 2000;568]

2.5.11 Flexible Budget

In contrast to the performance report based only on comparing the master budget to
actual results, a more helpful benchmark for analysis is the flexible budget. A flexible
budget (Sometimes called variable budget) is a budget that adjusts for changes in
sales volume and other cost driver activities. The flexible budget is identical to the
master budget in format, but managers may prepare it for many level of activity. For
performance evaluation, the flexible budget would be prepared at the actual levels of
activity achieved. In contrast, the master budget is kept fixed or static to serve as the
primary benchmark for evaluating performance. It shows revenues and costs at only
the originally planned levels of activity. [Horngren, Sudern & Stratton, 1998:295]

A budget prepared at different level of activities is a flexible budget. Flexible budget

will furnish the budgeted figures for any level of activity, which a company may
actually attain. It reflects costs revenue and profit at the various level of budgeted
activity. A flexible budget, as also called a variable, step budget, sliding-scale budget,
expenses-formula budget, dynamic budget and expenses control budget. It is a budget
which permits revision of estimates of operating cost and profit with charges in sales
or production volume. This budget is prepared on the basis of time, demand of
product, cost of product, availability of demand of product, cost of product, season
and availability of factor of production. In static budget, it is prepared at a single level
of activity, with prospect of modification in the light of the changed circumstance is
fixed/static budget. Fixed budgets have lacks of flexibility; some degree of flexibility
is required to adjust the activity with changed business environment which is not

43
 possible under the static budget. Uncertainty in the factor of level of activity,
impossibility of comparing actual with budget and complicated task of revising the
original budget etc are defects found in fixed budgeting and these make imperative to
avoid the rigidity regarding the level of activity and to introduce flexibility in the
system of budgeting. [Gyawali, Fago& Subedi, 2006:7.3]

The following methods are used for preparing a flexible budget:

1. Tabular Method
The budget prepared at different level of activities within the range of output.
the factor to be taken into consideration for preparing the flexible budget
under this method are summarized following
i. Determination of level of activity
ii. Estimation of cost and its behaviour for each level of activity
iii. Determination of units at the level of activities
iv. Preparation of flexible budget

2. Formula Format
This format provides a formula for such expenses account in each
responsibility centre. The formula gives the fixed amount and the variable
rate. This is more compact and generally more useful because the components
of each expense are given. The formula format uses straight line relationships.
It is a widely used for expressing expenses budget in actual practice. In this
the total cost is computed by using equation of y=a+bx; where y is total cost;
'a' is fixed cost and X is given level of activity.

2.5.12 Capital Budgeting

Capital Budgeting pertains to fixed/long term assets which by definition refer to assets
which are in operation, and yield a return, over a period of time, usually , exceeding
one year. It, therefore, involves a current outlay or rises of outlays of cash resources in
return for a anticipated flow of future benefits. In other words, the system of capital
budgeting is employed to plan expenditure which involve current outlays but are
likely to produce benefits over a period of time longer than one year. These benefits
may be either in the form of increased revenues or reduced costs. Capital expenditure
planning, therefore, includes addition, disposition, modification, and replacement of

44
 fixed assets. From the proceeding discussion may be deduced the following basic
features of capital budgeting (i) Potentially large anticipated benefits; (ii) A relatively
high degree of risk; and (iii) A relatively long time period between the initial outlay
and the anticipated returns. The term capital budgeting is used interchangeably which
with capital expenditure decision, capital expenditure management, long-term
investment decision, management of fixed assets; and so on[khan & Jain 2000:17.1]

The term capital budgeting is used to describe those actions relating to the planning
and financing of capital outlays. Capital budgeting decisions are a key factor in the
long-run profitability of a firm. There are at least two reasons why this is true. First,
funds available for investment are usually limited but investment opportunities may
be almost limitless. Therefore, the manager must somehow spread his limited
investment funds among many computing opportunities, and do so in a way that will
provide the greatest possible return to his firm. And second, most investment
opportunities are long-term in nature. Once a firm has made a decision to invest in a
particular project, it may become locked into that decision for many years into the
future even if it later turns out to be less profitable than another would have been.
Because of these factors, capital budgeting decisions are made only after a through
evaluation of the relative merits of every known alternative. [Garrison, 1976:456]

2.5.12.1 Estimating the Project's Cash Flows

Cash flow generally indicates a cash outflow and a cash inflow. The key point in
investment analysis is to focus exclusively on the difference in expected future cash
flows that result from implementing a project. All cash flows are treated as the same
whether they arise from operations, purchase or sale of equipment or investment in or
recovery of working capital. The opportunity cost and the flowing in or out of the
organization and not to the source of the cash. Estimation of the cash flows in an
investment projects should cover following process.
1. Calculation of Net Cash Outlay (NCO)
2. Calculation of Annual Depreciation
3. Calculation of Annual Cash Flow After Fax (CFAI)
4. Calculation of Cash Flow in Final Year.

45
2.5.12.2 Techniques of Capital Budgeting
After estimation of cash flow, the project must be evaluated by various techniques
which is classified into two groups /methods i.e. Traditional or Non-discounted
methods and discounted cash flow or time Adjusted methods.
1. Traditional or Non-Discounted Methods
This is the traditional methods and conceptually less satisfactory because they
ignore two basic financial principles i.e. the time value of money and total
benefits. The following two techniques are applied under this method.

a) Payback Periods (PBP)

The number of years required for the proposal cumulative cash flows
to be equal to its cash outflow is known as payback period. It can also
be define that the year required to cover its cost by it income. The
project which provides its return in the smallest period of time is
considered as the highest ranking project. Calculation of payback
period is different in following two conditions.
i) Even Cash Flow:
Net Cash outlay
Payback Period (PBP) =
Annual CFAT
ii) Uneven Cash Flow:
Amount Require to Recover I
Pay Back Period (PBP)  Minimum Required Period 
Next Year' s CFAT
Decision:
Accept if PBP < Maximum acceptable PBP
Reject if PBP> Maximum acceptable PBP

Independent projects: lower payback period than standard payback

period should be accepted.

Mutually exclusive projects: lower payback period should be accepted.

b) Accounting Rate of Return

The accounting rate of return is also called the average rate of return.
Accounting rate of return indicating to the profitability of the projects
instead of net cash flows considers profitability rather than liquidity.
According to this methods, the projects with higher rate of return is

46
 considered better projects than the lower rate of return. It is computed
by average the income after tax over the life of a project and then
dividing the average annual cash flow by the initial investment outlay.

Average Net Income After Tax

Average rate of return= Average Investment

Decision:
Accept if ARR > Minimum acceptable rate of return
Reject if ARR < Minimum acceptable rate of return

Independent projects. Higher average rate of return than standard

average rate of return should be accepted.

