Suggested Answer CAP III June 2017 GII

CHARTERED ACCOUNTANCY PROFESSIONAL CAP-III
SUGGESTED ANSWER
June 2017
The Institute of Chartered Accountants of Nepal
QGL P.T.O.
(2)
Management Information and control system
P.T.O.
(3)
Suggested
Roll No……………. Maximum Marks - 100
Total No. of Questions - 6 Total No. of Printed Pages -11
Time Allowed - 3 Hours

Marks
Attempt all questions.
1.
a) A
ssume you are developing the Terms of Reference to hire the IS
Auditor for commercial bank in Nepal. Explain the scope of IS Audit in
the given context. 10
b) E
lection commission hired you as the Information System consultant for
the analysis of election processes. Various types of report have to be
generated for different type of user. Describe the important factors that
have to be considered while designing the report. 10
Answers:
a) T
he IS Audit of a commercial bank is all about the evaluation of overall control
mechanism of Information Communication Technology system of the organization to
determine whether they produce timely, accurate, complete and reliable information in
conformity with the management goals and objective of the bank. The scope of the
evaluation of the control mechanism or scope of IS Audit are listed as below:
(a) Evaluation of Information Technology General Control (ITGC)
(b) Evaluation of Core Banking System Application
(c) Evaluation of Network and Communication Control
(d) Evaluation of System Development/Procurement.
Evaluation of Information Technology General Control (ITGC):
Following are the points associated with the evaluation of the control of the ITGC.
i. Evaluation of ICT management control.
ii. Evaluation of ICT system administration control.
iii. Evaluation of ICT acquisition and change management control.
iv. Evaluation of ICT operational control.
v. Evaluation of ICT System logical access control.
vi. Evaluation of ICT physical equipment including server and hardwares and
environmental control.
vii. Evaluation of business continuity planning control.
viii. Evaluation of ICT based system third party service providers control.
ix. Evaluation of ICT end-user computing control.
x. Evaluation of data integrity, security, non-repudiation, authenticity control.
Evaluation of Core Banking System Application Control
Following are the points associated with the evaluation of the control of the Core
Banking Application.
i. Evaluation of application security control.
P.T.O.
(4)
ii. Evaluation of input control.
iii. Evaluation of business rules and processing control.
iv. Evaluation of performance of application.
v. Evaluation of output control.
vi. Evaluation of exception handling control.
vii. Evaluation of master file and standing data control
Evaluation of Network and Communication Control
i. Evaluation of general network control.
ii. Evaluation of performance / integrity control.
iii. Evaluation of remote access control.
iv. Evaluation of physical security control.
v. Evaluation of logical security control.
vi. Evaluation of performance of overall network and recommendation of
remedies.
Evaluation of System Development/Procurement.
i. Evaluation of general control.
ii. Evaluation of planning control.
iii. Evaluation of design and development /Procurement process control.
iv. Evaluation of implementation control.
v. Evaluation of maintenance control.
vi. Evaluation of post implementation review control.
b) The report to be generated for the election process are highly sensitive. The accuracy
and timing of the report are very crucial. The essential factors to be considered while
designing the report of the election commission are listed as below:
 Content
 Timeliness
 Format
 Media
 Volume
Content:
It refers to the actual information to be given to the general public as well as the
various level of officials in Election commission. The content should be very precise
and free of unessential information. The type of content to be disseminated to the
public and Election Commission official varies. The general public is more concerned
about the result of election whereas the election commission official need analytical
type of reports as well.
Timeliness:
Information arrived after the required time has no use even in general case. In the case
of election, the timing of the information is highly crucial. The periodicity of the result
and information has to be confirmed and it has to be carried accordingly.
Format:
It is the arrangement of information of election process on the report. The tabular and
graphical are some example of presenting information to the user. Sometime the text
report is also equally important. So it depends upon to which type of user the report is
targeted.
P.T.O.
(5)
Media:
It refers to the actual physical accessories at which the output information is presented.
For the output design the media are the monitor, printed documents, internet, digital
display, mobile, radio television, social media are some of the medias through which
the information can be disseminated. For general public, the display of result might be
sufficient but for the EC officials the printed or softcopy of report would be better.
Volume: The amount of information to be released is associated with volume. For the
instant dissemination of the election process, the less and precise volume is better.
However during the process of analysis or managerial purpose the full content is
better. Volume of content also depends upon the media through which the information
are released and the target users of the information. So while disseminating the
information the amount of content has to be checked precisely without distorting
essential content.
2. I
nformation system developed once is not for always. It has to be changed
or modified or upgraded in due course of time. An organization named as
ABC Ltd is going to upgrade its Information System.
a) W
hat are the conditions that have to be analyzed while recommending
such change of the system? 7
b) W
hat are the possible online payment mechanisms that can be introduced
while upgrading the system to facilitate e-Commerce? 7
c) H
ow can they ensure the continuity of the business? 6
Answers:
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 course of implementation based upon various
conditions. Before making the decision of the change or upgrade or modification of
the system, following points has to be analyzed properly:
1. 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 needs modification.
2. Technology saturation or need of new technology. The programing language,
frameworks and architecture of the development of the system might be outdated
so there needs the upgradation of the new system. Sometimes the system should be
upgraded due to changing need of hardware‘s as well.
3. The technical support from the vendor. Some time, the system would be so old that
the vendor would be unable to provide the technical support to keep it running. So
in this case there arises the need of upgrading of the existing system.
4. The existing capacity of the database may become insufficient to hold the growing
needs of the data. So in order to hold the increased demand of the capacity of the
database sometimes the upgrading of the system is recommended.
5. Sometimes the system needs to be upgraded to eradicate the errors and bugs and
vulnerability in the existing system.
b) The payment mechanism in the e-commerce can be any one of following: (It is to be
noted that all these listed payment mechanisms are not in practice in Nepal.)
Online Banking:
P.T.O.
(6)
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 among 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 use 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 entering their address and credit card information
each time they buy something. A digital wallet securely stores credit card and owner
identification information and provides that information at an electronic commerce
sites. The digital wallet enters the shoppers name, credit card number and shipping
information automatically when invoked to complete the purchase.
Micropayment:
It is developed to make the payment of less than 10$ as such payment will be too
small to pay through the credit cards. Accumulate balance payment system facilitates
such type of small payment in the web by accumulating it into the debit card or in
credit card.
Stored value payment systems:
It enables consumer to make the instant online payment to merchants and other
individuals based on valued store 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 electronics form that moves outside
the normal network of money. Users are supplied with the client software and can
exchange money with another e-cash user over the internet or with retailer accepting
e-cash.
c) Business continuity is all about ensuring of the normal operation of the system in a set
of predefined time even in case of huge disaster thereby minimizing the losses to the
organization. The continuity of the business can be ensured with the following
process:
 Back up 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
P.T.O.
(7)
 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) W
hat is Artificial Intelligence (AI)? Name a few examples of it. 8
b) D
iscuss about the practical factors which influence the working of
Information Technology. 7
Answers:
a) A
I is computer software designed to perceive, reason, and understand.
1) Historically, computer software works through a series of if/then conditions in
which every operation has exactly two possible outcomes (yes/no, on/off,
true/false, one/zero).
(a) Human reasoning, on the other hand, is extremely complex, based on deduction,
induction, intuition, emotion, and biochemistry, resulting in a range of possible
outcomes.
2) AI attempts to imitate human decision making, which hinges on this combination
of knowledge and intuition (i.e., remembering relationships between variables
based on experience).
3) The advantage of AI in a business environment is that IT systems
(a) Can work 24 hours a day
(b) Will not become ill, die, or be hired away
(c) Are extremely fast processors of data, especially if numerous rules
(procedures) must be evaluated
There are several types of AI:
1) Neural networks
2) Case-based reasoning systems
3) Rule-based expert systems
4) Intelligent agents
5) An expert system
b) The practical influencing factors which affect the Information technology are
summarized as:
Flexibility of changes in business and technology:
P.T.O.
(8)
There should be sufficient room in any business and its involved technology for the
improvement. This can lead to the use of information technology in broader sense. If
business and the involved technology are confined within a small boundary new ideas and
concept cannot be groomed.
Budget:
Budget is major influencing factor of any process or system. The size of the budget
determines the level of integration, reliability and efficiency of technology to the business.
Budget also determines the quality of Information Technology related work.
Speed to the market:
How fast system is brought to the market determine the life of the technology. If the
technology is brought when its time value expires, then the success of the technology will
not be as expected. Now days it is convinced that the life of technology last not more than
one year. Moreover the right timing is very important.
Legal and Regulatory Body:
The regulatory and legal authorities are the major entity about the deployment of any
technology. If any technology is banned by the legal authority its faith will sink.
Other factors which influence the information technology are:
 International norms and practices about the technology
 Personnel self-interest and motivations towards the use of technology
 The functional business units of the organization
 Knowledge and qualifications of the personnel
So while introducing any technology organization should be clear about the government
rules and regulations.
4.
a) W
hat is ethics? Discuss patent, trademark, and copyright that protect
intellectual property rights. (2+6=8)
b) H
ow can a modern business organization benefit from cloud computing
and software as a service to quickly rollout its computerized
information system? 7
Answers:
a) First Part: Ethics refers to the principle of right and wrong that individuals, acting as
free moral agents, use to make choices to guide their behaviors. At its simplest, ethics
is a system of moral principles. They affect how people make decisions and lead their
lives. Ethics is concerned with what is good for individuals and society and is also
described as moral philosophy.
Second Part:
i. Patient: A patent grants the owner an exclusive monopoly on the ideas behind an
invention for 20 years. The intent behind patent law is to ensure that inventors
receive the full financial and other rewards and yet still make widespread use of the
invention possible for those wishing to use the idea under license from the patent‘s
owner. The granting of a patent is determined by the Patent Office and relies on
court rulings. The key concepts in patent law are originality, novelty, and invention.
Patent protection is that it grants a monopoly on the underlying concepts and ideas
of software. The difficulty is passing stringent criteria for novelty and invention.
ii. Trademark: Any intellectual work product used for a business purpose can be
classified as a trade secret, provided it is not based on information in the public
domain. Protections for trade secrets vary from state to state. In general, trade secret
P.T.O.
(9)
laws grant a monopoly on the ideas behind a work product, but it can be a very
tenuous monopoly. Software that contains novel or unique elements, procedures, or
compilations can be included as a trade secret. Trade secret law protects the actual
ideas in a work product, not only their manifestation. However, in the case of
computer software, it is difficult to prevent the ideas from falling into the public
domain when the software is widely distributed.
iii. Copyright: Copyright is a statutory grant that protects creators of intellectual
property from having their work copied by others for any purpose during the life of
the author plus an additional 70 years after the author‘s death. For corporate-owned
works, copyright protection lasts for 95 years after their initial creation. Most
industrial nations have their own copyright laws, and there are several international
conventions and bilateral agreements through which nations coordinate and enforce
their laws. Copyright protects against copying of entire software programs or their
parts; However, the ideas behind a work are not protected, only their manifestation
in a work; A competitor can build new software that follows the same concepts
without infringing on a copyright.
b) Cloud computing is a growing trend in global IT landscape. It commoditizes the

computing resources such as processing power, storage capacity and application
features as sellable units without involving the sale of actual physical devices. As a
result, businesses can quickly avail of the necessary features and computing resources
delivered to them by a cloud service provider. Among different flavors of cloud
computing, Software as a Service or SaaS is the most straightforward and quick option
for business, especially small businesses. This is because the cloud provider does
everything and sells the necessary features and as a software deliverable to the business
organization. Thus the businesses in need of the features and resources do not have to
spend time and effort in designing the system, procuring the hardware & software,
installing them, commissioning & testing them and finally making use of them. All this
is done by the cloud service provider that takes care of all the preparations and provides
the business organization the needed software features, functions, resources and their
manageability. The main requirement is the robust and reliable network connectivity
with sufficient capacity from the business organization to the cloud service provider‘s
data center where the actual system is located.
This also gives the business organization option of scalability. If the business
transaction grows and there is need of more features, functions and computing
resources, it can easily get those from the cloud service provider by paying the extra
cost. On the operational side, the business organization does not have to worry about
the management of the system, allocation of manpower, maintenance of the facility
and so on. From small to big business who want to roll out information systems and
computerized functions easily and quickly, cloud computing is a There are other
flavors of the cloud computing apart from Software as a Service but for businesses
with clear outline of their needs and a short timeline of deployment, SaaS is probably
the quickest and most straightforward option.
5.
a) W
hat is the significance of feasibility study in System Development Life
Cycle? List out various types of feasibility study. (3+4=7)
b) D
iscuss about the use of Information System at different levels of
hierarchy of organization. 8
P.T.O.
(10)
Answers:
a) Feasibility study is about process of evaluating viability of the project from various
prospects of the operation, technology and economy. The project will be subjected for
the real development only after confirming its positive feasibility test. Thus, the
feasibility stage is that which determine the viability of the project from the different
aspects of technicalities, operations, human resources, economy. During the feasibility
study, some recommendations can be given to make the system feasible from the
prospects of technology, economy, operation etc. If the feasibility test of the system is
not done, the system may fail after the development.
The various areas of determining the feasibility can be listed as:

