SUGGESTED ANSWERS TO

THE QUESTIONS SET AT

CHARTERED ACCOUNTANCY PROFESSIONAL (CAP)-III LEVEL
JUNE 2024 EXAMINATIONS

Group-II

The Institute of Chartered Accountants of Nepal (ICAN)

ICAN Marg, Satdobato, Lalitpur
 Suggested Answers June 2024 Examination (CAP III - Group II)

The Institute of Chartered Accountants of Nepal

All exam questions and solutions are the copyright of ICAN and can be used only by students in
preparation for their CA exams. They cannot be published in any form (paper or soft copy), or sold
for profit in any way, without first gaining the express permission of ICAN. Nor can they be used
as examinations, in whole or in part, by other institutions or awarding bodies.

Year and month of Publication: 2024 September

Disclaimer:
The suggested answers published herein do not constitute the basis for evaluation of the students'
answers in the examination. The answers are prepared by the concerned resource persons and
compiled by the Technical Directorate of the Institute with a view to assist the students in their
education. While due care has been taken in the compilation of answers, if any errors or
omissions are noted, the same may be brought to the attention of the Technical Directorate. The
Council or the Board of Studies of the Institute is not any way responsible for the correctness or
otherwise of the answers published herewith.

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Contents
Paper 5 – Management Information and Control System ................................................................. 4
Paper 6 – Advanced Taxation ............................................................................................................. 17
Paper 7 – Advanced Cost and Management Accounting ................................................................. 35
Paper 8 – Strategic Management and Decision Making Analysis ................................................... 54
Examiner’s Commentary on Students' Performance in June 2024 Examinations. ....................... 65

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Paper 5 – Management Information and Control System

All questions are compulsory. Working notes should form part of the answer. Make
assumptions wherever necessary.

1. Axyb Pvt Ltd. is a reputed technology company focusing on data analytics, AI and software
development. They aim to develop a core banking system from scratch. Assume you are appointed
as the project manager overseeing all the activities related to the development.
In this context, answer the following questions:
a) Core banking is a very sophisticated application with multiple major modules. Create a plan to
effectively use rapid application development approach with involvement of a client bank. How
can you effectively use their involvement in better designing the input and output of the core
banking system? (5+5=10)
b) Core banking data are very critical data with a lot of finance-related information. How do you
make sure that the system and its deployment ensures protection of the data and the privacy of the
clients? Describe the role of audit to ensure that your data protection scheme is working
(6+4=10)

Answer:1
a) Plan for effectively using rapid application development approach:
To develop software system quickly, it is necessary to know the high priority requirements of users
and high risk associated requirements. So, plan for using RAD will contain following steps:
- Identification users and their requirements
- Prioritization of the requirements
- Associated risks with the system
- Feasibility analysis of the system to be developed
- Development of use cases, design models
- Development of modules addressing risks, testing of developed models.
- Incrementally enhancing developed model until they become stable.
- Implementing developed modules in real working environment

By encouraging users to provide feedbacks and comments during the development process, their
involvement can be effectively used in better designing input and output of the core banking
system. Users will be asked to test the developed modules with real data. Different types of user
interfaces will be introduced to the users to select from. How the output should be displayed will
be discussed in detail. Processing time, execution time for each process will be discussed with the
users and get their feedbacks, comments on execution time, design etc.

b) Protection of data and privacy of clients can be ensured by testing each security measures taken
in the design and development of each module. All the user interfaces will be checked to ensure
safety from any kind of attack. All the users provided data and output data will be synthesized.
Users’ role and responsibilities defined will be properly checked and tested. All backups and
computers where user data is stored will be tested properly to ensure high security of those backups
and computers. All the user data will be stored in database in the encrypted form. It will be also
ensured that whatever data goes out from the bank system will be encrypted. Secure Socket layer
and digital certificates will be used for the proper authentication of the users.

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System audit has a very critical role in ensuring that the data protection and other security
mechanisms put in place for the core banking system shall be effective. The following are the roles
of the audit process in this respect:
➢ Audit process carries out neutral and impartial evaluation of the processes, practices and systems
to make sure that all security and data safeguard measures are in place.
➢ Audit process also evaluates the system redundancy and high availability measures put in place
are properly designed and without any critical flaws.
➢ Audit process also investigates in detail the system accesses, datacenter access and other
transactions to identify any insecure and risky activities. If such are found the audit process also
duly reports it to the management so that the corrective measures are taken as soon as possible.
➢ It is also helpful to ensure that people with proper authority and privilege are only allowed access
to the designated infrastructure, resources and services related to the core banking system.
➢ Moreover, the audit process also interacts with the users and other stakeholders of the system to
identify any practices that may lead to security breach and data protection compromise.
2. Suppose that you are hired to develop an e-commerce system of an online food store to sell its
food items to customers. Based on this scenario, answer the following questions.
a) Why do you need CASE tools in system development? What different features are available in
CASE tools? (3+4=7)
b) What different payment systems will you consider in this system for customers? 7
c) What is your plan for disaster recovery if this website goes down? 6