Mutually exclusive projects: Higher average rate of return should be

accept.

2. Discounted Cash Flow or Time Adjusted Methods

The discounted cash flow methods are theoretically superior to the traditional
methods. Their superiority to the traditional methods. Their superiority is the
use of time value of money. Before evaluation any project under this method
the future cash flow must be converted into present value. Under this method,
following techniques are used to evaluate the projects.
a) Net Present Value (NPV)
The Net present value (NPV) method is a DCF approach to capital
budgeting that discounts all expected future cash flows to the present
using a minimum desired rate of return. To apply the NPV method to a
proposed investment project, a manager first determines some
minimum desire rate of return. The rate depends on the risk of a
proposed project. The higher the risk the higher the minimum desired
rate of return. The minimum rate is based on the cost of capital what
the firm pays to acquire rat of return, hurdle rate, or discount rate.
Managers then determine the present values of all expected cash flows
from the project, using this minimum desired rate. If the sum of the

47
 present values of the cash flows is positive, the project is desirable. If
the sum is negative, it is undesirable. Why? A positive NPV means that
accepting the projects will increase the value project's cash inflow
exceeds the present value of its cash outflows (if by some chance, the
NPV is exactly zero, a decision maker would be indifferent between
accepting and rejecting the project). When choosing among several
investments, the one with the greatest net present value is the most
desirable. [Horngren, Sundern & Stratton. 1998:415]

NPV = Total present value of annual cash flow - NCO

Decision
Accept if NPV > O
Reject If NPV < O

Independent projects: Positive NPV should be accept and negative

NPV should be rejected.
Mutually exclusive projects : Higher positive NPV should be chosen.

b) Internal Rate of Return (IRR)

The internal rate of return (IRR) is an alternative technique for use in
making capital investment decisions that also takes into account the
time value of money. The internal rate of return represents the true
interest rate earned on and investment over the course of its economic
life. This measure is sometimes renewed to as the discounted rate of
return. The internal rate return is the interest rate K that when used to
discount all cash flows resulting from an investment, will equate the
present value of the cash outlays, In other words, it is the discount rate
that will cause the net present value of an investment to be zero.
Alternatively, the internal rate of return can be described as the
maximum cost of capital that can be applied to finance a project
without causing harm to the shareholders. [Drury, 2000: 462-463]

48
 The IRR is computing two method i.e. trial and error method of
interpolation which formula is following under.

For Trial and Error Method

PV inflows = PV investment cost
CF1 CF 2 CF n
Or,   ...........   Io = 0
(1  k )1 (1  k ) 2 (1  k ) n

Method of Interpolation
NPVLR
IRR = Lr +  Rate
NPVLR  NPVHR

Where,
LR = Lower rate
HR= Higher rate
NPVLR= Net Present value of lower rate
NPVHR= Net Present value of Higher rate

Decision:
Accept if IRR > required rate of return
Reject if IRR < Required rate of return
Independent projects: If the IRR is greater than cost of cost of capital,
the value of the firm increase and project should be accepted. If it is
equal to cost of capital, the firm breaks even and if IRR is less than
cost of capital, the project should be rejected.
Mutually exclusive projects: the projects one with the higher IRR
should be accepted.

c) Profitability Index (PI)

Profitability index is similar to net present value approach. It measures
present value of return per rupee invested while the NPV shows the
present value of return in lump sum. A ratio of total present value of
cash flow and initial outlay is called profitability index. The
profitability index is calculated as under.

49
 Total Present Value (TPV)
Profitability Index =
Net cash Outlay (NCO)

Decision:
Accept If PI > 1
Reject if PI< 1

Independent projects: PI greater than i should be accepted.

Mutually exclusive projects: PI greater than 1 should be accepted.

2.5.12.3 Analysis of Risk and Uncertainty Under Capital Budgeting

Risk is only condition a decision maker may force uncertainty and risk describe the
condition most financial manager face. Probability and statistics proved useful
methods for describing such situations can be described as certainty. If more than one
outcome is possible but the probabilities of these states of nature are unknown,
decisions are made under conditions of uncertainty. Different decision rules are
followed in each decision situation. Decision making under risk is different from
decision making that considers the degree of risk or uncertainty. Capital budgeting
analysis that incorporates consideration of risk may do so either traditional techniques
or statistical techniques. They are described of follows.
1. Traditional Techniques
Under these techniques, Risk adjusted discount rate, certainty equivalent
coefficient and sensitivity analysis are doing for analysis of risk.

a) Risk Adjusted Discount Rate

The Risk Adjusted Discount rate (RAD) approach is one of the
simplest and most widely used methods for incorporating risk into the
capital budgeting decision. Generally, under this method the risky ness
of the project depends upon the discount rate. If the discount rate is
high, that project is considered as a highly risky project and if the
discount rate is low that project is considered as a lower risky project.
A risk premium rate may be added to risk free discount rate to find out
the present value of future return from risky investment proposal.

50
 Decision Rule:
i. NPV should be positive by using the risk adjusted rates for
acceptance of proposal
ii. IRR should be greater than the risk adjusted rate of return for
acceptance of proposal.

b) Certainty Equivalent Co-Efficient (CEC)

The certainty equivalent approach is an alternative to the risk adjusted
rate method to incorporate risk in evaluating investment projects.
Under the risk adjusted discount rate method; the risk of the project is
taken into consideration by adjusting expected cash flows and not the
discount rate. These methods eliminate the problem arising out of the
inclusion of risk premium in the discounting process..[Khan and
Jain1993]
Riskless Cash Flow
CEC= Risky Cash Flow

Decision Rule
Higher the certainty equivalent co-efficient denotes lower the certainty
equivalent co-efficient denotes higher risk. The NPV of risk less cash
flows should be positive and IRR of risk less cash flows should be
greater than risk free rate of return.

c) Sensitivity Analysis
Sensitivity analysis provides information as to how responsive the
estimated project cash flows the discount rate and the project life are to
estimation errors. An analysis on these lines is important as the future
is always uncertain and there will always be estimation errors.
Sensitivity analysis takes care of estimation errors by using a numbers
of possible outcomes in evaluating a project. The method adopted
under sensitivity analysis is to evaluate a project using a number of
estimated cash flows to provide to the decision maker an insight into
variability of the outcomes.

51
 The sensitivity analysis provides different cash flow estimates under
these assumptions.
The best (i.e. the most optimistic)
The normal (i.e. the most likely/moderate)
The worst (i.e. the most pessimistic)

The large in the difference between the pessimistic and optimistic cash
flow is considered as riskier is projects depend upon the attitude of
decision maker towards the risk.