 Operational Feasibility
 Technical Feasibility
 Economic Feasibility
 Human Resource Feasibility
Operational Feasibility:
The operational feasibility of system development is all about ascertaining the views of
workers, employees, customers and suppliers about the use of Information
Technology. The operational feasibility will determine the support from management
and users. It will check whether new system will cause any difficulties or harm to any
functioning unit of the organization.
Technical Feasibility:
Technical feasibility is about the evaluation of hardware and software viability for the
system. The system analyst will ascertain whether the proposed system runs on the
existing technical infrastructure or not. It will also give idea what upgrade or change
need to be done on the existing Information Technology to meet the requirement of the
system.
Economical Feasibility:
The economical feasibility will evaluate the cost of the project during its development
and operational phase. It will determine what will be the increment in the cost and
what benefit it will provide after its implementation. The financial and economic
questions raised by analysis during preliminary investigation are for the purpose of
estimating may be: cost of conducting a full system investigation, cost of hardware and
software and benefit.
Human Resource Feasibility:
Human Resource Feasibility analyses the sufficiency, skill level and efficiency of
existing and future (if any) human resource to carry out the system development and
other tasks related to the life cycle. Lack of proper skilled and sufficient number of
personnel can greatly affect the timely implementation of the project over static makes
the system less feasible financially. So, proper HR feasibility is needed.
b) Computer based information system is the integrated form Information Technology
which collects the data from different sources, process those data to generate the
information and thus obtained information optimizes the organizational procedures. It
provides customized information to different hierarchy of management as and when
required.
There are three level of management hierarchy, which uses information system to
enhance their efficiency. Those levels are:
P.T.O.
(11)
a.) Top Level Management
b.) Middle Level Management
c.) Operational Level Management
Top Level Management:
Tope level management is defined as a set of management position, which is
concerned with the overall task designing, directing and managing the organization in
an integrated manner. In broader sense the job of top level management can be
categorized in two ways: external and internal.
Computer based information provides following types of information to the top level
management.
 Long term Policy and strategy formulation,
 Unstructured decision making process
 analysis of the competitive activities related with the rivalry
 analysis of customer preferences
 analysis economic trends, legal rulings and technological changes
 analysis of historical datas of the organization.
 analysis profit, cash flow, divisional income, sales, expenses
 analysis financial ratios, interests; credit outstanding etc
Middle Level Management (Tactical Level):
Middle management is defined as group of management position which trend to
overlap the top and operational management level. Middle level management is mainly
focused on supervision and monitoring of the operations and the administrative work
in the sense that it is responsible for the elaboration, classification and maintaining
operation of organization goals. Following information are provided the IS to the
middle level management to enhance their performance.
 Semi-structured decision making process,
 Supervisor roles,
 Short term policy strategy formulation
 Information about the price changes, shortages of products and raw materials,
 Information about the demand and supply, credit conditions
 Organizational performance indicators, over-under budgets
 Information about the sales, incomes, profits/loss etc.
Operational Level Management:
The operational level of management is defined as the group of those management
staffs which are responsible to carry out the day to day works and the execution of the
actual operation of office. The operational level management mainly concerned with
the implementing operational plans, policies and procedures for the purposes of
conversion of inputs and outputs. IS provides following information to the operational
level management.
 Structured decision-making process.
 Customer details, staffs details, products details.
 Units sales, expenses, stocks, staffs attendances.
 Current performances, operational level efficiencies and inefficiencies, input-
output ratios, maintenance reports etc.
6. W
rite short Notes on: (5*3=15)
P.T.O.
(12)
a) E
xecutive Support System
b) J
oint Application Development (JAD)
c) B
usiness to Consumer (B2C) E-Commerce
d) C
omputer Assisted Audit Technique (CAAT)
e) R
ole of IT in business development
Answers:
a) Senior managers use Executive Support systems (ESS) to help them make decisions.
ESS serves the strategic level of the organization. They address nonroutine decisions
requiring judgment, evaluation, and insight because there is no agreed-on procedure for
arriving at a solution. ESS is designed to incorporate data about external events, such as
new tax laws or competitors, but they also draw summarized information from internal
MIS and DSS. They filter, compress, and track critical data, displaying the data of
greatest importance to senior managers. ESS employs the most advanced graphics
software and can present graphs and data from many sources. Often the information is
delivered to senior executives through a portal, which uses a web interface to present
integrated personalized business content from a variety of sources.
Unlike the other types of information systems, ESS is not designed primarily to solve
specific problems. Instead, ESS provides a generalized computing and
communications capacity that can be applied to a changing array of problems.
Although many DSS are designed to be highly analytical, ESS tends to make less use
of analytical models.
b) Joint Application Development (JAD) uses highly organized and intensive workshops
to bring together system owners, users, analysts, designers, and builders to jointly
define and design systems. Synonyms include joint application design and joint
requirements planning.
A JAD-trained systems analyst usually plays the role of facilitator for a workshop that
will typically run from three to five full working days. This workshop may replace
months of traditional interviews and follow-up meetings.
JAD provides a working environment in which to accelerate methodology activities
and deliverables. It promotes enhanced system owner and user participation in system
development. But it also requires a facilitator with superior mediation and negotiation
skills to ensure that all parties receive appropriate opportunities to contribute to the
system's development.
One of the most interesting contemporary applications of systems analysis methods is
business process redesign.
c) B2C is one of the fastest growing segments of the economy. Consumers can order a
vast array of merchandise from the comfort of their homes or from mobile devices.
1) B2C is almost exclusively conducted via the Internet.
2) Traditional retailers have expanded their reach with B2C, and some firms, notably
Amazon.com, use the Internet as their sole communication channel with customers.
P.T.O.
(13)
Benefits accrue to businesses is with reduced costs and increased efficiency. Such as
reduced purchasing cost, increased marketing efficiency, greater market intelligence,
decreased inventory levels
Some security issues, such as authorization apply, but on a smaller scale. Also, the
vendor need not concern itself with the IT infrastructure on the customer‘s end.
d) Computer Assisted Audit Techniques (CAATs) is the tool which is used by the
auditors. This tool facilitates them to make search from the irregularities from the given
data. With the help of this tool, the internal accounting department of any firm will be
able to provide more analytical results. These tools are used throughout every business
environment and also in the industry sectors too. With the help of Computer Assisted
Audit Techniques, more forensic accounting with more analysis can be done. It‘s really
a helpful tool that helps the firm auditor to work in an efficient and productive manner.
The CAAT tool supports the forensic accounting in which larger amount can be
diverted to the analytical form and it also prompts where the tool detects the fraud.
This tool simplifies the data and in the automated form. The name of CAATs tool is
placed in almost every firm where the auditing or advance level accounting takes
place. The firm is well aware of the benefits of these tools and also making some
advancement in this tool in accordance with their need, in return all the large raw data
becomes in statistical and analytical form. It‘s a time saving tool.
With the advancement in the field of technology, many easy to use and more efficient
CAATs tools are available. Accountants of the present business world found this tool
very much easier to use as the new upcoming tools come with the guide book and even
are users friendly.
For working with the CAAT tool, it is essential for the accountant or the auditor to
select the right data, the selection process is very much tricky, and you need to be
professional for it. After selecting the right data, import that to the CAAT tool, now the
tool will automatically generate the analytical data. This tool really contributes to the
efficiency of the auditors.
e) Modern businesses are influenced by different factors for their smooth operation,
profitability and overall success. Having all the necessary information in a properly
managed, easily accessible and secure way is the most critical factor to have a
competitive business operation. From HR management to business transactions, from
supply chain management to accounting and finance, from decision support system to
operational transaction processing automation, quick, precise and timely availability of
information is the key for success. All this can be achieved only when there is a good
deployment, management, operation of IT facilities in the organization. Modern
organizations cannot even imagine of operating without computerized system for
almost every aspect of the business activities, both internal and external to the
organization. So, in short, IT has a pivotal and critical role in modern business
organization. Hence, every successful business organization is powered by well-
designed, timely and efficient use of Information Technology and its facilities.
P.T.O.
(14)
Advanced Taxation
P.T.O.
(15)
Suggested
Total No. of Questions - 8 Total No. of Printed
Pages - 6
Marks
Attempt all questions. Working notes should form part of the answer.
1. Ghimire and Company is an industry of special nature established in specified
economic zone (SEZ). The industry is located at normal place (not in Himali district)
and has a net profit of Rs. 2,000,000 for the income year 2072/73. The following are
the facts available.
a) C
ommission income of Rs. 50,000 is not included in net profit
b) D
ividend from a resident company of Rs. 28,500 was included in net profit
c) O
pening and Closing inventories were respectively valued at Rs. 300,000 and Rs.
200,000. The cost price of these stocks as on opening and closing date were Rs.
275,000 and Rs. 180,000 respectively
d) A
n asset under block D was purchased on Jestha 01 of income year costing Rs.
1,200,000. But it was not used in manufacturing process in the year. However,
its depreciation was found to be already adjusted in net profit.
e) I
n addition, the following amounts were not included in net profit
(a) Bad debt recovered Rs. 50,000
(b) Penalty under income tax Rs. 20,000
(c) Interest from tax free government securities Rs. 30,000
(d) Donation to tax exempt organization Rs. 200,000
(e) Net assessable income from investment of Rs. 150,000
(f) Business loss Rs. 250,000
(g) Total cost of pollution control device Rs. 1,500,000
(h) Speculation gain (winfall) of Rs. 40,000
f) H
owever, following items are recorded in profit and loss account
(a) Expense of income tax appeal Rs. 15,000
(b) Total cost of research and development Rs. 600,000
g) T
he industry is established 6 years ago
h) T
hough withholding tax has been paid on behalf of company by other entities, the
company has not deposited any advance tax during the year nor filed advance
tax return.
i) T
he company has not maintained the documentary evidence and papers as
required under section 81.
j) T
he return of income has been filed on Kartik 10, 2073 though extension for filing
Income Tax Return has been taken up to Poush end 2073. The contention of the
company is that the company has filed the return before the extended period;
there is no implication of interest under section 119.
k) D
uring the course of tax assessment, the Tax Officer assessed additional tax
P.T.O.
(16)
liability of Rs. 50,000 including tax, interest and fine. Out of which Rs. 20,000 is
undisputed and Rs. 30,000 is disputed tax liability. Also, the company is in
confusion whether to pay the interest and fine assuming that these are the
amounts not considered as tax as per act. Further, the Tax Officers reached to
the conclusion that the company has submitted erroneous statement and liable
for fine under section 120 (kha).
Required: (14+2+2+1+1=20)
i) Compute the Taxable Income and Tax Liability of Ghimire and Company.
Explain on each item on your computation with reference provisions of
Income Tax Act, 2058.
ii) Compute fine and interest under sections 117 and 119. Number of days in a
month 30. Ignore Section 118 interest computation, if any.
iii) What is the remedy available for disputed tax liability and implication
thereon? Also, the company is suffering from liquidity problem and does not
have sufficient cash, is there any possibility of providing bank guarantee
facility for disputed tax liability remedy?
iv) The company is very sure that the tax assessment performed by authority is
challengeable. If the remedy available under (iii) is opted and could not get
the decision on stipulated date, the company is in dilemma that whether
any recourse is available. Advise the company.
v) Compute the Fine to be charged as per Section 120 (kha).
Answer
(i)
Computation of Taxable Income and Tax Liability from business for the Income Year 2072.73
Particulars Amount (Rs) Amount (Rs)
Net income as per statement 2,000,000
Add: Commission Income 50,000
Over valuation of opening stock 25,000
Depreciation of unused asset 60,000
Bad debt recovered 50,000
Expense of Income tax appeal 15,000
Total cost of research and development 600,000 800,000
Total 2,800,000
Less: Over valuation of closing stock (20,000)
Dividend income (28,500) (48,500)
Adjusted Taxable Income before loss 2,751,500
Less: Business loss (250,000)
Adjusted Taxable Income for Pollution Control Cost 2,501,500
(PCC) and Research and Development Cost (R & D)
Less: Allowable Pollution Cost
50% of 2,501,500 (1,250,750)
Or actual cost incurred (1,500,000) (1,250,750)
(whichever is less)
Allowable Research and Development Cost
50% of 2,501,500 (1,250,750)
Or actual cost incurred (600,000) (600,000)
(whichever is less)
Net Assessable Income From Business 650,750
Statement of Total Taxable Income
Net Assessable Income From Business 650,750
Net Assessable Income From Investment 150,000
Total Net Assessable Income 800,750
Less: Allowable Donation (100,000)
Taxable Income 700,750
Tax Liability (50% of 20% = 10%) 70,075
P.T.O.
(17)
Notes:
1. Commission income is to be part of total assessable income from business.
2. Dividend income is to be excluded while computing the assessable income as it is subject to
final withholding tax as per section 92(1)(ka).
3. Over valuation of opening and closing stock to be adjusted while computing total assessable
income from business.
4. Depreciation shall be allowed only when the asset is put to use as per section 19. The asset is
purchased in Jestha 01 and hence, the adjustment of depreciation comes to Rs.
1,200,000×1/3×15% = Rs. 60,000.
5.
a. Bad debt recovered of Rs. 50,000 is to be included while computing total assessable
income from business.
b. As penalty amount of Rs. 20,000 is not allowed while computing total assessable income
from business and hence ignored.
c. Interest from Government Securities of Rs. 30,000 is subject to final withholding tax as
per section 92.
d. As per section 12, the donation amount to tax exempt organization is allowed as lower of
- 5% of Adjusted taxable income i.e. 5% of 2,651,500 = Rs. 132,575; or
- Actual donation paid i.e. Rs. 200,000; or
- Rs. 100,000.
Hence, 100,000 is allowed.
"Adjusted Taxable Income" means
Adjusted taxable income for pollution control cost and R & D 2,501,500
Add: Net assessable income from investment 150,000
Adjusted taxable income for donation 2,651,500
e. Net assessable income from investment of Rs. 150,000 is investment income and hence
separately included while computing total taxable income.
f. Business loss of Rs. 250,000 is allowed to be set off as per section 20.
g. Pollution Control Cost (PCC) is not included in net profit. Separate allowance as per
section 17 is allowed as follows;
50% of adjusted assessable income i.e. 50% of 2,501,500 = Rs. 1,250,750; or
Actual PCC paid i.e. Rs. 1,500,000
Whichever is less.
Hence, Rs. 1,250,750 is allowed.
6.
a. Speculation gain (winfall) of Rs. 40,000 is subject to final withholding tax as per section 92
and hence not included as part of assessable income.
b. Expense of income tax appeal of Rs. 15,000 which is recorded in profit and loss account
has been adjusted while computing assessable income from business.
c. Cost of R & D is allowed as per section 18 as follows
50% of adjusted assessable income i.e. 50% of 2,501,500 = Rs. 1,250,750; or
Actual R & D cost paid i.e. Rs. 600,000
Whichever is less.
Hence, Rs. 600,000 is allowed.
7. Section 2(3) of schedule 1 of Income Tax Act prescribes the tax rate of 20% for the industry
which is of special nature. Further, as per section 11(3ka)(kha), an industry which is located in
special economic zone and it has operated for more than five years, an exemption of fifty
percent on the applicable tax rate is allowed. Hence, Ghimire and Company is special industry
and situated in special economic zone, the applicable tax rate is 10% (fifty percent of twenty
percent).
P.T.O.
(18)
(ii)
Computation of Fine under Section 117 and Interest under Section 119
Computation of Fine under Section 117
Fine as per Section 117(1)(ka) for not filing Advance Tax Return Rs. 2,000
Fine as per Section 117(2) for not maintaining documentary evidence and papers under
Section 81
(Rs. 2,751,500 plus Rs. 150,000 = Rs. 2,901,500*0.1%=Rs. 2,901 or Rs. 1,000 whichever is
higher) Rs. 2,901
Computation of Interest under Section 119
Rs. 70,075*15%*1/12 = Rs. 876
Note: As per S ection 119(2), the amount of interest is chargeable even for extended time.
Hence, the contention of the company that the interest is not chargeable under section 119 is
not tenable though Income Tax Return filed before extended time.
(iii)
The remedy available to the company is that it can apply for administrative review as per
Section 115 by depositing one third of disputed amount as per Section 115(6). The one third of
the disputed tax liability is Rs. 10,000.
As per Section 2(dha)(4) the term tax includes fine and interest. Hence, fine and interest shall
form part of tax as per act.
Further, the provision of Section 115(6) specifically mentioned on the payment and hence no
bank guarantee facility is available as per act while making the application for administrative
review.
(iv)
If the company opted to file an application for administrative review and could not get the
decision within sixty days therefrom, it can apply to Revenue Tribunal as per Section 116 by
providing the information of such application to the department in writing within fifteen days.
(v)
Computation of Fine under Section 120(kha)
As per Section 120(kha), a person who makes the erroneous statement willfully, 100% of the
tax evaded shall be charged. The Tax Officer reached to the conclusion that the statement is
erroneous and the company is liable for fine of 100% of tax evaded. In this case, it shall be Rs.
70,075.
2.
a) J
anta Bank Ltd. has prepared its financial statements for the fiscal year 2072/73
and you are appointed as a tax auditor. Calculate loan loss provision allowed for
deduction as per Income Tax Act, 2058. 7
Amount in Rs. millions
Total outstanding loans and advances as on 2072.3.31 85,000
Total outstanding loans and advances as on 2073.3.31 125,000
Total outstanding loans loss provision as on 2072.3.31 6,000
Total outstanding loans loss provision as on 2073.3.31 9,000
During the year 2072/73, the bank has written off a debt of Rs. 150 million
from the outstanding loan loss provision.
b)
i) X
Investment Company invested Rs. 100,000 for 7% convertible debentures.
Debentures are converted to 1,000 share of Rs. 100 each. Market value of
share after conversion is expected to be Rs. 150. Calculate gain (loss) on
disposal in the following cases mentioning the relevant provisions of Income
Tax Act/Rules; (2+2=4)
(a) If the debentures were redeemed one year before of due date with
4.5% additional shares at par value.
P.T.O.
(19)
(b) I
f the debentures were redeemed one year before of due date with
premium of 4.5% of par value. Full value was settled by way of issued
shares at 2.25% of premium.
ii) T
ech Pvt. Ltd. has taken the extension of time for the submission of income
tax return for the income year 2072/73 as per section 98 of Income Tax Act,
2058 till Poush end 2073. The company submitted the income tax return on
Magh 09, 2073 instead of Poush end. The amount to be included in income,
as per Section 7, was Rs. 5 million and the deductible expense was Rs. 4
million. Since the company has taken the extension till Poush end there is
delay of nine days only and the amount of fees to be paid under Section
117(1) (ga) is for nine days only and shall be on the basis of net income i.e.
on Rs. 1 million. Comment on the claim of the company referring the
provisions of the Act. 3
c) M
r. Ramesh has taken voluntary retirement from ABC Ltd. on 2073.10.31 after
serving the employer for 13 years and 2 months. The employer has paid him Rs.
210,000 in connection with voluntary retirement, a gratuity of Rs. 180,000 and
leave salary of Rs. 150,000.
The employee was getting the basic pay Rs. 15,000 p.m. at the time of
retirement. The employer has unrecognized provident fund and has
contributed Rs. 3,000 p.m. to the unrecognized provident fund. The
employee has also contributed an equal amount. The employer has
credited interest of Rs. 27,000 to the unrecognized provident fund @ 11%
p.a. on the date of retirement. After retirement the employer has paid him
provident fund balance of Rs. 500,000, out of which employee‘s
contribution is Rs. 200,000. The employer‘s contribution is also Rs.
200,000 and balance is the interest on employee‘s and employer‘s
contribution. The employee has taken voluntary retirement after
completion of the age 50 years though he was to be retired at the age of 58.
The employer has allowed him one month leave per year of service. The
employee has availed seven months leave throughout his service and has
encashed six months leave.
Compute employee‘s tax liability for the income year 2073/074 and TDS
amount on taxable retirement payment. 6
Answer
a)
A. Total loan before the loan write off 125,000
+150 125,150
B. 5% on A 6,257.50
C. Loan Loss Provision claim up to
Previous year:
Loss loan provision Balance 6,000
Claimable Balance or claimed (85,000×5%) 4,250 4,250
Disallowed prev. year 1,750
D. Difference between B and C (6,257.50 -4,250) 2007.50
E. Actual Expense debited in income statement
Opening balance 6,000
Write off Adjustment (150)
Loan Loss Expenses 3,150 3,150
P.T.O.
(20)
Closing balance 9,000
F. Lower of D or E = 2007.50
(Claim to be made)
b)
i.
As per section 40(3)(d) an asset (a business asset, non-business chargeable asset, depreciable
asset, or trading stock) is deemed to be disposed if the form of the asset is changed just before
the new form of asset is used.
Further, as per section 41, in the case of an asset;
1. the person shall be treated as deriving an amount in respect of the disposal equal to the
market value of the asset at the time of the disposal; and
2. for the purpose of subsequent disposal of the asset, the net outgoings for the asset to the
time of the disposal under this section shall be treated as equal to the amounts derived.
Accordingly;
i. Incomings on disposal = Rs. 156,750 (1,000×1.045×150)
Outgoings = Rs. 100,000
Gain (loss) = Incomings – Outgoings
= Rs. 156,750 – Rs. 100,000
= Rs. 56,750
ii. Number of shares received = 1,022 (100,000×1.045/102.25)
Amount received at disposal = Rs. 153,300 (1,022×150)
Hence,
Incomings = Rs. 153,300
Outgoings = Rs. 100,000
Gain (loss) = Incomings – Outgoings
= Rs. 153,300 – Rs. 100,000
= Rs. 53,300
ii.
Section 117(1)(ga) prescribes the following provision.
In case a person fails to submit Income Tax Return as per Section 96(1), the fees shall be
charged as follows;
i. In case the person falls under the category as specified under Section 4(4), the fees shall be
Rs. 100 per month of delay.
ii. For other tax payers, the fees shall be higher of 0.1% of the 'assessable income' or Rs. 100 per
month of delay. The word 'assessable income' means the income derived after the
inclusion of all the amount to be included in income and before any allowed deduction.
A part of a month shall be treated as delay of one month for this section.
Accordingly,
Particulars Amount (Rs)
Amount to be included in Income is Rs. 5 million
Amount that can be allowed as deduction Rs. NIL
For the purpose of section 117(1)(ga) assessable income Rs. 5 million
Period of fees to be charged (Kartik to Magh) 4 months
Fees as per Section 117(1)(ga) [Rs. 5 million ×0.1%×4/12) Rs. 1,667
Conclusion: If the Income Tax Return was submitted within the extended time, the fees under
Section 117(1)(ga) would not have been charged. But if it is not submitted with in the
extended time the amount of fees under Section 117(1)(ga) shall have to be charged after three
months from the end of Income Year.
Hence, the contention of the company is incorrect
c)
P.T.O.
(21)
Computation of taxable Income and Tax Liability of Mr. Ramesh for the Income Year
2073-74
Particulars Amount
Basic Pay (15000*7) 1,05,000
Employers Contribution to Retirement 21,000
Fund (3000*7)
Taxable Income 126,000
Tax Liability
Social Security Tax on 126,000 @ 1% 1,260
Computation of Taxable Amount of Retirement Payment and Withholding Tax

