Group Ii - December 2022

SUGGESTED ANSWERS TO
THE QUESTIONS SET AT

CHARTERED ACCOUNTANCY PROFESSIONAL (CAP)-III LEVEL
December 2022 EXAMINATIONS
Group-II
The Institute of Chartered Accountants of Nepal

(ICAN)
ICAN Marg, Satdobato, Lalitpur
Suggested Answers December 2022 Examination (CAP III - Group II)
© The Institute of Chartered Accountants of Nepal

All exam questions and solutions are the copyright of ICAN and can only be used for classroom
and student use in preparation for their CA exams. They cannot be published in any form (paper
or soft copy), or sold for profit in any way, without first gaining the express permission of
ICAN. Nor can they be used as examinations, in whole or in part, by other institutions or
awarding bodies.
Year and month of Publication: 2023 March
Disclaimer:
The suggested answers published herein do not constitute the basis for evaluation of the
students' answers in the examination. The answers are prepared by the concerned resource
persons and compiled by the Technical Directorate of the Institute with a view to assist the
students in their education. While due care has been taken in the compilation of answers, if
any errors or omissions are noted, the same may be brought to the attention of the Technical
Directorate. The Council or the Board of Studies of the Institute is not any way responsible
for the correctness or otherwise of the answers published herewith.
2
Table of Contents
Paper 5: Management Information and Control System............................................................... 4
Paper 6: Advanced Taxation ....................................................................................................... 18
Paper 7: Advanced Cost and Management Accounting ............................................................. 40
Paper 8: Strategic Management and Decision Making Analysis ................................................ 61
Examiner’s Commentary on Students' Performance in December 2022 Examinations ............. 74
3
Paper 5: Management Information and Control System

Marks
Attempt all questions.
1. A hotel located in Patan is very popular among foodies for its delicious
meals, and lovely environment. This hotel has very good volume of
customers. It has a simple billing system installed to produce bills. But has
no proper database to analyze its past business and do trend analysis. Suppose
you, software consultant, are appointed by the hotel to develop a database
management system to keep track of all the businesses and do data analysis
tasks.
’’
a) List the steps you go through to develop a database management system

for the hotel and describe two of the most important software
development steps from your point of view for the system development.
(4+3+3=10)
b) Explain the security measures you consider to protect data of the hotel.
10
Answer
1 a) The steps to be taken to develop a database management system are:
- Study the existing billing system
- Collect requirements from the managers of the hotel, what they want to analyze,
what information they want, what business processes are run in the hotel, input
and output of those business processes etc.
- Conceptual design of the software system will be developed on the basis of the
collected requirements, wireframes of user interfaces will be developed. Those
wireframes will be communicated with the users of the hotel. Different modules
will be developed.
- The developed modules will be tested with real world data. Users will be asked
to check and test the system.
- Then the software will be implemented in the real-world scenario.
The most important two software development steps are:
- Requirement collection: Requirements Gathering is a fundamental part of any
software development project. These are things like “User wants to do X. How
is this achieved?” In effect, Requirements Gathering is the process of generating
a list of requirements (functional, non-functional, technical, etc.) from all the
stakeholders (customers, users, vendors, IT staff) that will be used as the basis
for the formal definition of what the project is. Because the requirements define
the project, poorly written requirements can cause problems during
development and, more seriously, cause projects to fail if the goals have been
misunderstood.
- System testing: Software Testing is a method to check whether the actual
software product matches expected requirements and to ensure that software
product is Defect free. It involves execution of software/system components
4
using manual or automated tools to evaluate one or more properties of interest.

The purpose of software testing is to identify errors, gaps or missing
requirements in contrast to actual requirements.
1 b) Cyber-attacks do not only happen to large corporations. Small businesses, groups

and charities have to protect their IT systems, too.
Here are some practical steps that can be taken today to tighten up data security.
Back up data
Create a back-up copy of the data, and do this regularly. Store it somewhere other
than the main workplace, if possible. That way, if there’s a break-in, fire or flood,
we don’t lose everything.
Use strong passwords
Make sure staff, volunteers, and anyone else involved in the operations uses strong
passwords - including smartphones, laptops, tablets, email accounts and computers.
Take care when working remotely
Make sure the devices used are as secure as the equipment used in the office. Also
be mindful of the surroundings.
Be wary of suspicious emails
Educate those working in the organization on how to spot suspicious emails.
Checking for obvious signs such as bad grammar, requests to act urgently, and
requests for payment will help avoid being caught out. If it looks suspicious, don’t
trust it – and warn staffs not to either.
Install anti-virus and malware protection
And keep it up-to-date.
Don’t leave paperwork or laptops unattended
Data breaches can occur when staff and volunteers leave paperwork or laptops
unattended. This could be in the boot of a car, on a train, or at home. Make sure
steps are taken to protect the personal and organizational data by being vigilant and
storing it securely away when it’s not in use.
Make sure your Wi-Fi is secure
Using public Wi-Fi or an insecure connection could put personal data at risk, so
make sure to always use a secure connection when connecting to the internet.
Lock your screen when you’re away from your desk
And make sure your staff do the same. Taking steps to lock your screen when you
leave your desk is a simple thing to do, but will prevent someone else from
accessing your computer.
Keep on top of who has access to what
Restrict who has access to the IT systems and buildings – don’t let just anyone in
unaccompanied because this will leave the systems vulnerable. The fewer people
5
with the access, the better. Visitors should be clearly identifiable. Make sure to limit
IT access to people who work for the organization, where possible. If someone
leaves the company, or if they’re absent for long periods of time, don’t forget to
suspend their access to your systems.
Don’t keep data for longer than you need it
Staying on top of personal data will save the time and resources. It will also help
enforce the data protection responsibilities. Only keep what is needed, for as long
as it is needed.
Dispose of old IT equipment and records securely
Before getting rid of them, make sure no personal data is left on personal
computers, laptops, smartphones or any other devices. Consider using deletion
software, or hire a specialist to wipe the data. This will ensure no one can access
information they’re not supposed to see when the equipment is disposed.
2. Assume that you are working as the ICT Manager for trading house. You
have to suggest changes/modification/upgrade of existing system of your
organization. In this scenario answer the following question.
a) What are the aspects that you will be analyzing as the ICT Manager while
recommending such change of the system? 7
b) What are the possible online payment mechanisms that can be
introduced while upgrading the system to facilitate e-Commerce? 7
c) How can they ensure the continuity of the business? 6
Answer
2 a) Yes, it is very true that no system is for all time. Either it has to be upgraded or
modified or changed during the long period of implementation based upon
various conditions and factors. Before making the decision for the change or
upgrade or modification of the running system I will be analyzing following points
properly:
• The operational outcome of the system. Sometime due to the changing
organizational environment and growth of the organization, the output of the
system becomes insufficient and ineffective. So there arises the need for
modification. Thus, firstly I will analyze the need of the business and the
services that we are getting from the existing system. Based upon the gap I will
recommend.
• Technology saturation or need of new technology. The programing language,
frameworks and architecture of the development of the system might be
outdated so there needs to be the upgrade of the new system. Sometimes the
system should be upgraded due to changing need of hardware as well.
• The technical support from the vendor. Sometimes, the system could be so old
that the vendor would be unable to provide the technical support to keep it
running. So, in this case there arises the need of upgrading the existing system.
6
• The existing capacity of the database may become insufficient to hold the
growing volume of the data. So, to hold the increased demand of capacity,
upgrade of the system is recommended.
• Sometimes the system needs to be upgraded to eradicate the errors and bugs and
vulnerability in the existing system. i.e., Organization needs. So, I will check if
there is any errors and bugs in the system.
• Budget is also very important parameter. While changing/modifying/upgrading
the system the investment and benefit in return has to be properly analyzed so
that it is financially sustainable. I will verify the budget that can be allocated for
the changes.
• If organization is up-scaling or diversifying the business, this might be another
issue to change/modify/upgrade the system. So, I will have detail idea about the
future plan of my organization.
2 b) The payment mechanism in the e-commerce can be any one of the following: (It is
to be noted that all these listed payment mechanisms are not in practices in
Nepal.)
Online Banking:
This is all about the transferring of money from one bank account to another bank
account with the help of the third-party payment gateway interconnected
between payer bank and payee bank having internet as the channel connecting
them.
Credit Card:
With the use of unique identification and verification authority among payer,
merchant and commercial banks (payer and payee banks) this system is used. All
the stakeholders are in electronic channel connection during the process of
payment. Here the verification and authentication mechanisms are very
important.
Digital Credit Card:
It is the extension of credit card into the internet so that it can be used for the
online payment. The information dissipated through the internet is protected for
merchant, consumer and processing bank by authorizing and authenticating.
Digital wallet:
Digital wallet makes paying for purchase over web more efficient by eliminating
the need for shoppers to repeatedly enter their address and credit card
information each time they buy something. A digital wallet securely stores digital
money and related information that can be used to make a payment.
Stored value payment systems:
It enables consumer to make the instant online payment to merchants and other
individuals based on value stored in digital account. Online value systems rely on
the value stored in consumers’ bank, checking or credit card account and some of
this system requires the use of digital wallet.
Digital cash:
Digital cash which is also known as e-cash can also be used for micropayment or
larger purchase. It is the currency represented in electronic form that moves
outside the normal network of money. Users are supplied with the client software
7
and can exchange money with another e-cash user over the internet or with
retailer accepting e-cash.
2c) Business continuity is all about ensuring of the normal operation of the system in a
set of predefined time even in case of huge disaster thereby minimizing the losses
to the organization. The continuity of the business can be ensured with the
following process:
• Backup Plan
• Emergency Plan
• Proper Recovery Plan
Backup Plan:
The backup plan will outline the way to restore the same data on different
location. Backup plan describe the process and timing of replicating the same data
in different media in redundant location. The redundancy of location is done to
ensure the recovery of data even in the failure of some location. Backup plan
describe following points:
• Making copy of data regularly
• Automation of data backup process
• Saving of backed-up data on different medium
• Saving of backed-up data on different location
Emergency Plan:
Emergency plan is all about the immediate action to be taken in case of
catastrophe. This part of the disaster recovery plan outlines the actions to be
undertaken immediately after a disaster occurs. Following points clarify the
emergency plan:
• Personnel to be notified in case of disaster
• Equipment to be operated or shutdown
• Procedures to be followed
Proper Recovery Plan:
Recovery plan mainly focuses on how the full capabilities of the system will be
restored and service will be resumed. Following points clarify the recovery plans:
• Formation of recovery committee
• Prioritizing the applications and systems to be recovered
• Replacement of hardware and network
3.
a) How do systems serve different management groups in a business?
Explain role of information system at the knowledge level of the
organization.
(6+2=8)
b) Rapid technological obsolescence is a major challenge in IT industry. As
an IT strategist in a modern business organization, what would you do to
ensure that the system you deploy will be able to resist rapid
obsolescence? What are the major impacts of the system being obsolete?
(4+3=7)
8
Answer
3 a) First Part: A typical business has different systems supporting the decision-making
needs of each of the main management groups. Operational management, middle
management, and senior management each use systems to support the decisions
they must make to run the company.
Systems serving operational management are transaction processing systems (TPS),
such as payroll or order processing, that track the flow of the daily routine
transactions necessary to conduct business. Management information systems
(MIS) produce reports serving middle management by condensing information
from TPS, and these are not highly analytical. Decision-support systems (DSS)
support management decisions that are unique and rapidly changing using advanced
analytical models. All of these types of systems provide business intelligence that
helps managers and enterprise employees make more-informed decisions. These
systems for business intelligence serve multiple levels of management and include
executive support systems (ESS) for senior management that provide data in the
form of graphs, charts, and dashboards delivered via portals using many sources of
internal and external information.
• Transaction Processing Systems: These are the computerized systems that
perform and records the daily routine transactions necessary to conduct business.
These systems serve the operational level of the organization. Some examples
include sales order entry, hotel reservation systems, payroll, employee record
keeping, and shipping. Transaction processing systems are central to a business.
TPS failure for a few hours can cause a firm’s demise and perhaps other firms
linked to it. Managers need TPS to monitor the status of internal operations and
the firm’s relations with external environment. TPS are also major producers of
information for the other types of systems.
Online transaction processing systems (OLTPS) is an interactive data
processing system that involves a direct connection between TPS programs and
users. As soon as a single transaction is entered into a computer system, the
program interacts immediately with the user for that transaction. It is often
known as the live system where there is no time lag between data creation and
its processing. A good example of this system is online ticket reservation system.
• Management Information Systems: These are the information systems at the
management level of an organization and serve management-level functions like
planning, controlling, and decision-making. These systems provide routine
summary of reports and, in some cases, with online access to the organization’s
current performance and historical records to managers. Typically, these systems
use internal data provided by the transaction processing systems. These systems
are used for structured decision-making and in some cases for semi-structured
decision making as well.
• Decision Support Systems: These systems also serve at the management level
of the organization. These systems combine data and sophisticated analytical
models or data analysis tools to support semi-structured and unstructured
decision-making. These systems use internal information from TPS and MIS,
and often information from external sources, such as current stock prices or
product prices of competitors. DSS have more analytical power than other
systems. Contract cost analysis is an example in which DSS can be used.
• Executive Support Systems: These systems serve the strategic level of the
organization. These systems are designed to address unstructured decision
making through advanced graphics and communication. These systems
9
incorporate data about external events such as new tax laws or competitors, but
they also draw summarized information from internal MIS and DSS.
These systems are not designed to solve a specific problem but they provide a
generalized computing and telecommunication capacity that can be applied to a
changing array of problems. 5-year operating plan is an example in which ESS can
be used.
Second Part: Knowledge-level systems support knowledge level people such as
knowledge and data workers in an organization to integrate new knowledge into
the business. These systems consist of office systems for increasing data workers’
productivity and knowledge work systems (KWS) for enhancing knowledge
workers’ productivity.
Knowledge work systems are the information systems that aid knowledge workers
(people who hold formal university degrees and who are often members of
recognized professionals such as engineers, doctors, lawyers, and scientists) in the
creation and integration of new information and knowledge in the organization.
Office systems primarily aid data workers (people having less formal advanced
educational degrees such as secretaries, bookkeepers, filing clerks, or managers
whose job are principally to use, manipulate, or disseminate information and tend
to process rather than create information) and include information technology
applications for increasing data workers' productivity by supporting the
coordinating and communicating activities of the typical office. Knowledge
workers also use these systems extensively. Both the knowledge work systems and
office systems serve the information needs at the knowledge level of the
organization.
3 b)
Rapid technological obsolescence is a major challenge in IT industry. As an IT strategist in a
modern business organization, what would you do to ensure that the system you deploy will
be able to resist rapid obsolescence? What are the major impacts of the system being
obsolete? (4+3)
Since IT is a rapidly developing and evolving field, there is constant change in technologies,
their use and the way they are adopted into the real life environments. In case of businesses
and their IT infrastructure, this poses a major challenge in terms of the alignment of the
strategy, its implementation, allocation of resources and expected returns – both tangible
and indirect. Because of the probable risks and challenges that originate when the
technology in use become out-of-date, the strategy and planning activity will have to
consider a few important aspect while formulating the strategy and plan for the IT
infrastructure of the business. Some of them are as follows:
➢ Have a clear plan for short, medium and longer term. On the longer term, even the
physical platform may need partial or complete overhaul. Short term requirements
may include patching, updates, small developments etc. Medium term may involve
evolution of the core software, changes in major functions etc.
➢ Use of a modern, flexible and dynamic platform for development and deployment so
that the technological changes in foreseeable future are easily addressed. For example,
a modular hardware architecture, virtualization and scalability can address short to
10
medium term hardware changes while use of modern, omni-channel software

architecture can handle evolution on the software front.
➢ Keep the manpower skillset constantly updated to keep in pace with the technological
changes.
➢ Incorporate requirement of flexibility and modularity in the system if it is in stage of
design and formulation of requirement before procurement or development.
➢ Have an up-to-date idea of what the technological trend is and how the industry is
adapting to those changes. A lot can be learned from peers in terms of adapting to
changes in an efficient way.
➢ Have a clear agreement with the developer/supplier to get timely information and
support regarding impending obsolescence and plan of action to mitigate adverse
effects.
Whatever the level of preparedness, every solution or system or environment has its day
and will be out of use sooner or later. The major risks of an untimely or before-than-planned
obsolescence can be stipulated as follows:
➢ Need for significant reinvestment of money, time and manpower that can have major
impact on the company.
➢ Probable disruption of services if there are problem in important functions and
solutions cannot be found due to the system being obsolete and out of support.
➢ Need to carry out painful and cumbersome migration when the system has to be
replaced by a new one.
➢ Difficulty to get proper and timely support from vendor/supplier.
➢ Need to re-train the workforce to the new system or processes that are incorporated to
replace the obsolete ones.
4.
a) Mobile computing is increasing in its scope and diversity. Supposing

yourself as a IT strategist of an online trading house, describe the major
factors that you consider to make your system mobile-friendly. How can
you make the system capable of serving both mobile and desktop users?
(5+3=8)
b) Explain the working principle of digital Signature generation and
verification process with neat diagram. Why it is necessary to do
System Audit in business organization? (4+3=7)
Answer
4 a)
Mobile computing is increasing in its scope and diversity. Supposing yourself as an IT
strategist of an online trading house, describe the major factors that you consider to make
your system mobile-friendly. How can you make the system capable of serving both mobile
and desktop users? (5+3)
Mobile computing is indeed an increasing trend. It is increasingly being used by businesses
and enterprises to deliver or operate their services. Mobile computing is important for
businesses because more and more people are relying on their mobile phones to carry out
several routine functions such as consuming internet content, having entertainment,
carrying out commerce, monitoring systems, working remotely, having meetings or simply
11
communicating with each other. As a result, a modern business function has to have a
strategy to adopt mobile computing in their IT rollout plans. As an IT strategist, I would
consider the following factors to make the system mobile friendly:
➢ Use a development technology that can provide easy switch from desktop to mobile
without loss of function or consistency of operation.
➢ Incorporate the mobile as well as fixed UI/UX considerations from the beginning.
➢ Make the applications as clean and clutter-free as possible as a small mobile screen
cannot handle all the gibberish and details of a conventional desktop environment.
➢ Size the infrastructure to handle small but frequent sessions or requests which as the
norm for mobile users.
➢ Make the end applications as light and universal as possible.
➢ Consider the current and near future mobile device environment changes so that as
many devices and screen sizes are supported as possible.
➢ Have a clear strategy to provide clear message to the end users about the device
support and the pre-requisites because as the mobile device ecosystem is huge, not all
devices and platforms can be served with proper quality. So, focus on the most
prevalent ones.
To make the system capable of supporting both mobile and desktop environment, a few
considerations have to be made:
➢ Choice of right technology.
➢ Use of modern web technology that can easily adapt to various screen sizes.
➢ Focus on standalone apps for mobile devices and web (with modern scripting tools)
for big screen.
➢ Use of a common development platform, if possible, for various mobile platforms
Current tech environment provides such development platforms.
4 b) A simple schematic of digital signature mechanism is shown below:
✓ Each person adopting this scheme has a public-private key pair.