2. Statistical Techniques
Under this technique, assignments of probabilities, standard deviation, co-
efficient of variation and decision tree are doing for analysis of Risk.
a) Assignment of Probabilities
The concept of probability for incorporating risk in evaluating capital
budgeting proposal. The Probability distribution of each flows
overtime provides information about the expected value of return and
the dispersion or the probability distribution of possible returns. On the
basis of the information on accept-reject decision can be taken.

The application of this theory is analyzing risk in capital budgeting

depends upon the behavior of the cash flows, from the point of view of
behavioral cash being (a) Independent of (b) dependent. The
assumption that cash flows are independent over time signifies that
future cash flows are not affected by the cash flows in the proceeding
or following year.

Decision Rule:
i) NPV must be positive to accept the project.
ii) IRR must be greater than cost of capital to accept projects.

b) Standard Deviation

52
 Standard deviation that measures of the tightness, or variability of a set
of outcomes. Standard deviation is defined as square roots of the mean
of the square deviation where is the difference between an outcomes
and the expected value of all outcomes.

Greater the standard deviation is said the higher degree of risk and
lower the standard deviation is said the lower degree of risk. The
project, which has higher degree of standard deviation, is not generally
accepted and vice-versa.[ Gyawali, Fago& Subedi, 2006:12.35-12.36]

c) Co- Efficient Variance

Co- efficient of variance (C.V.) standardized measure of the risk per
unit of return, Calculated as the standard deviation divided by the
expected return.
Standard Deviation
C.V. =
Expected Cash flow

Higher the co-efficient of variation is considered as the higher degree

of risk and lower the co-efficient of variation is considered as the
lowest degree of risk.[Weston, 1996:190]

d) Decision Tree
The decision tree (DT) approach is another useful alternative for
evaluating risky investment proposals. The outstanding feature of this
method is that it takes into account the impact of all probabilistic
estimates of Potential outcomes. In other words, every possible
outcomes is weighted in probabilistic terms and then evaluated. The
DT approach is especially useful for situations in which decisions at
one point of time also affect the decisions of the firm at some later
date. Another useful application of the DT approach is for projects
which require decisions to be made in sequential parts. [Gyawali,
Fago& Subedi, 2006: 12.84]

53
 A decision tree is a pictorial representation in tree from which
indicates the magnitude, probability and inter relationship of an
possible outcomes. The format of the exercise of the investment
decision has an appearance of a tree with branches and, therefore, this
method is referred to is the decision-tree method. A decision tree
shows the sequential cash flows and the NPV of the proposed project
under different circumstances.[ Bajracharya, Ojha, Goet & Sharma,
2005: 828]

2.5.13 Standard Costing

Standard costing is a system before starting the production and then comparing this
with the actual cost of the job after completing the production. The difference
between the predetermined or standard costs and the actual costs is termed 'the
variance.’ Standard costing is the process of the preparation and use of standard cost,
their comparison with actual costs and the analysis of variance to their causes and
points of incidence. A standard cost is measure of acceptable performance,
established by management as a guide to certain economic decisions.[ Bajracharya,
Ojha, Goet & Sharma,2005:545]

Standard cost is a predetermined cost, which is calculated from management’s

standards of efficient operations and the relevant necessary expenditure. It may be
used as a basis of price fixing and for cost control through variable analysis. Standard
is a predetermine set of objectives based on usual, normal ideal of technical
parameters. A standard is always futuristic. Standard costing is the process of the
preparation and the use of standard costs, their comparison with actual costs and the
analysis of variance to their causes and points of incidence. (CIMA)

2.5.13.1 Standard Costing Process

Standard costing is a management accounting tool for management control.
Controlling is the process of comparing actual results with the planned objectives and
determining where adjustment should be made. The management control process
encompasses the following steps. [Bajracharya, Ojha, Goet & Sharma, 2005: 495-
501]

54
 Setting Standards
1. Actual performance measurement
2. Variance analysis
3. Computer variances for each reasons
4. Point out the reasons of variances
5. Corrective Action.

2.5.13.2 Variance Analysis

A variance is the difference between standard cost and actual cost. There are a
number of causes which leads to a difference between the actual and standard costs.
All the causes are weighted and the amount connected with each is as certained and
described in a way to indicate the causes leading to the variance. For example the
variance caused by a change in price of materials will be described as materials price
variance. A variance which increases profit is called favorable and the variance which
reduces profit is unfavorable or adverse. The variance may be broadly classified as
under. [Gyawali, Fago& Subedi, 2006: 6.2-6.3]
1. Direct Material Variances
Direct material variances are related with the variance in cost of actual
material with cost of standard materials. This variance is created due to change
into rate of materials or change into consumption units of materials. Material
consumption unit variance is created due to change into the ratio of two or
more than two materials and change into output of final product. The material
variance can be shown on the following figure.

Direct Labour Cost Variance (LCV)

Labour Rate Variance Labour Efficiency Variance Labour Idle Time Variance
(LRV) (LEV) (LIV)

Material Mix Variance (MMV) Material Yield Variance (MMV)

Figure No. 2-3

For calculating the above material variances, the following formulas have to
be applied.

55
 i. Material cost variance = SQ X SP - AQ X AP
ii. Material price Variance = AQ (SP-AP)
iii. Material Usage Variance = SP (SQ- AQ)
iv. Material Mix Variance =

Total Weight of AM
 (SC of SM) - (SC of AM)
Total Weight of SM

v. Material Yield Variance = SR (Actual Yield- Standard Yield)

Where,
SQ = Standard Quantity AQ = Actual quantity
SP = Standard Price AP = Actual Price
AM = Actual Mix SM = Standard Mix
SC of AM = Standard Cost of Standard Mix
SC of AM= Standard Cost of Actual Mix

2) Direct Labour Variances

Direct Labour variances are related with the variance in the cost of actual
labour with cost of standard labour. This variance is creating due to change
into rate of labour or change into consumption time of labour. Due to cost on
time of labour the cost of labour also is high. Labor efficiency variance is
concerned with the variance of labour mix and labour yield variance. Labour
variance can be shown the following figure as below.