Particulars Detail Amount
Voluntary Retirement Payment 2,10,000
Gratuity 180,000
Leave Salary 1,50,000
Taxable Amount 5,40,000
Withholding Tax @ 15% U/S 88(1) 81,000
Unrecognised Provident Fund Balance 500,000
Less: Contribution 400,000
Gain (Taxable Amount) 1,00,000
Withholding Tax @ 5% U/S 88(2) 5,000
3.
a) M
th
r. Gopal Shrestha has migrated to UK on 10 Poush, 2073. He has equity shares
in a commercial banks purchased at Rs. 500,000 and a house which he recently
purchased for Rs. 10,000,000. He could not sell these properties and therefore
decided to leave them in the country and migrated to UK on permanent basis.
He has plans to sell the shares as well as the house later on when he will come
to Nepal on a visit.
Explain the tax implication on the assets while he is migrating to UK and the
time when he will come back and sell the same? 5
b) S
ection 21 states that no deduction is allowed for expenses to the extent which
they are of domestic or personal nature. What do you understand by the
expenses of domestic or personal nature? Explain with reference to relevant
provision of Income Tax Act, 2058. 5
Answer
a)
As per the provisions of the Act, in a normal situation, when the ownership in an assets is
relinquished, it is considered that the assets is sold, however there are special provision in
Section 40 (3) of the Act which has prescribed the conditions on which the assets are deemed
to
have been sold even if the ownership is not transferred. Provision clarifies that where if the
owner of assets other than land or land & building, becomes non-resident then by the
operation of Section 40(3)(cha), the assets is deemed to have been sold at the prevailing
market rate. The Act clearly provides the exception for land and building. It therefore is
applicable for all other assets.
The asset is deemed to have been sold the day on which the person becomes non-resident.
In this case the shares in the commercial bank is deemed to have been sold on the day the
P.T.O.
(22)
person goes abroad, because from then on the person is going to be non-resident. The market
price of the shares (Stock Exchange Price) is considered the consideration for the shares sold
and the cost price will be the cost he incurred while purchasing those shares. The net gain will
be considered to have been realized by Mr. Gopal and he will have to pay tax.
Subsequently, when he will come to the country to sell these assets, he will have to consider
the cost of the shares to be the earlier notional income, while the income will be the market
price/transaction price of the shares sold on the date of the transaction.
There will be no special treatment for the land and building sale as these are excluded from
presumed sale of assets mentioned in section 40(3) (cha), therefore goes as per the normal
process
prevailing at the time the transaction is done
Since the house was recently purchased and he is a non-resident, he will not be eligible for any
concessional rate of tax on the sale of house and he would have to pay tax at 25% on the gains
on sale of the house as well as shares, as per Clause 1(8) of schedule 1 to the Income tax Act,
2058
b)
Expenses of a domestic or personal nature means the following expenses-

(1) Personal expenses incurred for an individual and the following expenses, including
interest incurred with respect to money borrowed to the extent to which it is used
for personal purpose-
(Ka) expenses incurred in maintaining the natural person, including in providing
shelter as well as meals, refreshment, entertainment, or other leisure
activities;
(Kha) expenses incurred with respect to the individual commuting, other than
commuting in the course of conducting a business or investment that does
not involve commuting between the individual's home and a place at which
the business or investment is conducted;
(Ga) expenses incurred in acquiring clothing for the individual, other than
clothing that is not suitable for wearing outside of work; and
(Gha) expenses incurred in education and training.
Provided that the deduction of the expenses incurred for education that is directly
relevant to a business or investment conducted by the individual and which does not
lead to a degree or diploma is allowed.
(2) where a person makes a payment to an individual, expenses incurred in making the
payment, including expenses incurred in favour of a third person, except in and to
the extent of the following conditions-
(Ka) the payment is included in calculating the income of the individual;
(Kha) the individual makes a return payment of an equal market value to the
person as consideration for the first mentioned payment; or
(Ga) the payments of the prescribed small amounts which are so small and thus
unreasonable or administratively impracticable to make accounting for them.
4.
a) A
One Ltd. imports/purchases the taxable raw materials to manufacture them
into different taxable and non-taxable items for VAT purpose. The company
furnished following information for the month Shrawan of year 2073.
Details of total imports excluding VAT are as follows;
Cost of raw materials declared by the company Rs. 300,000
Revised cost fixed by customs officer Rs. 350,000
Freight Rs. 50,000
Insurance Rs. 5,000
P.T.O.
(23)
Import duty @ 6%
In addition, it has purchased following raw materials:
Raw material 1 (Exclusive of VAT) Rs. 100,000
The products manufactured out of the above raw materials are sold out
with the details given below:
Ammonium Sulphate Rs. 20,000
Sodium Nitrate Rs. 20,000
Potassium Chloride Rs. 10,000
Pedestrian Controlled Tractor Rs. 200,000
Furniture Rs. 100,000
Sale of manufactured items to special economic zones
Established as per prevailing law. Rs. 200,000
Calculate: (5+2+1+2=10)
i) Amount of net VAT receivable or payable for the month.
ii) If the amount calculated is receivable and the same amount remains
unadjusted upto Poush 2073, whether the company could apply for refund?
Has the act specified final date for application of refund?
iii) The company insists that the refund, if any, shall have to be deposited in the
bank account of the company as per VAT rules. Is the company request
tenable as per law?
iv) If the tax office delays the payment of refund, if any, whether the tax payer
is entitled for interest? If interest is applicable, from which date such
interest is given?
b) A
nswer the followings by mentioning relevant provisions of Double Taxation
Avoidance Agreements (DTAA). (3+4+3=10)
i) Mr. Khamer, a resident of Pakistan, has conducted a hotel business in
Pakistan in income year 2072/73. As per law of Pakistan, Mr. Khamer has to
pay tax of Rs. 1 million to Pakistan Government out of the income from
operation of such business. Mr. Khamer left Pakistan without paying such
tax and has been residing in Nepal being resident person in income year
2073/74. There is DTAA between Nepal and Pakistan which mentions the
clause of assistance in collection of taxes. Though DTAA mentions such
clause, Mr. Khamer has not committed any tax related offences in Nepal;
Inland Revenue Department (IRD) cannot do anything in collection of such
taxes as per law of Nepal. State your views.
ii) Mr. Ravi Kanta Dawedi, a senior Ophthalmologist of Nepal, worked as a
resource person in AIIMS, New Delhi for a period of four months in income
year 2072/73. He generated Rs. 1 million as income in the form of service
fee. As per DTAA between Nepal and India, if any person provides the
service to a country wherein he is not residence of such country and resides
less than 183 days thereon, the income generated by providing service is not
taxable to a country wherein he provides the services (to a source country).
Since the service has been provided in New Delhi, Indian Income Tax
Department demanded tax on income of Rs. 1 million generated by Mr.
Dawedi. State your opinion.
What will be your opinion if there is no DTTA between Nepal and India?
P.T.O.
(24)
iii) Mr. Jalaluddin, a resident of Qatar provided loan to a hydropower in Nepal
amounting to Rs. 100 million and generated interest income of Rs. 10 million
charging interest at the rate of 10 percent. There is DTAA between Nepal
and Qatar wherein it has mentioned that if a resident person of a country
provides loan to a resident of another country and receives interest income,
the tax shall be charged at the rate of 10 percent. But as per Income Tax of
Nepal, any person other than resident natural person receives interest
income it is subject to withholding tax of 15 percent and in case of non-
resident person it shall be considered as final. State your views on the
taxability of such interest income.
Answer
a)
i.
In the case given, ammonium sulphate, sodium nitrate, potassium chloride and pedestrian
controlled tractor are Value Added Tax (VAT) exempted items as per Group 4: Agricultural
Items of Schedule 1 of VAT Act. Hence, no VAT shall be collected on those items.
Accordingly, input tax credit for that proportion shall also be disallowed.
Further, sale of manufactured items to special economic zones established as per prevailing
law shall be charged VAT at the rate of zero percent.
Computation of input VAT amount on import
Cost of raw materials Rs. 350,000
Freight Rs. 50,000
Insurance Rs. 5,000
Total Rs. 405,000
Import Duty @6% Rs. 24,300
Total cost for VAT purpose Rs. 429,300
Input VAT on import @13% Rs. 55,809
Computation of Input VAT amount on local purchase
Total cost Rs. 135,000
Input VAT @13% Rs. 17,550
Total VAT paid on Input Rs. 73,359
Computation of sales
VAT exempted sales Rs.250,000
Furniture @13% on Rs. 100,000 Rs. 13,000
Sale of manufactured items to special economic zones
established as per prevailing law @ 0% on Rs. 200,000 Rs. 0
Total VAT collected on sales Rs.13,000
Ratio of taxable and non-taxable sales is 300,000:250,000 i.e. 55:45
Input tax credit which can be claimed is: 55% of Rs. 73,359 is Rs. 40,347.45.
Amount of net VAT receivable is Rs. 40,347.45 – Rs. 13,000 is Rs. 27,347.45.
ii.
As per Section 24(3) of the Act, a registered person may file an application to a tax officer for
a lump sum refund, as prescribed, for an excess remaining amount that remains after taking
tax credit for a consecutive period of six months under this section. Hence the company may
file an application for refund.
As per Section 24ka of the act, notwithstanding anything mentioned in Section 24 of the Act,
the amount to be refunded as per VAT act shall not be refunded if the application for such
refund is not made within 3 years from the end of the tax period. In this case, last date for
application of refund is end of Shrawan, 2076.
iii.
As per Rule 45(2) of the rules, if refund of more than twenty thousand rupees has to be made,
payment has to be made so that the amount is credited in his bank account. Hence, the request
of the company is tenable as per law.
P.T.O.
(25)
iv.
As per Rule 47 of the VAT Rules, the rate of interest to be given by government of Nepal for
purposes of Section 24(5) of the Act shall be fifteen percent per annum. Such interest amount
shall be calculated only after sixty days from the date of claim for refund pursuant to sub-
sections (3) and (4) of Section 24 of the Act.
b)
i.
As per Section 73(2) of Income Tax Act, where Inland Revenue Department (IRD) receives a
request pursuant to an international agreement from the competent authority of another
country for the collection in Nepal of an amount payable by a person under the tax laws of the
other country, IRD may require such person to pay the amount.
Accordingly, as per DTAA arrangement between Nepal and Pakistan, IRD has the right to
summon a notice to collect such tax from Mr. Khamer. Such act is lawful under the law of
Nepal though Mr. Khamer who is citizen of Pakistan has not committed any tax related
offences in Nepal. As per DTAA, IRD has to assistance in collection of such tax defaulted by
Mr. Khamer in Pakistan.
ii.
As per Section 73(1) of Income Tax Act, 2058, in case any income of a person is subject to
income tax under Income Tax Act or any other prevailing law of Nepal during any Income
Year and the same income is subject to tax under laws of any other country, Government of
Nepal may conclude a Double Tax Avoidance Agreement (DTAA) to avoid any such double
taxation on same income.
Based on above provision, Nepal has entered into DTAA arrangement with India and
following provision have been mentioned.
If any person provides the service to a country wherein he is not residence of such country and
resides less than 183 days thereon, the income generated by providing service is not taxable to
a country wherein he provides the services (to a source country). Accordingly, the income of
Rs. 1 million as service fee generated by Mr. Dawedi is not taxable in India and the demand of
tax by Indian Income Tax Department is invalid. But if there is no DTAA arrangement
between Nepal and India, the income generated by Mr. Dawedi could also be taxable in India
as per the law of that country. There could be possibility of double taxation in case there is no
DTAA arrangement.
iii.
As per Section 73(4) of Income Tax Act, 2058, where an international agreement provides that
Nepal will exempt income or a payment or subject income or a payment to reduced tax, this
Sub-section shall apply.
If there is a provision in the tax law which states that the tax is levied as per act or at a higher
rate, and there is no tax or charged at lower rate as per Double Taxation Avoidance Agreement
(DTAA), the provision mentioned in DTAA shall prevail to a transaction wherein there is
DTAA arrangement.
Accordingly, tax rate mentioned in DTAA between Nepal and Qatar is 10 percent which is the
taxable rate if the loan is provided by a person resident of Qatar to a person resident of Nepal
superseding the tax rate mentioned in the provision of Income Tax of Nepal. The amount of
tax to be paid by Mr. Jalaluddin on income generated of Rs. 10 million of interest shall be Rs.
1 million (10 percent of Rs. 10 million).
5.
a)
P.T.O.
(26)
i) A
brick kiln owner produces and sells 500,000 brick at Rs. 10 per brick. He had
three chimneys which produced the following numbers of bricks.
Particular Amount (Rs.)