Answer
2 a) First Part: Computer-aided systems engineering (CASE) tools are the software programs that help
the development team do their jobs more efficiently and more effectively. These tools support the
drawing and analysis of system models. Some CASE tools also provide prototyping and code
generation capabilities. The focus of CASE tools remains the improvement of the overall systems
development process. CASE tools enable the developing of systems that are easier to test and
maintain and contain good quality documentation. In a nutshell, software developed using CASE
tools has improved quality due to fewer defects.
Designers can input the requirements of a system and the CASE tool can generate the code
(forward engineering). CASE tools also support reverse engineering (RE), where existing code
from legacy systems can be turned into design specifications, which in turn can be used to
restructure the code and ultimately the system to meet new business needs. The automation of
previously manual tasks by CASE tools can reduce the time to perform certain tasks, such as
diagramming and code generation. CASE tools can even assist in the laborious task of project
estimation and can assist with the estimation of work effort in hours through the use of project
estimation tools. A big advantage of CASE tools is that the usage of CASE tools enables an
organization to implement a single design philosophy for all projects, systems and people. With
CASE tools, developers working in different teams utilize the same procedures and methods for
developing their aspect of the project, sharing information common to all the development teams.
Because of this, CASE tools have the ability to synchronize the model design and implementation.
The result is better analysis and design and more accurate coding due to procedures like automatic
testing and debugging. This also leads to a reduction in lifetime maintenance of the product. CASE
tools provide better documentation during each phase of development. With the advent of object-
oriented methodologies being incorporated into CASE tools, inexperienced or even non-
programmers are able to utilize CASE tools due to the simplicity of object-oriented module usage.
Hence, primary reasons for utilizing CASE tools are:
• Reduce the amount of time and money spent on projects
• Improve the quality of the system developed
• Enhance the developers' productivity and satisfaction
• Make the system development task more enjoyable
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Second Part: Around the CASE repository is a collection of tools or facilities for creating system
models and documentation. These facilities generally include:
• Diagramming tools enable system process, data, and control structures to be represented
graphically.
• Computer display and report generators help prototype how systems “look and feel.” Display
(or form) and report generators make it easier for the systems analyst to identify data requirements
and relationships.
• Analysis tools automatically check for incomplete, inconsistent, or incorrect specifications in
diagrams, forms, and reports.
• A central repository enables the integrated storage of specifications, diagrams, reports, and
project management information.
• Documentation generators produce technical and user documentation in standard formats.
• Code generators enable the automatic generation of program and database definition code directly
from the design documents, diagrams, forms, and reports.

2 b) E-commerce payment systems allow businesses to accept payments from customers online, and
offer diverse features and benefits to both parties. The most common types of e-commerce
payment systems considered are given below.
• Online credit card transactions: It is the most dominant form of online payment system. It is
processed in much the same way that in-store purchases are, with the major differences being that
online merchants never see the actual credit card being used, no card impression is taken, and no
signature is available. These types of purchases are also called CNP (Cardholder Not Present)
transactions. These are most closely resemble MOTO (Mail Order-Telephone Order) transactions.
There are five parties involved in an online credit card purchase: consumer, merchant,
clearinghouse, merchant bank (sometimes also called the “acquiring bank”), and the consumer’s
card issuing bank. In order to accept payments, online merchants must have a merchant account
established with a bank or financial institution. A merchant account is simply a bank account that
allows companies to process credit card payments and receive funds from those transactions.
• Digital wallets: Digital wallets (sometimes called e-wallets) are small electronic packages that
automatically supply information such as credit card numbers and shipping addresses for use in
conducting e-commerce transactions. These systems provide a means by which customers may
order products and services online without ever entering sensitive information and submitting it
via e-mail or the World Wide Web, where it is vulnerable to theft by hackers and other cyber-
criminals. Allow consumers to make online purchases easily and securely. Traditionally, digital
wallets were stored on the desktops of personal computers; new digital wallets are compatible with
wireless and other mobile devices, and are more often stored on a central server owned by a digital
wallet vendor or Internet service provider (ISP). Digital wallet vendors maintain relationships with
online merchants.
• Digital cash: Digital cash (e-cash) is an alternate payment system developed for e-commerce in
which unique, authenticated tokens representing cash value are transmitted from consumers to
merchants. Banks issue digital tokens (unique encrypted numbers) for various dimensions of cash,
and consumers can spend these at merchants’ site. Merchants in turn deposit these electronic
tokens in banks. Some examples are, DigiCash, First Virtual, and Millicent.