✓ The private key used for signing is referred to as the signature key and the public
key as the verification key.
✓ Signer feeds data to the hash function and generates hash of data.
12
✓ Hash value and signature key are then fed to the signature algorithm which
produces the digital signature on given hash. Signature is appended to the data
and then both are sent to the verifier.
✓ Verifier feeds the digital signature and the verification key into the verification
algorithm. The verification algorithm gives some value as output.
✓ Verifier also runs same hash function on received data to generate hash value.
✓ For verification, this hash value and output of verification algorithm are
compared. Based on the comparison result, verifier decides whether the digital
signature is valid.
✓ Since digital signature is created by ‘private’ key of signer and no one else can
have this key; the signer cannot repudiate signing the data in future.
Instead of signing data directly by signing algorithm, usually a hash of data is
created. Since the hash of data is a unique representation of data, it is sufficient to
sign the hash in place of data. The most important reason of using hash instead of
data directly for signing is efficiency of the scheme.
Necessity of System audit
IT audit is a process wherein you evaluate and examine the organization’s IT
infrastructure, policies, and operation. It covers a wide range of software
applications, security systems, operating systems, and more.
Your IT systems are always vulnerable to multiple risks and as you continuously
rely on technology or your company’s IT system, it is essential to protect it from
various threats. Since an IT audit’s main objective is to identify inaccuracies and
inefficiencies in the management and use of the IT system, it is necessary for any
business. IT audit is essential to ensure that your system is not vulnerable to any
attacks.
IT audit isn’t a simple procedure, but it is helpful when you want to
understand the status of your company’s IT infrastructure. IT audit is a very
useful tool to protect your assets and maintain the efficiency of your
company’s business operation.
5.
a) Assume you are specifically assigned as IS auditor to audit the business

continuity plan of the main IT system of a financial institution. What will
be the major factors that you will focus on? Why is it important to have
the BCP regularly audited and updated? (5+3=8)
b) Why do we need knowledge of business for developing IT system? What
is IT governance? (4+3=7)
Answer
5 a)
Assume you are specifically assigned as IS auditor to audit the business continuity plan of
the main IT system of a financial institution. What will be the major factors that you will
focus on? Why is it important to have the BCP regularly audited and updated? (5+3)
Business Continuity Plan (BCP) is a strategic plan of an enterprise to make sure its business
functions continue unaffected or are promptly restored to normal operation in case of a
major disruption due to natural or manmade disaster or any kind of adverse impact on the
13
infrastructure. It consists of the process to ensure redundancy, backup, data recovery

procedure and well-rehearsed set of steps to restore the system operation and ensure
availability in case of a partial or full disruption of functions
As an IS auditor, assessing the BCP of the client is a major task. The major factors that need
to be focused on are as follows:
➢ Is the BCP complete in terms of the possible scenarios, options and contingencies?
➢ Is the BCP well-documented?
➢ Is the corresponding team or workforce well-versed with the BCP?
➢ Does the BCP have clear stipulation of the main procedure and an alternate course of
action if the main option does not work?
➢ Does the plan include detailed information about the stakeholders, points of contact,
their roles and escalation procedure?
➢ Is the supplier/vendor well-versed with the plan or is the plan supported/verified by
the partner?
➢ Does the plan have detailed information of the steps and timeline of each?
➢ Does the plan provide sufficient consideration towards communication to the
stakeholders and making them at ease with the restoration activity being performed?
It is very important to have the BCP regularly audited and updated because of various
critical factors. Some of them are as follows:
➢ Changes in business processes in terms of new additions, updates etc.
➢ Changes in capability of the environment because of obsolescence, upgrades, bugs
etc.
➢ Changes in team, both at the working level and strategic level.
➢ Changes in the regulatory and legal environment that might impact the BCP and its
enforcement.
➢ Change of system or its components in terms of functions, nature of data or processes
of operation.
5 b) First Part: We cannot successfully design and use IT system without having
knowledge of the business. An IT System can have a major impact on corporate
strategy and organizational success. The involvement of managers and decision
makers in all aspects of information systems is a major factor for organizational
success, including higher profits and lower costs. Some of the benefits business
organizations seek to achieve through information systems include: better safety,
competitive advantage, fewer errors, greater accuracy, higher quality products,
improved communications, increased efficiency and productivity, more efficient
administration, superior financial and managerial decision making.
IT system should be designed to support different organizational business processes

and management decision making. IT systems can also be used to communicate
with suppliers, business partners, distributors, retailers, and even customers. To
design and use IT system that support efficiently and effectively, we should have
knowledge of each and every activity within the organization including its structure,
management style, business processes etc. The IT system designed without having
detail knowledge of the organization may not support the activities of the
organization properly. Furthermore, the system may not fulfill the needs of different
14
stakeholders that are affected by the IT system. The IT system designed without
having detail knowledge of business may not
• achieve the business goals articulated by the user department
• operate at an acceptable cost, commensurate with the value produced for the firm
• meet carefully defined performance standards (such as response time and system
availability)
• produce accurate, reliable output
• be easy to learn and use
• be flexible
Second Part: Information technology governance (IT governance) is the collective

tools, processes and methodologies that enable an organization to align business
strategy and goals with IT services, infrastructure or the environment.
IT governance uses manages and optimizes IT in such a way that it supports,
complements or enables an organization to achieve its goals and objectives.
IT governance is a broad concept that is centered on the IT department or
environment delivering business value to the enterprise. It is a set of rules,
regulations and policies that define and ensure the effective, controlled and
valuable operation of an IT department. It also provides methods to identify and
evaluate the performance of IT and how it relates to business growth. Moreover,
by following and implementing an IT governance framework such as COBIT, an
organization can comply with regulatory requirements and reduce IT business
while attaining measurable business benefits.
6. Write short notes on: (5×3=15)
a) User interface design
b) General attributes of Information System Security
c) Electronic fund transfer
d) e-Governance
e) Liabilities of the network service provider as per Electronic Transaction
Act, 2063.
Answer
6 (a) User Interface Design
User interface design is an important aspect of system design. Since modern
computing and information systems are to be used by users of various levels of
computer and IT skills, user interface design and overall user experience
considerations have major impact on the usability of the system and the
perception of the user who are supposed to use it. If the user interface is too
complicated and requires a lot of training, there will be a lot of resistance from
users and the required user acceptance level will not be met. While ensuring
easy, intuitive and smooth use, the user interface design also needs mechanism
to ensure accuracy, consistency and structural sanity of the data being input by
the user or presented to the user as output. The interface design process also
has to consider the overall time taken to input or retrieve certain data or
information from the system user interface. In modern system design exercise,
interface design is in itself a major field that involves contribution from not only
the IT and programming team but also from the marketing, aesthetic and
artistic design teams as well.
15
6 (b) The attributes of information system security can be listed as:

• Confidentiality
• Integrity
• Availability/Access Control
• Non-Repudiation
Confidentiality:
Confidentiality mainly refers to the case that only authorized user/system should
be able to access the data or network. Unauthorized users/system should be
denied getting access into the database or system.
Integrity:
The system should ensure that while transmitting the data remains intact or they
are not changed during the entire life cycle of the particular set of data. It is about
maintaining the consistency, trustworthiness and accuracy of data.
Availability and Access control:
Availability ensures that the system is accessible whenever and wherever user
wants. Access control is all about giving right access of the data to right user/ right
system.
Non-repudiation:
Non-repudiation means to ensure that someone cannot deny what it is doing
which mean to say that it is all about the rejection of the false claiming.
6 (c) An electronic funds transfer (EFT), or direct deposit, is a digital movement of

money from one bank account to another. These transfers take place
independently from bank employees. As a digital transaction, there is no need for
paper documents. EFT has become a predominant method of money transfer since
it is a simple, accessible, and direct method of payment or transfer of funds. As
businesses increase their usage of EFT, paper checks become obsolete due to
expense, slower expedition, and overall effort.
6 (d) e-Governance is the method of delivering government services to stakeholders

through the use of IT The delivery of services can be from government to people
(G2P), government to businesses (G2B), government to employees (G2E),
government to government (G2G) etc. It can be at all the levels of government
including central, regional or local based on the level of automation, the modality
of deployment and the policy of the government at the various level. On the
practical front, the implementation of e-governance also depends upon the
robustness of IT infrastructure such as Internet services, mobile coverage and
reliability of the availed services. It is also affected by the purchase power of the
masses for the devices and connectivity as well as the ability of the people to use
the tools such as devices, applications and software functions to avail of the
services.
Successful and wide implementation of e-governance leads to efficient and timely
service delivery, higher transparency, less leakage revenue and a better overall
governance.
In Nepal, various efforts have been made by the government to use technology in
delivery of various services through IT. Examples in include the Nagarik App as well
16
as various other tools to apply for government services, pay for them (such as
taxes, duties, fines, service charges etc) and so on. However, being a developing
economy, there is still much to be done in terms of better adoption of e-
governance in the country.
6 (e) According to the Electronic Transaction Act, 2063, the liabilities of the network
service providers include the following:
• Liabilities referred to in the agreement with the subscriber in regard to the
provision of the said service.
• Liabilities referred to in the license of the network service providers.
• Any other liability as prescribed.
However, the network service provider will not be liable for the breach caused by
the data or information of the third party simply because the network service
provider provided the network service or connectivity used by the third party
concerned.
17
Paper 6: Advanced Taxation

Marks
Attempt all questions. Working notes should form part of the answer.
1. Big Cement Industries is public limited company listed with Nepal Stock Exchange
and substantially owned by Bharat Cements Limited, Mumbai India. Big Cement has
its plant in Pyuthan District and Corporate Office in Lagankhel, Lalitpur. The industry
had started commercial production in Ashwin 2070 and provides direct employment to
565 people throughout the year out of which 350 are Nepalese and 135 are women.
Beside sales of Big Mark cement in local market, it also exports clinker to its parent
company Bharat Cements Limited, India. Following is the extract of profit and loss
statement for the year are ended 32 Asar
2079:
20
Particulars Amount in ‘000

Sales of Cement 1,245,000
Export of clinker 645,000
Provision writeback 1,200
Gain on sales of old machinery 826
Interest Income 41,325
Scrap Sales 1,800
Total Income 1,935,151
Expenditure:
Cost of goods sold 1,122,500
Employee Expenses 505,125
Admin expenses 16,300
Interest Expenses 123,975
Depreciation and amortization 96,758
Repair & maintenance 24,189
AMC for software 1,425
Provision for doubtful debt 10,500
Loss on sales of Vehicle 1,380
Donation 5,800
Miscellaneous expenses 600
Exchange Loss 8,000
Total Expenditure 1,916,552
Additional Information:
• Paid-up capital of the company is Rs. 2 billion of which 65% is held by Bharat
Cements Limited. Bharat Cements Limited is subsidiary of Ambuja Investments
Limited, India.
• The company has pricing policy of cost plus 20% but the clinker exported to Bharat
Cements Limited is priced on cost plus 10%.
• Cost of goods sold includes cost of obsolete material Rs. 655,000.
• Administrative expenses include Thailand visit of Board members not related to
business amounting Rs. 655,000. Similarly, employee expenses include provision
for staff gratuity amounting Rs. 36,005,000 from which only Rs. 1,850,000 was
due for payment to the staff retiring this year.
18
• Provision write back was previously claimed as expenses of which IRD has not
carried full audit and reassessment yet.
• Interest expenses include interest for the loan of Rs.15,000,000 at interest rate of
11% p.a. taken for purchase of new plant and machinery on Jestha 1, 2079, and the
asset was put to use in Bhadra 2079 only. Other than this, the interest expenses
include interest on overdraft of Rs. 12,500,000 and the rest was paid to Ambuja
Investment Limited for the loan taken since last year.
• Donation includes Rs. 6,580,000 incurred for Swargadwari temple renovation with
prior approval from IRD Rs. 855,000 donated to PM relief fund and rest to local
sports clubs with exemption status from IRD.
• Exchange loss includes Rs. 6,700,000 pertaining to forex liability revaluated at year
end rate.
• Information about depreciable assets
(Rs000)
Assets Block Block A Block B Block C Block D Block E
Opening depreciation
base 180,000 68,553 26,250 252,763 1,000
Addition till poush 4,456 2,500
Addition during Magh
to Chaitra end
Addition during
Baisakh to Asar end 2,100
Disposal during the
year 3,245 2,543
• Block E value relates to asset purchased 5 years ago, life of which was originally
estimated to be 10 years.
• Repair cost includes Rs. 6,500,000 for leasehold assets, Rs. 5,280,000 for factory
building and Rs. 730,000 for vehicle and rest for machineries.
• The company has carried forward tax credit of Income Year 2078/79 Rs. 987,000
deposited first installment Rs. 850,000 on 2078 Poush and bank deducted TDS on
interest Rs. 6,162,000 on 32 Asar 2079.
• Company has not filed the estimated tax return.
a) Calculate income tax liability of the company for the Financial Year 2078/79,
considering the relevant provisions of Income Tax Act, 2058 and relevant Finance
Act.
b) Calculate the late submission fees if the return was submitted on Magh end 2079
but extension of filing return was obtained only till Poush end 2079.
Answer to Question 1
(in Rs. ‘000)
Income of Special Industry General
Particulars Note Domestic Export Business
Sales Sales Income
Sales of Cement 1 1,245,000 645,000
Provision Write Back 2 1,200
Gain on Sale of old machinery 3
Interest income 41,325
Scrap Sales 4 1,800
19
Total Inclusions 1,245,000 645,000 44,325

Deductions
Interest Expense u/s 14 (1) 5 8,234 4,266 -
Cost of Goods sold 6 739,425 383,075 -
Depreciation 7 61,667 31,948 -
Repair and Improvement cost of depreciable
11,652 6,037 -
asset 8
Repair cost of leasehold asset u/s 13 9 4,282 2,218 -
Employee expense u/s 13 10 332,741 172,384 -
Admin Expense u/s 13 11 10,306 5,339 -
AMC for software u/s 13 939 486 -
Provision for doubtful debt 12 - - -
Loss on Sale of vehicle 3 - - -
Donation 13 - - -
Miscellaneous expenses (S. 13) 395 205 -
Exchange loss 14 - 1,300 -
Total Deductions before cost u/s 14 (2), 17 &
1,169,641 607,258 -
18
Interest Expense u/s 14 (2) 15 68,968 35,730 -
Total Deductions 1,238,608 642,989 -
Assessable Income from Business 6,392 2,011 44,325
Less:
Contribution to PM Relief Fund 16 104 33 719
Cost incurred to renovate Swargadwari Temple
121 38 841
(S. 12Ka) 15
Donation u/s 12 15 - - -
Taxable income 6,167 1,941 42,766
Rate of Tax 17 4% 4% 25%
Corporate Tax 247 78 10,691
Calculation of Fees u/s 117

Higher of following, for failure to file income return within due date:
a. Rs. 100 per month, i.e., Rs. 400
b. 0.1% p.a. of Gross inclusion, i.e., 0.1% of Rs. 1,934,325,000 (Rs. 644,775)
Interest u/s 118 (failure to pay adequate tax in installment) (in ‘000)
Particulars Description for amounts to To be Actually Shortfall Interest @15%
be paid paid (A) paid (B) (A – B) p.a. on
shortfall for
three months
by the end of Poush 90% of 40% of Tax liability 3,966 1,837 2,129 79.82
By the end of Chaitra 90% of 70% of Tax liability 6,940 1,837 5,103 191.36
By the end of Chaitra 90% of 100% of Tax
liability 9,914 7,999 1,915 71.82
Total 343.00
Interest u/s 119 (for failure to pay tax on due date)
Shortfall tax payment Rs. 3017 (‘000)
Interest @ 15% p.a. for four months 150.84 (‘000)
Notes
20
1. Transfer Pricing Adjustment in case of export sales