Chimney - 1 100,000
Chimney - 2 80,000
Chimney - 3 320,000
Total 500,000
Assess his Excise Duty Liability 4
ii) A
n Inland Revenue Officer has passed assessment order under section 23 (ga) of
Value Added Tax Act. The order states that goods sold by the firm are under
invoiced. Consequently the firm is ordered to pay additional tax, fine and fee for
the under invoiced amount. The proprietor of the firm is considering to file
petition in the Revenue Tribunal. Advise the firm. 3
b) B
utwal Power Company Ltd. had sent its machines for repair purpose to Norway
on Magh 1, 2072 and the value of machine is US$ 800,000. Since, the repair
process is too longer time and the company takes permission from custom office
for extended time for re-export for 5 months from date of export. The machine
was returned after repairing on Chaitra 30, 2072. The bill provided by Norway
for repair is of US$ 250,000 (including spare parts replacement). The company
found that the machine was not repaired correctly and therefore again on 1st
Baisakh 2073 sent the machine back for repairing to Norway. It took another 1
month for the repair to complete and finally the machine was back in Nepal
after repair on Jestha 1, 2073. Calculate the custom deposit/bank guarantee at
the time of sending machine to Norway and custom duty to be paid on returning
of machines. Assuming the custom rate to be 14%. 4
Exchange rates were as follows:
On Magh 1, 2072 Rs. 102.50
On Chaitra 31, 2072 Rs. 104.50
On Baishakh 1, 2073 Rs. 106.75
On Jestha 1, 2073 Rs. 107.50
c) S
tate the penal provisions under the Custom Duty Act and Excise Duty Act for the
following cases. 3
i) I
f any person cause or attempts to cause a loss of revenue or duty by
submitting a forged, fake or false document to the custom office.
ii) I
f any person deliberately obstructs or hinders the Custom Officer or any
employee or the custom office in the exercise of the power conferred by
Custom Act and the Rules.
iii) I
n case of committing any offense in contravention of Excise Act by preparing
false account or forged documents.
d)
i) P
QR Pvt. Ltd. is engaged in supply of taxable goods and is an unregistered
P.T.O.
(27)
under VAT. There is an exhibition scheduled on Poush 3, 2073 and the
company wants to participate in the exhibition for promoting its products.
Exhibition is for a period of one week. Since the company is unregistered, it
claims that registration is not mandatory as its participating in exhibition for
a week only. In other hand, Tax Officer demanded deposit of Rs. 500,000
citing the reason that the company is participating in exhibition. Also, Tax
Officer asked for the submission of tax return. Since the transactions
occurred on Poush, 2073, the company is in the view that it will submit tax
return by Magh 25, 2073.
Comment referring to the provisions of VAT Act/Rule. Also, mention
the fine to be paid by the company, if any, on non-compliance of
registration. 3
ii) M
s. Binita is a proprietor of a VAT registered firm. For the month of Shrawan
2073, she has collected VAT of Rs. 300,000 which she has to deposit within
25th Bhadra, 2073. But on Bhadra 10, 2073, she has delivered a baby boy due
to that she could not deposit the VAT amount within Bhadra 25. The tax
officer wants to levy additional fee of 10% per annum on her. She has
submitted an application to Director General, Inland Revenue Department
on Bhadra 26, 2073 for waiver of additional fee levied by the tax officer as
the non-payment of VAT was due to the circumstances beyond her control.
Can Director General waive that additional fee levy imposed by the tax
officer? Give your opinion. 3
Answer
a)
i) As per Excise Rules, 2059 Schedule – 2, Point 3 (ja(Excise duty license fee for Brick Klin is
Rs. 150,000 per chimney irrespective of production of chimney.
But if the kiln owner is registered under VAT he need not pay the above excise duty
license fee if the VAT payable is in excess of the Excise fee but if the VAT payable is less
than
Excise fee he has to pay the difference within Month of Shrawan from the year end.
In this case, VAT payable is 5,00,000 X 10 = 5,000,000 X 13% = 650,000
Excise license fee payable for the three Brick Kilns is 1,50,000 X 3 = 4,50,000
Since, total VAT payable is more than the excise duty license fee payable he need not pay
any excise duty fee.
Comments: This provision has been revised. As per amended provision, license fee for brick
industry, per chimney of Rs. 150,000 has been withdrawn. Such industry has to be
mandatorily registered under VAT as per provisions mentioned in VAT Act. Hence, Excise
duty payable is NIL.
ii) Under section 23 (ga), tax officer has power to seize similar goods in stock which are under
invoiced and can be purchased or caused to be purchased by the department or the Internal Revenue
Office at the under invoiced price but at the same time the tax officer has no power to levy additional
tax, fine, fee and penalty. So, the order to pay additional tax, fine and fee for the under invoiced
amount is not in compliance with Section quoted i.e. 23 (ga).
b)
As per Rule 7, in case it becomes necessary to send any goods or machinery or spare parts thereof to
a foreign country from Nepal for purpose of repair, deposit as defined below shall be taken.
P.T.O.
(28)
0.5% of the value of the goods in case the goods is aircraft, helicopter and parts thereof, otherwise it
shall be 5% of value.
Here, the value of machinery sent is US$ 800,000 *102.50 = NRs. 820,00,000. Thus, custom shall be
5% of it i.e. 5% of NRs.8,20,00,000 = NRs.41,00,000.
The time given in Rule 7 for re-exports of machine sold for repair is three months from date of
export. This limit can be extended for next three months if granted by custom officer. Here time
limit shall be extended and re-import shall be done within lime limit.
Thus, Custom Officer shall charge custom duty at prevailing rate on the expenses involved in such
repair or on the price of spare parts which are replaced.
From it, custom deposit furnished earlier shall be deducted and custom officer shall return the
balance of the amount of the person.
Particulars Amount NRs
Expenses of repair USD 250,000 * NRs. 104.50 2,61,25,000.00
Rate of Custom Duty 14%
Custom Duty on repair 36,57,500.00
Custom deposit given while machines sent for repair 41,00,000.00
Amount to be received 4,42,500.00
BPC need to receive Rs. 442,500 back from Custom Office.

Bank guarantee proved for the replacement spare parts will be returned by the Custom Office
once the machine is sent back within 6 months for bringing the machine. Since the final repair
was completed within 6 months, the machine was returned on time, therefore no further duty is
payable.
c)
i) 200% of the amount of duty or revenue the loss of which has been so caused or attempted
to be caused or with imprisonment for a term from six months to one year or with both
punishments.
ii) Fine not exceeding Rs. 5,000 or with imprisonment for a term not exceeding one year or
with both punishments, if such person is a government employee, and with a fine not
exceeding Rs. 1,000 or with imprisonment for a term not exceeding six months or with
both punishment if such person is not a government employee.
iii) Fine equal to the amount involved in the offense, or with imprisonment for a term not
exceeding one year, or with both.
d)
i.
Value Added Tax Act, 2052 prescribes the following provisions.
Section 10(ka)(1)
Any unregistered person, willing to engage in any taxable transactions of goods or services at
fair, exhibition and similar activities as organizer or participants, shall have to be temporarily
registered as prescribed under VAT before starting such transactions.
Section 10(ka)(3)
P.T.O.
(29)
After completion of the fair or exhibition, within seven days, the person registered under
subsection (1), has to submit a tax return of the transactions made at the fair or exhibition, pay
the tax accordingly and cancel the temporary registration thereof.
Section 29(1)(ka)
On infringement of section 10ka, Rs. 10,000 for each tax period is to be charged.
Accordingly,
PQR Pvt Ltd is participating in exhibition Ltd has to be temporarily registered under VAT
before participating in it i.e. before Poush 3, 2073.
The Tax Officer cannot demand deposit any deposit as the provision of deposit has been
withdrawn by Finance Act.
Tax Return has to be submitted by the company within seven days from the end of exhibition
and tax thereon has to be paid and cancel the temporary registration thereof, i.e. within Poush
17, 2073.
If the company is submitting tax return on Magh 25, 2073, Rs. 10,000 for each tax period is to
be paid as fine under section 29(1)(ka).
ii.
As per Rule 35 of the Value Added Tax Rules, 2053 In case a woman required to pay tax
delivers a child; up to thirty five days of the date of delivery is considered as circumstances
beyond the control. Further, as per Rule 36 of VAT Rules, for the remission of the additional
charges pursuant to 19(4) of the Act, an application shall be submitted to the Director General
within thirty days of the expiry of time-limit prescribed for payment of tax. In case an
application is not submitted within the time-limit referred, the waiver of additional charges
shall not be granted.
In this case, she has made an application within the limit mentioned in Rule 36. So, applying
the provision of section 19(4) of the Act which states if a taxpayer applies to the Director
General for the exemption of the additional charges levied due to non-payment of VAT within
time stating the reason that the failure to make a timely payment was caused by extraordinary
circumstances beyond the taxpayer‘s control, the Director General may, if he finds the reason
reasonable, exempt such charges.
The Director General after the necessary verification of the matter can waive the additional fee
levied.
6.
a) W
hether the Excise Duty shall be levied on the followings? (5×1=5)
i) P
roduction of Pet bottles (under custom code 3923) by a Beverage Industry
for packing of its final product.
ii) S
ale of Molasis (Khudo) by a sugar manufacturing unit.
iii) L
ocal production of marble.
iv) L
ocal production of motorcycle (Electric)
v) P
roduction and sale of Pasta /Noodles/ Macaroni
b) A
t what conditions excise duty is exempt and what is the penalty if the person
fails to furnish information to extend co-operation as per Excise Act? 5
Answer
P.T.O.
(30)
a)
i) Yes, Excise shall be levied on Production of Pet bottles (under Custom Code
3923) by a Beverage Industry for packing of its Final Product. (Schedule-1 of
Excise Act)
ii) Excise shall be levied on Sale of Molasis by manufacturer. (Schedule-1 of
Excise Act)
iii) No, excise shall not be levied on Local Production of marble. (Schedule-1 of
Excise Act)
iv) No, excise shall be levied on Local production of Electric Motorcycle.
(Schedule-1 of Excise Act
v) Yes, excise shall be levied on Production & sale of Junk Foods. (Schedule-1 of
Excise Act)
b)
In the following cases excise duty is exempt as per Excise Act:
i. No excise duty shall be levied on converting into government number plate by handing
over vehicle imported in diplomatic privilege or duty privilege by foreign mission and
donor agency to a project as per approved annual program and on handing over of vehicle
imported under full or partial duty privilege (except imported under pass book or bank
guarantee) to government entity by converting into government number plate with the
approval from the Ministry of finance on completion of the project.
ii. No excise duty shall be levied on canceling registration with the approval from the Ministry of
Finance by scraping in a not reusable way of vehicle that is old over 15 years from the date of
manufacture and was imported on duty privilege by diplomatic mission, project, and other entity,
iii. Excise duty will be exempted on transferring the vehicle exported on customs duty privilege for
personal use in the name of husband or wife on death of owner of the vehicle.
In case any person who is under obligation to furnish information about any action taken,
about to be taken, or being taken in contravention of Excise Act after getting information
thereof, or to extend cooperation as demanded by the Excise Officer, does not willfully furnish
such information or extend such cooperation, as the case may be, he shall be punished with
imprisonment for a term not exceeding three months, or with a fine not exceeding Rs 10,000,
or with both, according to the nature of the offense.
P.T.O.
(31)
Advanced Cost & Management Accounting
P.T.O.
(32)
Suggested
Total No. of Questions - 7 Total No. of Printed Pages - 5
Marks
Attempt all questions. Working notes should form part of the answer.
Make assumptions whenever necessary.
1. Zephyr Industries is a diversified corporation with separate operating
divisions. Each divisio‘s performance is evaluated on the basis of profit
and return on investment.
The AC Division manufactures and sells air conditioning units. The
coming year‘s budgeted income statement, which follows, is based upon a
sales volume of 18,750 units:
AC Division
Budgeted Income Statement
Per Unit Total
(Rs.) (Rs.‘000)
Sales revenue 40,000 750,000
Manufacturing costs:
Compressor 7,000 131,250
Other direct material 3,700 69,375
Direct labour 3,000 56,250
Variable overhead 4,500 84,375
Fixed overhead 3,200 60,000
Total manufacturing costs 21,400 401,250
Gross margin 18,600 348,750
Operating expenses:
Variable selling 1,800 33,750
Fixed selling 1,900 35,625
Fixed administrative 3,800 71,250
Total operating expenses 7,500 140,625
Net income before taxes 11,100 208,125
The manager of AC Division believes sales can be increased, if the price
of the air conditioner is reduced. A market research study by an
independent firm indicates that a 5% reduction in the selling price would
increase sales volume by 16%. AC Division has sufficient production
capacity to manage this increased volume with no increase in fixed costs.
AC Division uses a compressor in its units, which it purchases from an
outside supplier at a cost of Rs. 7,000 per compressor. The Auxiliary
Division currently manufactures and sells a compressor to outside firms
which are similar to the compressor used by AC Division. The manager of
AC Division has asked the manager of the Auxiliary Division about selling
compressor to AC Division. The specifications of the AC Division
compressor are slightly different, which would reduce the Auxiliary
Divisions direct material cost by Rs. 150 per unit.
In addition, the Auxiliary Division would not incur any variable selling
costs for the units sold to AC Division. The manager of AC Division wants
all of the compressors it uses to come from one supplier and has offered to
pay Rs. 5,000 for each compressor.
The Auxiliary Division has the capacity to produce 93,750 units. Its
budgeted income statement for the coming year, which follows, is based
P.T.O.
(33)
on a sales volume of 80,000 units without considering AC Division.s
proposal:
Auxiliary Division
Budgeted Income Statement
Per Unit Total
(Rs.) (Rs.‘000)
Manufacturing costs:
Direct material 1,200 96,000
Direct labour 800 64,000
Fixed overhead 1,100 88,000
Total manufacturing costs 4,100 328,000
Gross margin 5,900 472,000
Operating expenses:
Variable selling 600 48,000
Fixed selling 400 32,000
Fixed administrative 700 56,000
Total operating expenses 1,700 136,000
Net income before taxes 4,200 336,000
Required: (7+7+4+2=20)
i) Should AC Division undertake the 5% price reduction on its air conditioner
units even if it cannot acquire the compressors internally for Rs. 5,000 each?
Support your conclusion with appropriate calculation.
ii) Independently of your answer to requirement (i) above, assume AC Division
needs 16% increase in its units. Should the Auxiliary Division be willing to
supply the compressor units for Rs. 5,000 each? Support your conclusions
with appropriate calculations.
iii) Independently of your answer to requirement (i) above, assume AC Division
needs 16% increase in its units. Suppose Zephyr Industries. top management
has specified a transfer price of Rs. 5,000. Would it be in the best interest of
Zephyr Industries for the Auxiliary Division to supply the compressor units at
Rs. 5,000 each to the AC Division? Support your conclusions with
appropriate calculations.
iv) Is Rs. 5,000 a goal-congruent transfer price? Refer to your answers for
requirements (ii) and (iii) above.
Answer
i. Undertaking of 5% price reduction:
(Rs./ per
Unit)
Before 5% After 5%
Price Reduction Price
Reduction
Variable costs:
Compressor 7,000 7,000
Other direct materials 3,700 3,700
Direct labor 3,000 3,000
Variable selling 1,800 1,800
Total variable costs 20,000 20,000
Contribution margin 20,000 18,000
P.T.O.
(34)
Contribution margin: Rs.