Material Cost Variance (MCV)

Material Price Variance (MPV) Material Usage Variance (MUV)

Material Mix Variance (MMV) Material Yield Variance (MMV)

Figure No. 2-4

The following formula is applied for find out the above variance.
i. Labour Cost Variance= ST X SR - AT X AR

56
 ii. Labour Rate Variance =- AT (SR - AR)
iii. Labour Efficiency Variance = SR (ST - AT)
iv. Labour Idle Time Variance = Idle Time X SR
v. Labour Mix Variance =

 Actual Labour Mix 

  SC of SM   SC of Am
 STd. Lahour mix 
vi. Labour Yield Variance = SR (Actual yield - Std. yield)

Where,
ST = Standard Time AM= Actual Mix
SR = Standard Rate SM = Standard Mix
AT = Actual Time SC of SM = Standard cost of standard mix
AR = Actual Rate SC of AM = Standard cost of Actual Mix

2.5.13.3 Budgeting Control and Standard Costing

Budgeting and standards both provides the basic for comparison with the actual
results. So, both these management accounting technique can applied for performance
reporting and maintaining the reward punishment system. There are some difference
between Budgeting control and standard costing as follows
1. Budgeting control deals with the operating of a department or the business or a
whole in terms of revenue and expenditure. Standard costing is used in
manufacturing or producing of product or in rendering a service.
2. Budgeting control seeks to keep in focus the total amount involved and total
activity to be carried on. Standard costing provides control to be exercised in
the cost of production.
3. Budgetary control is a projection of financial accounts while standards costing
is a projection of cost accounts.
4. Budgetary control is generally applicable to all business organization while
standard costing can be usefully applied in manufacturing concerns.
5. Budgets prepared under budgeting control system are for specific periods and
are based on totals of amount while in standard costing, the standard costs are
worked out generally per unit of production.

57
 6. Budgeting control is an effective tool in the control of all types of expenses
while standard costing is a very effective tool for controlling elements of costs
(like direct material, direct labour etc.)
7. Budgeting control is an effective tool to plant and exercise control over capital
expenditure, finance, and cash forecast etc. Where standard costing can offer
no help.
2.5.14 Management Accounting Control System
Management consists of the basic functions of planning, decision making and control.
Control is the function of management that ensures the proper implementation of
plans and policies to achieve the organizational objective. Management functions are
just means to maximize profit in terms of current value. Management control system
focus on motivating managers for the sake of enhancing total profitability of the
organization. One of the different control mechanisms practiced is management
accounting control system. A well - designed management control system aids and
coordinates the process of making decision and motivated individual throughout the
organization to act in accordance with the decision. It a also facilities forecasting
revenue and cost-deriver levels, budgeting and measuring evaluating performance.
[Horngren, Sundern and Stratton, 2002]

Components of Management Control System are:

i. Planning Process
ii. The responsibility Accounting System

2.5.14.1 Responsibility Accounting

Responsibility - accounting system are designed to faster goal congruence among the
managers in decentralized organizations. Each submits in a organization. Each submit
in a organization is designate as a cost center, revenue center, profit center, or
investment center. The Managerial accountant prepares a performance report for each
responsibility center. These reports show the performance of the responsibility center
and its manager for a specified time period. To use Responsibility Accounting
effectively, the emphasis must be on information rather than blame. The intent should
be to provide managers with information rather than blame. The intent should be to
provide managers with information to help them better manage their subunits.
Responsibility accounting system can bring about desired behaviour, such as reducing

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 the number of rush order in a manufacturing company. Segmented income statements
often are included in a responsibilities accounting system, to show the performance of
the organization and its various segments. To be most effective, such reports should
distinguish between the performance of segments & segment mangers. Customer
profitability analysis is an increasingly used tool, which helps managers to better
understand which customers are providing the greatest profit. [Hilton, 1997:601]

Responsibility accounting represents a method of measuring the performance of

various divisions of an organization. It focuses on the value of decentralization, which
is more essential in case of a large-scale organizations responsibility accounting
system becomes more urgent. Major contribution of responsibility accounting in an
organization are for decentralization, performance Evaluation motivation, transfer
pricing, and drop or continue decision. [Bajracharya, Ojha, Goet & Sharma,2005:
480]

2.5.14.2 Process of Responsibility Accounting

Responsibility accounting encompasses the following steps: [Bajracharya, Ojha, Goet
& Sharma, 2005, 461-463]
i. Identifying the responsibility center
ii. Delegation of authority and responsibility or decentralization
iii. Controllability of the object
iv. Establishing performance evaluation criteria.

2.5.15 Decision Making

Decision making is concerned with the future. It involves a choice between
alternatives; it is one of the important but difficult tasks of management. It is the
process of evaluating two or more alternatives leading to a final choice. Decision
making is closely involved with planning for the future and is directed towards a
specific objective or goal. In business, when evaluation alternative course of action,
managers should select the alternative that provides the highest incremental benefit to
the company. In some instance, all alternatives result in incremental losses, and the
managers must choose the one that causes the smallest incremental loss. While
making decisions in business, managers should be economically rational. Long-term
profit maximization is the core of business decisions. Therefore, financial feasibility

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 is the prime determinant in selecting the best alternative. The course of action, which
maximizes profits by increasing revenues or minimizing costs, is considered as the
most economic one. Opportunity costs, which are the benefit foregone in the next best
alternative, must be counted in the alternative, must be counted in the alternative to be
undertaken. And also other non-quantitative factors must be taken into account before
the management takes the final action or decision.

2.5.15.1 Process of Decision Making

1. The following are the steps involved in the process of rational decision
making.
2. Recognize and define the problems
3. Identify appropriate possible solutions to the problems
4. Evaluate selective alternatives
5. Select the best alternatives
6. Implement the selected alternative
7. Evaluation and follow up

2.5.15.2 Types of Decisions

1. Drop or Continue Decision
When a firm or company is divided into many departments, divisions,
sections, branches and product lines to produce and sell various types of
product, it is not necessary for earning profit by each product line, division,
department, and branch. Incase of loss or low profit from one or more,
management should taken decision whether to drop or continue product line in
the future. While taking drop or continue product line decision, it is very
important to consider various points i.e. alternative utilization of idle capacity
like machine, labour, land etc.: continuity of constant cost/fixed cost,
department or traceable fixed cost, opportunity cost, government rules and
regulation regarding drooping product, union activity, Effect on other product
lines, Responses of material suppliers and regular customer etc.

2. Special Order Decision

A special order is one that has been offered for a bulk volume at a reduced
price. Opportunity consider an order for a quantity of its regular product at a

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 special price, usually less than that charged to regular customer, frequently
arises for a management. When there is idle capacity, such an offer may be
attractive. The basis of decision Making should be the difference that it will
make in the overall profit of the company, Essentially, if there is idle capacity,
the special order is advantageous if the price amounts exceed out of pocket
costs and the opportunity costs. The purposes of a short-run price reduction
may be increasing market share, loss leaders and disposing of inventories.