In point (b) of additional information, it is given that the margin for export sales is cost plus 10%
whereas pricing policy is cost plus 20%.
Sec. 33 empowers tax authority to readjust cost and revenue of a taxpayer in case tax is reduced by
way of transfer pricing arrangement. The provisions of Sec. 33 are not suo moto applied by tax
expert, tax advisor or auditor or even the tax payer. In practical scenario, if any taxpayer believes
that transfer pricing provision may be triggered, then the taxpayer chooses to issue invoice in such
price so as to minimize the assessment risk from tax authority.
Further, there are guidelines under Transfer Pricing international practices that promotes the usage
of Comparable Uncontrolled Price to make transfer pricing adjustment. The comparable
uncontrolled price in case of export sales in CIF-Nepal Customs price (if the same customs frontier
is used to export goods produced from same factory location) or FOB price of exporter. In the given
case, reading the general statement we can conclude the pricing policy of cost plus 20% is for
domestic sales. The price fixed for domestic market cannot be the comparable uncontrolled price
for international market. Other information such as, FOB price of similar or identical goods exported
to Indian market by another firm can be used to determine whether the price fixed by Big Cements
is at arm’s length, after giving due effect on market conditions of India. But the question lacks such
information, as such, we cannot directly conclude that there is reduction in tax liability by way of
transfer pricing arrangement.
Even when there are indications that there might be reduction in tax liability by way of transfer
pricing arrangement, the students are expected to answer the possible impact of transfer pricing
adjustment by tax authority. The students are not expected to make transfer pricing adjustment in
the main solution of question.
2. Provision write-back is part of such provision that was claimed as expense during the time the
provision was made. As such, the amount is included in income.
The question does not specify what the provision was about. If it were about provision against debt,
then the amount would be included as part of domestic or export sales, as the case may be. In absence
of information as such, we include it as part of other business income. The treatment of the amount
vary on the basis of assumption made by particular examinee.
3. Gain or loss on sale of depreciable is calculated for accounting purpose. The total amount received
or receivable on sale of depreciable asset forms part of incomings of respective pool of depreciable
asset of the industry. As such, the amount is ignored in tax calculation.
4. We should know the type of asset that became scrap. If it is of depreciable asset, then sale proceeds
of scrap are treated as part of incomings of respective pool of asset, and if it is of trading stock, then
the sales form part of incomings from trading stock. If it is in respect of newspaper or old stationeries
or such items that are deductible u/s 13, then the amount is treated as income of other business
income. The solution may vary on the basis of assumption made by particular examinee.
5. Interest expense u/s 14 (1)
The total interest expense given in the question is bifurcated as follows based on additional
information (f):
Particulars of expense Amount Deductible or not Sec. applicability
Given interest 123,975
Interest on plant and machinery 275 Not deductible, as the The amount is treated as
(put to use Bhadra 2079 only) related asset has not outgoings of plant and
been put to use machinery
21
Interest on overdraft 12,500 Deductible, as it meets u/s 14 (1)

the business expediency
test
Interest paid to Ambuja 111,200 Deductible with u/s 14 (2)- separate
Investment Ltd. maximum limit, working is done
assuming it meets
business expediency
test
The amount of Rs. 12,500 (‘000) is allocated between domestic sales and export sales in the ratio
1245:645, as the best assumption is the overdraft is used to meet the working capital need of the
company and not to generate interest income.
6. Cost of obsolete material is part of cost of goods sold. As per Sec. 40 (1), an asset is disposed in
case the asset’s usability is expired, and in case of disposal of trading stock, the cost form part of
COTS u/s 15. The amounts of COTS are allocated between domestic sales and export sales in the
ratio 1245:645, as it is the only practical assumption which can be made based on the given
information. However, in practical scenario, it is always possible to keep record to determine the
specific cost of trading stock for domestic or export sales.
7. Depreciation expense
The expense is allocated between domestic sales and export sales in the ratio 1245:645.
In case of Pool E, since the method is SLM, and the asset’s remaining life is 5 years, the depreciation
is Rs. 200 (1000*2/10).
The question has provided the information of total disposal proceeds, as such, the amount given in
additional information is presumed to be cash received or receivable in case of disposed assets.
Particulars Pool A Pool B Pool C Pool D Pool E
Opening depreciation base 180,000 68,553 26,250 252,763 1,000
Addition till Poush 4,456 2,500
Addition from Magh to Chaitra
Addition from Baisakh to Ashad 2,100
Absorbed additions
100% for addition ill Poush - 4,456 2,500 - -
2/3rd for addition in 3rd quarter - - - - -
1/3rd for addition in 4th quarter - 700 - - -
Disposal Proceeds 3,245 2,543
Depreciable Basis 180,000 73,709 25,505 250,220 1,000
Depreciation Rate 6.67% 33.33% 26.67% 20.00%
Depreciation expense 12,000 24,570 6,801 50,044 200
Total depreciation 93,615

8. Repair and Improvement cost
Particulars Pool A Pool B Pool C Pool D
Depreciable Basis 180,000 73,709 25,505 250,220
7% of above 12,600 5,160 1,785 17,515
Actual Cost 5,280 - 730 11,679
Deductible (Lower of above two) 5,280 - 730 11,679
Total Allowable cost: Rs. 17,869 (‘000)
9. Cost to repair leasehold development is equivalent to rental expense. As such, it is deductible u/s
13.
22
10. Employee expense

The staff gratuity is not paid to individual employee, and the question does not specify whether the
amount so calculated is fixed obligation or a probable obligation. In case we assume that the gratuity
provisioned for is fixed obligation (such as, it is 8.33% of basic salary), it is deductible during the
year when the expense is accrued. In case it is a probable obligation (such as, the employee’s total
receivable can be determined only after the employee retires and actuarial assumption is needed to
determine the amount of liability), then the amount is deductible at the time of payment. The
examinee’s answer varies based on their assumption. In the given case, it is assumed that the liability
for gratuity is calculated as per the provision of Labour Act, 2074; i.e., the amount is fixed
obligation. The expense is allocated between domestic sales and export sales in the ratio 1245:645.
11. The personal expense of director is not deductible u/s 21. Remaining cost is allocated between
domestic sales and export sales in the ratio 1245:645, as it is well known fact that significant
administrative expense is not incurred to generate interest income.
12. Provision for doubtful debt is not an expense for the purpose of sec. 24 of Income Tax Act, 2058,
hence, not deductible.
13. Donation is considered while calculating taxable income u/s 5 of the Act. This section of the answer
is related to calculation of assessable income; thus, donation cannot be considered in this section of
answer.
14. Realized exchange loss can be claimed as per the circular of IRD dated 2071/9/18. As foreign
exchange transaction is involved in export business, the loss is treated as expense from export
business.
15. Calculation of ATI, Donation and Cost u/s 12Ka
Donation u/s 12
In the question, the total donation amount is Rs. 5,800,000 of which Rs. 6,580,000 is expense that
must be tested u/s 12Ka and 855,000 is expense that must be tested u/s 12Kha. This gives negative
donation to exempt organization. Considering there is no donation, there is no deductible amount.
As the donation amount is negative, as such, ATI for the purpose of donation is not required to be
calculated.
Cost u/s 12Ka:
The limit of cost as per Sec. 12Ka is minimum of following:
a. 10% of assessable income (in the given case, 10% of assessable income is greater than Rs. 10
million, even when the total interest incurred and paid to Ambuja Investments is treated as
total eligible interest cost)
b. Actual cost paid to swargadwari temple renovation, i.e., Rs. 6,580,000
c. Max. Rs. 1 million
As such, it is concluded that Rs. 1 million is deductible u/s 12Ka.
Calculation of ATI and eligible amount for deduction on payment of interest to M/s Ambuja
Investments (in ’000)
Particulars u/s 14 (2)
Total inclusions (from main solution above) 1,934,325
Less: Interest income 41,325
Total deductions before cost u/s 14 (2), 17 & 18 (from main solution above) 1,776,899
Add: Interest expense 12,500
Less: Actual interest where Sec. 14 (2) is attracted
Less: Actual Pollution control cost -
Less: Actual Research & Development Cost -
Less: Contribution u/s 12Kha and 12Ga 855
Less: Expense u/s 12Ka 1,000
23
Adjusted taxable income without considering interest as income or expense 126,746
The eligible amount is lower of following:

a. 50% of ATI plus interest income (i.e., 63,373 plus 41,325)
b. Actual cost Rs. 111,200
The amount is allocated in sales ratio between domestic and export sales.
16. Contribution to PM Relief fund: PM relief fund is treated as Pradhan Mantri daibi prakop uddar
kosh. The cost is allocated between three incomes in assessable income ratio.
17. Effective Tax Rate:
Income of Normal
Special Income
Ref Sub- Industry
sec of Sec. Local Export
Particulars 11 Sales Sales
Normal Rate 25% 25% 25%
(2kha)
5% 5% N/A
20 % Rebate to Special Industry (kha)
Applicable Rate 20% 20% 25%
Option I:
Employment opportunity throughout the year by
14.4% 14.4% N/A
special industry to 300 plus Nepali national 100 plus
Nepali women (20*0.8*.9) (3) (ka)
Option II:
Applicability of 20% of tax rate for 10 years to Special
Industry established in under-developed area
commencing from commercial production 4% 4% N/A
Pyuthan district is categorized as under developed zone
under Schedule 10 of the Industrial Enterprises Act,
2076 (3) (kha)
Option III:
Full exemption for 5 years then after 50% exemption
for 3 years to special and tourism industry established 10% 10% N/A
with more than Rs. one billion capital and providing
direct employment to 500 plus throughout the year (3) (ga)
Option IV:
20% rebate on export income and additional 35%
N/A 10.4% N/A
rebate for export income of manufacturing industry
(20*0.8*0.65) (3ng) (ga)
Option V:
15% rebate for manufacturing industry listed in Nepal 17% 17% N/A
Stock Exchange (3chha)
Effective Tax Rate (Lowest of available options) 4% 4% 25%
2.
a) Nepali Samaj Party is a political party registered with Election Commission of
Nepal. It had following transactions in the Financial Year 2078/79. You are
required to calculate the taxable income and tax liability for the year, ignore the
interest and penalties. 7
Particulars Amount (Rs.)
Membership fees received from members 5,000,000
Levy received from members 1,000,000
24
Interest received from banks 2,400,000

Building rent received 360,000
Income from sale of merchandise 500,000
Income from sale of scrap 50,000
Royalty from canteen operator 300,000
10 set of computers donated by party supporter (market value
Rs. 1,000,000) for general election campaign
Election related expenses 2,000,000
Travelling expenses 400,000
Refreshment expenses 100,000
Other office expenses 300,000
b) Mrs. Firozza is working in Bhojpur branch of Nepal SBI Bank Ltd. In Income Year
2078/79, informations about her are as follow:
• Salary Rs. 50,000 per month; Dashain allowance Rs. 50,000; Bonus Rs. 90,000.
• Rs. 70,000 has been deposited into CIT in the year but the contribution by the
employer for the year is Rs. 40,000 only.
• Her husband is a pension holder from Nepal Government; he has received Rs.
180,000 pension during the year. He is involving in share transactions from
secondary market. During the year, he has net cash gain of Rs. 1,000,000 from
share transactions.
• The couple has insurance cover and paid insurance premium Rs. 15,000 for wife
and Rs. 14,000 for husband during the year.
• Mrs. Firozza paid Rs. 4,000 and her husband paid Rs. 6,000 for their medical
treatments to approved institution.
• Mrs. Firozza did not have information about the gain on share transactions
while providing the information to the Bank branch.
• She has opted for couple under section 50 for calculating her monthly
remuneration tax during the year.
Discuss whether the bank should take into account her husband income while
calculating her remuneration tax and tax credit.
Compute Assessable Income, Taxable Income, Tax liability of Mrs. Firozza and
her spouse for the Income year 2078/79 as per Income Tax Act, 2058. 7
c) As a tax expert, you have been asked to calculate the TDS amount on the following
transactions on the basis of Income Tax Act, 2058. The accountant wants to know
whether it is enough to deduct TDS and deposit it only or will they have to comply
with other provisions relating to the deducted TDS?
i) NM Bank borrowed USD 2 million from Bank of Netherlands and paid interest
USD 80k during the income year 2078/79.
ii) Payment made to an entity for VAT exempted service where the invoiced
amount was Rs. 50,000.
iii) House rent of Rs. 100,000 paid to Mr. Harihar Basudev.
iv) Carriage service provided by Answer City Cargo amounting Rs. 20,000.
v) Interest of Rs. 125,000 paid against loan to a commercial bank in Nepal.
vi) Commission paid to a private company amounting Rs. 250,000.
25
Answer to question 2 (a)

Since Nepali Samaj Party is registered with Election Commission of Nepal, it is exempt entity. This has
the following impact on its tax computation:
a. Donation, gifts and other contributions (directly related to the objective of the party and where the
contributor does not receive or expect any consideration) are exempt income of the party, and
b. The expense incurred to the extent generating the exempt income and final withholding payments
are not deductible u/s 21 of the Act
Computation of Assessable income
Particulars Sec. Amount Note
Membership fees received from 10 (Chha) Exempt as received as per the objective and
members - the contributor does not obtain or expect
Levy received from members 10 (Chha) - consideration
Interest received from banks 92 - Final withholding
Building rent received 7 (2) 360,000
Income from sale of 7 (2)
merchandise 500,000 Even if these are as per the objective of the
Income from sale of scrap 7 (2) 50,000 organization, contributor receives
Royalty from canteen operator 7 (2) 300,000 consideration against these payments
10 (Chha) Exempt as received as per the objective -
person donating does not expect any
Computer donation - consideration in return
Total Income 1,210,000
Deductions
Election related expenses 21 -
Travelling expenses -
Refreshment expenses - Since income is exempt related expense not
Other office expenses - allowed for deduction
It is assumed that the computers are used
only to generate exempt income. There is
Depreciation of computers - alternate answer for alternate assumption
Total Deductions -
Taxable income 1,210,000
Tax liability @25% 302,500
Answer Question 2 (b)

Whether the bank should take into account her husband’s income while calculating her
remuneration tax and tax credit
The provision for couple assessment as per Income Tax Act, 2058 are as follows:
a. Voluntary election by a resident natural person and his/her resident spouse for a particular income
year u/s 50 (1)
b. Compulsory couple election by a resident widow or widower who has to look after dependant u/s
50 (3)
Mrs. Firozza, though resident of Nepal, is not a widow. As such, there is no applicability of Sec. 50 (3).
We need to test whether Sec. 50 (1) shall be considered for couple selection.
The couple selection u/s 50 (1) is not mandatory. The resident natural person and his/her resident spouse
can make a choice whether to opt for couple. Considering the fact that (a) every taxpayer is rational (i.e.,
every taxpayer makes their tax arrangement such that they do not pay more tax than they actually require
to pay after giving due effect to every benefit by tax law), and (b) election u/s 50 (1) is voluntary, what
we have to conclude is: the lawmakers’ intent of drafting Sec. 50 (1) is to reduce the tax liability of a
26
taxpayer who has non-earning spouse so as to maintain the cost of maintenance of non-earning spouse
from the income of earning spouse. When the lawmakers provide option for the taxpayer in tax law, they
always believe that the taxpayer makes a choice that decreases its tax liability. As such, one cannot
assume that a taxpayer resorts to couple assessment when s/he has the option to scheme the tax in such
a way that reduces his/her tax liability.
Based on the above analysis, the examinee shall always calculate tax liability without opting for couple
when both the spouses earn income. Similarly, when the employer has information regarding the income
of another spouse, they are desired to stop the employee from choosing couple for tax assessment. There
are no legal provisions that compels employer to stop the employee, however, as law entrusts accurate
tax computation to the employer, it’s their moral obligation not to promote couple assessment in case
when both the spouse earn income as per Income Tax Act, 2058.
Similarly, if both the earning spouses choose couple assessment, the tax authority has two choices, (a)
whether to assess the income of both the spouses ignoring the effect of couple assessment, or (b) whether
to club the income of spouses together and assess the tax as single taxing unit. Since the law does not
incorporate procedural provision to club income and tax assessment by tax authority is part of judicial
activity, the latter choice may not be made. Under the conservative interpretation, the latter choice may
be made, however, the same is subject to final decision from competent court.
In light of above argument, the tax liability of Mr. and Mrs. Firozza is calculated separately. As a tax
advisor, Chartered Accountants are not expected to compel anyone to assess tax that results into higher
tax obligation, as such, the questions in the examination shall not be drafted for conservative
interpretation of Sec. 50.
Even if she opted for couple, the employer cannot take into consideration the income of her husband
while assessing her income and tax liability.
As per Sec. 4 (3), the tax computed by the employer is final for the employee who has no other income,
since she satisfies all the conditions mentioned in that section.
Calculation of tax liability of Mrs. Firozza

Salary 8 (2) 600,000 50000 X 12
Dashain Allowance 8 (2) 50,000
Bonus 8 (2) 90,000
Employer's Contribution in CIT 8 (2) 40,000
Assessable income of Mrs. Firozza 780,000
Less: Reductions under sec. 63

Actual, or one-third of assesable income
Contribution to ARF (CIT) 63 70,000
or Rs. 300,000 whichever is lower
Taxable Income 710,000
Less: Deductions under Schedule 1
Payment of investment insurance
15,000 Lower of actual Rs. 15,000 or Max. (Rs.
premium 25,000)
Residence in D Class Remote area 20,000 Assumed resided throughout the year
Balance Taxable Income 675,000
Calculation of Tax liability of Mrs. Firozza (F.Y. 2078/79) (0.5 Marks)

Slab Limit Rate Tax amount
1 400,000 1% 4,000
2 100,000 10% 10,000
27
Balance 175,000 20% 35,000

Tax liability before tax credit 49,000
Less: Female Tax Credit (10% of calculated amount) 4,900
Less: Medical tax credit
(Lower of Rs. 750 or 15% of approved medical expense) 600
Tax liability for the year 43,500
Calculation of Income and Tax liability of Mr. Firozza

Pension Income 8 (2) 180,000 Income from Employment
Assumed disposed securities were held
for more than one year, the net cash
Gain on Sale of listed shares 9 (2) 1,052,632 amount is 95% of gain, as such gain is
1,000,000/.95. It is gain on disposal of
NBCA
Total Assable income 1,232,632
Less: Deductions under Schedule 1
Payment of investment insurance premium 14,000 Lower of actual Rs. 15,000 or Max. (Rs.
25,000)
Generation of pension income 100,000 25% of Basic exemption limit of Rs.
400,000
Balance Taxable Income 1,118,632
Balance taxable income other than NBCA Gain is Rs. 66,000
Tax Liability Computation sheet

Nature of income Slab Limit Rate Tax amount Marks
Pension Balance in Slab 1 66,000 0% -
NBCA Gain Balance in Slab 1 334,000 0% -
NBCA Gain Balancing amount 718,632 5% 35,932
Total 35,932
Less: Medical tax credit
(Lower of Rs. 750 or 15% of approved medical expense) 750
Advance tax already paid 52,632
Refundable amount 15,950
Answer 2 (c)
The withholding tax on the following payments are as follows:
Particular TDS TDS Amount
Rate
Interest payment to Netherland Bank 10% USD 8k (to be deposited in NPR applying the
by NM Bank rate applicable on date of payment)
Payment made to an resident entity 1.50% Rs. 750, assuming that the entity was resident.
for VAT exempted service where the The alternative answer is nil TDS if the student
invoiced amount was Rs. 50,000 assumes that the entity was non-resident, and the
service was rendered in Nepal without physical
presence of its employee
House rent of Rs. 100,000 paid to Mr. N/A N/A, as it is paid to natural person
Harihar Basudev
28
Carriage service provided by City 2.50% 500