2 c) A Disaster Recovery Plan (DRP) is a business plan that describes how work can be resumed quickly
and effectively after a disaster. Disaster recovery planning is just part of business continuity
planning and applied to aspects of an organization that rely on an IT infrastructure to function.
If website goes down, in that case the web site will be restored using the backups of the website.
The recovery plan contains high availability of the system, arrangement of backups of the system
in different places or computer. So, recovering web site will not be difficult task.

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After recovering the website, why the site went down? Reasons for that will be studied carefully.
Then action plan will be developed and implemented such that the website does not go down
because of those reasons. Also, the website will be studied to figure out if any security issues are
still there.

3.
a) Information Systems are arrangement of People, Process and Technology to address information
needs of management working at different roles viz. Operational, Tactical and Strategic roles.
MIS and DSS are systems that help tactical level of management for their problem solving and
decision-making needs. Discuss difference between MIS and DSS Systems and how they support
management. How do you think management decision makings are better complemented by
Artificial Intelligence Systems? (5+3=8)
b) What are different reasons that case failure of Enterprise IT implementations? Discuss on change
management processes with regard to people, process and technology changes. (4+3=7)

Answer
3 a) First Part: Management Information Systems (MIS) and Decision Support Systems (DSS) are
both information systems used in tactical level at organizations to help managers to support
decision making and problem-solving situations, however, they serve different purposes and have
distinct characteristics. Following are key differences
Purpose:
MIS: Management Information Systems focus on providing managers and decision-makers with
the information needed to monitor and control organizational performance. MIS typically provides
predefined reports and summaries of operational data, such as sales figures, inventory levels, and
financial performance, to support routine decision-making and operational management.
DSS: Decision Support Systems are designed to help managers and decision-makers analyze
complex problems and make semi-structured or unstructured decisions. DSS provide analytical
tools, models, and interactive interfaces to facilitate decision-making processes, allowing users to
explore data, perform what-if analysis, and evaluate alternative courses of action.
Nature of Decisions Supported:
MIS: MIS primarily supports structured or routine decision-making processes that involve
predefined criteria, rules, and procedures. These decisions are typically repetitive, well-defined,
and occur at operational or tactical levels within the organization.
DSS: DSS support both structured and semi-structured or unstructured decision-making processes
that involve uncertainty, complexity, and ambiguity. DSS are designed to handle dynamic and
changing environments, allowing users to explore multiple options and scenarios before making
decisions.
Data and Information Processing:
MIS: MIS typically processes structured data from internal and external sources, such as
transactional databases, operational systems, and external reports. MIS focus on aggregating,
summarizing, and presenting data in predefined formats, such as reports, dashboards, and charts.
DSS: DSS can handle both structured and unstructured data from multiple sources, including
internal databases, external sources, and real-time feeds. DSS support ad-hoc querying, data
mining, and analytical processing to help users analyze and interpret data in various formats and
from different perspectives.

User Interaction:
MIS: MIS typically provide predefined reports and summaries that are generated and distributed
to managers and decision-makers on a regular basis.
DSS: DSS offer interactive interfaces and analytical tools that allow users to explore data,
manipulate variables, and conduct analysis in real-time. DSS support iterative and exploratory
decision-making processes, enabling users to interactively modify parameters and assumptions.
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Scope and Flexibility:

MIS: MIS have a narrower scope and focus primarily on operational and tactical activities within
specific functional areas or departments of the organization.
DSS: DSS have a broader scope and can support decision-making across multiple levels and
functions of the organization.

3 (a) Second Part:

Artificial Intelligence has the potential to significantly complement decision-making processes
across various industries and domains by providing insights, automation, and predictive
capabilities. Several ways AI can enhance decision-making are as below.
Data Analysis and Insights:
AI algorithms can analyze vast amounts of data quickly and efficiently to uncover patterns, trends,
and insights that may not be apparent to human analysts.
Predictive Analytics:
AI-powered predictive models can forecast future outcomes and trends based on historical data
and real-time inputs.
Predictive analytics enables organizations to anticipate customer behavior, market trends, and
business opportunities.
Personalized Recommendations:
AI-driven recommendation systems can analyze user preferences, behavior, and past interactions
to deliver personalized recommendations and content.
Automation and Optimization:
AI-based automation technologies can streamline repetitive tasks, workflows, and processes,
reducing manual effort and human error.
Robotic Process Automation (RPA) can automate routine tasks such as data entry, document
processing, and customer support
Natural Language Processing (NLP):
NLP enables machines to understand and process human language, including text and speech,
allowing for more natural and intuitive interactions.