3. Cash or Purchase Decision

A Business firm needs various types of assets and properties like plant and
machinery, land and buildings, departmental stores, etc. for many years. The
firms can obtain these assets and properties either by purchasing on cash or
paying lease rent over years without buying them. Leasing is the arrangement
used to obtain assets without buying from outright. Therefore, lease is the
agreement or document which transfer right of the owner (i.e. lessor) to the
tenant (called lessee) in the exchange of the rent to be paid over the years to
the lessor. The document includes the rights and duties a of lessor and lessee
relating to the use of the property. It transfers the procession of property. It
transfers the procession of property to the tenant for specific property. When
the lease period is over, lease period can be renewed, or procession of the
property can be return back to the lessor. But a firm can purchase assets and
properties on cash borrowing from outsource, issuing shares, debentures, or
using equity of shareholders. In case of outright purchase, the purchaser
obtains both ownership and possession from the seller in return from a certain
sum paid. [Gyawali, Fago& Subedi, 2006:8.79]

4. Quotation Process
A business firm needs various types of small assets for daily operations. The
small assets are stationery items such as paper, pen, stamps, punjing machine,
file, clip, whiteboard, plastics, pin, boxes etc. The firms can obtain these assets
by quotation process. So, quotation process is also say for small financial
activities.

5. Tender Process

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 A business firm needs various types of assets, properties like plant machinery,
land, building, department stores etc. for many years and construction work
can be doing. That time the firm can be doing that activity by tender process.
So, Tender process is also say for great financial activities which is fixed by
law.

2.5.16 Managerial Use of Financial Statement Analysis

Before discussing about financial analysis it is necessary to know about the financial
statement and report which is issued by company annually, periodically to its
stakeholders. This gives a complete account of financial health of the company. The
financial statement and report generally consists following terms.
 The Income Statement
 The Statement of Retained Earnings
 The Balance Sheet
 The Statement of Cash Flows

The income statement contains two broad categories of items: Revenue and expenses.
The “revenues” may be through of as the level of accomplishment attained by the
company, while the “expenses” represent the effort expended to attain the level of
accomplishment. More specifically, revenues represent the actual or expected inflow
of assets, the settlement of liabilities, or both, from a company's primary business
activity, while expenses represent the utilization or consumption of assets or incurring
of liabilities or both, to produce the revenue inflow.

The statement of retained earning shows how the net incomes of the period were
appropriated or distributed. The statement shows the change in retained earnings
between the beginning and the end of a period. Retained earning is that portion of the
firm's earning that has been saved rather than paid out as dividend.

The objective of a balance sheet or statement of financial position is to provide, as of

a specific point in time, information concerning the assets owned by the company and
the equity interest (of both the creditors and owners) in those assets. The proper
recognition, valuation, and classification of company assets and equities are intended

62
 to aid the users of financial statement in assessing the solvency, liquidity, and
financial flexibility of the company. The fundamental relationship reported in a
balance sheet is expressed by the classic accounting equation. [Bajracharya, Ojha,
Goet & Sharma, 2005: 1012]

Assets = Liabilities + Owner's Equity

2.5.16.1 Cash Flow Statement

Cash is the life blood of any business organization. Without cash no business
activities can be taken place. In recent years, the statement of cash flow has come to
be viewed as a part of fall set of financial statement. Cash flow statement provides
relevant information about the cash receipts and cash payment of an enterprise during
a period. Information about enterprises cash flows is useful in assessing its liquidity,
financial flexibility, profitability and risk. Cash flow information is widely used by
investors, analysis, creditors, managers and others. It shows how the accrual
accounting information is converted into cash-based information and arranges the
information so that investors, analysis, creditors, managers and other can better
understand the cash efforts of companies operating, investing and financing activities.
The primary purposes of a statement of cash flow is to provide information about the
cash receipts and cash payments of the company and how they related to the
company's operating, investing and financing activities. The cash flow statement
helps to assets the solvency of a business and to evaluate its ability to generate
positive cash flows in future periods, pay dividends and finance growth. In Nepal,
Nepal Company Act 2053 also made mandatory to present cash flows statement along
with balance sheet and income statement. So, each and every company should prepare
it as integral parts of its financial statement for each period for which financial
statement are presented.

2.5.16.1.1 Objectives of Cash Flow Statement

Cash flow statement is an important tool which provides information to its users about
the ability of the company to generate cash and its utilization. The main objectives of
cash flow statement are listed at below.
1) To help the financial manager to explain the situation of cash

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 2) To make easy to prepare cash budget for the specific period for future
reference.
3) To help know the causes of changes in the cash position on two dates.
4) To help to evaluate the financial position of an organization.
5) To help to know the cash position so that it can make plans and policies
regarding decision making activities for short term and long term financing.

2.5.16.1.2 Preparation of Cash Flow Statement

A specific procedure should be followed while preparation of cash flow statement
should report cash flows during the period classified by operating, investing and
financing activities. So the first process is preparing the statement of cash flows is to
calculate the cash flow from operating activities using either the direct or indirect
method. The second process is to analyses the information for changes resulting from
investing and financing activities. The third process is to arrange the information
gathered in process first and second into proper format for the statement of cash flow.
Now, the detail process of cash flow statement is described as follows:
1. Determination of Cash Flows from Operating Activities (Direct Method)
The Direct method of cash flow converts its income statement from accrual
basis to the cash basis. Operating activities involve producing and delivering
goods and providing services. Cash how from operating activities includes
receipt from customers for sales of goods and services (collection from
debtors). Cash outflows from operating activities include payments to
purchase of materials and for services, payment to employees for services and
payment and to government for taxes and duties.

Indirect Method: Indirect Method is that type of method which calculates the
cash flow from operating activities by considering the non-cash items. The
non-cash expenses are added on net profit and non-cash income is deducted on
net profit and changes in working capital are also considered.

2. Determination of Cash Flows from Investing Activities

Investing activities involve making and collecting loans and acquiring and
disposing of fixed assets. Cash inflows from investing activities are receipts
from sale of shares, debenture or outflow under investing activities are

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 purchase of share and debenture of other enterprises, purchase of fixed assets
etc.

3. Determination of Cash Flows from Financing Activities

Financing activities involve obtaining resources from owner and providing
them with a return of their investment, borrowing money and repaying
amounts borrowed. It also includes incoming of cash by issue of share and
debenture, issue of long term loan, payment of dividend, repayment of
principal with interest etc.