Cargo amounting Rs. 20,000
Interest of Rs. 125,000 paid against N/A N/A, as interest is paid to a resident bank
loan to a commercial bank of Nepal
Commission paid to a private 15.00% 37,500, if there is not VAT-invoice. In case there
company is VAT invoice, tax shall be withheld @ 1.5%
Advice to accountant if he has to comply with any other legal provisions other than payment of taxes
withheld
The accountant shall file a withholding tax return within 25 days of the end of month in relation to the
taxes withheld or deemed to be withheld during that month.
3.
a) Mention the provisions of the Income Tax Act, 2058 in case of following
transactions: 5
i) An Israeli investor selling the stake in Dowell Software Company Pvt. Ltd.
Nepal.
ii) A local bank selling its house property to an individual.
iii) A local bank providing exchange facility to a student for language test fee.
iv) A resident natural person receives money for uploading videos in social
platforms from abroad.
v) A resident company importing frozen fish in the country for business purpose.
b) Explain the factors that are relevant in evaluating the level of threats created by
providing tax service to an audit client with reference to ICAN Code of Ethics,
2018. 5
Answer 3 (a)
This question requires examinees to mention the provisions of Income Tax Act, 2058 and all these
provisions have close link to Sec. 95Ka of the Act. However, as the question does not specifically require
the provisions of Sec. 95Ka, the examinee can give the alternative answer based on the provisions of the
Act. The solutions below are based on Sec. 95Ka, however, the alternative answers are also not
overruled:
Particulars Solution based on Sec. 95Ka Alternative answer
Israeli investor selling The investor’s obligation: It has to As per clarification of Sec. 67 (6),
stake of Pvt. Co. declare the gain on disposal of his stake the definition of ‘asset situated in
at Pvt. Ltd. company Nepal’ does not include the asset
of non-resident other than land
Pvt. Co.’s obligation: and building in Nepal as asset
The private company shall collect situated in Nepal. Since, the
advance tax @ 25% of gain on disposal related asset is not situated in
of his shares [Section 95Ka (2)] after Nepal, there is no taxability of the
determining his residential status and if said income of the investor, if he is
the investor is non-resident of Nepal (in non-resident of Nepal.
case the student assumes that the
investor is entity, then it has to be non-
resident). If he is resident of Nepal, then
the company shall collect advance tax
@10% of gain
29
Return filing requirement:

The Israeli investor shall file an income
return, if he chooses to file the return.
Domestic bank selling Advance tax payment obligation u/s 95Ka:
a house property The Land Registration office demands advance tax @ 1.5% of sales value
from domestic bank at the time of registration of land.
Corporate tax obligation:

The gain on disposal of land is included in bank’s income and the bank shall
have to pay tax @ 30% of its taxable income when assessing its income and
filing income return.
Domestic bank Bank’s obligation:
providing exchange The bank has to collect advance tax @ 15% of such test fees at the time of
facility providing exchange facility [Sec 95Ka (6Ka)]
Resident natural The exchange service provider’s obligation:
person receiving The exchange service provider shall collect advance tax @ 1% of the amount
money from abroad received in the accounts of such resident natural person.
by uploading the
videos content in Resident Natural person’s obligation (2079/80)
social media network, The resident natural person is not required to file income return in case his
concerned bank, income is exclusively from the source mentioned above.
financial institution or
money transfer entity The tax collected as described above is treated as his final tax obligation
under Sec. 1 (4) of Sch.1
Resident company The obligation of customs authority
importing frozen fish The customs authority shall collect advance tax @ 5% on the value
in the country for determined for customs purpose on fresh or frozen fish, among others.
business purpose [Section 95Ka (7)]
Obligation of importer
The importer shall conduct its business transaction calculate its corporate tax
obligation and compute tax as per Schedule 1 of Income Tax Act, 2058. The
tax paid at customs frontier is treated as advance tax.
Answer 3 (b)
As per Sub-Section- 104 .3 A2 of ICAN Code of Ethics, 2018, following factors that are relevant in
evaluating the level of threats created by providing tax service to an audit client:
a. The particulars characteristics of the engagement,
b. The level of tax expertise of clients employees,
c. The system by which the tax authorities assess and administer the tax in question and the role of the
firm or network firm in that process, and
d. The complexity of the relevant tax regime and the degree of judgment necessary in in applying it.
4.
a) Silver Star Footware P. Ltd. is a newly established company incorporated on
15.04.2079. It intends to export 50% of its products to India. It has following plans
of import to begin with: 10
i) Import of raw material Rs. 5,000,000 – 5% custom duty
30
ii) Import of other raw material Rs. 1,500,000 – 10% custom duty
iii) Import of packing material Rs. 50,000 – 10% custom duty
iv) Freight and insurance on raw material not included above Rs. 1,300,000
The management intends to get the goods imported through bonded warehouse
facility.
i) Please guide the management if it can import through the bonded warehouse
mechanism.
ii) Calculate the amount of duty payable or guarantee to be provided depending on
your advice on above.
iii) It could not export the supplies in the agreed period due to COVID and could
export only in Kartik 2079. Does that impact the duty payment?
b) Thamel Beverage Limited is a manufacturing Company producing and selling

various juices. Below is its transaction for the month of Shrawan 2079.
Import Detail:
Particulars Amount VAT Total Bill

Amount
Raw Material 25,000,000 3,250,000 28,250,000
Packing Material 15,000,000 1,950,000 16,950,000
Machinery 7,500,000 975,000 8,475,000
Spare Parts 900,000 117,000 1,017,000
Domestic Purchase Detail:

Particulars Amount VAT Total Bill
Amount
Raw Material 1,000,000 - 1,000,000
Packing Material 3,000,000 - 3,000,000
Raw Material 3,500,000 455,000 3,955,000
Packing Material 1,200,000 156,000 1,356,000
Bus for Office Staff 2,500,000 325,000 2,825,000
Motor Cycle for Office Use 3,500,000 455,000 3,955,000
Car for General Manager 3,000,000 390,000 3,390,000
Motor Cycle for Sales 1,500,000 195,000 1,695,000
Team
Car for Personal Use of 5,000,000 650,000 5,650,000
Director
Motor Cycle for Personal 200,000 26,000 226,000
Use of Director
Audit Fee 500,000 65,000 565,000
Entertainment Expenses 50,000 6,500 56,500
Diesel purchased for Car 55,000 7,150 62,150
Petrol purchased for Car 125,000 16,250 141,250
and motorcycle
31
Sales Detail for the month of Shrawan 2079
Particulars Amount
Export : Taxable 120,000,000
Domestic : Taxable 30,000,000
Export : Non Taxable 50,000,000
Additional information:
i) Plant manager has given one bill of repair and maintenance of Rs. 2,500,000
plus VAT dated 2078.05.01. The said bill was kept at hold due to non-
satisfactory service.
ii) Marketing manager has given bill of Rs. 500,000 plus VAT of advertisement
dated 2078.03.01which was kept on hold due to some dispute.
iii) Company has paid Rs. 1,000,000 to an India party for consultancy service
provided for safety audit of Factory.
iv) Opening VAT credit on is Rs. 1,000,000
Compute the VAT Payable or Receivable for the month of Shrawan 2079.
10
Answer 4 (a)
i. Can it import goods through the bonded warehouse facility?
The following industries can use bonded warehouse facility, as per Rule 9 of Customs Regulation,
2065, to import raw materials, auxiliary raw materials and packing materials (not produced in Nepal
on recommendation of Department of Industry):
i. Industry exporting readymade garment or any of its product to third country,
ii. Industries exporting:
• Readymade garment to India, or
• In case of other than readymade garment, at least twenty percent of its total production or
more than one crore in value to India,
iii. Duty free shop importing goods Person who is importing goods to sale through the government
licensed duty-free shop.
For an existing industry to enjoy facilities of bonded warehouse, it has to submit proof of meeting
any of the conditions described above. For a new industry that has not surpassed its one year of
operation, as per Proviso of Rule 9 (2), the industry shall provide a commitment letter (bond) that
it shall fulfill the condition along with export plan.
In the given case, as M/s Silver Star Footware Pvt. Ltd. is a newly established industry and it intends
to export 50% of its product in India. As such, it can avail bonded warehouse facility as per Rule 9
(as it intends to export at least 20% of its production of goods to India). To obtain license to operate
bonded warehouse, it has to file an application at Department of Customs with a bond that it will
export 50% of its production in India and export plan in case it cannot produce the proof of export
of 50% of its production or export of goods worth more than Rs. 1 Crore. In case it is a readymade
garment industry, it can apply for bonded warehouse’s license if it has already exported readymade
garment or it can produce export plan and commitment letter to export readymade garment to India.
ii. Duty payable or amount of bank guarantee
When an industry avail bonded warehouse facility, it can import raw materials, auxiliary raw
materials and packing materials (not produced in Nepal on recommendation of Department of
Industry) that will be consumed to produce finished goods that will be exported by producing bank
guarantee equivalent to 115% of import duty applicable on it plus agriculture reform, as per Rule
10.
32
Auxiliary
Raw Packing
Particulars Raw
Material Material
Material
Cost of Import 5,000,000 1,500,000 50,000
Freight & Insurance on raw material 1,300,000
Transaction Value 6,300,000 1,500,000 50,000
Rate of Customs Duty 5% 10% 10%
Customs Duty 315,000 150,000 5,000
To be paid in cash to release goods- 50% 157,500 75,000 2,500
Bank Guarantee to be produced to release goods-
115% of 50% (for export) plus agriculture reform 181,125 86,250 2,875
fee, which is zero
Note: as the freight and insurance is on ‘raw materials’, it is assumed that the freight and insurance
in case of auxiliary raw materials and packing materials are already included in cost of import
iii. What if it imports goods on Kartik 2079?

To release the bank guarantee, the industry availing bank guarantee facility (as per bonded
warehouse’s license) shall export goods within 11 months of import after adding at least 10% value
addition on transaction value determined by the customs authority [Rule 12 (3)].
In case the goods cannot be exported within such eleven month’s period, the industry can file an
application along with reasons for extension of export duration. The Chief of Customs office can
extend the deadline by maximum 6 months if the reason is found to be genuine (Rule 13).
In the given case, the industry is established in Shrawan 15, 2079 and the question misses the
information regarding the date of import of materials. If we assume the materials were imported on
Shrawan 15, 2079 itself, the total time available for the industry to convert the materials into
finished goods is Ashad 14, 2080 and if extended Poush 14, 2080. In the given question, the goods
are exported within eleven months of import of goods, therefore, the halt of export due to COVID
does not attract. It can release the bank guarantee after submission of application along with the
documents required under Rule 12
If eleven (or seventeen) month’s deadlines were missed, then there is COVID relief to export goods
by Mangsir 2079 that is not relevant in the given case
Answer 4 (b)
Note: It is assumed that all the inputs are used to produce joint products that are both VAT attractive
and VAT exempt.
Calculation of Output VAT for the month of Shrawan 2079:

Particulars Amount VAT Note
Export: Taxable 12,00,00,000 0 @0%, export
Domestic: taxable 3,00,00,000 39,00,000 @13%
Export: Non-taxable 5,00,00,000 0 VAT exempt
Total 20,00,00,000 39,00,000 (0.5 marks)
Ratio of Taxable Sales to Total Sales: 75%
Calculation of Eligible input VAT Credit for the purchases made during Shrawan 2079
Particulars Amount VAT Eligible Note
paid VAT
Import of Raw 2,50,00,000 32,50,000 2,437,500
Material
33
Import of Packing 1,50,00,000 19,50,000 1,462,500 In the ratio of taxable sales to

Material total sales
Import of Machinery 75,00,000 9,75,000 731,250
Import of Spare 9,00,000 1,17,000 87,750
Parts
Raw Material 10,00,000 - -
Packing Material 30,00,000 - -
Raw Material 35,00,000 4,55,000 341,250 In the ratio of taxable sales to
Packing Material 12,00,000 1,56,000 117,000 total sales
Bus for Office Staff 25,00,000 3,25,000 97,500 40% of paid VAT in the ratio
of taxable sales to total sales,
as it is automobiles
Motor Cycle for 35,00,000 4,55,000 341,250 In the ratio of taxable sales to
Office Use total sales, as it’s not
automobiles
Car for General 30,00,000 3,90,000 117,000 40% of paid VAT in the ratio
Manager of taxable sales to total sales,
as it is automobiles
Motor Cycle for 15,00,000 1,95,000 146,250 In the ratio of taxable sales to
Sales Team total sales, as it’s not
automobiles
Car for Personal 50,00,000 6,50,000 195,000 Practically, it cannot be
Use of Director established whether the
vehicle in the name of
company is used entirely for
personal purpose by director.
When Rule 41 (3) was
drafted, the 40% VAT
allowance on automobiles
was agreed citing the reason
that even if the automobile is
used by director, at least 40%
is used for business purpose
and the remaining is the
personal use. As such, 40% of
paid VAT in the ratio of
taxable sales to total sales is
treated as credit
Motor Cycle for 2,00,000 26,000 19,500 Citing the reason as above, in
Personal Use of the ratio of taxable sales to
Director total sales, as it’s not
automobiles
Audit Fee 5,00,000 65,000 48,750 In the ratio of taxable sales to
total sales
Entertainment 50,000 6,500 - No Credit
Expenses
Diesel purchased 55,000 7,150 5,362.25 In the ratio of taxable sales to
for Car total sales
34
Petrol purchased 1,25,000 16,250 - No credit as it is petrol for

for Car and vehicle. Examinee shall focus
motorcycle the term ‘vehicle’ is not equal
to ‘automobile’.
Total credit for purchases during the month 6,147,862
Calculation of Eligible input VAT Credit for the purchases made in previous 12 months where
the input credit was erroneously not claimed:
Particulars AmountVAT Eligible Note
paid VAT
Repair invoice dated 25,00,000 3,25,000 243,750 In the ratio of taxable sales to
2078.05.01 total sales. Principally it has to be
in the sales ratio of fiscal year, as
the benefit was consumed during
that accounting period
Repair invoice dated 5,00,000 65,000 - No credit, as a year since the
2078.03.01 purchase has been made is
elapsed
Total eligible amount 243,750
Calculation of Eligible input VAT Credit in case of Reverse VAT u/s 8 (2)
In case of payment of VAT u/s 8 (2), the service recipient can claim VAT credit after the payment of
Reverse VAT is made. If the recipient pays the VAT amount during the month of Shrawan, M/s Thamel
Beverage will be eligible to obtain credit of that VAT paid amount while filing the VAT return of
Shrawan 2079. As such, the answer of the examinee varies as per their assumption. Assuming the reverse
VAT on safety audit of factory is not paid during Shrawan 2079, the payable reverse VAT becomes Rs.
130,000 and VAT credit can be claimed after Shrawan 2079 within one year of purchase of service.
Calculation of payable or receivable VAT
VAT collected on Sales 3,900,000
Less: VAT credit for purchases during the month 6,147,862
Less: VAT credit for purchases made during last twelve month, 243,750
where the credit was not claimed
Less: Opening VAT Receivable 1,000,000
VAT receivable 3,491,612
5.
a) XYZ Industries Pvt. Ltd. produces tobacco products for which the raw materials
and packing materials are imported from India. Excise duty is paid on the same at
the time of imports. The company value adds 20% on the raw material to make the
final product and export to India and other third countries. Answer the following
with reference to Excise Act and Rules: 7
i) Will excise duty paid on the import of raw material and packing materials be
allowed to claim for credit or refund?
ii) Will the answer be same if the custom duty on such raw materials is not levied?
iii) Can the excise duty paid on import of raw materials in the month of Shrawan
2078 be claimed in the month of Ashwin 2079?
iv) Can the excise duty on raw materials be claimed for refund if the value addition
is 10% only?
35
b) What is the fine and penalty under Excise Act in case of following offense by a
person? 7
i) Excess stock that those recorded in books.
ii) Produced excisable wine without obtaining approval of brand name.
iii) Producing excisable goods without obtaining license.
iv) Using duplicate excise sticker used in production and removal of tobacco
products.
v) Not maintaining safe records for the required period of 6 years.
vi) Person other than hotel, restaurant and party palace doing business of alcohol
and tobacco mixing with other business.
vii) Obstructing the review by Inland Revenue Department and its officers.
c) Shalimar industries is a manufacturing industry whose 70% product is exported to