3 b) Enterprise IT implementations can fail for various reasons, often stemming from challenges related
to technology, people, processes, and organizational factors. Following are the reasons for failure,
Poor Requirements Definition:
Inadequate or unclear requirements can lead to misalignment between IT solutions and business
needs.
Failure to involve key stakeholders and end-users in the requirements gathering process can result
in solutions that do not meet user expectations.
Lack of Executive Sponsorship and Leadership:
Enterprise IT implementations require strong executive sponsorship and leadership to drive
alignment, support, and resources across the organization.
Without visible support from senior management, projects may face resistance, resource
constraints, and competing priorities
Scope Creep and Change Management:

Scope creep occurs when project requirements, objectives, or deliverables expand beyond the
original scope, leading to schedule delays, cost overruns, and project complexity.
Inadequate change management processes can exacerbate scope creep by failing to manage
stakeholder expectations, communication, and resistance to change effectively.
Resistance to change from employees, stakeholders, or organizational culture can hinder the
adoption and success of IT implementations

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Poor Project Management and Governance:

Ineffective project management practices, such as inadequate planning, scheduling, and resource
allocation, can lead to project delays, budget overruns, and quality issues.
Lack of governance mechanisms, including project oversight, risk management, and decision-
making processes, can result in project mismanagement and failure to address issues promptly.
Technical Challenges and Complexity:
Enterprise IT implementations often involve complex technologies, integrations, and
dependencies that may pose technical challenges.
Inadequate technical expertise, architectural design flaws, and compatibility issues can lead to
system failures, performance bottlenecks, and security vulnerabilities.
Poor Quality Assurance and Testing:
Poor vendor selection, communication, and collaboration can lead to delays, conflicts, and subpar
outcomes.

External Factors and Environmental Changes:

External factors such as changes in market conditions, regulatory requirements, or technological
disruptions can impact the success of enterprise IT implementations.
Change Management is a complex process and important journey organization should pass during
the time of transformation. Technology changes are often easy by process changes and people
changes are tough job for many enterprises.
People, Process, and Technology change management is a holistic approach to managing
organizational change that focuses on three interconnected dimensions: people, processes, and
technology
People:
The people dimension emphasizes the importance of understanding and addressing the human
factors involved in change, including employee attitudes, behaviors, skills, and capabilities.
Key Tactics for People Change management
Stakeholder Analysis: Identify key stakeholders, their interests, concerns
Communication and Engagement: Develop a communication plan to inform, involve, and engage
employees throughout the change process.
Training and Development: Provide training, resources, and support to help employees develop
the knowledge, skills, and capabilities
Change Leadership: Empower leaders and managers to champion the change, model desired
behaviors, and support employees through the transition.
Process:
The process dimension focuses on redesigning organizational processes, workflows, and systems
to enable and sustain the desired change.
Key Tactics for Process Change management
Process Analysis: Assess current processes and workflows to identify inefficiencies, bottlenecks,
and areas for improvement.
Redesign and Optimization: Redesign processes and workflows to align with the goals and
objectives of the change initiative.
Change Governance: Establish governance structures and mechanisms to oversee and manage the
implementation of process changes.

Technology:
The technology dimension involves leveraging technology solutions and systems to enable and
support the desired change.
Key Tactics for Technology Change management
Technology Assessment: Evaluate existing technology infrastructure, systems, and applications to
assess their suitability and alignment with the change initiative.

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Solution Selection and Implementation: Identify and select technology solutions that address
specific business needs, enhance capabilities, and support organizational goals. Implement and
integrate technology solutions into the organization
Change Enablement: Provide training, support, and resources to help employees adapt to and
leverage new technology solutions effectively.

4.
a) Describe key technology trends that raise ethical issues. What is intellectual property? How do
you protect intellectual property? (3+2+3=8)
b) As an IT manager at a manufacturing company, how would you reduce computer frauds and
leakage of business secrets from your organization? How can the Electronic Transaction Act help
you in this regard? (4+3=7)

Answer
4 a) First part:
Ethical issues long preceded information technology. Information technology has heightened
ethical concerns, taxed existing social arrangements, and made some laws obsolete or severely
crippled. There are four key technological trends responsible for these ethical stresses
Doubling of computer power: The doubling of computing power every 18 months has made it
possible for most organizations to use information systems for their core production processes. As
a result, our dependence on systems and our vulnerability to system errors and poor data quality
have increased. Social rules and laws have not yet adjusted to this dependence. Standards for
ensuring the accuracy and reliability of information systems are not universally accepted or
enforced.
Rapidly declining data storage costs: Advances in data storage techniques and rapidly declining
storage costs have been responsible for the multiplying databases on individual employees,
customers, and potential customers maintained by private and public organizations. These
advances in data storage have made the routine violation of individual privacy both cheap and
effective. Already massive data storage systems are cheap enough for regional and even local
retailing firms to use in identifying customers.
Networking advances and the Internet: Advances in data analysis techniques for large pools of
data are a third technological trend that heightens ethical concerns because companies and
government agencies are able to find out much detailed personal information about individuals.
With contemporary data management tools, companies can assemble and combine the myriad
pieces of information about data stored on computers much more easily than in the past.
Advances in data analysis techniques: Companies with products to sell purchase relevant
information from these sources to help them more finely target their marketing campaigns.
Companies can analyze large pools of data from multiple sources to rapidly identify buying
patterns of customers and suggest individual responses.