'000'
Before 5% price reduction (20,000 x 18,750)
375,000
After 5% price reduction (18,000 x 21,750)
391,500
Increase in contribution margin
16,500
Decision:
Yes, AC Division should undertake the 5% price reduction on its air conditioner units
because
contribution margin would increase by Rs.16,500,000.
ii. Supply of Compressors to AC Division: Rs./ per Unit
Outside Sales Sales to AC
Div.
Selling price 10,000 5,000
Variable costs:
Direct materials 1,200 1,050
Direct labour 800 800
Variable selling expenses 600 .
Total variable costs 3,600 2,850
Contribution margin 6,400 2,150
Contribution margin: Rs. in '000.
If Auxiliary Division does not consider to transfer 21,750 units to AC
Division (80,000 x 6,400) 512,000.0
If Auxiliary Division transfer 21,750 units to AC Division (W-1) 507,562.5
Decrease in contribution margin 4,437.5
Workings: W-1:
If Auxiliary Division transfer 21,750 units to (21,750 x 2,150) Rs.
46,762,500
AC Division (72,000 x 6,400)
460,800,000 Contribution margin
507,562,500
Decision:
No, the Auxiliary Division should not sell all 21,750 units to AC Division
for Rs.5,000 each. If the Auxiliary Division does sell all 21,750 units to AC
Division, it will only be able to sell 72,000 units to outside customers
instead of 80,000 units due to the capacity restrictions. This would decrease
Auxiliary Division's contribution margin by Rs.4,437,500. Auxiliary
Division would be willing to accept any orders from AC Division above the
80,000 unit level at Rs.5,000 per unit because there would be a positive
contribution margin of Rs.2,150 per unit.
iii. Best interest to supply the compressors: Rs. in '000.
Contribution margin of AC Division:
If buying from Auxiliary Division (22,000* x 21,750) 478,500
If buying from outsider (20,000 x 21,750) 435,000
Increase in AC Division contribution 43,500
Contribution margin of Auxiliary Division:
If supply 21,750 units to AC Division (W-1) 507,562.5
If does not supply 21,750 units to AC Division (6,400 x 80,000) 512,000
Decrease in contribution of Auxiliary Division (4,437.5)
Net benefit to Zephyr Industries 39,062.5
P.T.O.
(35)
* Contribution margin as calculated in (i) above Rs. 20,000 + Reduced compressor
cost 2,000.
Decision:
Yes, it would be in the best interests of Zephyr Industries for the Auxiliary Division
to sell the units to the AC Division at Rs.5,000 each. The net advantage to Zephyr
Industries is Rs.39,062,500.
iv. As the answers to requirements (ii) and (iii) above show, Rs.5,000 is not a goal-
congruent
transfer price. Although a transfer is in the best interests of Zephyr
Industries as a whole, transfer of Rs.5,000 will not be perceived by the
Auxiliary Division's management as in that division's best interests.
2.
a) As the management accountant of a company, the following
information is available to you:
Previous Period Current Period
Rs. in ‗000 Rs. in ‗000
Sales (100,000 units 39,000 (106,000 units 41,340
at Rs. 390 each) at Rs. 390 each)
Costs 30,000 32,322
Profit 9,000 9,018
You find that between the previous year and current periods, there was
4% general cost inflation and it is forecast that costs will rise further
6% in the next period. As a matter of policy, the firm did not increase
the selling price in the current period although competitors raised their
prices by 4% to cover the increased costs. A survey done by
economists was commissioned and it was found that the demand for
the product is elastic with an estimated price elasticity of demand of
1.5 which means that the volume would fall by 1 ½ times the rate of
real price increase.
The company‘s Board wants you to do the following indicating clearly
the assumptions you have made: (7+3=10)
i) Show the budgeted position if the firm maintains the selling price of Rs.
390 for the next period (when it is expected that the competitors will
increase their prices by 6%), and
ii) Show the budgeted position if the firm raises its price by 6%.
b) A Ltd. produces the basic fillings used in many popular ice creams. It
uses standard costing and carries over no inventory from one month to
the next. The results for Baishakh 2074 were as follows:
Performance Report for Baishakh 2074
Particulars Actual results Static budget
Unit (Kg.) 355,000 345,000
Revenues (Rs.) 1,917,000 1,880,250
Variable manufacturing costs ( Rs.) 1,260,250 1,207,500
Contribution margin ( Rs.) 656,750 672,750
The business manager is pleased that more ice creams were sold than
budgeted and that revenues were up. Unfortunately, variable
manufacturing costs went up too. The bottom line is that contribution
margin declined by Rs. 16,000, which is
less than 1% of the budgeted revenues of Rs. 1,880,250. Overall, the
business manager feels that the business is running fine.
The business manager would also like to analyze how the company is
performing compared to the overall market for ice-cream products. He
P.T.O.
(36)
knows that the expected total market for ice-cream products was
1,150,000 kg. and that the actual total market was 1,109,375 kg.
Required: (5+3+2=10)
i) Calculate the flexible-budget variance, sales-volume variance and static-
budget variance in units, revenues, variable manufacturing costs, and
contribution margin, and reconcile them.
ii) Calculate the market-share and market-size variances.
iii) Assume the role of management accountant at A Ltd. How would you
present the results to the business manager? Should he be more
concerned? If so, why?
Answer
a)
(i) Budgeted Position if the firm maintains selling price of Rs. 390 for next period:
Price elasticity of demand (% in quantity demand ÷ % increase in price) = 1.5
This means that, when the price fall by 4%, demand will increase by 4% x 1.5 = 6%
Also, when the price fall by 6%, demand will increase by 6% x 1.5 = 9%.
Determination of fixed and variable costs:
Adjust current period cost of previous period cost = 32,322 / (1 + 4% of 1 or 1.04) =
31,078.84.
Using high and low method to determine the split between fixed and variable cost:
Period Units (‘000) Cost (Rs. in ‘000)
Current 106 31,078.84
Previous 100 30,000,00
6 1,078.84
Variable cost per unit = Rs. 1,078.84 / 6 = Rs. 179.80
Fixed cost (in Rs. ‗000) = 30,000 – (100 x 179.80) = 30,000 – 17,980 = Rs. 12,020
Variable cost per unit for the next period = Rs. 179.80 (1.04) (1.06) = Rs. 198.21
Fixed cost for the next period = Rs. 12,020,000 x (1.04) (1.06) = Rs. 13,250,848
Budgeted Position with a Selling Price of Rs. 390:
Sales 106,000 units (1 + 9% of 1 or 1.09) x Rs. 390 = Rs. 45,060,600
Variable cost = 106,000 x 1.09 x 198.21 = Rs. 22,901,183
Contribution Rs. 22,159,417
Fixed Cost (as calculated above) Rs. 13,250,848
Profit: Rs. 8,908,569
ii) Budgeted Position with a Selling Price of Rs. 390 with a 6% increase in Price:
Sales 106,000 units (1 + 6% of 1 or 1.06) x Rs. 390 = Rs. 43,820,400
Variable cost = 106,000 x 1.06 x 198.21 = Rs. 22,270,876
Contribution Rs. 21,549,524
Fixed Cost (as calculated above) Rs. 13,250,848
Profit: Rs. 8,298,676
Assumptions:
(a) The volumes are exclusively the functions of price changes and are not influenced by factors
such as advertisement, consumer preference and general economic conditions.
(b) The shift in fixed/variable cost is constant over time.
(c) The estimates of elasticity of demand are correct.
b)
P.T.O.
(37)
i) Calculation of the flexible-budget variance, sales-volume variance and static-
budget variance
Particulars Actual Static- Flexible-

Static- Flexible- Sales-
(1) budget budget
budget budget volume
(2) (3)
variance variance variance
(4) = (5) = (6) =
(1) – (2) (1) – (3) (3) – (2)
Unit (Kg.) 355,000 345,000 355,000 10,000 F 0 10,000 F
Revenue 1,917,000 1,880,250 1,934,750 36,750 F 17,750 U 54,500 F
(Rs.)
VC (Rs.) 1,260,250 1,207,500 1,242,500 52,750 U 17,750 U 35,000 U
CM (Rs.) 656,750 672,750 692,250 16,000 U 35,500 U 19,500 F
Reconciliation:
Static-budget variance = Flexible-budget variance + Sales-volume variance
Rs. 16,000 U = 35,500 U + 19,500 F
Rs. 16,000 U = Rs. 16,000 U
Workings:
Budgeted selling price = Rs. 1,880,250/ 345,000 Kgs. = Rs. 5.45/ Kg.
Flexible-budget revenues = Rs. 5.45 × 355,000 Kgs. = Rs. 1,934,750
Budgeted variable mfg. cost/ unit = Rs. 1,207,500/ 345,000 Kgs. = Rs. 3.50
Flexible-budget variable mfg. costs = Rs. 3.50 × 355,000 Kgs. = Rs. 1,242,500
ii) Calculation of the market-share and market-size variances
Actual market size = 1,109,375 Kgs.
Budgeted market size = 1,150,000 Kgs.
Actual market share = Actual unit sold/ Actual market size
= 355,000/ 1,109,375 = 32%
Budgeted market share = Budgeted unit sold/ Budgeted market size
= 345,000/ 1,150,000 = 30%
Budgeted contribution margin/ Kg = Budgeted CM/ Budgeted unit