2.5.16.2 Techniques of Financial Statements Analysis

Stakeholders of a business firm perform server types of analyses on a company's
financial statement. All of there analysis rely on comparisons or relationships of data
that enhance the utility or practical value of accounting information.
1. Common-Size Statements: The analysis of common size statements is also
called vertical analysis. Common size statements express all items in the
statement as a percentage of a selected item (the base) in the statement.
Analyses also use vertical analysis of a single financial statement, such as an
income statement. Vertical analysis consists of the study of a single financial
statement in which each item is expressed as a percentage of significant totals.
Vertical analysis is especially helpful in analyzing income statement data such
as the percentage of the cost of goods sold to sales. Financial statements that
show only percentages and no absolute amounts are common-size statements.
All percentage figures in a common-size balance sheet are percentages of total
assets while all the items in a common-size income statement are percentage
of net sales. The use of common-size statements facilities the vertical analysis
of a company's financial statements. [Bajracharya, Ojha, Goet & Sharma,
2005: 1014-1015]

2. Horizontal Trend Percent Analysis

Horizontal analysis is the analysis of financial statement over a series of years.
Comparative financial statements present the same company's financial
statement for one or two successive periods in side-by-side columns. The
calculation of changes in absolute amount or percentage change in the

65
 statement amount or percentage change in the statement items or total is
horizontal analysis. This analysis delects changes in a company's performance
and highlights the trends. Trend percentages are similar to horizontal analysis
except in that comparisons are made to a selected base year or period. Trend
percentages are useful for companying financial statements over several years
because they disclose changes and trends occurring thought time.
[Bajracharya, Ojha, Goet & Sharma, 2005: 1016]

3. Ratio Analysis
2.5.16.3 Ratio Analysis
An analysis of financial statement with the help of ratio may be termed as ratio
analysis. It is a mathematical relationship between two related items express in
quantitative form. When this definition of ratio is explained with reference to the
items shows in financial statement, then it is called accounting ratio. So, the ratio is
the measurement of quantitative relationship between two or more items of financial
statements connected with each others. The quantitative relationship may be
expressed in terms of proportion, in rate, in time, in percentage or coefficient. There
are different types of ratios analysis which is listed under.
1. Liquidity Analysis
It measures the adequacy of a firm's cash resources to meet its near term cash
obligations. Short-term lenders such as suppliers and creditors use liquidity
analysis to assess the risk level and ability of a firm to meet its current
obligations. Satisfying these obligations requires the use of the cash resources
available as of the balance sheet date and the cash to be generated through the
operating cycle of the firm. Under liquidity analysis, therefore calculate the
current ratio and quick ratio.

2. Long Term Debt and Solvency Analysis

It examines the firm's capital structure in terms of the mix its financing
sources and the ability of the firm to satisfy its long-term debt and investment
obligations. This analysis contains the debt equity ratio and debt to total
capital ratio.

3. Activity Analysis

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 To carryout one's operations, a firm needs to invest in both short-term
(inventory and accounts receivable) and long-term (property, plan and
equipment) assets. Activity analysis describes the relationship between the
firm's level of operations (usually defined as sales) and the assets needed to
sustain the activity. This analysis contains the investor turnover, daily sales
outstanding, fixed assets turnover, total assets turnover and capital employed
turnover ratios.

4. Profitability Analysis
Profitability is an indicator of efficiency of the business organization.
Profitability ratio measures the management overall efficiency as show by the
return generated from sales and investment. Higher the profitability ratio
shows the efficiency of the management. Profitability in relation to sales as
well as investment. So, profitability analysis consists some ratio i.e., Net Profit
Margin, Gross Profit Margin, Operating Cash Flow Margin, Return on Assets
(ROI) and Return on Common Stockholders Equity.

2.6 Review of the Previous Thesis

Profit planning and control is important part of management accounting. Without
profit planning and control management accounting is not sufficient. So, profit
planning and control is backbone of management accounting. Researches in the area
of profit planning and control practices have been made many but researches in the
area of management accounting practices have not made many in Nepalese context.
An attempt is made here to review some of the researches, which have been submitted
in profit planning & control as well management accounting practices in the context
of Nepal are following one by one respectively.

2.6.1 Mr. Tulasi Prasad Shrestha (1998) had conducted a research on a topic “Profit
Planning in SRI Bhrikuti Pulp and paper Nepal Limited.” Mr. Shrestha had mainly
focused on the practice and effectiveness of profit planning system in SBPP. The time
period covered by the research was five year from FY 2051/52 to FY 2055/56.
Necessary data and other information were collected from both the secondary and
primary sources of data. In his research, Mr. Shrestha had pointed out various
objective and findings. The major objectives of his study were follows:

67
  To understand theoretical concept of profit planning.
 To examine and analyze the practice and effectiveness of profit planning in
SBPPNL.
 To analyze the various functional budgets used by the company.
 The evaluate the variance between planned and actual of the company.
 To provide recommendation and suggestion.

Some of the major findings were as follow:

 SBPPNL's objectives aren't much clear, different specific financial goals aren't
prepared and strategies policies and programmed aren't adequate to develop
the company.
 SBPPNL don't consider CVP analysis while pricing the product.
 Inadequate forecasting system.
 Un-necessary centralization of power so that decision making is only from
top-level.

2.6.2 Mr. Madhu Sudan Bhattarai (1999) had conducted a research on topic "Profit
Planning of Non- Manufacturing Public Enterprise in Nepal. A case study of Nepal
Oil Corporation Limited". Mr Bhattarai had mainly focused on appraise of the
performance of NOC. The time period covered by the study was five years from FY
049/50 to FY 053/054. The necessary data and other information had been collected
from secondary as well primary sources of data. In his research, Mr. Bhattari pointed
out various objectives & findings. The major objectives of his study were follows:
 To study the various accounting system of NOC.
 To examine the procurement and distribution channel system of petroleum oil
and lubricant products
 To analyze the profit planning of NOC.
 To provide recommend and the provided suitable suggestions to the
corporation.

Some major findings were as follow.

 Goals and objective aren't clear
 No clear policy in purchasing sales and investor.

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  Unable to dine duties and responsibilities of the employees.
 No classification of costing.
 Red-Rapism in implementation phase of profit plan.
 Decision making power has been controlled.

2.6.3 Madan Bahadur Badu (1999) had conducted research study on “Profit Planning in
Dairy Development Corporation.” Mr. Badu has centralized his study in current
practice of profit planning in DDC. The time period covered by the research was five
years from FY 2049/50 to FY 2053/54. The data and other necessary information
were collected from secondary and primary sources of data. In his research, Mr. Badu
had pointed out various findings. Some major findings were as follow:
 No proper were of segregation of cost into fixed and variable.
 No maintenance of periodic performance report systematically.
 Plan is prepared on ad-hoc basic.
 Inadequate authority and responsibility to planning department.
 No proper analysis of environmental variables.