Second part:
Intellectual property is a broad categorical description for the set of intangible assets owned and
legally protected by a company or individual from outside use or implementation without consent.
An intangible asset is a non-physical asset that a company or person owns.

Third part:
Three main ways that protects intellectual property are as follows
Trade secret: Any intellectual work product such as a formula, device, pattern, or compilation of
data 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 laws grant a monopoly on the ideas behind a work product, but it can be a very tenuous
monopoly.
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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. Copyright protects against copying of entire programs or their parts. Damages
and relief are readily obtained for infringement.
Patents: A patent grants the owner an exclusive monopoly on the ideas behind an invention for 20
years. The congressional intent behind patent law was to ensure that inventors of new machines,
devices, or methods receive the full financial and other rewards of their labor and yet make
widespread use of the invention possible by providing detailed diagrams for those wishing to use
the idea under license from the patent’s owner. The key concepts in patent law are originality,
novelty, and invention. The strength of patent protection is that it grants a monopoly on the
underlying concepts and ideas of software.
4 b) As the IT manager, I would adopt the following measures to reduce computer frauds and leakage
of business secrets from my organization:
➢ Have a clearly articulated IT security and information security policy.
➢ Make all the stakeholders (staff, management, partners) aware of the security issues, risks, policy
provisions, implications and preventive measures against computer fraud and information leakage.
➢ Use appropriate technology to ensure information safeguards such as enforce use of official email
address for all business correspondences, banning portal storage devices for non-essential
purposes, use genuine and licensed software, ban pirated software.
➢ Restrict use of unnecessary online services such as torrents, social media etc in the corporate
computers.
➢ Have a proper whistleblowing and follow-up mechanism to bring any breach of the policies and
laws to the knowledge of management.
➢ Keep software and tools update with necessary patches, upgrades, support from vendor etc.
➢ Promptly isolate and act upon any case of impropriety and data loss.
➢ Conduct regular security and information system audit to ensure the systems, processes and
practices are properly tuned to ensure maximum security and to prevent fraud.

The Electronic Transaction Act shall help in the following ways to reduce computer frauds and
leakages:
➢ It specifies the categories of the offenses related to computer fraud and mismanagement.
➢ It also specifies what constitutes the unlawful access to information and information system
infrastructure.
➢ Apart from defining the offenses and unlawful activities, the Act also specifies the action and
punishment for the defined offenses along with the initial process of reporting and investigation.

As the Electronic Transaction Act defines offenses and the actions/punishment for those offenses,
it serves as a baseline to specify organization-wise policy to control frauds as well as take action
on the acts of frauds that have been committed. As a result, organizations and their security team
have a good frame of reference regarding controlling and managing computer frauds.

5.
a) Why do you need IT strategy? How do you align IT strategy with business strategy?
(3+5=8)
b) Why do we need information systems audit? Explain standards for information systems audit.
(3+4=7)
Answer

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5 a) First Part: In today's digital age, every organization is dependent on technology to carry out its
business functions. From managing customer data to processing financial transactions, technology
has become an integral part of every organization’s operations. Having an IT strategy is crucial for
organizations to leverage technology effectively and achieve their business objectives.
Having an IT strategy is critical for organizations of all sizes and industries. It helps align IT with
the organization’s business goals, increase efficiency and productivity, enhance security and
compliance, improve customer experience, foster innovation, manage costs, and enable scalability.
By investing in an IT strategy, organizations can leverage technology effectively and achieve their
desired outcomes, driving growth and success in today's digital age.
• Align IT with Business Goals: One of the primary benefits of having an IT strategy is that it helps
align IT with the organization’s business goals.
• Increase Efficiency and Productivity: An IT strategy can also help increase efficiency and
productivity within the business.
• Enhance Security and Compliance: Security and compliance are critical concerns for every
organization, particularly in today's environment where cyber threats are rampant. An IT strategy
can help organizations enhance their security and compliance posture by identifying the right
security tools and processes to protect their assets, data, and systems.
• Improve Customer Experience: Customer experience is a key differentiator for businesses today.
With an IT strategy in place, you can leverage technology to enhance the customer experience by
offering more personalized, responsive, and seamless interactions across all touchpoints.
• Foster Innovation: Innovation is critical for any business to stay competitive in today's fast-paced
environment. An IT strategy can help foster innovation by identifying emerging technologies and
trends that can be leveraged to create new products, services, and business models.
• Manage Costs: IT costs are often a significant burden for organizations, particularly for small and
medium-sized businesses with limited resources. An IT strategy can help manage costs by
identifying the most cost-effective solutions and technologies that meet the business's needs.
• Enable Scalability: As businesses grow and evolve, their IT needs also change. An IT strategy
can help enable scalability by identifying technologies and processes that can grow and adapt with
the organization.