= Rs. 672,750/ 345,000
= Rs. 1.95
Market-share variance = (Actual market share – Budgeted market share) × Actual
market size × Budgeted contribution margin per unit
= (0.32 – 0.30) × 1,109,375 × Rs. 1.95
= Rs. 43,266 F
Market-size variance = (Actual market size – Budgeted market size) × Budgeted
market share × Budgeted contribution margin per unit
= (1,109,375 – 1,150,000) × 0.30 × Rs. 1.95
= Rs. 23,766 U
iii) The flexible-budget variances show that for the actual sales volume of
355,000 kgs., selling prices were lower and costs per kg were higher. The
favorable sales volume variance in revenues (because more ice-creams were
sold than budgeted) helped offset the unfavorable variable cost variance and
shored up the results in Baishakh 2074. The business manager should be more
concerned because the small static-budget variance in contribution margin of
Rs. 16,000 U is actually made up of a favorable sales-volume variance in
contribution margin of Rs. 19,500, an unfavorable selling-price variance of
Rs. 17,750 and an unfavorable variable manufacturing costs variance of Rs.
17,750.
He should analyze why each of these variances occurred and the
relationships among them. Could the efficiency of variable manufacturing costs be
P.T.O.
(38)
improved? The sales volume appears to have increased due to the lower sales price
or a better quality product since the overall total market size decreased. The
company increased its market share even in the face of an overall decrease in the
market for ice-cream products. This could be due to increased efforts in marketing
or actions by competitors that are driving more customers to the company.
3.
a) A cement company produces two types of cement; i.e. OPC and PPC.
Each of them are packed and sold in a 50 Kg. sack. Both are of good
quality. The contribution margin from each sack of 50 Kg. of OPC and
PPC is Rs. 400 and Rs. 300 respectively. The market demand is quite
good that the company can sell all the quantities of both types of
cements in any quantity combination.
Each sack of OPC and PPC require 45 Kg. and 40 Kg. of lime stones
respectively. The availability of lime stones is limited to 9,000 Kg.
each day. One very advanced machine is involved in production that
crushes mixes and packs the cement. Each sack of both types of
cements requires 6 minutes in this machine. The available machine
hour per day is limited to 18 hours only.
Required: (4+6=10)
i) Formulate a linear programming model for the above case.
ii) Determine how much of each type of cement should be produced to
maximize total contribution margin. Use revised simplex method.
b) A furniture company, manufacturing a fire proof filing cabinet, is
planning to introduce a new model which requires the following tasks:
Task Description Task Time in minutes
A Prepare the wheels 10
B Mount the wheels 5
C Assemble the sides 15
D Attach the top 11
E Attach the base 10
F Insert the brackets 5
G Insert the shelves 5
H Attach the doors 10
I Attach the back panel 10
J Paint the unit 15
The wheels are mounted after they are prepared. The base cannot be
attached until the sides are assembled and the wheels mounted. The top
cannot be attached nor the brackets inserted until the sides are
assembled. The shelves are inserted after the brackets are installed.
The back panel is attached after the base and top are attached. The
doors are attached after the shelves are inserted and the top and base
are attached. The unit is painted after the back and doors are attached. 10
i) Identify the immediate predecessors of each task.
ii) Draw the network.
iii) Find the critical path(s).
Answer
a)
i) Formulation of LP Model
Suppose X1 number of sacks of OPC and X2 number of sacks of PPC can be
manufactured.
Objective function:
P.T.O.
(39)
The contribution margin per sack from OPC is Rs. 400 and that of PPC is Rs. 300.
The objective function is to maximize the total contribution. Therefore, Max. Z =
400X1 + 300X2
Raw material constraint:
Each sack of OPC requires 45 Kgs. of lime stones and each sack of PPC requires 40
Kgs. of lime stones. The total quantity of lime stones available per day is only 9,000
Kgs. Therefore, 45X1 + 40X2 ≤ 9,000
Machine hour constraint:
Each sack of OPC and PPC requires 6 minutes in average. The available machine
hour is only 18 hours (1,080 minutes) each day. Therefore, 6X1 + 6X2 ≤ 1080
Non-negative constraint:
X1, X2 ≥ 0
Now, LP Model is:

Max. Z = 400X1 + 300X2
Subject to
45X1 + 40X2 ≤ 9,000
6X1 + 6X2 ≤ 1,080, and
X1, X2 ≥ 0
ii) Determining the quantity of OPC and PPC to be manufactured each day to maximize
the total contribution using revised simplex method:
Introducing slack variables S1 and S2 for ≤ situations and re-writing the problem:
Max. Z = 400X1 + 300X2 + 0S1 + 0S2
Subject to
45X1 + 40X2 + S1 + 0S2 = 9,000
6X1 + 6X2 + 0S1 + S2 = 1,080
Where,
X1, X2, S1, S2 ≥ 0
Converting into standard LPP:
Row 0: Z - 400X1 - 300X2 - 0S1 - 0S2 = 0
Row 1: 0Z + 45X1 + 40X2 + S1 + 0S2 = 9,000
Row 2: 0Z + 6X1 + 6X2 + 0S1 + S2 = 1,080
Simplex Table I:
Table I Z X1 X2 S1 S2 Constant Ratio
R0 1 -400 -300 0 0 0 -
R1 0 45 40 1 0 9,000 9,000/45= 200
R2 0 6 6 0 1 1,080 1,080/6= 180
Key column is X1 with highest negative value (-400) 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 180.
Key element is 6; 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: 0/6, 6/6, 6/6, 0/6, 1/6, 1,080/6
: 0, 1, 1, 0, 1/6, 180
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 -400 -300 0 0 0
Intersecting element -400 -400 -400 -400 -400 -400
Element of replacing row 0 1 1 0 1/6 180
P.T.O.
(40)
New R0 1 0 100 0 400/6 72,000
Replacing value for R1

Old R1 0 45 40 1 0 9,000
Intersecting element 45 45 45 45 45 45
Element of replacing row 0 1 1 0 1/6 180
New R1 0 0 -5 1 -45/6 900
Simplex Table II:
Table II Z X1 X2 S1 S2 Constant
R0 1 0 100 0 400/6 72,000
R1 0 0 -5 1 -45/6 900
R2 0 1 1 0 1/6 180
Since all the values of R0 is, now, ≥ 0, the optimal solution is reached.
Basic solution:
1 0 0 Z 72,000
0 1 0 S1 = 900
0 0 1 X1 180
Therefore, required quantity, to maximize total contribution, of OPC is 180 sacks and
PPC is 0 sacks. It will give a total profit contribution of Rs. 72,000.
b)
Statement showing the predecessors of each task
Activity Immediate predecessors
A -
B A
C -
D C
E B,C
F C
G F
H D,E,G
I D,E
J H,I
ii)
B E
A 2 4 6 I
J
1 8 9
C D H
3
5 7
F G
iii) There are two critical paths:

1-3-6-8-9, 1-3-6-7-8-9
4.
a) Top Palace Hotel Ltd. is 7 star hotels at highly costly area and focusing
only high net worth business personals as their customer. Only
luxurious suit rooms will be available in that hotel. Three types of
suites for its customers, viz. single room, double room and three rooms
respectively. Each type of suite and cost information are as follows:
P.T.O.
(41)
i) The number of luxury suites of each type are:
Single room suites 100
Double room suites 30
Three room suites 20
ii) The rent of double room suite is to be fixed as 1 ½ times the single-
room suite and that of three rooms as twice the single room suite.
iii) The occupancy of each type of suite is as follows:
Summer Winter
Single room suites 90% 50%
Double room suites 80% 20%
Three room suites 60% 20%
iv) The annual expenses are as follows :
(a) Staff salaries Rs. 220,000,000
(b) Room attendant‘s wages when occupied :
(Rs.‘000)
Summer Winter
Single room suites 2 3.00
Double room suites 3 4.50
Three room suites 4 6.00
(c) Lighting, heating and power for full month, when occupied
(Rs.‘000)
Lighting Power
Single room suites 40 20
Double room suites 60 30
Three room suites 80 40
(d) Repairs and renovation Rs. 42,000,000

Linen etc. 45,000,000
Interior decoration 50,000,000
Sundries 31,550,000
(e) Depreciation:
Building @ 5% on Rs. 1,400,000,000
Furniture & Fixtures @10% on Rs. 100,000,000
Air-conditioner @ 10% on Rs. 200,000,000
v) Summer may be assumed for 7 months and winter for 5 months in
a year. A month may be taken as of 30 days.
vi) Profit including interest on investment @ 25% on cost.
Required: 8
Calculate the rent to be charged for each type of suite on the basis of
above mentioned information.
b) Cherry Idea Ltd. makes a variety of garden storage units and has one
very popular model, ‗The Smart‘, which it sells to two large
supermarkets (Market A and Market B respectively) and to a third
privately owned firm with a number of smaller garden center shops
(Market C). The garden storage units are sold to customers at Rs. 200
each (before discounts) and the standard cost of production is Rs. 100
per unit out of the Rs. 100 cost, 40% is fixed overhead. The CEO of
Cherry Idea Ltd. is concerned about the real profitability of each group
of customers. He asks the CFO to undertake a customer profitability
analysis and calculate and compare the profit margin per customer
(using ABC and before deducting fixed overhead) with the traditional
contribution margin per customer.
P.T.O.
(42)
The following additional overhead information is provided:
• Delivery costs vary at the average rate of Rs. 5 per KM.
• If a customer‘s inventory runs low then emergency delivery costs
amount to Rs. 600 per delivery and are incurred in addition to the
cost related to delivery distances.
• Order taking costs are Rs. 100 per order.
• Customers are entitled to specific discounts and sales commissions
as agreed with them individually.
• Publicity costs are determined and agreed with each customer with
regard to the support they required for each customer‘s individual
marketing strategy. These costs are paid for by Cherry Idea Ltd. as
part of the contract.
Additional customer data for the latest period:
Market A Market B Market C
Sales (in units) 1,000 500 400

Delivery KM travelled 1,000 500 850
Number of emergency deliveries 2 0 0
Number of orders taken 5 4 10
Discounts (% of sales revenue) 20% 15% 10%
Sales team overheads (% of sales) 10% 10% 5%
Publicity costs Rs.25,000 Rs.20,000 Rs.15,000
Required: (6+1=7)
Using customer based profitability analysis, evaluate each of
Cherry Idea Ltd.‘s three customer segments. Advise Cherry Idea
Ltd., with reasons, which customer segment is the most profitable.
Answer
a)
In this problem total services rendered should be expressed in single room days to
determine the rent for one day for single room. Rent for double and three rooms
should be charged accordingly based on weightage given.
Operating Cost Statement
Total cost per annum
( Rs.‘000)
Staff salaries 220,000
Attendants‘ wages (working note 2) 93,150
Repairs and renovation 42,000
Lighting (working note 3) 55,400
Power (working note 4) 27,700
Linen 45,000
Interior decoration 50,000
Sundries 31,550
Depreciation :
Building 70,000
Furniture and fixture 10,000
Air-conditioner 20,000 100,000
Total cost for the year 664,800
Profit 25% on cost 166,200
Total rent to be charged 831,000
Total single room days (working note 1) 41,550 days
Rent for one day (831,000,000÷ 41,550) = Rs. 20,000
So rental charges for all categories of room will be as follows:
( Rs.‘000)
P.T.O.
(43)
Rent for single room suite 20
Rent for double room suite (20 × 3/2) 30
Rent for three room suite (20 × 2) 40
Working notes :
1. Room days :
(a) Single room suite :
Summer : 100 rooms × 90% × 30 days × 7 months = 18,900
Winter : 100 rooms × 50% × 30 days × 5 months = 7,500
Total single room days 26,400
(b) Double room suite :
Winter : 30 rooms × 20% × 30 days × 5 months = 900
Total double room days 5,940
(c) Three room suite :

Winter : 20 rooms × 20% × 30 days × 5 months = 600
Total three room days 3,120
Total single room days
The rent of a double room suite is 1 ½ times and that of a three room suite as twice the
single room suite.
Single room days
Single room suite (26,400 days × 1) = 26,400
Double room suite (5,940 days × 3/2) = 8,910
Three room suite (3,120 days × 2) = 6,240
41,550
2. Room attendants‘ wages
Summer Rs.‘000
Single room suite (18,900 days × Rs. 2) = 37,800
Double room suite (5,040 days × Rs. 3) = 15,120
Three room suite (2,520 days × Rs. 4) = 10,080
Winter
Single room suite (7,500 days × Rs. 3) = 22,500
Double room suite (900 days × Rs. 4.5) = 4,050
Three room suite (600 days × Rs.6) = 3,600
The room attendants wages = 93,150
3. Lighting for full year Rs.‘000

Single room suite (26,400 days × Rs. 40)/30 days 35,200
Double room days (5,940 days × Rs. 60)/30 days 1 1,880
Three room suite (3,120 days × Rs. 80)/30 days 8,320
55,400
4. Power for full year Rs.‘000
Single room suite (26,400 days × Rs. 20)/30 days 17,600
Double room days (5,940 days × Rs. 30)/30 days 5,940
Three room suite (3,120 days × Rs. 40)/30 days 4,160
27,700
b)
Customer value statement report
Item Market A Market B Market C
Sales (units) 1,000 500 400
Rs. Rs. Rs.

P.T.O.
(44)
Sales (Rs.) 200,000 100,000 80,000
Std. variable production cost 60,000 30,000 24,000
Gross Margin (A) 140,000 70,000 56,000
Delivery costs (Rs.5 per Km) 5,000 2,500 4,250
Emergency deliveries (Rs.600 1,200 0 0
each)
Order costs (Rs.100 per order) 500 400 1,000
Discounts (% of sales) 40,000 15,000 8,000
Sales commissions (% of sales) 20,000 10,000 4,000
Publicity costs (given in Rs.) 25,000 20,000 15.000
Total other overheads (B) 91,700 47,900 32,250
Profit (A-B) 48,300 22,100 23,750
Profit margin 24.15% 22.05% 29.69%
(pre fixed production overhead)
Rank considering profit II III I
margin
Market C has highest profit margin so ranked at no. I position to manufacture and sell
products; while there will be constraint to manufacture of sell products first priority
will be given to Market C , Than Market A and Market B products at last.
Considering the ABC costing Maket C is most profitable market segment.
5. Answer the following: (5×3=15)