2.3.4 Mr. Narayan Prasad Bhattarai (2000) had conducted a research on the topic “Profit
Planning in Central Zoo.” The main focus of his research was the application of profit
planning and control and its effectiveness in central zoo. The time period covered by
the research was five years from FY 2051/52 to FY 2055/56. Necessary data and
other information were collected from secondary as well as primary sources of data.
In his research, Mr. Bhattarai had pointed out various findings and recommendations.
Some major findings were as follow:
 Goals and objectives of the central zoo aren't clearly communicated to the
lower level and there is lack of responsibility accounting system.
 Participation of lower level in planning and decision making is nil and there is
still shortage of management by objectives techniques.
 The public participation approach, which helps for the entire wildlife
conservation and environment protection.

2.6.5 Mr. Laxmi Prasad Prasai (2000) had conducted a research on the topic “Profit Planning
in Ilam Tea Estate” Mr. Prasai's main focused of the study was the current practices

69
 and effectiveness of profit planning. The time period covered by the research was five
years from FY 2050/051 to FY 2054/55. The necessary data and other information
were collected from secondary as well as primary sources of data. In his research, Mr.
Prasai had pointed out various findings. Some major findings were as follow.
 Specific goals and financial targets aren't defined clearly to achieve the basic
objectives.
 There is lack of defined authority and responsible departments.
 Inadequate profit planning due to lack of planning experts planer.
 Un-necessary centralization of power so the decision making is only from
Top-level.
 Inadequate forecasting system.
 Failure to maintain periodic performance and so system of reward and
punishment.

2.6.6 Miss Abha Subedi (2001) had conducted a research on the topic “Profit Planning in
Commercial Bank; A Case Study of Rastriya Banijya Bank.” Miss Subedi had
focused her study in the investment policy of Rastriya Banijya Bank with the current
practice of profit planning and its effectiveness in Rastriya Banijya Bank. The time
period covered by the research was five years from FY 1993/94. The data and other
information were collected by using secondary as well as primary sources of data. In
her research, Miss Subedi had pointed out various findings and recommendations.
Some remarkable findings were as follows:
 Investment pattern of RBB is mainly towards the security of land, gold and
silver.
 There is no proper management planning. This is causing problem of over
staffing and extra cost burden.
 No systematic application of budgeting.
 Activities of the bank are centered to urban areas only.
 No. of branches have been increasing each year.

2.6.7 Miss Pramita Dangol (2001) had conducted a research on the topic "Profit planning in
manufacturing public Enterprise; A case study in Hetauda Cement Industry Ltd."
Miss Dangol had focused her study in the application of profit planning concepts in

70
 PE's. The time period covered by the research was five years from FY 2051/52 to FY
2055/56. The necessary data and other information were collected from secondary as
well as primary sources of data. Miss Dangol had pointed out various findings. Some
remarkable findings were as follow:
 No proper application any effective sales foresting technique.
 Planning of budgeting policy of the company is very poor and there is no
system of taking corrective action for pre-planning.
 Decision making power is centralized.
 There were no clear cut duties and responsibilities of the employee.

2.6.8 Mrs. Dozey Tater (2001) had conducted a research on the topic “profit planning is
soft Drinks Industry; A Case Study of Bottlers Nepal Limited Balaju.” The period
covered by her study was six years from FY 1993/94 to FY 1999/00. The necessary
data and other information were collected from secondary as well as primary sources
of data. The basic objectives of the study were to examine how far the different
functional budgets were being applied as tools of profit planning in business
enterprises. In her research, Mrs. Dozey Tater had pointed out various findings were
as follow:
 Specific goals and targets were not founds to be defined clearly to achieve the
basic objectives of BN Ltd.
 There was lack of defined authority and responsibility. So there is no proper
coordination between the various responsibility departments.
 Inadequate profit planning due of experts/planners.
 Financial performance of the company was not satisfactory.
 The company failed to maintain its periodic performance and there was no
proper rewards and punishment system.

2.6.9 Mr. Sagar Sharma (2002) had conducted a research on the topic “Management
Accounting Practices in Listed Companies of Nepal.” He had focused his study to
examine the practice of Management Accounting tools in the listed companies of
Nepal. Mr. Sharma's research study was based on only primary sources of data.
Stratified random sampling with proportionate allocation of percentage was followed

71
 to draw the sample. In his research, he had pointed out various objectives & findings,
among those some remarkable objectives are as follow:
 To study and examine the present practice of management accounting tools in
the listed companies in Nepal.
 To identify the areas where management accounting tools can be applied to
strength the companies.
 To identify the difficulties in applying management accounting tools in
Nepalese companies.
 To make recommendations to overcome the difficulties in applying
management accounting tools in Nepalese companies.

Some major findings were as follow.

 Different types of Management Accounting tools, which are tough in the
colleges, are not found applied by the listed companies of Nepal.
 Management Accounting is help to managers in overall managerial activities
by providing information and helping in planning, controlling decision
making.
 Nepalese listed companies are infant stage in practicing of management
account tools such as capital budgeting, annual budgeting, cash flow, ratio
analysis, zero based budgeting, activity based costing, target costing and value
engineering
 As Nepal is proceeding towards globalization and has got the membership of
WTO, companies are recommended to apply management accounting tools of
fit with the global environment.

2.6.10 Miss Kalpana Bhattari (2004) had conducted a research on the topic “Budgeting in
Public Enterprises; A Case Study of Nepal Telecom”. The main objective of her study
is to examine the application of profit planning in NTC. The necessary data and other
information were collected from secondary as well as primary sources of data. The
time period covered of the research was five years from FY 2055/56 to FY 2060/61.
In her research, she had pointed out various Objectives & findings. Some remarkable
objectives were as follows:
 To examine the practice and effectiveness of profit planning in NTC.

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  To observe the NTC's profit planning system on the basis of budgeting system.
 To provide suggestions for improvement of efficient planning or budgeting of
NTC's in near future based on findings.

Some major findings were as follow.

 Budgets are prepared just to fulfill the formalities which are not used
effectively for profit planning process.
 Long term and short term budgets are prepared but long term budget is
confined only able to the top level.
 The corporation is not able to maintain to proper coordination between various
directorates in regard in the goal and objectives of the corporations.
 The corporation fails to analyze its strengths and weakness in depth because of
the absence of the competitors.
 Lack of skilled planners and experts.
 Gap between actual production and actual sales.