Second Part: Technology & Business are almost inseparable. We cannot even imagine a business
without computers, internet & software today. Information Technology plays a very vital role in
the efficient functioning of a Business.
Business strategy is the roadmap to achieve the company’s business objectives. The business
strategy consists of defining business goals, planning the course of actions, business processes,
and taking decisions to achieve specified business objectives.
IT Strategy or Information technology strategy provides guidelines on how technology should be
used to help the business achieve its objectives.
Business-IT alignment is a process where businesses leverage information technology (IT) to
achieve strategic business objectives, such as expanding the reach of their products, improving
financial performance, or more. For example, companies that only sell their products through
physical stores, can leverage IT to launch an eCommerce website & carry out online sales to
expand their reach and increase market share
The business scenario is changing rapidly. Customers’ expectations have also increased. They
want the right quality product, at the right price to be delivered to them right away. Adopting
technology is inevitable for improving customer experience & satisfaction.
With advancements such as computing power, internet, mobility, cloud computing, automation
tools, application software are now widely available & affordable. Technology is now well within
the reach. So, companies must leverage IT to meet and overcome current business challenges and
stay ahead of the competition.
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To align IT with the business and use information technology effectively for competitive
advantage, managers need to perform a strategic systems analysis. To identify the types of systems
that provide a strategic advantage to their firms, managers should ask the following questions:
• What is the structure of the industry in which the firm is located?
What are some of the competitive forces at work in the industry? Are there new entrants to the
industry? What is the relative power of suppliers, customers, and substitute products and services
over prices? Is the basis of competition quality, price, or brand? What are the direction and nature
of change within the industry? From where are the momentum and change coming? How is the
industry currently using information technology? Is the organization behind or ahead of the
industry in its application of information systems?
• What are the business, firm, and industry value chains for this particular firm?
How is the company creating value for the customer – through lower prices and transaction costs
or higher quality? Are there any places in the value chain where the business could create more
value for the customer and additional profit for the company? Does the firm understand and
manage its business processes using the best practices available? Is it taking maximum advantage
of supply chain management, customer relationship management, and enterprise systems? Does
the firm leverage its core competencies? Is the industry supply chain and customer base changing
in ways that benefit or harm the firm? Can the firm benefit from strategic partnerships, value webs,
ecosystems, or platforms? Where in the value chain will information systems provide the greatest
value to the firm?
• Have we aligned IT with our business strategy and goals?
Have we correctly articulated our business strategy and goals? Is IT improving the right business
processes and activities to promote this strategy? Are we using the right metrics to measure
progress toward those goals?
5 b) First Part: An information technology audit, or information systems audit, is an examination of the
management controls within an Information technology (IT) infrastructure. The evaluation of
obtained evidence determines if the information systems are safeguarding assets, maintaining data
integrity, and operating effectively to achieve the organization's goals or objectives. These reviews
may be performed in conjunction with a financial statement audit, internal audit, or other form of
attestation engagement. IT audits are also known as "automated data processing (ADP) audits" and
"computer audits". They were formerly called "electronic data processing (EDP) audits".
The purposes of an IT audit are to evaluate the system's internal control design and effectiveness.
This includes, but is not limited to, efficiency and security protocols, development processes, and
IT governance or oversight. Installing controls are necessary but not sufficient to provide adequate
security. People responsible for security must consider if the controls are installed as intended, if
they are effective, or if any breach in security has occurred and if so, what actions can be done to
prevent future breaches.
The primary functions of an IT audit are to evaluate the systems that are in place to guard an
organization's information. Specifically, information technology audits are used to evaluate the
organization's ability to protect its information assets and to properly dispense information to
authorized parties. The IT audit aims to evaluate the following:
• Will the organization's computer systems be available for the business at all times when required?
(known as availability)
• Will the information in the systems be disclosed only to authorized users? (known as security and
confidentiality)
• Will the information provided by the system always be accurate, reliable, and timely? (measures
the integrity)
Many organisations are spending large amounts of money on IT because they recognise the
tremendous benefits that IT can bring to their operations and services. However, they need to
ensure that their IT systems are reliable, secure and not vulnerable to computer attacks.

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IT audit is important because it gives assurance that the IT systems are adequately protected,
provide reliable information to users and properly managed to achieve their intended benefits.
Many users rely on IT without knowing how the computers work. A computer error could be
repeated indefinitely, causing more extensive damage than a human mistake. IT audit could also
help to reduce risks of data tampering, data loss or leakage, service disruption, and poor
management of IT systems.