India. It imports raw materials against letter of credit. It has not obtained license for
bonded warehouse so far and seeks your advice for obtaining bonded warehouse
facility. Define bonded warehouse and with appropriate reference to the Custom
Act and Regulations, advice Shalimar industries about the procedures and benefits
of bonded warehouse facility. Shalimar industries is in process of signing contract
with their importer in India for a contract production under which Indian importer
shall supply necessary raw materials and Shalimar industries will make the
production according to the requirement of the importer and the importer has
guaranteed the buyback. Also advice about the related provisions of import of
goods under such buy back guarantee contract. 6
Answer 5 (a)
(i) In case of industry under physical control system and industries producing tobacco related
products, the input excise credit on raw materials can be claimed on the basis of consumption of
such raw materials to produce the excise-attractive goods (Sec. 3Ka (3)). As such, the excise paid
on raw materials is claimed as credit at the time when those raw materials are consumed to
produce the excise attractive finished goods.
As per Sec. 3Kha (5), in case of export of excise attractive finished goods, the amount of excise
duty paid on consumption of raw materials used for production of exported finished goods that
cannot be set off against the payable excise duty on issuance of goods, such excess input excise
credit can be refunded.
However, excise credit is not available on other than raw materials, which means, not available
for packing materials.
(ii) As per Sec. 3Ka (5) of Excise Act, 2058, the input excise credit cannot be available if there is no
import duty on import of raw materials.
(iii) As explained in (i) above, the input excise credit is availed on tobacco related products on the
basis of consumption raw materials to manufacture finished goods. As such, there is no periodic
restriction to claim the credit. If the manufactured goods were issued from factory unit in Ashwin
2079, excise credit must be claimed at the time of issuance of goods from factory unit.
(iv) As per Sec. 3Ka (7), the minimum value addition for refund of excess excise duty is 15%, as such,
refund cannot be claimed in case the value addition is 10%.
Answer 5 (b)
Excise officer may ask to record such excess stock and 100% of the market value of such stock may be
levied as fine. Section 16 (4) (Dha)
(i) Confiscation of goods and 200% of the value of such goods (including Excise duty that would
have been applicable for such products) or Rs. 1 lakh whichever is higher as fine or imprisonment
for 1 year or both may be imposed by the Excise Officer. Section 16 (2) (Ga) & Section 16 (3)
(ii) Confiscation of goods and 100% of the value of such goods as fine or imprisonment for 1 year or
both may be imposed by the Excise Officer. Section 16 (1) (Kha)
36
(iii) Confiscation of goods and 100% of the value of such goods (including Excise duty that would
have been applicable for such products) as fine or imprisonment for 1 year or both may be
imposed by the Excise Officer. Section 16 (1) (Nga) & Section 16 (3)
(iv) Fine of Rs. 10,000 may be imposed by the Excise Officer. Section 16(4)(Cha)
(v) Fine of Rs. 10,000 for the first time and Rs. 20,000 for each subsequent violation may be imposed.
Section 16(4)(Da)
(vi) Fine of Rs. 5,000 for each instance of obstruction may be imposed. Section 16(4) (Chha)
Answer 5 (c)
Definition of Bonded warehouse
As per Sec. 2(n), ‘Bonded warehouse’ means the warehouse approved by Department of Customs to
store goods [i.e., raw materials, and auxiliary raw materials (including packing materials not produced
in Nepal)] imported under bank guarantee facility where such imported goods are to be consumed to
produce goods to be exported or to be sold in convertible foreign currency in Nepal.
Procedures and benefits of bonded warehouse facility
The following industries can use bonded warehouse facility, as per Rule 9 of Customs Regulation, 2065,
to import raw materials, auxiliary raw materials and packing materials (not produced in Nepal on
recommendation of Department of Industry):
(i) Industry exporting readymade garment or any of its product to third country,
(ii) Industries exporting:
• Readymade garment to India, or
• In case of other than readymade garment, at least twenty percent of its total production or
more than one crore in value to India,
(iii) Duty free shop importing goods Person who is importing goods to sale through the government
licensed duty-free shop.
For an existing industry to enjoy facilities of bonded warehouse, it has to submit proof of meeting any
of the conditions described above. For a new industry that has not surpassed its one year of operation,
as per Proviso of Rule 9 (2), the industry shall provide a commitment letter (bond) that it shall fulfill the
condition along with export plan.
Since M/s Shalimar Industries has exported 70% of its production to India, it is eligible to apply for the
license of bonded warehouse.
The benefits of bonded warehouse facility
The industries with license to operate bonded warehouse can import following goods that shall be
consumed in production of goods to be exported or to be sold in Nepal in convertible foreign currency
by producing bank guarantee equivalent to 115% of duty applicable plus agriculture reform fee, if any:
(i) Raw Materials,
(ii) Auxiliary raw materials, and
(iii) On recommendation of Department of Industries, packing materials that are not produced in
Nepal
Import of raw materials under buy back arrangement (Rule 10 (6) and (7))
In this arrangement, an industry with license to operate bonded warehouse do the following
(i) Imports raw materials and auxiliary raw materials (Including packing materials that are not
produced in Nepal on recommendation of Department of Industries) that shall be consumed in
production of goods without any payment of any price
(ii) During the import, there will be no outflow of cash to the supplier of such raw materials and
auxiliary raw materials (Including packing materials that are not produced in Nepal on
recommendation of Department of Industries) and there will not be any letter of credit
(iii) There is a buy back agreement and recommendation of Department of Commerce to import raw
materials and auxiliary raw materials (Including packing materials that are not produced in Nepal
on recommendation of Department of Industries)
(iv) The produced goods are exported to same supplier of such raw Materials, and auxiliary raw
materials (Including packing materials that are not produced in Nepal on recommendation of
Department of Industries) or in case supplied to another buyer, the supply will be authenticated
by the recommendation of Department of Commerce after receiving the cost during
manufacturing process and profit only
37
(v) The importer produces the following documents in front of concerned Customs Office to import
the goods along with Pragyapan patra:
(vi) Recommendation from Department of Commerce in the name of Customs office to import goods
without letter of credit as per the terms and conditions prescribed by the Department,
(vii) Agreement with the foreign buyer
(viii) Invoice without any price but where the amount is disclosed only for the purpose of customs
Shalimar industry can import goods by producing bank guarantee equal to 100% of import duty
applicable on the import of the goods. The industry shall add minimum value as prescribed by
Department of Commerce on export of goods.
The goods manufactured from the consumption of raw materials and auxiliary raw materials (including
packing materials) imported under bank guarantee facility shall be exported within eleven months from
the date of import unless the industry submits an application for extension of deadline along with reason
for the failure to export or sell. In case such an application for extension of deadline is received (Rule
13) and the reason is found to be genuine, the Chief of concerned Customs office may extend the
deadline by another six months.
6.
a) Miss Poonam Awale is a professor at Agriculture & Forestry University, Nepal and
was a resident of Nepal during income year 2077/78. On Ashwin 1, 2078, she went
to Beijing under an assignment for carrying out specific forest research work in
Shangai University. For her outstanding work, Shangai University paid
remuneration of Chinese Yuan 200,000 for the period Ashwin 1, 2078 to Ashadh
31, 2079. Discuss the tax liability of Miss Poonam with consideration to the
agreement between Nepal and China for avoidance of double taxation and
prevention of fiscal evasion with respect to taxes on income. You need not to
calculate the tax payable. 5
b) Write short note on Agency PE, Service PE and Construction PE. 5
Answer 6 (a)
As per Article 20 of the agreement between Nepal and China for Avoidance of Double Taxation and
Prevention of Fiscal Evasion with respect to taxes on income, a professor or teacher who is or was a
resident of one of the contracting states immediately before visiting the other contracting state for the
purpose of teaching or engaging in research, or both, at a university, college, school or other approved
institution in that other contracting state shall be exempt from tax in that other state on any remuneration
for such teaching or research for period not exceeding two years from the date of his arrival in that other
state.
This provision applies to Miss Poonam because she was resident in Nepal during FY 2077/78 and her
stay in China has not exceeded two years. Therefore, remuneration of Chinese Yuan 200,000 received
by Miss Poonam during income year 2078/79 is exempt from tax in China. However, the income is
taxable in Nepal, as he has been in Nepal for a continuous period of 183 days before departure to Beijing.
Answer 6 (b)
Agency PE:
There are two types of agents (a) Independent Agent, and (b) Depended Agent.
Independent agent is an agent who takes independent decision in the normal course of business than the
principal who appoints them, whereas, Dependent Agent takes decision in consultation with the
principal who appoints them.
The place of business of dependent agent is considered as a place of business of principal, as such, it is
considered PE of principal.
Service PE
The rendering of service in Nepal by a person through employee or otherwise for more than 90 days in
any twelve months period is treated as service PE.
38
For a service PE of a non-resident, there must be physical presence of their representative in Nepal.
However, the rendering of service for more than 90 days shall not be necessarily continuous.
Construction PE
The construction, establishment or installation work or allied services for such work is treated as
construction PE in case the work is carried out in Nepal for 90 days or more. These types of work shall
be done continuously in Nepal for more than 90 days for such work to be treated as PE of non-resident.
39
Paper 7: Advanced Cost and Management Accounting

Marks
Attempt all questions. Working notes should form part of the answer.
Make assumptions wherever necessary.
1. A multiproduct company produces four types of products A, B, C and D which are sold
@ Rs. 250, Rs. 300, Rs. 350 and Rs. 400 per unit respectively. It uses identical material
and labor for its all products. Each product is produced in its own division i.e. A
division, B division, C division and D division. Revenue and cost for the last year was
as follows: (6+4+4+3+3=20)
Products A B C D
Sales 2,500,000 2,400,000 1,750,000 800,000
Less: Cost of goods sold
Direct material @ Rs. 30 per k.g. 900,000 960,000 750,000 300,000
Direct labor @ Rs. 20 per hour 800,000 480,000 400,000 80,000
Manufacturing Overheads 900,000 720,000 550,000 200,000
Profit Margin (100,000) 240,000 50,000 220,000
Total fixed manufacturing overheads of the company is Rs. 1,490,000. The company
is following the policy of allocating fixed manufacturing overhead to product division
based on sales value of each product division. Consumption of material and labor
resources per unit varies with the types of product it produces.
i) The loss produced by the product A division has got the Managing Director of the
company into dilemma of whether continue the product A or not and requires
your advice. Should the company discontinue the product A? Why? Measure the
impact of discontinuation of product A on profitability of the company.
ii) Sales of each product can be increased by 40% next year but raw material
available is only 111,000 kg. What shall be the strategy of the company to
optimize profit? Compute the amount of optimum profit.
iii) If present unit sales mix ratio is fixed and continued, what shall be the sales units
of each product to get company into break even?
iv) There was 300 working days of single shift of 8 hours each day last year. Half an
hour is allowed for lunch and 2 rests of 15 minutes each every day. One hour is
spent each day for production set up and maintenance. Considering the
increased product demand and material resource constraints in (ii) above,
compute the no. of human resource required if 300 working days is available for
estimation period also.
v) What shall be the sales unit of each product if the company plans to earn a profit
of Rs. 563,500 after tax. Corporate income tax rate is 30% and there is no resources
constraints and present sales unit mix ratio continues.
Answer
1) Allocation of fixed manufacturing overhead to products A, B, C and D in the ratio of
sales value for last year
Ratio of sales value: A:B:C:D=250:240:175:80
Total ratio:250+240+175+80=745
40
Total fixed Manufacturing cost= Rs. 1,490,000

Fixed manufacturing overhead allocated to-
Product A=250/745x1,490,000=Rs. 500,000
Product B=240/745x1,490,000=Rs. 480,000
Product C=175/745x1,490,000=Rs. 350,000
Product D=80/745x 1,490,000=Rs. 160.000
Total Rs. 1,490,000
Analysis for cost per unit of output for last year:
Analysis for sale
Products A B C D
Sales (Rs.) 2,500,000 2,400,000 1,750,000 800,000
Selling Price per unit 250 300 350 400
No. of units sold 10,000 8,000 5,000 2,000
Analysis for raw material cost
Products A B C D
No. of units sold 10,000 8,000 5,000 2,000
Direct material @ Rs. 30
900,000 960,000 750,000 300,000
per k.g.
Direct material used (in kg) 30,000 32,000 25,000 10,000
Direct material per unit of
3 4 5 5
output
Direct material cost per
unit of output (@ Rs. 30 per 90 120 150 150
kg)
Analysis for direct labor cost
Products A B C D
No. of units sold 10,000 8,000 5,000 2,000
Direct labor @ Rs. 20 per hour 800,000 480,000 400,000 80,000
Direct Labor hours used 40,000 24,000 20,000 4,000
Direct labor hour per unit of
4 3 4 2
output
Direct labor cost per unit of
80 60 80 40
output (@ Rs. 20 per hour)
Analysis for variable overhead cost
Products A B C D
No. of units sold 10,000 8,000 5,000 2,000
Direct Labor hours used 40,000 24,000 20,000 4,000
Direct labor hour per unit of output 4 3 4 2
Total Manufacturing Overheads 900,000 720,000 550,000 200,000
Allocated Fixed Manufacturing overhead 500,000 480,000 350,000 160,000
Variable manufacturing overhead 400,000 240,000 200,000 40,000
Variable manufacturing overhead per
10 10 10 10
direct labor hour
Variable manufacturing overhead cost
40 30 40 20
per unit of output
41
Analysis of contribution margin per unit of output

Products A B C D
Selling Price per unit 250 300 350 400
Less: variable cost per unit of output
Direct material cost 90 120 150 150
Direct Labor cost 80 60 80 40
Variable manufacturing overhead 40 30 40 20
Total Variable cost 210 210 270 210
Contribution margin per unit of output 40 90 80 90
i) From analysis of the contribution margin per unit of product above, it is
observed that product A is producing Rs. 40 contribution margin per unit. So,
last year it produced Rs. 400,000 contribution margin (i.e. 10,000xRs.40). The
loss was due to allocation of fixed overhead to the division. Any product
producing positive contribution margin if discontinued reduces profit by the
contribution lost due to discontinuation. So, product A should not be
discontinued. If discontinued, total profit will be reduced by Rs. 400,000 i. e.
by the amount of contribution margin lost.
ii) Since the raw material availability is the limiting factor (key factor), we have
to take the strategy of allocating limiting resources to those products yielding
highest contribution margin per unit of limiting resources i. e. raw material.
So, analysis will be as follows:
Products A B C D
Expected demand of product 14,000 11,200 7,000 2,800
Contribution margin per unit of output 40 90 80 190
Raw material Requirement per unit (in kg) 3 4 5 5
Contribution margin per kg of raw materials 13.33 22.50 16.00 38.00
Ranking by highest contribution IV II III I
Above analysis suggests that raw material resources are to be allocate to Product
B first, then to D, then to C and balance to A as follows:
Balance material
Allocation of Raw materials (k.g.)
Total raw materials available 111,000
Raw material Allocation to B (11,200 units x 4 kg per unit) 44,800 66,200
Raw material Allocation to D (2,800 units x 5 kg per unit) 14,000 52,200
Raw material Allocation to C (7000 units x 5 kg per unit) 35,000 17,200
Raw material Allocation to A (5,733.33 units x 3 kg per unit) 17,200 -
Maximum profit (contribution earned will be as follows:
Products A B C D Total
Proposed sale of product
(units) 5,733.33 11,200 7,000 2,800
Contribution margin per unit 40 90 80 190
Less: fixed cost 1490000
Profit 559333
Total contribution margin 229,333 1,008,000 560,000 532,000 2,329,333
42
iii) If present unit sales mix ratio is to continued, break-even point unit sales will be as
follows:
Product A B C D Total
No. of units sold 10,000 8,000 5,000 2,000
Unit Sales Ratio (let it be called one package sales) 10 8 5 2
Contribution margin per unit 40 90 80 190
Total contribution margin per package sales 400 720 400 380 1,900
Total fixed cost 1,490,000
No. of package to be sold for break-even= Total Fixed cost/contribution margin
per package
=1,490,000/1,900
= 784.21
No. of units of each product to be sold for Break Even is computed as below:
No. of Units of product per Total units to be
Product package package sold
A 784.21 10 7,842.1
B 784.21 8 6,273.68
C 784.21 5 3,921.05
D 784.21 2 1,568.42
iv) Net productive hours per worker per annum

Hours Hours
Daily hours of shift 8
Less: Normal Allowances
Allowance for lunch 0.5
Allowance for rest (2 rests of 15 minutes each) 0.5
Production set up and maintenance 1.0 2
Net Productive hours per day 6
No. of working days in a year 300
Net Productive hours per worker per year 1,800
Total direct labor hour required will be as follows for optimal product mix:
Products A B C D Total
Proposed sale of product (units) 5,733.33 11,200 7,000 2,800
Direct labor hour per unit of output 4 3 4 2
Total Direct labor hour required 22,933 33,600 28,000 5,600 90,133
Total no. of worker required for the production=Total hours required/productive
hours per worker per annum
=90,133/1,800
= 50.07
= 50 worker
v) Total contribution margin required =Fixed cost+ desired profit before tax
=1,490,000+563,500/(1-.3)
=1,490,000+805,000
=2,295,000
No. of package to be sold = Required contribution/contribution margin per package
43
= 2,295,000/1700
=1,350 package
No. of units to be sold to earn desired profit:
Units of product per Total units to be
Product No. of package
package sold
A 1207.89 10 12078.9
B 1207.89 8 9663.12
C 1207.89 5 6039.4
D 1207.89 2 2415.78
Verification: (student need not show verification)
total
Product Total units Contribution margin per unit contribution
A 13,500.00 40 540,000.00
B 10,800.00 90 972,000.00
C 6,750.00 80 540,000.00
D 2,700.00 90 243,000.00
Total 2,295,000.00
2.
a) Apex and B-Tex Associates undertake to prepare income tax returns
for individuals for a fee. Their advice to their clients is to pay the proper
tax and relax. In order to arrive at the proper scale of fees and assess
their own performance, they have a good system. They use the
weighted average method and actual costs for financial reporting
purposes. However, for internal reporting, they use a standard cost
system. The standard, based on equivalent performance, have been
established as follows:
Labour per return 5 hours @ R 40 per hour
Overhead per return 5 hours @ Rs. 20 per hour
For March 2022 performance, budgeted overhead is Rs. 98,000 for the
standard labour hours allowed. The following additional information
pertains to the month of March 2022:
March 1 Returns in process (25% complete) 200 Nos.
Return started in March 825 Nos.
March 31 Returns in Process (80% complete) 125 Nos.
Cost Data
March 1 Returns in process
Labour Rs. 12,000
Overhead Rs. 5,000
March 1 to 31 Labour 4,000 hours Rs. 178,000
Overheads Rs. 90,000
You are required to compute: 10
i. For each cost element, equivalent units of performance and the
actual cost per equivalent unit.
ii. Actual cost of returns in process on March 31
iii. The standard cost per return
44
iv. The total labour, labour rate and labour efficiency variance as
well as total overhead, overhead volume and overhead budget
variance.
b) V. Ltd. produces two products ‘P’ and ‘Q’. The draft budget for the
next month is as under:
Products P Q
Budgeted Production and sales (units) 40,000 80,000
Selling price (Rs. Per unit) 25 50
Total costs (Rs. Per unit) 20 40
Machine (hours per unit) 2 1
Maximum sales potential (units) 60,000 100,000
The fixed expenses are estimated at Rs. 960,000 per month. The
company absorbs fixed overheads on the basis of machine hours
which are fully utilized by the budgeted production and cannot be
further increased.
When the budget was discussed, the Managing Director stated that
the production mix should be altered to yield optimum profit.
The marketing Director suggested that he could introduce a new
product ‘C’, each unit of which will take 1.5 machine hours. However,
a processing container involving a capital outlay of Rs. 200,000 is to be
installed for processing product ‘C’. The additional fixed overheads
relating to the processing container was estimated at Rs. 60,000 per
month. The variable cost of product ‘C’ was estimated at Rs. 21 per
unit.
Required: 10
i. Calculate the profit as per draft budget for the next month.
ii. Revise the product mix based on data given for ‘P’ and ‘Q’ to yield
optimum profit.
iii. The company decides to discontinue either product ‘P’ or ‘Q’
whichever is giving lower profit and proposes to substitute
product ‘C’ instead. Fix the selling price of product ‘C’ in such a way
as to yield 15% return on additional capital employed besides
maintaining the same overall profit as envisaged in (ii) above
Answer
2 a) Apex and B-Tex Associates
i. Computation of each cost element, equivalent units of performance and the
actual cost per equivalent unit:
Labour Overhead
Returns Completed (200 + 825-125) 900 900
Returns in process (125 X 80%) 100 100
Equivalent Units of performance 1,000 1,000
45
Actual Cost Rs. Rs.