2.6.11 Mr. Bodha Raj Tripathee (2005) had conducted a research on the topic “Profit
Planning in Manufacturing Enterprises of Nepal; A Case Study of Harrisiddhi Brick
and Tiles Factory”. He had focused his study in the application of profit planning in
manufacturing enterprises. The time period covered by the research was 12 years
from FY 2047/48 to FY 2058/59. The necessary as well primary sources of data. In
his research, he had pointed out various objectives & findings. Some remarkable
Objectives were as follows:
 To analyze the absolute profit and losses of HBTF.
 To examine and analyze the various functional budgets those are prepared by
HBTF.
 To evaluate the variance between target and actual sales of HBTF.
 To assess financial performance of HBTF in terms of various financial ratios
and cost structure.
 To examine relationship between the financial performance of the factory and
the market price of the share of the factory.

Some major findings were as follow.

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  HBTF Ltd. prepares functional budgets like sales budget, production, budget,
expenses budgets on annual basis. But the short term product wise production
and sales budgets on monthly basis. But they are found to be found far from
real life situation.
 Marketing manager is responsible for sales forecasting in HBTF. Forecasting
is said to be done keeping in view different situations and past records but it is
not supported by necessary marketing strategy for promotion.
 The sales target set with foresting is ambitions. Actual sales are less then that
of targeted sales. There is significance difference between targeted sales an
actual stale. This shows lack of promotional activities to increase sales.
 Although, straight-line trend shows the positive sales figure for the future, it is
for below the volume of sales to operate at BEP level.
 The poor financial performance of the factory has also led to decline in its
market price of share.

2.6.12 Mr. Ailendra Kumar K.C. (2006) had conducted a research on the topic “Management
Accounting Practices in Public Enterprises.” He had focused his study to examine the
practice of Management Accounting Tools in public enterprises. Mr. K.C.'s research
was based on only primary sources of data. In his research, he had pointed out various
objectives & findings. Some remarkable objectives were as follow:
 To study and examine the present practice of management accounting tools in
public enterprises in Nepal.
 To identify the areas where management accounting tools can be applied to
strengthen the public enterprises.
 To identify difficulties in applying management accounting tools in Nepalese
public enterprises.
 To make recommendations to overcome the difficulties in applying
management accounting tools in Nepalese public enterprises.

Some major findings were as follow.

 Different types of management accounting tools, which are tough in the
colleges, are not found applied by Public Enterprises.

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  Management Accounting is help to managers to formulate organizational
strategies as well as policy. PE's as practicing MA tools such as Capital
Budgeting, Annual Budgeting, Cash Flows and Ratio Analysis. And not
practicing MA Tools such as zero Based Budgeting, Activity Based
Budgeting, Activities Based Costing, Target Costing and Value engineering.
 In PE's hiring outside experts for carrying out different activities are almost nil
because of high cost.
 PE's are with the concept that MA is similar to financial Accounting.
 Lack of information and cognizance about MA tools are the main factors
causing problem in the application of such tools.

2.6.13 Mr. Krishna Bdr. Karki (2006) had conducted a research study on "Management
accounting practice in Joint Venture Banks of Nepal." He had focused his study to
examine the practice of MA tools in Joint Venture Banks of Nepal. Mr. Karki's
research study was based on only primary sources of data collection. In his research,
he had pointed out various objectives & findings. Some remarkable objectives were as
follows:
 To study and analyses the present practice of management accounting tools in
the Joint Venture Banks of Nepal.
 To identify the areas where management accounting tools can be applied to
strengthen the banks in commercial activities.
 To make recommendations to overcome the difficulties in applying
management accounting tools in Joint Venture Banks.

Some major findings were as follow.

 Different types of MA tools, which are tough in the colleges are not found
applied by the Joint Ventures Banks of Nepal. So, it shows gap between the
theory and practice.
 MA is help to managers to formulate organizational strategies as well policy
for decision making.
 In NJVBs, practice of hiring outside expert almost nil. Thus it can be
concluded that NJVB's are in infant stage in practicing of MA tools. Now,
here in the banks cannot find MA experts.

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  In NJVBs practicing the MA tools such as capital Budgeting, Annual Budget,
Ratio Analysis and cash flow. And not practicing MA tools such as zero Based
Budgeting, Activity Based costing, Target costing, value engineering.
 They are with concept that TIA is similar to financial accounting.
 Lack of information and cognizance about Management Accounting tools are
the main factors causing problem in the application of such tools.

2.6.14 Mr.Narayan Prasad Acharya (2006) had conducted research study on topic
"Management Accounting practice in Nepalese Public Enterprises." He had focused
his study to examine the practices of MA tools in NPE's. Mr. Acharya's research study
was based on only primary sources of data collection. In his research, he had pointed
out various objectives & findings. Some remarkable objectives were as follows:
 To study and examine the extent of practice of MA tools and techniques made
in Nepalese PEs.
 To identify the business sector, where MA tools can be applied to strengthen
the PEs.
 To identify the major difficulties for applying the MA tools in Nepalese
companies.
 To make recommendation to overcome the difficulties in applying MA tools
and techniques in Nepalese PEs and other business companies.

Some major findings were as follow.

 Different types of MA tools, while are tough in the colleges are not found
applied by the NPE's. So, it shows gap between the theory and practice.
Managerial Accounting is a new discipline and still in developing stage in the
context of modern business organization.
 In NPE's not practicing MA tools such as Standard Costing, Cost Segregation
and allocation activity based costing. The use of overall Master Budgets was
very low. Activity based Budgeting and zero-based budgeting were not proper
practicing to prepare the budget.
 The pricing strategy was completely based on cost of production and
government's decision.
 The traditional inventory valuation technique FIFO was widely practiced.

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  NPE's overall performances are fully measure by profit & loss account.
 In NPE's past trend was most used technique to forecast the future cost &
revenue.
 Government's policy was affecting to more then half of NPE's for making the
account related decisions.
 Role of MA tools and technique were found negligible for making MA related
decision.

2.7 Research Gap (Different Between the Current Research and Previous Research)
There is the gap between the present research and previous research. Previous
researches conducted on accounting on profit planning control were public enterprises
as well as private enterprises based on a case study of particular company or a
comparative study of two more companies. Previous researches conducted on
accounting on profit planning control were only on the budgeting practices in
manufacturing companies especially in public enterprises and their findings were
based mostly on secondary data. Previous Researches conducted on Management
Accounting practices were not sufficient and they were concerned especially on
public enterprises. Public Enterprises consists various sector like manufacturing,
trade, financial, public utility and social service sector. This study focused only Public
Trade sectors. This research examines the present practice of management accounting
tools in Public trade companies in Nepal and disclosed the reason about the
management accounting tools which were not practiced for planning, controlling and
decision making process.

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