Second Part: The specialized nature of Information Systems auditing and the professional skills
and credibility necessary to perform such audits, require standards that would apply specifically
to IS auditing. Standards, procedures and guidelines have been issued by various institutions,
which discuss the way the auditor should go about auditing Information Systems. The framework
for the IS Auditing Standards provides multiple levels of guidance. Standards provide a framework
for all audits and auditors and define the mandatory requirements of the audit. They are broad
statement of auditors’ responsibilities and ensure that auditors have the competence, integrity,
objectivity and independence in planning, conducting and reporting on their work.
The IT Audit Framework can serve as a reference for mandatory standards and recommended best
practices to follow during IT audit and assurance engagements. The standards are divided into
three categories:
• General standards: These are the guiding principles under which the IS assurance profession
operates. They apply to the conduct of all assignments and deal with the IS audit and assurance
professional’s ethics, independence, objectivity, and due care as well as knowledge, competency,
and skill. These are: Audit Charter, Organizational Independence, Professional Independence,
Reasonable Expectation, Due Professional Care, Proficiency, Assertions, and Criteria.
• Performance standards: They deal with the conduct of the assignment, such as planning and
supervision, scoping, risk and materiality, resource mobilization, supervision and assignment
management, audit and assurance evidence, and the exercising of professional judgement and due
care. These are: Engagement Planning, Risk Assessment in Planning, Performance and
Supervision, Materiality, Evidence, Using the Work of Other Experts, Irregularity and Illegal Acts.
• Reporting standards: These address the types of reports, means of communication and the
information communicated. These are: Reporting and Follow-up Activities.

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

a) Disadvantages of IT Outsourcing
b) Cloud computing
c) High availability planning
d) B2C e-Commerce
e) Categories of Application Controls

Answer
6 a) IT outsourcing is a strategic business technique whereby companies contract with outside service
providers to handle particular IT tasks or full projects. This technique is an essential part of
contemporary corporate operations since it includes a wide range of services and activities.
Disadvantages of IT Outsourcing
Loss of control: When you outsource, you are handing over control of your IT operations to a
third party. This can be a concern for some organizations that want to maintain secure control over
their network.
Dependence on the service provider: When outsourcing, you depend on the service provider to
manage your IT operations. This can be a risk if the service provider is not reliable, or fails to meet
your expectations.
Hidden costs: You may have to deal with hidden costs with IT outsourcing, such as contract
termination fees or unexpected changes in scope.
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Long distances: If you outsource IT to a provider in another country, the time difference and long
distance can make communication difficult. It can also make business trips costly and time-
consuming.

6 b) Cloud computing is a general term for the delivery of hosted services over the internet. Cloud
computing enables companies to consume computer resources, such as a virtual machine
(VM), storage or an application, as utility rather than having to build and maintain computing
infrastructures in house.
Cloud computing boasts several attractive benefits for businesses and end users. Five of the main
benefits of cloud computing are:
• Self-service provisioning: End users can spin up compute resources for almost any type of
workload on demand. This eliminates the traditional need for IT administrators to provision and
manage compute resources.
• Elasticity: Companies can scale up as computing needs increase and scale down again as demands
decrease. This eliminates the need for massive investments in local infrastructure, which may or
may not remain active.
• Pay per use: Compute resources are measured at a granular level, enabling users to pay only for
the resources and workloads they use.
• Workload resilience: Cloud service providers often implement redundant resources to ensure
resilient storage and to keep users' important workloads running -- often across multiple global
regions.
• Migration flexibility: Organizations can move certain workloads to or from the cloud or to
different cloud platforms as desired or automatically for better cost savings or to use new services
as they emerge.

6 c) High availability planning of the system is a detailed planning of how the system’s operation is
continued even if there is a major disruption and outage. A high-availability plan consists of the
infrastructure and logistics as well as a set of clearly defined policies & plan of action regarding
how to ensure business continuity in case of a major disruption caused by system failure, natural
disaster, network link outages as well as other causes.
A well-prepared high-availability plan may consist of a combination of the following:
➢ Details of the high-availability design including server/storage redundancy, network redundancy
and geographical redundancy in terms of central and disaster recovery
➢ Step-by-step procedure of restoring services, bringing up backup site if main site is down, starting
up services and applications.
➢ Clear matrix of responsibilities and persons involved.
6 d) Business-to-Consumer (B2C) refers to a process of businesses selling products and services
directly to consumers, with no middle person. B2C typically refers to online retailers who sell
products and services to consumers through internet. A business website is a place where all
transactions take place directly between a business organization and a consumer. A consumer goes
to the website, selects products and orders the products. After receiving the order, goods are
dispatched to the customer.