Cost of Returns in Process on March 1 12,000 5,000
Add: Labour 178,000 90,000
Total cost 190,000 95,000
Actual cost per equivalent unit:
Labour (Rs. 190,000/1,000) 190 -
Overhead (Rs. 95,000/1000 - 95
ii. Actual cost of returns in process on March 31

Labour (125 x 80% x Rs. 190) Rs. 19,000
Overheads (125 x 80% x Rs. 95) Rs. 9,500
Total Rs. 28,500
iii. Standard cost per retrun:
Labour (5 Hrs x Rs. 40) Rs. 200
Overheads (5 Hrs x Rs. 20) Rs.100
Total Rs. 300
iv. Computation of variances:
Labour Variances:
A. Total Labour Variance = Standard Labour cost – Actual Labour cost
= (950 x Rs. 200) – Rs. 178,000
= Rs. 12,000 (Favourable)
B. Labour Rate variance = Actual Hours x (Standard Rate – Actual Rate)

= 4,000 (Rs. 40 – Rs. 44.50)
= Rs. 18,000 (Adverse)
C. Labour efficiency variance = Standard Rate x (Standard Hours – Actual

Hours)
= Rs. 40 x (950 x 5 – 4,000)
Overhead Variances
A. Total overhead variance = Standard overheads – Actual overheads
= 950 x Rs. 100 – Rs. 90,000
B. Overhead volume variance = Std. overhead rate x (Budgeted volume –

actual
volume)
= Rs. 100 x (980 – 950)
= Rs. 3,000 (Adverse)
C. Overhead Budget Variance = Budgeted Overhead – Actual Overhead

= Rs. 98,000 – Rs. 90,000
Working Notes:
46
WN1. Actual Performance in March

Labour Overhead
Equivalent units as per (a) 1,000 1,000
Less: Equivalent units of returns in process at beginning
50 50
(200 x 25%)
Total equivalent unit for March performance 950 950
WN2. Budgeted volume for March = Rs. 98,000/Rs. 100 = 980 Returns
WN3. Actual Labour Hour Rate = Rs. 178,000/4,000 = Rs. 44.50
Alternative
Units comp
Opening WIP (200×75%) 150
Introduction 700
Closing WIP (125×80%) 100
950
2 b)
V. Ltd.
i. Profit as per draft budget for the next month
Products P Q
Budgeted production and sales (units) 40,000 80,000
Per unit Per unit
Rs. Total Rs. Total
Sales 25 1,000,000 50 4,000,000
Total costs 20 800,000 40 3,200,000
Profit 200,000 800,000
Total Profit for the month = Rs. 200,000 + Rs. 800,000 = Rs. 1,000,000
ii. Revised product mix to yield optimum profit
The product Q has higher contribution per machine hour. Since machine hour is a
limiting factor here, therefore, maximum units of product Q should be produced.
However it’s maximum sales potentially is of 100,000 units. It will take 100,000
machine hours. Balance 60,000 hours will produce 30,000 units of P.
Hence, revised product mix to yield optimum profit is as follows:
Rs.
Product Q: 100,000 units x Rs. 16 1,600,000
Product P: 30,000 units x Rs. 17 510,000
Total Contribution 2,110,000
Less: Fixed expenses 960,000
Profit 1,150,000
iii.
Since product P gives lower contribution per machine hour, it will be discontinued
and substituted by product C. The discontinuance of product P will make 60,000
machine hours available to produce 40,000 units of product C. The following
statement shows the computation of selling price of product C based on monthly
data:
Rs.
47
Variable cost (40,000 x Rs. 21) 840,000

Additional fixed cost of container per month 60,000
900,000
Return on capital (on Rs. 200,000 @ 15% per annum)
= Rs. 30,000 So, Monthly Return on capital = Rs. 30,000/12 = 2,500
Existing contribution from Product P 510,000
Total Sales value to be recovered 1,412,500
Selling price per unit = Rs. 1,412,500/ 40,000 units = Rs. 35.3125
Working Notes:
WN1. Machine hours used by P = 40,000x 2 = 80,000 hours
Machine hours used by Q = 80,000 x 1 = 80,000 hours
Total Machine hours 160,000 hours
WN2. Fixed overhead rate per machine hour = Rs. 960,000/ 160,000 hours
= Rs. 6 per hour
WN3. Fixed overhead per unit:
P: 2 x Rs. 6 = Rs. 12
Q: 1x Rs. 6 = Rs. 6
WN4. Contribution per unit= Fixed cost + profit
P: Rs. 12 + Rs. 5 = Rs. 17
Q: Rs. 6 + Rs. 10 = Rs. 16
WN5. Product wise contribution per machine hour:
P: Rs. 17/ 2 = Rs. 8.50
Q: Rs. 16 / 1 = Rs. 16
3.
a) A mutual fund is deciding how to divide its investments among bonds,
preferred stocks and speculative stocks. It does not want to exceed a
combined risk rate of 3, when the bonds have been assigned a risk rate
of 1, the preferred stocks, 3, and the speculative stocks, 5. However the
fund does want a total annual yield of at least 10 percent. The interest
rate of the bond is 8 percent, of the preferred stocks is 12 percent and
of the speculative stocks is 20 percent.
Required: How should the investment be distributed for the greatest
annual yield? Formulate the Linear Programming Problem and solve
by simplex method. 10
48
b) The activities and time estimates of a small project is as below:

Activities Duration (Days)
Pessimistic Optimistic Most likely
A 20 4 12
B 24 8 22
C 8 4 6
D 12 4 8
E 18 6 12
F 24 8 16
G 10 2 6
Activities A and B start at the beginning of the project. When A is
completed, C and D start. E can start when B and D are finished. F can
start when B, C and D are completed. G can start when F is finished
and is the final activity.
Required:
(5+3.5+1.5=10)
i. Find out the expected time duration and the critical path of the project.
ii. What is the probability of completing the project 2 days earlier?
iii. Describe, in short, three major differences of CPM and PERT.
Answer
3 a) Let X1, X2 and X3 be the required fraction of amount to be invested in Bond,
Preferred Stock and speculative stock portfolio respectively.
The LPP will be:
Max Z = 0.08X1 + 0.12X2 + 0.20X3
Subject to;
X1 + X2 + X3 = 1 (i.e. sum of total fraction of amount be 1)
X1 + 3X2 + 5X3 ≤ 3 (i.e. combined risk rate cannot exceed 3)
where,
X 1, X 2, X 3 ≥ 0
Introducing slack and artificial variables and converting to standard LPP:
Max Z = 0.08X1 + 0.12X2 + 0.20X3 + 0S – MA
Subject to;
X1 + X2 + X3 + A = 1
X1 + 3X2 + 5X3 + S = 3
where,
X1, X2, X3, X4, S, and A are non-negative.
Converting into standard LPP:
Row 0 (R0): Z - 0.08X1 - 0.12X2 - 0.20X3 - 0S + MA = 0
Row 1 (R1): 0Z + X1 + X2 + X3 + 0S + A = 1
Row 2 (R2): 0Z + X1 + 3X2 + 5X3 + S + 0A = 3
Fitting in Simplex Table
Simplex Table 1
Table 1 Z X1 X2 X3 S A Constant Ratio
R0 1 -0.08 -0.12 -0.20 0 M 0 -
49
R1 0 1 1 1 0 1 1 1/1 =
1
R2 0 1 3 5 1 0 3 3/5
Key column is X3 with highest negative value (-0.20) in R0.
Ratio for each row is derived by dividing the constant of each row with the
value of key column, except for R0.
Key row is R2 with minimum ratio of 3/5.
Key element is 5; i.e. the value at the intersection of key column and key row.
Replacing value for key row (R2) is to be calculated by dividing the value of
key row for Table I by key element:
New R2: 0/5, 1/5, 3/5, 5/5, 1/5, 0/5, 3/5
: 0, 1/5, 3/5, 1, 1/5, 0, 3/5
Replacing value for other remaining row is calculated using the following
formula:
Replacing value = Element of old row – (intersecting element of old row with
key column x corresponding element of replacing row)
Now,
Replacing value for R0
Old R0 1 -0.08 -0.12 -0.20 0 M 0
Intersecting element -0.20 -0.20 -0.20 -0.20 -0.20 -0.20 -0.20
Element of replacing row 0 1/5 3/5 1 1/5 0 3/5
New R0 1 -0.08 0 0 0.04 M 0.12
Old R1 0 1 1 1 0 1 1
Intersecting element 1 1 1 1 1 1 1
Element of replacing row 0 1/5 3/5 1 1/5 0 3/5
New R1 0 4/5 2/5 0 -1/5 1 2/5
Simplex Table 2
Table 2 Z X1 X2 X3 S A Constant Ratio
R0 1 -0.08 0 0 0.04 M 0.12 -
R1 0 4/5 2/5 0 -1/5 1 2/5 1/2
R2 0 1/5 3/5 1 1/5 0 3/5 3
Replacing value for key row (R1):
New R1: 0, 1, 1/2, 0, -1/4, 5/4, 1/2
Now,
Old R0 1 -0.08 0 0 0.04 M 0.12
Intersecting element -0.08 -0.08 -0.08 -0.08 -0.08 -0.08 -0.08
Element of replacing row 0 1 1/2 0 -1/4 5/4 1/2
New R0 1 0 0.04 0 0.02 M+0.1 0.08
Old R2 0 1/5 3/5 1 1/5 0 3/5
Intersecting element 1/5 1/5 1/5 1/5 1/5 1/5 1/5
Element of replacing row 0 1 1/2 0 -1/4 5/4 1/2
50
New R2 0 0 1/2 1 1/4 -1/4 1/2

Simplex Table 3
Table 3 Z X1 X2 X3 S A Constant
R0 1 0 0.04 0 0.02 M+0.1 0.08
R1 0 1 1/2 0 -1/4 5/4 1/2
R2 0 0 1/2 1 1/4 -1/4 1/2
Since all the values of R0 is, now, ≥ 0, the optimal solution is reached.
Basic solution:
1 0 0 Z 0.08
0 1 0 X1 = 1/2
0 0 1 X3 1/2
Therefore, investment should be 1/2 in Bond (X1) and 1/2 in Speculative Stock
(X3), which will give maximum return of 14 percent i.e. (0.08 x 1/2 + 0.20 x1/2
= 0.14).
3 b)
i) Tabulation and calculation of expected time of completing activities, standard
deviation and variance
Activities Predecessor Duration (Days) Expected SD (σ) Var (σ2)
event TP TO TM Time (TE)
A - 20 4 12 12 2.67 7.13
B - 24 8 22 20 2.67 7.13
C A 8 4 6 6 0.67 0.45
D A 12 4 8 8 1.33 1.77
E B, D 18 6 12 12 2 4
F B, C, D 24 8 16 16 2.67 7.13
G F 10 2 6 6 1.33 1.77
TE = (TP + 4TM + TO)/ 6
σ = (TP - TO)/ 6
Network diagram
C F
2 6 4 16 5
A 12 D 6 G
8
B E
1 20 3 12 6
There are two critical paths:

A-D-F-G = 12+8+16+6 = 42
B-F-G = 20+16+6 = 42
51
ii) Calculation of probability of completing the project 2 days earlier, i.e. in 40 days
Variance about target = Target completion time – Expected project completion time
= 40 – 42 = -2
Project SD as per critical path 1: A-D-F-G (σp1) =
√Σ(all individual critical path activity variance)
= √Σ(7.13+1.77+7.13+1.77)
= 4.22
Standardized mean difference (Z) = Variance about target/ Project SD
= -2 / 4.22 = -0.47
Project SD as per critical path 2: B-F-G (σp2) = √Σ(7.13+7.13+1.77)
= 4.004
Standardized mean difference (Z) = Variance about target/ Project SD
= -2 / 4.004 = -0.50
Since Z is negative in both cases, the probability will be less than 50%
From normal distribution curve area table, the number -0.47 lies near 0.3192
and the number -0.50 lies near 0.3085.
Therefore, the required probability = 0.3192 = 31.92%, or
= 0.3085 = 30.85%
Average probability = (0.3192 + 0.3085)/2 = 0.3139 = 31.39%
iii) Major three differences of CPM and PERT are:
a) In CPM, network is constructed on the basis of jobs or activities (activity
oriented), where as, in PERT, network is constructed basing on the events
(event oriented)
b) CPM does not take uncertainties involved in the estimation of times. The
time required is deterministic and hence only one time is considered. PERT
network deals with uncertainties and hence three time estimations are
considered (Optimistic Time, Most Likely Time and Pessimistic Time).
c) CPM times are related to cost because by decreasing the activity duration
direct costs increases (crashing of activity duration is possible). As there is
no certainty of time in PERT, activity duration cannot be reduced. Hence
cost cannot be expressed correctly. We can say that expected cost of
completion of activity (crashing of activity duration) is not possible.
4.
a) Computo Ltd. manufactures two parts ’P’ and ‘Q’ for computer
industry.
P: Annual production and sales of 1,00,000 units at a selling price
of Rs. 100.05 per unit.
Q: Annual production and sales of 50,000 units at a selling price
of Rs. 150 per unit.
Direct and indirect costs incurred on these two parts are as follows:
(Rs. in thousand)
P Q Total
Direct material cost (Variable) 4,200 3,000 7,200
Labour cost (Variable) 1,500 1,000 2,500
700 550 1,250
52
Direct machining cost (see

note)* 462
Indirect costs: 2,375
Machine setup cost 2,250_______
Testing cost 16,037______
Engineering
Note: Direct machining costs represent the cost of machine capacity
dedicated to the production of each product. These costs are fixed and
are not expected to vary over the long-run horizon.
Additional information is as follows:
P Q
Production batch size 1,000 units 500 units
Set up time per batch 30 hours 36 hours
Testing time per unit 5 hours 9 hours
Engineering cost incurred on each 8.40 lakhs 14.10 lakhs
product
A foreign competitor has introduced product very similar to ’P’. To
maintain the company’s share and profit, Computo Ltd. has to reduce
the price to Rs. 86.25. The company calls for a meeting and comes up
with a proposal to change the design of product ‘P’. The expected effect
of new design is as follows:
• Direct material cost is expected to decrease by Rs. 5 per unit.
• Labour cost is expected to decrease by Rs. 2 per unit.
• Machine time is expected to decrease by 15 minutes;
previously it took 3 hrs to produce 1 unit of ‘P’. The machine
will be dedicated to the production of new design.
• Set up time will be 28 hrs for each set up.
• Time required for testing each unit will be reduced by 1 hour.
• Engineering cost and batch size will be unchanged.
Required: 8
i. Company management identifies that cost driver for machine setup
costs is ‘set up hours used in batch setting’ and for testing costs is
‘testing time’. Engineering costs are assigned to products by special
study. Calculate the full cost per unit for ‘P’ and ‘Q’ using activity-
based costing.
ii.What is mark-up on full cost per unit of P?
iii. What is the target cost per unit for new design to maintain the same
mark up percentage on full cost per unit as it had earlier? Assume
cost per unit of cost drivers for the new design remains unchanged.
iv.Will the new design achieve the cost reduction target?
v. List four possible management actions that the Computo Ltd.
should take regarding new design.
b) X Ltd. has an annual turnover of Rs. 6,00,00,000 from a range of

products, material costs and conversion costs account for 30% and
25% of turnover, respectively. Other information relating to the
company is as follows:
(i) Stock values are currently at a constant level, being: 7
Raw materials stock: 10% of the material element of annual turnover.
53
(a) Work in progress: 15% of the material element of the annual

turnover together with a proportionate element of conversion
costs in annual turnover allowing for 60% completion of work
in progress as to conversion cost and 100% completion for
material. The ratio is constant for all products.
(b) Finished goods stock: 12% of the material element of annual
turnover together with a proportionate element of conversion
cost in annual turnover.
(ii) Holding and acquisition costs of materials comprise fixed costs
of Rs. 2,00,000 per annum plus variable costs of Rs. 0.10 per Rs.
of stock held.
(iii) Movement and control costs of work in progress comprise fixed
costs of Rs. 2,80,000 per annum plus variable costs of Rs. 0.05
per Rs. of material value of work-in- progress.
(iv) Holding and control costs of finished goods comprise fixed costs
of Rs. 3,60,000 per annum plus variable costs of Rs. 0.02 per Rs.
of finished goods (material cost + conversion cost).
(v) Financial charges due to the impact of stock holding on
working capital requirement are incurred at 20% per annum on
the value of stocks held.
X Ltd. is considering a number of changes due to following JIT policy,
which it is estimated will affect stock levels and costs as follows:
(a) Raw material stock: Negotiate delivery from suppliers on a just
in time basis. Stock levels will be reduced to 20% of the present
level. Fixed costs of holding and acquiring stock will be reduced
to 20% of the present level and variable costs to Rs. 0.07 per Rs.
of stock held.
(b) Work in progress: Convert the layout of the production area into
a dedicated cell format for each product type instead of the
existing system which comprises groups of similar machines to
which each product type must be taken. Work in progress
volume will be reduced to 20% of the present level with the
same stage completion as at present. Fixed costs of movement
and control will be reduced to 40% of the present level and
variable costs to Rs. 0.03 per Rs. of material value of work in
progress.
(c) Finished goods stock: Improved control of the flow of each
product type from the production area will enable stocks to be
reduced to 25% of the present level. Fixed costs of holding and
control will be reduced to 40% of the present level and variable
costs to Rs. 0.01 per Rs. of finished goods held. Evaluate the
proposal.
54
Answer
4 a) i)
Computation of full cost per unit using Activity based costing:
Particulars Basis P Q
Direct materials Direct 42,00,000 30,00,000
Direct labour Direct 15,00,000 10,00,000
Direct Machine cost Direct 7,00,000 5,50,000
Machine set up cost 3,000 hours@Rs. 70 2,10,000
3,600 hours@Rs.70 2,52,000
Testing Cost 5,00,000 hours@Rs.2.50 12,50,000
4,50,000 hours@Rs. 2.50 11,25,000
Engineering cost Allocated 8,40,000 14,10,000
Totals cost(Rs.) 87,00,000 73,37,000
Cost per unit(Rs.) 87.00 146.74
ii) Mark up on full cost basis for Product P:

Particulars Per unit(Rs.)
Selling price 100.05
Less: Full cost 87.00
Mark up 13.05
Percentage of mark up on full 15%
cost=13.05/87.00*100
iii) Target cost of product P after new design is implemented
Particulars Per unit(Rs.)
Target price(given) 86.25
Mark up(86.25*15/115) 11.25
Target cost per unit(Rs.) 75.00
(iv) Statement of cost for new design of P