a) Write a short note on ‗imputed cost‘.
b) Briefly explain the impact of just in time (JIT) system on overhead
costs.
c) Distinguish between ‗cost indifference point‘ and ‗break-even point‘.
d) Elaborate upon the key factors which should be considered while
making a recommendation in marginal costing.
e) Explain the four phases involved in simulation process.
Answer
(a)
These costs are costs not actually incurred in some transaction but which are relevant to
the decision as they are related to a particular situation. Imputed costs do not enter into
traditional accounting systems but they being related with economic reality help in
making proper decision making. Interest on internally generated fund, rental value of a
firm-owned properly and salaries of owners of a single proprietary or partnership firm are
some of the instances of imputed costs. Thus, costs actually paid or incurred are not
imputed costs.
When a firm uses internally generated funds, it does not involve actual payments. If such
funds had been invested elsewhere, interest would have been earned. The revenue
foregone (loss of interest) represents an opportunity cost. Imputed cost may also be
termed as opportunity cost.
(b)
When JIT system is installed and operational, costs of material handling, facilities and
quality inspection is reduced. Reduction in all types of inventories results in the heavy
reduction in the amount of spaces required for storage facility. This causes reduction in
the cost of staff, equipment, fixed assets, facilities and rental charges associated with the
warehouses.
When manufacturing cells are created under JIT system, costs are shifted from overhead
cost pool to direct cost pool. As a result of this, depreciation, maintenance labour and
P.T.O.
(45)
utility cost of each manufacturing cell is directly charged to the product. Although this in
itself does not increase or reduce the cost, it does increase the reliability of allocation of
many types of cost. Thus, the installation of JIT system helps to reduce the overhead costs
since some costs are eliminated while some other costs are directly charged to products.
(c)
A 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
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.
(d)
In marginal costing decision situations, the following factors are to be considered before
making any recommendation:
(i) Whether the product or production line in question makes a contribution.
(ii) Where a choice is to be made between two courses of action, the additional fixed
overhead to be incurred, if any, should be taken into consideration.
(iii) The continuity of demand after expansion, renovation, or installation of the sophisticated
equipment, as the case may be, and its impact on the selling price should also be taken
into account.
(iv) Cost is not the only criterion for decision making. Non-cost factors like the necessity to
retain the experienced and skilled employees, labourers, etc. should also be taken into
consideration.
(e)
The four phases involved in the simulation process are:
 Definition of the problem and statement of objectives
 Construction/development of an appropriate model
 Experimentation with the model constructed/developed
 Evaluation of the results of simulation
The first step is to identify and clearly define the problem and list the objective/s for
which solution is intended to achieve. This will help not only to develop an appropriate
model but also provides a basis for evaluation of the simulation results that is derived.
The second step is to develop a suitable model. The model represents the important
elements of what is being simulated. A simulation model may be a physical model,
mathematical model, a mental conception, or a combination of some or all of these.
Collection of data is an important aspect in the development of model.
After the development of simulation model, the next step is to run the model. A single run
would be sufficient if the model is deterministic, with all its parameters known and
constant. A number of runs would be required to get a clear picture of the model
performance if the simulation is stochastic, with the parameters subject to random
variation.
P.T.O.
(46)
The last step in the simulation process is to analyze the results of the runs. The
interpretation of results is dependent largely on the extent to which the simulation model
represents the reality.
6.
a) A company produces two products, A and B, which pass through two
production processes P and Q, The time taken to make each product in
each process is as follows:
Product A Product B
Process P 6 minutes 10 minutes
Process Q 20 minutes 15 minutes
The company operates a 16-hour day and the processes have an
average downtime each day of:
Process P: 3 hours
Process Q: 2 hours
The cost and revenue for each unit of each product are:
Product A Product B
Direct materials Rs. 15 Rs. 15
Direct labour 17 12
Variable overhead 8 6
Fixed costs 8 6
Total costs 48 39
Selling price 90 80
Sales demand restricts the output of A and B to 40 and 60 units a day
respectively.
You are required to find out the daily production plan that would
maximize throughput contribution. 5
b) A customer has approached Crystal Limited for the supply of a new
product made to customer‘s specification. Crystal Ltd. experiences a
90% learning rate. The estimated labour time for the first unit of the
product is 150 hours and the direct labour cost is 500 per hour.
Required: (2.5+2.5=5)
i) Estimate labour cost of Crystal Ltd. for this order, and
ii) After receiving the first order, if the customer places a repeat order,
what will be the labour cost for the second order?
AAnswer
a)
Throughput
per day Product A Product B
Process P (16 – 3) Hour x 60/6 = 130 units (16 – 3) Hour x 60/10 = 78 units
Process Q (16 – 2) Hour x 60/20 = 42 units (16 – 2) Hour x 60/15 = 56 units
It is given that sales demand restricts the output of product A and B to 40 and 60 units a
day respectively. From the above table, it is seen that Process P is able to meet this
P.T.O.
(47)
demand but Process Q cannot meet the demand of 60 units per day. Process Q is therefore
the bottleneck for both the products.
It should be noted that throughput accounting takes return as sales less material costs in
contrast to contribution approach in which return is sales minus all variable costs
(materials, labour and variable overhead taken together. This is because the assumption in
throughput accounting is that all costs except materials are fixed in relation to throughput
in the short run.
Contribution per hour of product A: Rs. (90 – 15) x 60 /20 = Rs. 225
Contribution per hour of product B: Rs. (80 – 15) x 60 /15 = Rs. 260
Thus, the processing of Product B at the rate of 56 units per day will give larger
throughput contribution.
b)
(i) Labour cost for the First Order:
Units Cumulative
Average time per unit (hours) Total labour time
produced production
(1) (2) (3) (4) = (2) x (3)
1 1 150.0 150.0
1 2 135 (90% of 150) 270.0
2 4 121.5 (90% of 135) 486.0
Estimated labour cost for the order = 486 x Rs. 500 = Rs 243,000
Labour Cost per Unit = Rs. 243,000 /4 = Rs. 60,750
(ii) Labour cost for the Second Order:
Obviously, the repeat order will be for additional four units.
Thus, average labour hours for 8 units will be:
Average time per unit = 90% of Rs. 121.5 = Rs. 109.35 hours
Average time for units = 109.35 x 8 = 874.80 hours
Less: T ime spent on the first order = 486.00 hours
388.80 hours
Total Labour Cost for the Second Order = 388.80 x Rs. 500 = Rs. 194,400
Labour Cost per Unit for the Second Order = Rs. 48,600 (Rs. 194,400 /4)
P.T.O.
(48)
Strategic Management &

Decision Making
Analysis
P.T.O.
(49)
Suggested
Total No. of Questions - 6 Total No. of Printed Pages -11

Marks
Attempt all questions.
1. Read the following and answer the questions accordingly:
Tea industry in Nepal is growing rapidly due to the active participation of
the private sector. Now, Nepal is self-sufficient in CTC tea. There is a huge
international market for Orthodox tea. According to Nepal Tea and Coffee
Development Board, 20 million kg of tea is produced in the country
annually. Out of this, only four million kg is orthodox type. About eight
million kg of tea produced in the country is consumed domestically and the
rest 12 million kg are exported.
International demand for tea produced in Nepal was hit hard in Europe and
USA when a test in Germany few months ago revealed that it contained a
harmful chemical called 'anthraquinone'. However, the situation has
improved. Recently, a Chinese businessman contacted to make a recurring
deal of 200,000 kg organic tea per year. Chinese are also among the major
customers of Nepali organic tea. Nepal produces varieties of high-quality
teas that cater to the varied needs of global customers. Quality tea is sold at
€100 per kg in foreign markets.
The organic feature of the tea has become a minimum quality acceptable in
Western markets. Western customers have started seeking other standards
in tea production, such as eco-friendliness and bio-friendliness. In the past
few weeks, Indian tea producers and traders have been seeking ban on
import of non-organic orthodox tea from Nepal in their country.
Keeping health issues in mind, some organic tea producers in the country
have demanded the government to make all the production of tea organic in
Nepal. They have argued that this step not only have health benefits for
consumers, but also helps the economy grow.
However, those in opposition say that the move could do more harm than
good. Organic production takes at least three years to complete. And with
the lengthy time, the production can be affected by fertilizers shortage and
other challenges, according to non-organic tea producers.
Frequent strikes by the workers, effect of climate change, low labour
productivity, poor support from the government, high cost of capital, use of
modern technologies, competition with Indian tea, and promotion at
international market, etc. are some of the major issues confronting the
Nepalese tea industries.
Questions:
a) Identify the components of the task and general environments that
Nepalese tea industries are facing in light of the probable opportunities
and threats they create. 10
b) In view of the growing globalization, what strategies should Nepalese
tea industries adopt to remain competitive in the market? 10
Answer
P.T.O.
(50)
a)
Each and every business is environment specific. This equally applies to the tea industry. The
operating or task environment is composed of the factors that are directly related to the
competitive position of a business. It consists of different stakeholders who have direct or
indirect interest in the performance of the business. The general environment is composed of
the factors that are broad and affect the industries and the firms competing each other. The
general environmental forces should be scanned, monitored, forecasted, and assessed to
determine their effects on the firm in terms of opportunities and threats.
The general environmental components of Nepalese tea industry are;
 Political environment: Instable leading to policy instability and political risks
 Economic environment: Increasing purchasing power of the people
 Legal environment: Favourable legislations of the government emphasizing the
private sector
 Technological environment: Low investment in R & D and low level of
technology employed
 Socio-cultural environment- Exists tea culture
 Global environment- Poor integration with global economy
The task environment of Nepalese tea industry consists of;
 Customer: High bargaining power
 Supplier: Moderate bargaining power
 Competitiveness: High with domestic and Indian products
 Substitution: High due to presence of different coffee brands, other drinks.
 New entrants: Moderate possibility
b)
Globalization is a gradual process of integrating the world. Economic globalization
views the whole world into an economic unit. All the business organizations are
affected by the trend of globalization. Nepalese tea industry is not an exception.
Nepalese tea industry should follow expansion strategy at corporate level and
differentiation strategy at business level to compete successfully in the global
market. It should pursue the expansion strategy through product as well as market
development. Product line development and product innovations are possible long
term actions of Nepalese tea industry to take competitive advantage at international
level. Likewise, the limited market coverage of Nepalese tea in the world should be
expanded as much as possible. Nepalese tea should be exported in large quantity in
diversified countries.
At the business level, Nepalese tea industry should follow differentiation strategy.
Nepalese tea has its unique features due to climatic favorableness and organic way
of production. However, cost leadership strategy may be followed for the products
that are likely to be sold at domestic products. These ways, Nepalese tea can
compete with the foreign products (especially Indian).
2.
a) What is strategy management? Why is strategic management important
in organizations? (3+7=10)
b) Define blue ocean strategy. How does it differ with red ocean strategy?
Explain. (3+7=10)
Answer
a)
Strategic management is concerned with formulation, implementation and evaluation of
strategy. It is a set of managerial decisions and actions that determine the long term
performance of an organisation. In other words strategy management involves those decision
and actions in which organisationalmembers' analysis the current situation. Develop
P.T.O.
(51)
appropriate strategies, put those strategies in to action and evaluate, modify or change those
strategies as needed.
Strategic management involves strategic decision and action of top management. It entails all
the basic managerial functions: planning, organisating, implimenting and controlling. The
organisations‘ strategies must be planned (formulated), organised and put into effect
(Implemented), and controlled (evaluated). Strategic management provides long term future
direction to organisations. It evaluates and controls managerial performance. Therefore,
strategic management is concerned with future direction, long term performance and overall
effectiveness of the organisation.
Importance of Strategic Management
Strategic Management is a philosophy or way of managing an organization. Strategic
management ties the organization together with common sense of purpose, and shared values.
It enables the organization to develop a clear self-concept, specific goals and consistency in
decision making.
Strategic Management provides long term direction to organization. It attempts to improve
organizational performance in the long run. Strategic management is always goal-oriented. It
helps coordinate the diverse division, function, and work activities. Strategic management
encourages innovation and reduces resistance to change within the organization in order to
meet the needs of dynamic situations.
The importance of strategic management can be highlighted as follows:
1. Goal attainment: Every organization has its own goals and objectives to
be achieved. Strategic management is goal-oriented. Therefore, it always
helps to achieve long-term goals of the organization.
2. Performance Improvement: Strategic management attempts to improve
long-term financial performance. It also improves managerial performance
by developing core competencies and commitments.
3. Effective communication: Strategic management requires managers to
communicate both vertically and horizontally within the organization.
4. Overall coordination: Overall coordination within the organization is
often improved in strategically managed organizations.
5. Organizational effectiveness: Organizational effectiveness can be
achieved through strategic management.
6. Innovation and change: Strategic management encourages innovation and
change to meet the needs of changing situations.
7. Competitive advantage: Effective strategic management helps managers
to achieve and maintain competitive advantage.
b)
Blue oceans indicate all the industries not in existence today where the markets are unexplored
and untainted by competition. In Blue Oceans, competition is irrelevant. The blue ocean
companies follow a different strategic logic called value innovation.
Blue ocean strategy is based on the simultaneous pursuit of differentiation and low cost.
Hence, it is and-and strategy not either-or strategy. It does not aim to outperform the
competition, rather aims to make the competition irrelevant. It does so by reconstructing
industry boundaries.
Blue Ocean creating businesses follow a different strategic logic. They are;
 Challenge industry conditions and paradigms
 Focus on customers, not competitors
 Don‘t segment customers, aggregate them
 Assets capabilities are not fixed, they are fluid
 Solve problems across the entire supply chain
P.T.O.
(52)
The following are the differences between Red Ocean and Blue Ocean strategy.
Bases of
Red Ocean Strategy Blue Ocean Strategy
difference
Competition Compete Create uncontested market
in existing market space. space.
Aim Beat the competition. Make the
competition irrelevant.
Demand Exploit existing demand. Create and
capture new demands.
Trade-off Make the value-cost trade- Break the value-cost trade-off.
off.
Alignment of Align the whole system of Align the whole system of a
organizational a firm‘s activities with firm‘s activities in pursuit of
system its strategic choice of differentiation and low cost.
differentiation or low cost.
3.
a) What are the criteria you set forth to claim that your project is
successful? Explain. 10
b) Explain the project portfolio management highlighting the key factors

of its success. 10
Answer
a)
The definition of project success is obviously critical. After all, that‘s how you‘ll be judged as
a project manager. Unfortunately, there are almost as many definitions of project success as
there are project management professionals. To add to the confusion, every organization has
its own view of what matters in project outcomes. So, instead of trying to focus on one
definition, I‘d like to offer a framework of thought on success. If you consider the many ways
that projects could be deemed successful, you come to realize that project success exists on
four levels, each with a unique perspective and set of metrics. And despite the specific values
used to quantify success or failure, the principle remains constant. Following are the four
levels of success of each project.
Level I—Meeting Project Targets
Did the project meet the original targets of cost, schedule, quality, and functionality? Although
it‘s certainly admirable to beat these targets, my concept of success is tied to whether the
project manager did what was expected. In other words, maximum success is zero variance
between project targets and results. There are at least two reasons why I embrace this
interpretation. First, it supports the organization‘s need for certainty. Second, I believe that
project managers who chronically beat targets are suspect, at best.
Level II—Project Efficiency

How well was the project managed? This is a metric for the process. If the project meets its
targets, but
the customer groups, project team, or others were adversely affected by the project experience,
the
project will probably not be perceived as successful. Project efficiency can be evaluated
through the use
of criteria such as the following:
• The degree of disruption to the client‘s operation
• How effectively resources were applied
• The amount of growth and development of project team members
• How effectively conflict was managed
P.T.O.
(53)
• The cost of the project management function
Level III—Customer or User Utility

To what extent did the project fulfill its mission of solving a problem, exploiting an
opportunity, or otherwise satisfying a need? Here are some questions to help assess Level III
success:
• Was the original problem solved?
• Was there a verifiable increase in sales, income, or profit?
• Did we save as much money as expected?
• Are the customers using the product as intended?
When you‘re assigned to manage a project, one of your first steps should be to uncover the
true need. If you don‘t, you can‘t be certain that your project will satisfy that need.
Unfortunately, taking time to determine the true need may be viewed by some as
―backtracking.‖ But the alternative is to risk being perceived as unsuccessful. So back up if
you aren‘t sure you understand the true need.
Level IV—Organizational Improvement