Particulars Basis Cost per unit Total cost
Direct materials Decrease by Rs.5 p.u. 37.00 37,00,000
Direct labour Decrease by Rs. 2 p.u. 13.00 13,00,000
Direct Machine cost No changes as machine is
dedicated 7.00 7,00,000
Machine set up cost 100 set up * 28 hrs* Rs. 70 1.96 1,96,000
Testing Cost 1,00,000 units * Rs. 2.5*4 hrs 10.00 10,00,000
Engineering cost No change 8.40 8,40,000
Totals cost(Rs.) 77.36 77,36,000
The target cost is Rs. 75 per unit and estimated cost of new design is Rs 77.36 per
unit. The new design does not achieve the target cost set by Computo Ltd. Hence the
target mark up shall not be achieved.
(v) Possible management action
• Value engineering and value analysis to reduce the direct material costs.
• Time and motion study in order to redefine the direct labour time and
related costs.
• Exploring possibility of cost reduction in direct machining cost by using
appropriate techniques.
55
• Identification of non-value added activities and eliminating them in order to

reduce overheads.
• The expected selling price based on estimated cost of Rs. 77.36 per unit is (Rs.
77.36 + 15%) Rs. 88.96. Introduce sensitivity analysis after implementation of
new design to study the sales quantity changes in the price range of Rs. 86.25
to Rs.88.96.
Working Notes:
Particulars P Q
A. Production/ Sales quantity 1,00,000 50,000
B. Batch size (units) 1,000 500
C. No. of batches [A/B] 100 100
D. Set up time per batch (hours) 30 36
E. Total set up hours (C D) (hours) 3,000 3,600
F. Machine set up cost Rs. 4,62,000
G. Cost driver per machine set up hour
[4,62,000/6600] Rs. 70 Rs. 70
H. Testing time per unit 5 hrs 9 hrs
I. Total testing time [A H] 5,00,000 4,50,000
Cost driver per testing hour = Total testing cost/Total testing time
= 23,75,000/(5,00,000 + 4,50,000) = Rs. 2.50 per hour.
4 b)
Statement of Comparative cost
Particulars Present system (Rs) JIT system (Rs)
Opportunity cost (W.N.
2) 19,62,000 4,32,000
Storage cost:
Raw material:
Fixed 2,00,000 40,000
Variable (0.01 * 18,00,000) (0.07 * 3,60,000) 25,200
WIP: 1,80,000
Fixed 1,12,000
Variable 2,80,000 (5,40,000 * 0.03) 16,200
Finished goods: (0.05 * 27,00,000)
Fixed 1,35,000 1,44,000
Variable (0.01 * 9,90,000) 9,900
3,60,000
Total cost (39,60,000 * 0.02) 79,200 7,79,300
31,96,200
Decision: It is better to apply just in time approach due to cost saving.
Working notes:
1. Material = Rs. 600 lakh * 30% =180 Lakhs
Conversion cost = 600 lakh * 25% = Rs. 150 lakhs
2. Statement of capital blocked
Particulars Present (Rs) JIT (Rs)

Raw material (180 * 10%) 18 lakhs 3.6 lakhs
WIP:
56
Material (15% of 180 * 100%) 27 Lakhs 5.4 lakhs

Conversion (15% of 150 * 60%) 13.5 Lakhs 2.7 lakhs
Finished goods:
Material (12% of 180) 21.6 lakhs 5.4 lakhs
Conversion cost (12% of 150) 18 lakhs______ 4.5 lakhs_________________
Total average investment 98.10 lakhs_________ 21.6 lakhs________________
Opportunity cost (98.1 * 20%) 19. 62 lakhs (21.6 * 20 %) 4.32 lakhs
5. Write Short Notes: (5×3=15)

a) Advantages of Life Cycle Costing
b) Cost indifference point and breakeven point
c) Opportunity cost approach for transfer pricing
d) Lean Production
e) Imputed cost and Sunk cost
Answer
5
a) Advantages of Life Cycle Costing
The advantages of life cycle costing are summarized as follows:
• The product life cycle costing results in earlier actions to generate revenue
or to
lower costs than otherwise might be considered. There are a number of
factors that
need to be managed in order to maximize return on a product.
• Better decisions should follow from a more accurate and realistic
assessment of
revenues and costs, at least within a particular life cycle stage.
• Product life cycle thinking can promote long term rewarding in contrast to
short
term profitability rewarding.
• It provides an overall framework for considering total incremental costs
over the
entire life span of a product, which in turn facilitates analysis of parts of the
whole
where cost effectiveness might be improved.
b) Cost indifference point and breakeven point
Cost indifference point is the point where the total cost (fixed and variable) of
the two alternatives under consideration is the same. Suppose a company has
two methods available for producing goods. It may happen that one production
method is suitable up to a certain point whereas the second method is
beneficial beyond that point. The level of capacity where the choice shifts
from one production method to another is called cost indifference point and at
this point, total cost will be the same for both the alternatives.
The cost indifference point is found out by using the following formula:
Cost indifference point = Differential fixed cost
Differential variable cost per unit
57
Cost indifference point is therefore the point at which the cost lines under two
alternatives intersect each other. On the other hand, under break-even point,
total cost line and total revenue line for a particular alternative are equal (or
intersect each other). Thus, analysis of cost indifference point compares the
cost of two alternatives whereas break-even analysis compares total cost and
total revenue of a single product.
c) Opportunity cost approach for transfer pricing
The opportunity cost approach for transfer pricing identifies the minimum
price that a selling division would be willing to accept and the maximum price
that the buying division would be willing to pay. These minimum and
maximum prices correspond to the opportunity costs of transferring internally.
They are defined for each division as follows:
i. The minimum transfer price, or floor, is the transfer price that would leave
the selling division no worse off if the good is sold to an internal division.
ii. The maximum transfer price, or ceiling, is the transfer price that would
leave the buyingdivision no worse off if an input is purchased from an
internal division.
The opportunity cost rule signals when it is possible to increase firm-wide
profits through internal transfers. Specifically, goods should be transferred
internally whenever the opportunity cost (minimum price) of the selling
division is less than the opportunity cost (maximum price) of the buying
division. By its very definition, this approach ensures that the divisional
manager of either division is no worse off by transferring internally. This
means that total divisional profits are not decreased by the internal transfer.
d) Lean Production
Lean Production is a management approach that organizes resources such as
people and machines around the flow of business processes and that only
produces units in response to customer orders. It is often called just-in-time
production (or JIT) because products are only manufactured in response to
customer orders and they are completed just-in-time to be shipped to
customers. Lean thinking differs from traditional manufacturing methods,
which organize work departmentally and encourage those departments to
maximize their output even if it exceeds customer demand and increases
inventories. Because lean thinking only allows production in response to
customer orders, the number of units produced tends to equal the number of
units sold, thereby resulting in minimal inventory. The lean approach also
results in fewer defects, less wasted effort, and quicker customer response
times than traditional production methods.
58
e) Imputed cost and Sunk cost

The imputed cost is a cost, which does not involve actual cash outlay, and are
used only for the purpose of decision making and performance evaluation. It is
a hypothetical cost from the point of view of financial accounting. e.g., interest
on capital.
The sunk cost is that cost, which is already invested in a project and which will
not be recovered if the project is terminated. This cost is not affected by a
particular decision under consideration. This cost is always the result of the
decision taken in the past e,g. depreciation on plant and machinery.
6.
a) A car rental agency has collected the following data on the demand for
five-seater vehicles over the past 50 days. (3+1+1=5)
Daily Demand 4 5 6 7 8
No. of Days 4 10 16 14 6
The agency has only 6 cars at present.
(i) Use the following 5 random numbers to generate 5 days of
demand for the rental agency Random Nos 15, 48, 71, 56, 90
(ii) What is the average number of cars rented per day for the 5 days
?
(iii) How many rentals will be lost over the 5 days?
b) The research and development wing of Famous Electronics Ltd. has

developed a new kind of energy efficient inverter motor with 5-star
rating from Bureau of Standards of Energy for use in industrial
generator. The initial trials noted that it would take 10 hours for the first
motor, which is subject to learning curve of 80%. The cost of material
per motor would be Rs. 2,500, labour charges Rs. 175 per hour and
overheads amount to 125% of labour cost.
The first order received is for delivery of eight motors.
Required: 5
Calculate price the company should quote to have a profit margin of
20% on sales.
Answer
6 a) i)
Daily Days Probability Cumulative Range
demand probability
4 4 0.08 0.08 00-07

5 10 0.20 0.28 08-27
6 16 0.32 0.60 28-59
59
7 14 0.28 0.88 60-87

8 6 0.12 1.00 88-99
Total 50 1.00
Simulation worksheet
S.N. RN Range Demand Rented Lost
1 15 8-27 5 5 -
2 48 28-59 6 6 -
3 71 60-87 7 6 1
4 56 28-59 6 6 -
5 90 88-99 8 6 2
29 3
ii) Average no. of cars rented = 29/5 =5.8

iii) Rental lost = 3
6 b)
Calculation of labour hours required
No. of units Cumulative Average Time per unit (hrs.) Total Hours
1 10 10
2 8 16
4 6.4 25.6
8 5.12 40.96
Calculation of price to be quoted for 8 motors

Particular Rs.
Material Cost (8 x Rs. 2,500) 20,000
Labour Cost (40.96 x Rs. 175) 7,168
Overheads (7168 x 125%) 8,960
Total Cost 36,128
Add: Profit 20% on sales i.e., 25% on cost 9,032
Price to be quoted 45,160
60
Paper 8: Strategic Management and Decision Making

Analysis
Marks
Attempt all questions.
1. Read the following and answer the questions accordingly:

A management college affiliated to one of the prominent universities of Nepal was
established at Kathmandu in 2012. It offered BBA and MBA program. Its vision is
to connect the management education with the corporate world by offering value
based education.
The number of universities offering management education in Nepal is increasing
over the years. Almost all of them offer BBA and MBA programs. There are several
colleges offering these programs at Kathmandu valley affiliated to Tribhuvan
University, Pokhara Univeristy, Purwanchal University, Kathmandu University and
some foreign universities. The universities seem to offer program affiliations to
different colleges without much analysis of suitability and feasibility since they
intend to increase the number of students.
In the initial year of establishment, the performance of the college was satisfactory
both in terms of financial performance and market positioning. The graduation rate
was 80% and job enrollment rate was 70% which may be taken as satisfactory. By
2018, the college was awarded as the best business college twice in 2014 and 2016
by a reputed independent rating body.
From 2019, the college enrollment started decreasing. It was 85% in 2019, 80% in
2020 and only 70% in 2021. Some expert claimed that the industry started showing
the initial declining stage. The higher number of college at Kathmandu is another
reason. The program diversification by the universities such as BBM, BBA-Finance,
BIM, MBM, MBA in different sectoral areas also led to decease of the students in
BBA and MBA programs. Likewise, another reason would be inclination of the
students to foreign universities offering both online and offline classes. The increase
in the number of students going abroad also affected the industry adversely. In
general, the industry seems to have narrowed at an alarming rate.
To address the above situation, the college decided to start technical based education
such as BBA-IT and hybrid programs such as BBA-BL with affiliation from a
reputed Nepalese university. Now the college assumes that the scope of pure
management degrees is likely to decrease in the time to come. Moreover, it also
decided to acquire a reputed school nearby its location expecting that it can build
synergy and enhance its market power. However, the decision to expand in the
critical situation was criticized by 2 board members out of 5.
Questions
a) Analyze the industry attractiveness of management education in
Nepal by using the Porter’s five force model. 10
61
Answer:
Porter presented a model of competitive analysis describing five competitive
forces: threats of new entrance, threats of substitute, bargaining power of
buyers, bargaining power of suppliers, and rivalry among the competitors.
These five forces are the prominent determinant of an industry’s profit potential.
This analysis provides a comprehensive framework for industrial analysis to
develop competitive strategies, and ultimately determine profit potential of the
industry, where profit potential is measured in terms of long run returns on
investment.
Based on Porter’s model, the industry given in the case may be analyzed as
under.
• Rivalry is high: there are multiple colleges offering the same product.
• High entry barriers: new colleges are likely to come since the universities
are likely to offer affiliations relatively easier
• Moderate existence of substitutes: the foreign universities also offer
affiliations to Nepalese institutions, provision of online degrees offered by
foreign universities.
• Strong bargaining power of the buyer: existence of a high number of
colleges inside Kathmandu valley, students have more choices
• Moderate bargaining power of the supplier: availability of faculties
relatively easier but a high cost of infrastructure.
Considering the above five forces and their position, it may be stated that the
industry is not attractive with poor profit and growth potential.
b) Critically evaluate the decision of the college to add new programs

as well as acquire the
school.
10
Answer:
The college has adopted the growth strategies based on related diversification.
Since the environment is competitive and dynamic, the industry growth rate is
negative, and competitive rivalry is severe, the strategy seems convincing. It
may be a very appropriate strategy because the college has a strong competitive
position but industry attractiveness is low. Furthermore, it is suitable because
the current industry is unattractive and that the firm lacks outstanding abilities
or skills that it could easily transfer to products or services in other industries.
Likewise, the strategy may be taken as suitable since it can build synergy and
enhance efficiency leading to better market positioning.
By applying the strategy, there are some challenges to the college too. First, it
should build its capabilities to address the new organizational and external
challenges. Second, it should equally focus on the existing programs so that its
62
market share does not go down. Third, financial management may be critical
due investments in programs and increase infixed overheads.
Considering the above, it can be concluded that the related diversification
strategy adopted by the college may be taken as an appropriate decision.
2.
a) After carefully analyzing all available strategic options, managers are in
charge of choosing the most appropriate strategy. One of the factors
considered while assessing strategic options is acceptability. Discuss a few
common methods used to determine acceptability while taking strategic
options into account. 10
Answer:
Acceptability is concerned with the expected performance outcomes of a
strategy and the extent to which these would be in line with the expectations of
the stakeholders. The following are the common methods used to determine
acceptability while taking strategic options into account.
1. Return Analysis
The benefits that stakeholders are expected to receive from a strategy are
referred to as returns. The expected return on investment by stakeholders
determines the selection of a specific strategic option under return analysis.
There are several approaches to understanding return in an organization. They
are as follows:
a. Profitability Analysis: It is concerned with calculating the monetary return
on investment. Return on Capital Employed (ROCE), Payback Period (PBP),
and Discounted Cash Flow (DCF) are the three major approaches used for
profitability analysis.
b. Cost-Benefit Analysis: It evaluates the strategic option's overall economic
impact. It assists decision-makers in selecting efficient strategic options for
future projects to invest in based on cost/benefit ratios.
c. Shareholders Value Analysis (SVA): It evaluates the impact of strategic
options on shareholder value creation. Total shareholder return (TSR) is the
most commonly used shareholder value measure, and it is equal to the
increase in the price of a share over the year plus dividends per share
earned in the year, divided by the share price at the start of the year in any
given year.
2. Risk Analysis
The likelihood and consequences of a strategy failing are referred to as risk. It is
comparatively high for organizations with large long-term innovation programs
or where key environmental issues are fraught with uncertainty. As a result, the
level of risk associated with choosing a specific strategic option can be used to
determine whether or not to accept it. Accepting a strategic option necessitates
an assessment of the risk involved in terms of time and resource allocation, as
63
well as the expected effectiveness of the given option. Risk analysis can be done
in a number of ways. Here they are:
a. Financial Ratios Projection: It helps to examine possible financial
strengths and weaknesses.
b. Sensitive Analysis: It allows each of the important assumptions underlying
a particular strategy to be questioned and challenged.
c. Simulation Modeling: It is creating an abstraction of reality. After examining
a large volume of quality data, it aids in establishing relationships between
environmental factors and company performance. It runs a series of trial
and error experiments to predict the system's behavior over time by varying
certain variables.
d. Heuristic Models: They are the rules that guide decision-makers in their
search for alternatives that have a high probability of producing satisfactory
results. Such a search is based on the decision makers' managerial memory,
judgment, past experience, intuition, hunch, and abstract reasoning. They
usually choose strategic options based on a rule of thumb.
e. Decision Matrices: Decision matrices are rectangular arrays of numbers
with rows and columns. They are used to assess the level of risk associated
with various strategic options. Strategic options with low risk are identified.
3. Stakeholders' Reactions Analysis

Stakeholders are individuals or groups in the organization's vicinity who have a
vested interest in the organization's outcomes. They can be shareholders,
suppliers, customers, competitors, the government, labor unions, financial
institutions, pressure groups, the media, and so on. The reactions of
stakeholders greatly influence the likelihood of acceptance of a strategic option.
b) Discuss the different methods of strategy development? Why does it

appear that strategic alliances and collaborative development are
becoming more and more widespread in the present day? 10
Answer:
Methods of strategy development
Strategy development methods are the means by which any strategic direction
will be pursued. There are three techniques or methods that any organization
may use to improve or develop its strategies:
A. Internal Development
Internal development refers to growth that occurs when a company or
organization uses its own resources to expand. The primary goal of internal
development is to increase sales, increase efficiency, better handle customers,
and generally assist in the expansion of the company. Internal development is
carried out in high-performing organizations, particularly when the product is
highly technical in design or the method of manufacture is complex, to acquire
64
new competencies and compete in the market. This method can help a company
to design a new product while also improving its current level of competence to
create and capitalize on new market opportunities. This method will be more
useful for businesses with fewer resources to invest in large-scale projects.
Businesses should use internal development strategies to improve areas such as
customer service, management, mentoring, and assessment.
B. Merger and Acquisition
Mergers and acquisitions (M&A) refer to the consolidation of businesses or
assets in general. A merger is the joining of two companies to form a new
company, whereas an acquisition is the purchase of one company by another
without the formation of a new company. M&A is an important part of strategic
management because such strategies allow businesses to grow, shrink, change
the nature of their business, or improve their competitive position. Mergers and
acquisitions are typically done to gain operational advantages in terms of time
and speed, economies of scale, and market advantages. The following are the
strategic driver for mergers and acquisitions.
• Effecting organizational growth
• Increasing market share
• Gaining entry into new markets
• Obtaining products
• Keeping pace with change
C. Joint Development and Strategic Alliances
Joint development is a strategy in which two or more organizations pool their
resources and activities to pursue common goals and strategies. Indeed, in
today's complex environment, firms cannot always secure the necessary skills,
ideas, technology, or market knowledge on their own, and collaboration with
another company can greatly assist them. Joint development is a collaborative
approach to strategy development. This method can be used by a company to
gain a competitive advantage in an industry by collaborating with other
companies. It entails a company attempting to gain a competitive advantage by
collaborating with other businesses. The primary goal of collaborative
development is to build and share competencies for mutual benefit.
Cooperative strategies, such as collusion and strategic alliances, are used in joint
development.
Joint development and strategy alliances are becoming increasingly popular and
common methods of strategy development in the age of globalization due to
the following reasons:
Joint development and strategy alliances are becoming increasingly popular and
common methods of strategy development in the age of globalization for the
following reasons:
 Resource Utilization: Joint development and strategic alliances assist in the
utilization of existing resources and competencies. They also look into new
ways to broaden their resources and competencies.
65
 Cost and Value: Joint development and strategic alliances result in cost
savings through the use of shared facilities. Customer satisfaction rises as a
result of added value and increased product and service availability.
 Co-specialization: Joint development and strategic alliances enable each
partner to focus on activities that are best suited to their capabilities.
 New Markets Access: Access to new markets and businesses is made
possible through joint development and strategic alliances. Global
companies can form alliances with local businesses to benefit from market
knowledge, distribution networks, and customer support services.
 Learning: Partners learn from one another through joint development and
strategic alliance. They gain new skills, increase their innovative capacity,
and share organizational and management practices.
 Risk Management: Joint development and strategic alliances aid in risk
management on financial, technological, and political levels. They provide
strategic advantages.
 Competition: Joint development and strategic alliances support the
reduction of competition among partners.
3.
a) Explain the significance of project management in organizations?
Explain various components of project management plan for
effectiveness and efficiency. (6+4=10)
Answer:
Project is a temporary endeavor designed for particular purpose to satisfy
specific group of consumers within specific time. Project management is the
art of managing all the aspects of a project from inception to closure using a
scientific and structured methodology. Project management is very important
in production of goods and services.
Following points justify the significance of project management in any
organization:
i. Strategic alignment: Good project management ensures that the goals of
projects closely align with the strategic goals of the business. Project
management sets action, deliver value and align them with national plans
and policies.
ii. Leadership: Without project management, employees get no direction,
control or purpose. Project management provides leadership and vision,
facilitates employee motivation, and overcomes probable obstacles,
inspiring the team to do their best work.
iii. Focus on objectives: Project management is important because it ensures
there’s a proper plan for executing strategic goals. Project management
allows project team to execute the work plan with proper guidance and
supervision.
iv. Realistic project planning: Project management ensures proper
expectations around what can be delivered, by when, by whom, to whom
66
and for how much. It helps in estimation of budget, resources, and project
delivery timelines.
v. Quality control: Projects management is important for establishing quality
standard of project output. It delivers the expected quality level, measures
the actual output and the corrective actions to ensure the set quality
standard.
Components of project management
• Scope statement: Every tool purchase, equipment rental, employee wage,
cup of coffee or any item of expense must be defined as either a part of the
project, or not a part of the project. Scope statement should be specific,
measureable, attainable, relevant, and time specific.
• Deliverables: Project management plan should state deliverables as the
products or services as the results of the project for effectiveness.
• Work Breakdown Structure (WBS): Work Breakdown Structure is the
details of activities essential to accomplish the project. Each activity need
to be clearly identified and linked with other activity. This helps to prepare
schedule and manage the resources.
• Schedule: Based on WBS, it is essential to breakdown each activity for the
earliest possible time to start and completion. Effective schedule helps to
complete the project in time.
• Budget: For effective project management, project manager need to prepare
budget for each activity as well as total budget, and cash flow statements.
• Quality: Quality is one of the constraint for project management which need
to maintain for effectiveness. Thus, project plan should estimate the quality
standard, strategies to meet the quality and quality control techniques.
• Human Resources plan: Project plan should prepare the HR requirement,
acquisition, training and development, compensation and maintenance
plans.
• Procurement plan: The project management plan should identify the
outside products and services are required, process for procurement,
monitoring progress and quality.
b) Explain different attributes of project managers for success of the

project. 10
Answer:
Effective project manager is one who effectively leads the project team so that
project objectives can be attained at the right time. Project managers, in general,
possess the following attributes:
i. Effective communication skills: Project manager is to set project goals, set work
plan, member’s task, responsibilities, expectation and feedback and
communicate these things to project team members as well as other
stakeholders. Thus, managers must be a good communicator so that they can
connect with people at all levels.
67
ii. Strong leadership skills: Effective project management should have strong
leadership qualities such as motivating the team member, supervising, leading
and controlling the team activities and drive them to maximum performance.
iii. Sound decision maker: An effective project manager needs to make decision-
making in several issues. S/he should have special skills of making decisions for
effectiveness and efficiency.
iv. Technical expertise: An effective project manager needs to have sound technical
knowledge to understand the issues that are related to the technical aspect.
Knowledge of theory as well as the technical side can greatly help manager in
taking strategic initiatives when needed.
v. Inspires a shared vision: An effective project manager should to articulate the
team vision to members effectively. A visionary person can lead his people to the
right direction as well as easily adapt to the changes that come in the way.
vi. Good negotiation skills: One of the qualities needed for effective project
management is the ability to negotiate. In times that conflict arise due to
differences in opinion, project managers need sheer negotiating skills to settle
the issue and maintain harmony in the team.
vii. Empathetic: Understanding and caring for people as well as being grateful for
their help are a few of the things that an empathetic leader shows to his
members. It includes understanding the needs of the project and its
stakeholders.
4.
a) The effectiveness of strategic management depends not only on good
strategy formulation but also on effective implementation. In light of
this statement, explain the process of strategy implementation in an
organization. 8
Answer:
Strategy implementation is often described as the action phase of the strategic
management process. It covers strategy activation and evaluation and control.
The following are the key steps in the strategy implementation process:
a. Communicating strategy: Once the strategy is formulated, it must be
communicated to those people who would implement it. Strategy
communication is a process of transferring the strategy information from
the formulators to the implementers. Communication is normally in writing.
The communication should include the purpose of the strategy, and the
activities required to implement the strategy.
b. Structuring an organization: Strategy-friendly organizational structure is
required for the proper implementation of the strategy. The structure is the
way the activities are organized. It is meant to implement a strategy. It is
reflected in the organizational chart. It defines the levels and roles in an
organization. On the one hand, the structural format for developing
objectives and policies can significantly impact all other strategy-
implementation activities. On the other hand, changes in strategy often
require changes in structure. The structure dictates how resources will be
68
allocated. So, at this step of strategy implementation, it is required to match

organizational structure with strategy. The structure should be according to
the need of the strategy so that it is implemented effectively.
c. Preparing resource plans: For successful implementation of strategy,
resources are required to be planned to deploy in different activities to
create competencies. In an organization, there must be proper resource
allocation to various units and activities. The resources can be financial,
physical, human resources and intellectual resources. Therefore,
organizations have to prepare resource plans.
d. Establishing management system: At this step, an organization's
management system is established to plan and control resources in the
process of strategy implementation. The management system involves
human resource management, information management, leadership,
organizational culture, reengineering, action plan, management by
objectives (MBO), and total quality management (TQM). The establishment
of an effective management system is very important for the successful
implementation of the strategy.
e. Implementing strategy: At this step, strategy is implemented. It puts
strategy into action. Implementation is based on a pre-determined plan.
Single or many strategies are implemented as per the requirement and
planning of the organization.
f. Evaluating and controlling: This step of the strategy implementation
process is concerned with the monitoring of performance results. The
effectiveness of the strategy is evaluated in terms of achieving
organizational objectives. Controlling activities are conducted to resolve
performance problems.
g. Taking corrective action: This is the final step of the strategy
implementation process. At this level, corrective actions are taken to bring
performance in line with the predetermined objectives of the organization.
Strategies are revised based on the requirements of the organization and
changes in the environment.
b) What is strategic change? Describe the main levels of strategic change.

(2+5=7)
Answer:
Strategic change
Strategic change refers to adjustments that an organization makes throughout
time to its goals and strategy. Change can be more gradual, more dramatic,
evolutionary, or even revolutionary. Implementing strategic change involves
making adjustments to a company's key traits, sometimes in response to new
market risks or opportunities. The chief executive officer in particular, together
with upper management, is accountable for this change.
Levels of strategic change
Strategic change can be broken down into the following five levels:
69
a. Continuation Strategy: It involves using the same strategy that was

employed during the last planning session. The key to successful
implementation is keeping an eye on the various tasks to make sure they
are completed on time.
b. Routine Strategy Change: It involves normal changes in the appeals to
attract customers. Positioning or repositioning a product in the minds of
consumers is a significant aspect of routine strategy changes.
c. Limited Strategy Change: Offering new items to new markets within the
same basic product class is a limited strategy change. This level of strategic
change has many variations since products can be new in many different
ways.
d. Radical Strategy Change: It involves a major reorganization within the firm.
When firms in the same core industry merge or are acquired, this kind of
change frequently takes place. In addition to numerous organizational
structure changes, radical changes can also include several subsidiary
acquisitions and sales.
e. Organizational Redirection: It involves major strategic change resulting
from planned programs. It includes switching from one industry to another.
Mergers and acquisitions of businesses in various industries are one type of
organizational redirection.
5. Write short notes on the following: (5×3=15)

a) Strategic vision
b) ETOP
c) Value chain analysis
d) CEO as a strategic manager
e) Benchmarking
Answer:
a. Strategic vision
Vision is a picture of what the firm wants to be and, in broad terms, what it
wants to ultimately achieve. It shows what an organization ultimately wants to
achieve. Thus, a vision statement gives shape to its intended future. In other
words, a vision statement points the direction where an organization would
eventually like to be in future. It reflects a firm’s values and aspirations. It
intends to capture the heart and mind of the employees as well as stakeholders.
It should be relatively short and concise, making it easy to remember.
b. ETOP
Environmental threats and opportunity profile (ETOP) is a technique for
diagnosing external environment. ETOP is a mechanism for effective diagnosis
of the information to assess the opportunity and threats to the company. The
preparation of ETOP involves dividing the external environments into different
sectors and sub-sectors and then analyzing the impact of each sectors and sub-
70
sectors on the organization. Management is able to know where the organization

stands with respect to its environment through ETOP. ETOP is useful in
formulating strategies to take advantage of opportunities and counter the threats.
c. Value chain analysis

Value chain analysis allows the firm to understand the parts of its operations
that create value and those that do not. Understanding these issues is important
because the firm can earn return only if it creates greater value than the costs
incurred to create that value. The value chain shows how a product moves from
the raw-material stage to the final customer. Value chain analysis helps build
sustained competitive advantage through the following process.
1. Value chain activities are identified and assessed
2. Core competencies arise in some activities
3. Some core competencies evolve into distinctive competencies
4. Some distinctive competencies yield sustained competitive advantages
d. CEO as a strategic manager

The CEO as the most prominent strategic leader plays the key role in strategy
formulation and implementation. The success of the strategic management
process largely depends on the competency and the foresightedness of the CEO.
He/she bears the supreme role in strategy formulation and implementation. He
stands himself as a key person in managing strategies.
The CEO is responsible for the organization’s strategic management, but he or
she relies on a team of top-level executives- including members of the board of
directors, vice presidents, and even various line and staff managers. The CEO
plays crucial roles in formulation and implementation of strategy.
e. Benchmarking
Benchmarking is the process of comparing one's business processes
and performance to industry bests and/or best practices from other industries.
In the process of benchmarking, management identifies the best firms in their
industry, and compares the results and processes of those studied to one's own
results and processes.
There are a number of different approaches to benchmarking, some are more
useful than others.
• Historical benchmarking considers organizational performance in relation
to previous years in order to identify any significant changes.
• Industry/sector benchmarking looks at the comparative performance of
other organizations in the same industry sector or between similar public
service providers.
• Best-in-class benchmarking seeks comparisons more widely through the
search for best practice wherever it may be found.
71
6.
a) Describe the prevalent decision-making practices in the corporate
sector of Nepal. 5
Answer:
Decision-making practices in the corporate sector of Nepal
Decision-making is the process of making choices by identifying a decision,
gathering information, and assessing alternative solutions. By organizing
relevant information and defining alternatives, a step-by-step decision-making
process can assist decision-makers in making more deliberate, thoughtful
decisions.
The following are the prevailing decision-making practices in Nepal's corporate
sector in general:
 In both public and private enterprises, decision-making is highly centralized.
It is due to politically appointed managers in public enterprises and friends
and relatives in private enterprises.
 Top managers in Nepalese organizations are very powerful and highly
authorized, so middle and lower level managers must rely on top level
managers to make decisions. Managers at the middle and lower levels must
wait for orders before carrying out their responsibilities.
 Decisions in Nepalese organizations are not implemented effectively.
Monitoring, evaluation, and follow-up are ineffective during
implementation. The feedback system is not being used properly.
 Nepalese managers frequently postpone decisions until tomorrow, which
never seems to arrive. This is the great art of avoiding decisions.
 Power-center pressures have a significant impact on decision-making.
 Committees are formed to make decisions.

Professionalism among Nepalese managers has gradually grown in recent years.
This process of professionalization has been assisted by improved education and
training. It is hoped that these managers will make sound decisions that will
contribute to the growth of the Nepalese corporate sector.
72
b) What is environmental analysis? Explain the environmental analysis

process. (2+3=5)
Answer:
Environmental analysis
Environmental analysis is the study of the business environment to pinpoint
environmental factors that can significantly influence organizational operations. It
refers to the process of identifying the external and internal elements, which can affect
the performance of an organization. Analyzed facts will then be used for formulating
strategies and taking decisions, so as to exploit opportunities and enhance strengths,
and minimize threats and weaknesses.
Environmental analysis process
Environmental analysis process consists of scanning, monitoring, forecasting and
assessment.
1. Scanning: Scanning involves acquiring information from the environment. It is one
of the main methods of acquiring information and analyzing the trends in the
environment. It detects trends already underway. It also detects emerging trends
that have a potential impact on business activities. Scanning considers the following
variables:
 Changes in macro-environment
 Changes in market
 Nature of competition
 Customer needs
 Product offerings
2. Monitoring: It involves watching the major trend in the environmental forces and
identifying trends and events for further monitoring. It is the auditing of
environmental influences. The likely effects of environmental influences on
business performance are identified. Mainly monitoring provides information
related to the following matters.
 Specific description of environmental trends and events.
 Identification of trends and events for further monitoring.
 Identification of areas of forecasting.
3. Forecasting: It is primarily concerned with trying to reduce the uncertainty that
exists about some parts of the future. It involves:
 Identification of key forces (such as economic, political, legal, socio-cultural,
and technological) at work in the environment
 Understanding of the nature of key influences and drivers of change
 Projection of future alternative paths available
4. Assessment: It evaluates the available data and information and identifies
opportunities and threats. Basically, it identifies the organizational objectives,
goals, internal analysis, strategic planning, etc. to determine the trend as
opportunities or threats for the organization.
73
Examiner’s Commentary on Students' Performance in

December 2022 Examinations
Paper 5: Management Information and Control System
List of Questions Specific Comments on the Performance of the Students
Question no. 1 Confused in two most important software development.
Question no. 2 Students are confused with question.
Question no. 3 Satisfactory Performance.
Question no. 4 Block Diagram is missing in the most of the students’ answer
Question no. 5 Satisfactory performance.
Question no. 6 Confused in IT governance and E governance.
Not answered according to the Act.
Paper 6: Advanced Taxation

Question no. 1 Unsatisfactory; Not a single student completely answered.
Question no. 2 Question is not understood by most of the students.
Question no. 3 Very little preparation; unsatisfactory performance.
Question no. 4 Very little preparation
Question no. 5 Very little preparation.
Paper 7: Advanced Cost and Management Accounting

Question no. 1 Most of the students could not calculate Break Even Point. Conceptual
understanding was found very poor.
Question no. 2 a. Equivalent unit of performance could not be calculated by most of
the students.
b. Well attempted and solved by many students.
Question no. 3 a. Many students could not formulate LPP.
b. Well answered by most of the students
Question no. 4 a. Most of the students could not calculate Cost for New Design of
product P.
b. Students lacked conceptual knowledge of Cost Saving made by JTT
system
Question no. 5 Answers were too sketchy. Lack of proper preparation.
Question no. 6 Not adequately answered, little preparation in theoretical part.
Paper 8: Strategic Management and Decision Making Analysis

Question no. 1 Students are lacking the concept of Porter’s five force model.
Question no. 6 Many students could not answer 6(b).
74

Group Ii - December 2022

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Group Ii - December 2022

Uploaded by

Copyright:

Available Formats

SUGGESTED ANSWERS TO

THE QUESTIONS SET AT

The Institute of Chartered Accountants of Nepal

© The Institute of Chartered Accountants of Nepal

Year and month of Publication: 2023 March

Paper 5: Management Information and Control System

a) List the steps you go through to develop a database management system

using manual or automated tools to evaluate one or more properties of interest.

1 b) Cyber-attacks do not only happen to large corporations. Small businesses, groups

medium term hardware changes while use of modern, omni-channel software

a) Mobile computing is increasing in its scope and diversity. Supposing

✓ Each person adopting this scheme has a public-private key pair.

a) Assume you are specifically assigned as IS auditor to audit the business

infrastructure. It consists of the process to ensure redundancy, backup, data recovery

IT system should be designed to support different organizational business processes

Second Part: Information technology governance (IT governance) is the collective

6 (b) The attributes of information system security can be listed as:

6 (c) An electronic funds transfer (EFT), or direct deposit, is a digital movement of

6 (d) e-Governance is the method of delivering government services to stakeholders

Paper 6: Advanced Taxation

Particulars Amount in ‘000

Total Inclusions 1,245,000 645,000 44,325

Calculation of Fees u/s 117

1. Transfer Pricing Adjustment in case of export sales

Interest on overdraft 12,500 Deductible, as it meets u/s 14 (1)

Total depreciation 93,615

10. Employee expense

Adjusted taxable income without considering interest as income or expense 126,746

The eligible amount is lower of following:

Interest received from banks 2,400,000

Answer to question 2 (a)

Answer Question 2 (b)

Calculation of tax liability of Mrs. Firozza

Less: Reductions under sec. 63

Calculation of Tax liability of Mrs. Firozza (F.Y. 2078/79) (0.5 Marks)

Balance 175,000 20% 35,000

Calculation of Income and Tax liability of Mr. Firozza

Tax Liability Computation sheet

Carriage service provided by City 2.50% 500

Return filing requirement:

Corporate tax obligation:

b) Thamel Beverage Limited is a manufacturing Company producing and selling

Particulars Amount VAT Total Bill

Domestic Purchase Detail:

Sales Detail for the month of Shrawan 2079

iii. What if it imports goods on Kartik 2079?

Calculation of Output VAT for the month of Shrawan 2079:

Ratio of Taxable Sales to Total Sales: 75%

Import of Packing 1,50,00,000 19,50,000 1,462,500 In the ratio of taxable sales to

Petrol purchased 1,25,000 16,250 - No credit as it is petrol for

c) Shalimar industries is a manufacturing industry whose 70% product is exported to

b) Write short note on Agency PE, Service PE and Construction PE. 5

Paper 7: Advanced Cost and Management Accounting

Total fixed Manufacturing cost= Rs. 1,490,000

Analysis of contribution margin per unit of output

iv) Net productive hours per worker per annum

Actual Cost Rs. Rs.

ii. Actual cost of returns in process on March 31

B. Labour Rate variance = Actual Hours x (Standard Rate – Actual Rate)

C. Labour efficiency variance = Standard Rate x (Standard Hours – Actual

B. Overhead volume variance = Std. overhead rate x (Budgeted volume –

C. Overhead Budget Variance = Budgeted Overhead – Actual Overhead