Did the organization learn from the project? Is that knowledge going to improve the chances
that future projects will succeed at each of the three levels described above? High-performing
organizations will learn from their failures—and their successes— and use that knowledge to
improve their success rate in
over time. This level assumes a long-term perspective and measures
organizational learning and a resultant increase in project successes. The
primary tools for organizational improvement are the maintenance of accurate
historical records and the widespread use of lessons learned.
b)
Projects are managed concurrently under a single umbrella and it may be either related or
independent of one another. The key to portfolio management is realizing that a firm‘s
projects share a common strategic purpose and the same scarce resources. The concept of
project portfolio management holds that firms should not manage projects as independent
entities, but rather should regard portfolios as unified assets. There may be multiple
objectives, but they are also shared objectives. In a project-oriented company, project portfolio
management poses a constant challenge between balancing long-term strategic goals and
short-term needs and constraints. Project management does not mean only selection of a
project in competition with other projects. In reality organization should maintain portfolio of
projects and keep a proper balance among this portfolio.
Managers must be aware of the questions all the time what projects are good to fund and does
the organization has the resources to support them. The project must be complementary to
other company projects with good business sense. Project portfolio management is the process
of bringing an organization‘s project management practices into line with its overall corporate
strategy. By creating complementarity in its project portfolio, a company can ensure that its
project management teams are working together rather than at cross-purposes. Portfolio
management is also a visible symbol of the strategic direction and commercial goals of a firm.
Taken together, the projects that a firm chooses to promote and develop send a clear signal to
the rest of the company about priorities, resource commitment, and future directions. Finally,
portfolio management is an alternative method for managing overall project risk by seeking a
continuous balance among various families of projects, between risks and return trade-offs,
and between efficiently run projects and nonperformers. As more and more organizations rely
on project management to achieve these ends, it is likely that more and more firms will take
the next logical step: organizing projects by means of portfolio management.
The successfully managed project portfolios usually reflect the following factors, which are
keys to success:
 Flexible structure and freedom of communication: Restrictive layers of bureaucracy
P.T.O.
(54)
and narrow communication channels create constrains. When project teams are
allowed to improve and experiment on existing product lines, innovative new product
ideas are likely to emerge.
 Low cost environmental scanning: Successful organizations should constantly build

and test new projects prior to full-scale development with low cost as a routine work. It
is not necessary all the time devote a lot of money struggling to take new market.
 Time-paced transition: Successful organizations use project portfolio planning

routinely to develop long lead times and plan ahead in order to make the smoothest
possible transition from one product to another. Accurate predictions of the likely life
cycle of current products are necessary keys.
4.
a) State and explain the relevance of strategic management for
professional accountants. 7
b) Give the concept of strategic decision making. Examine the importance

of strategic decision making. (3+5=8)
Answer
a)
Strategic management the formulation and implementation of long-term plans and carrying
out the activities may be expected to yield several benefits. It is important for organizational
adoption and success to its environment. Various authors and executive create a number of
reasons as to why an organization engages in strategic management. Some of the points of
importance are discussed as follows:
Full Exploitation of Opportunities

Strategic management allows an organization‘s top executives to anticipate change and
provides direction and control for the organization. It allows the organization to innovate in
time to take advantages of new opportunities in the environment and reduce the risk because
the future was anticipated. Therefore, it helps ensure full exploitation of opportunities. The
strategic management process stimulates thinking about the future. It allows the organization
to take action at an early stage of new trend and consider the lead-time of effective
management.
Clarity in Objective and Directions

Strategic management provides clear objectives and directions for the employees. It indicates
the way for the employees to follow. Strategic management provides a strong incentive for
employees and management to achieve company objectives. It serves as a basis for
management evaluation and control because top executives have a unified opinion on strategic
issues and actions. When the objectives are clearly spelled out, these provide clear direction to
persons in the organization who are responsible for implementing the various course of
actions.
Strategic Alignment
The emphasis of strategic management lies on making a good fit alignment between business
strategy and management practices to make an organization more competitive in the market.
Effective implementation of strategies depend on how far they can be aligned with the
organizational structure, managerial activities and policies. Strategic management has an
inherent qualities to maintain horizontal as well as vertical alignment among the strategies,
structures, programs, resources, managerial activities and policies.
P.T.O.
(55)
Efficiency, Effectiveness and Success
Strategic management teaches to put the resources in a way, which ensures their maximum
contribution to organizational objectives. It also teaches to CEOs to become better decision
makers, which is helpful to achieve effectiveness. It also improves corporate communication,
the coordination, allocation of resources and budgeting etc. Strategic management focuses on
business problems, not only in the sector of functional areas, but also on business areas, such
as marketing, finance etc. Because of all these reasons efficiency can be accelerated, the
degree of effectiveness can be increased and corporate success can be assured of an
organization.
Others
i. Strategic management focuses on the research which is essential for growth and
diversification. It helps to carry out many researches which are definitely fruitful to the
success of business.
ii. Strategic management helps better understanding of the authorities and responsibilities of
individual and groups which reduces the gap and overlap the activities.
iii. Strategic management helps to cope up with changes.
A survey of nearly fifty corporations engaged in a variety of strategic management has found
out to be:
 Clearer sense of strategic vision for the firm
 Sharper focus on what is strategically important
 Improved understanding of a rapidly changing environment.
b)
Strategic decisions are made by top management. Such decisions are non-routine and non-
programmed decisions. They are generally made in uncertain environmental conditions.
Strategic decisions are concerned with the selection of organizations mission, long-term goals
and strategic plans. Strategic decisions are very broad that define the scopes of business
activities. They attempt to achieve and sustain competitive advantage in the long run.
Strategic decisions making refers to the selection of best course of action for the long term
future of an organization. It involves a series of activities, i.e. developing strategic options,
and choosing appropriate options to achieve strategic goals.
Strategic decisions are very important decisions because of the following reasons:
 Strategy formulation: Strategic decisions are directly related to strategy
formulation. Strategic decisions make strategic choice from among many strategic
options.
 Future direction: Strategic decisions are important as they provide long-term
direction to the organization. They guide organizations to achieve long-term goals
and objectives.
 Competitive advantage: Strategic decisions are also important to achieve
competitive advantage. They always search for unique resources and core
competencies that result in competitive advantage.
 Resource mobilization: Strategic decisions estimate the resources requirements,
identify sources of resources, accumulate and allocate resources among various
strategic business units.
 Environmental adaptation: Strategic decisions are made within a changing
environment. They are based on comprehensive analysis of external environmental
P.T.O.
(56)
forces. They promote managerial competency to adopt to the changing
circumstances.
 Strategic control: Strategic decisions also support to strategic control. They not only
set standards for future performance, but also suggest relevant corrective actions to
solve the problems.
 Performance improvement: Strategic decisions improve managerial performance.
Managerial efficiency can be evaluated in terms of quality of strategic decisions.
5. Write short notes on the following: (5×3=15)

a) Premise control
b) SWOT analysis
c) Nature of strategic change
d) Benchmarking
e) Strategic alliance
Answer
a) Assumptions or predictions are planning premises around which a firm‘s strategy is
designed. A strategy may be only as long as the planning premises remain valid. The
premise control is designed to check systematically and continuously whether or not
the premises set during the planning and implementation process are still valid. A
strategy may be based on certain premises related to environment and industry
factors. The environmental factors are beyond the control of a company and they
exercise considerable influence over the success of the strategy. These factors differ
among industries. A company should be aware of the factors that influence success in
its particular industry. Managers must choose those premises and variables that are
likely to change and would have a major impact on the company and its strategy.
Assumptions refer the prediction of external environments and internal resources of
an organization, which are dynamic and explore the strengths and weaknesses,
opportunities and threats. Because of the time gap between strategy formulation and
its implementation, the assumptions predicted earlier may not be relevant at present.
This is a serious warn to the organization about the performance of the strategy,
which takes into account by strategic control. Therefore, it serves the purpose of
continually testing the assumptions to find out whether they are still valid or not. The
premise control enables the strategist to take corrective action at the right time rather
than continuing with a strategy based on invalid assumptions. The responsibility for
premise control can be assigned to the corporate planning staff that can identify key
assumption and keep a regular check on their validity.
b) SWOT analysis is strengths, weaknesses, opportunities and threats analysis. It is
concerned with internal as well as external environments of an organization. Internal
environmental forces provide strengths and weaknesses whereas external forces
generate opportunities and threats.
SWOT analysis no doubt is a technique of environmental analysis.
Internal Strengths (S) Weaknesses (W)
Opportunities (O) Threats (T)

External
P.T.O.
(57)
Strengths are the basic capabilities of an organization which can be used to gain
competitive advantage (e.g. high R & D capability), weaknesses are the basic
limitations of an organization which create strategic disadvantage.
Opportunities are the favorable conditions and threats are the unfavorable conditions
of the organization. Opportunities provide position of superiority and threats provide
position of inferiority I relation to competitors. With the help of SWOT analysis,
internal strengths are matched with external opportunities to achieve and sustain
competitive advantage.
c) Strategic change can be defined as a shift in the product or service mix produced by the
organization and the markets to which it is offered. A key step in the shift is the discovery of
a product-market idea. It is necessary to survive and grow. Strategic drift occurs when the
current strategy loses the relevance to changing environment.
Strategic change implies change in strategy. Strategies in business organizations are

formulated to cope with the environment. As business environment is dynamic in
nature, the strategies should be reviewed constantly to address the dynamism.
Strategic change consists of rethinking, reviewing and changing strategy to adapt to
environmental changes. It is not an instantaneous event, but a protracted time and cost
consuming process. The entire processes of strategic change should be planned and
guided by the management.
d) Benchmarking is a continuous process of measuring products, services, and practices

against the toughest competitors or the industry leaders. It involves openly learning
from others to improve it techniques. The benchmarking process usually involves
identifying the area or process to be examined, selection an accessible set of
competitors and best-in-class companies against which to benchmark, calculation of
the differences among the company‘s performance measurements and those of the
best-in-class and determine why the differences exist, development of tactical
programs for closing performance gaps and implementing the programs and then
compare the resulting new measurements with those of the best-in-class companies.
e) A strategic alliance is a cooperative strategy in which firms combine some of their

resources and capabilities to create a competitive advantage. It involves some degree
of exchange and sharing of resources and capabilities to develop, sell, and service
goods or services. Strategic alliances allow firms to use their existing resources and
capabilities while working with partners to develop additional resources and
capabilities as the foundation for new competitive advantages. The success from
strategic alliance is more likely when partners behave cooperatively to solve mutual
problems. Other success factors include being trustworthy and combining resources
and capabilities of each other to create value.
6.
a) W
rite any five major issues of strategic management in Nepal. 5
b) W
hat is strategic decision making? What are its characteristics? (2+3=5)
Answer
a) The major issues of strategic management in Nepal are;
P.T.O.
(58)
 Intuitive approach of strategy formulation is adopted rather that a systematic
approach based on environmental analysis.
 Very fewer considerations are laid on infrastructures of strategic management
such as resource planning, organizational structuring, development of
management system, etc.
 Nepalese organizations are found to be poor in strategy evaluation.
 Lack of empowerment among operating personnel is an important issue of
strategic management in Nepal.
 Most of the organizations adopt red
ocean strategy.
b) Strategic decision deals with the long run future of the entire organization. It is
primarily concerned with the external rather than the internal problems and the
selection of the product mix which the firm will produce and the markets to which
it will sell. It is concerned with the long-term directions to achieve some
advantages along with matching the activities of an organization to the
environment.
Jauch and Glueck defined the strategic decision as, ‗Strategic decisions are means
to achieve ends‘. These decisions encompass the definition of the business,
products and markets to be served, functions to be performed, and major policies
needed for the organization to execute these decisions to achieve objectives. This
definition is regarded as a comprehensive definition, from which we can point out
the core of strategic decision as:
 It is the means to achieve objectives.
 It is the long-term decision related with overall business.
 It focuses the execution of decisions.
Strategic decision have three important characteristics.
i. Rare: Strategic decisions are not common and have no precedents.
ii. Consequential: Strategic decision involves commitment towards substantial
resources of the company and hence, high degree of efforts needed form
persons at all levels.
iii. Directive: Strategic decision can serve as precedence for further decisions
and future actions throughout the organization.
Characteristics of strategic decision making.
1. Strategic decision is concerned with the- long-term direction of an
organization. It is a major decision which affects the whole or main parts of
the organization.
2. Strategic decision is helpful to achieve strategic advantage for an
organization. It searches for effective positioning to achieve advantage.
3. Strategic decision concerns with the activities of the organization. Change in
product production policies, personnel policies, etc. are the examples of
strategic decisions related with the organizational activities.
4. Strategic decision matches the resources and activities of the organization to
its environments in which it operates. It helps the organization to cope up with
environment demand.
5. Strategic decision affects operational decision. The operational decision is
related with day-to-day operations of the organization. Such decisions are
mostly of repetitive nature and is taken within the overall framework of
strategic decision.
P.T.O.
(59)
6. Along with the environmental forces and resources availability, the strategic
decision is affected by the value and expectations of top management.
7. Strategic decision is affected not only by environmental forces, resources
availability and value and expectations of top management, but also by the
values and expectations of other stakeholders who have power in the
organization.
8. Strategic decision is helpful to build on organization’s resources and
competencesto create opportunities. It identifies the existing resources and
competence, which is a base for creating new opportunities.
P.T.O.

Suggested Answer CAP III June 2017 GII

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Suggested Answer CAP III June 2017 GII

Загружено:

Авторское право:

Доступные форматы

CHARTERED ACCOUNTANCY PROFESSIONAL CAP-III

The Institute of Chartered Accountants of Nepal

Management Information and control system

Total No. of Questions - 6 Total No. of Printed Pages -11

Time Allowed - 3 Hours

Flexibility of changes in business and technology:

b) Cloud computing is a growing trend in global IT landscape. It commoditizes the

The various areas of determining the feasibility can be listed as:

Computation of Taxable Amount of Retirement Payment and Withholding Tax

Expenses of a domestic or personal nature means the following expenses-

Particular Amount (Rs.)

Particulars Amount NRs

Expenses of repair USD 250,000 * NRs. 104.50 2,61,25,000.00

Rate of Custom Duty 14%

Custom Duty on repair 36,57,500.00

Custom deposit given while machines sent for repair 41,00,000.00

Amount to be received 4,42,500.00

BPC need to receive Rs. 442,500 back from Custom Office.

Advanced Cost & Management Accounting

Contribution margin: Rs.

Particulars Actual Static- Flexible-

Budgeted contribution margin/ Kg = Budgeted CM/ Budgeted unit

Now, LP Model is:

Replacing value for R1

iii) There are two critical paths:

(d) Repairs and renovation Rs. 42,000,000

Sales (in units) 1,000 500 400

(c) Three room suite :

3. Lighting for full year Rs.‘000

Sales (units) 1,000 500 400

Rs. Rs. Rs.

5. Answer the following: (5×3=15)

Strategic Management &

Roll No……………. Maximum Marks - 100

Total No. of Questions - 6 Total No. of Printed Pages -11

Time Allowed - 3 Hours

b) Explain the project portfolio management highlighting the key factors

Level II—Project Efficiency

Level III—Customer or User Utility

Level IV—Organizational Improvement

 Flexible structure and freedom of communication: Restrictive layers of bureaucracy

 Low cost environmental scanning: Successful organizations should constantly build

 Time-paced transition: Successful organizations use project portfolio planning

b) Give the concept of strategic decision making. Examine the importance

Full Exploitation of Opportunities

Clarity in Objective and Directions

5. Write short notes on the following: (5×3=15)

Internal Strengths (S) Weaknesses (W)

Opportunities (O) Threats (T)

Strategic change implies change in strategy. Strategies in business organizations are

d) Benchmarking is a continuous process of measuring products, services, and practices

e) A strategic alliance is a cooperative strategy in which firms combine some of their

a) The major issues of strategic management in Nepal are;

Вам также может понравиться