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6 e) Categories of application controls

The objective of application controls is to ensure that Input data is accurate, complete, authorized,
and correct. Data is processed as intended in an acceptable time period. Data stored is accurate and
complete.
Outputs are accurate and complete. A record is maintained to track the process of data from input
to storage and to the eventual output
Categories of application controls are as follows:
Input Controls – These controls verify the integrity of data input into a business application. This
data can be entered directly, remotely, or through a web-enabled application or interface. The
purpose of these checks is to confirm that the data stays within the set parameters.
Processing Controls – These controls are designed to verify that the processing of the input data
is complete, accurate, and authorized in a timely manner.
Output Controls – These controls focus on processing the data and aim to validate the output by
comparing it with the expected outcome, ensuring that the results align with the original input.
Integrity Controls – These controls monitor processed data and data at rest for integrity and
accuracy.
Management Trail – These controls allow management to trace transactions and events from
their inception to their final output and vice versa. They also evaluate the efficiency of other control
mechanisms and pinpoint errors as near to their origin as feasible.

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Paper 6 – Advanced Taxation

Attempt all questions. Working notes should form part of the answer.

1. Omega Shoes is a private limited company engaged in Manufacturing of Sports shoes and Hawai
Chappal.Books of Account of Company reveals the following income statement for FY 2079/80:
Amount in
Particulars NPR Particulars Amount in NPR

Raw Material Export Sales 4,500,000

Opening Stock 350,000 Other Income 200,000

Purchase 490,000 Closing Stock

Packing Material Raw Material 670,000

Opening Stock 95,000 Packing Material 150,000

Purchase 210,000 Finished Goods 680,000

Finished Goods Dividend Received 88,000

Foreign Exchange
Opening Stock 700,000 Gain 89,000

Purchase -
Freight and Wages on
Purchase 130,000
Freight and Wages on
sales 167,000
Employees Benefit
Expenses 1,200,000
Interest Expenses 36,000
Administrative and
Office Running
expenses 450,000
Repair and Maintenance 85,000
Depreciation 345,000
Donation 175,000

Profit for the Period 1,944,000

Total 6,377,000 6,377,000

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Additional Information
• Depreciable Assets details

Pool
A B C D E
Opening
Depreciation base 578,000 124,000 1,074,000 2,214,500
Addition
Upto Poush - 25,000 235,000
Magh to Chitra
Baisakh to Ashad 670,000

• Repairs and Maintenance is related to Pool D only.

• Eligible Carry Forward loss is NPR.69,000
• Salary paid to Employee who is in the process of obtaining Permanent Account Number(PAN) is
2,30,000 included in Employee Benefit Expenses.
• Foreign Exchange Gain is net of NPR 9,000 on account of exchange loss as on reporting date.
• Business Renewal Tax paid to Rural Municipality is NPR.11,500 included under administrative
and office running expenses.
• Out of Donation NPR.100,000 is paid to Prime Minister Natural Disaster Relief Fund and Rest to
various organizations.
• Company is failed to submit Installment Tax Return for entire year.
Based on above Information, Calculate: (18+2)
a) Taxable Income &Tax Liability
b) Fees for Not submitting Instalment Tax Return

Answer
1(a)
Other Income
Particulars Export Amount Notes
Inclusions
Export Sales 4,500,000
Other Income - 200,000
Foreign Exchange Gain 98,000 A
Dividend Income A
200,000
Total Inclusions 4,598,000
Deductions
Interest Expenses 36,000
Cost of Trading Stock 475,000 B
Depreciation 924,833 C
Repair and
Maintenance 85,000 D
Other Deductible Expenses 1,587,000 E
Total Deductions 3,107,833

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Allowable Carry Forward Loss 69,000

Total Deductions 3,176,833
Donations 95,932 4,168
Taxable Income 1,325,335 195,832

Calculation of Tax Liability

Particulars Export income Other income Total
Taxable Income 1,325,335 195,832 1,521,167
Effective Tax Rate (see 8% 25 %
below)
Tax Liability For The Year 106,026.80 48,958.00 154,984.80

Ascertainment of Effective Tax Rate for export

Tax Rate for Entity 25%
Rebate in Tax 20% 5% Sec 11 (2kha): Rebate for Special
Industry/Manufacturing Industry
Tax Rate After 20%
Rebate
Rebate in Tax 20% 4% Export Income Sec 11(3Nga)(
Kha) for export income
Tax Rate After 16%
Rebate
Additional Rebate 8% sec.11(3Nga)(Ga) for export
50% income
Final Tax rate 8%

1(b)
Fee for Not submitting Installment Tax Returns is NPR 5,000
Applicable Section 117
Fees per Return 5,000
Assessable Income (Total inclusion 4,798,000 1,690,167
– Total deduction 3,107,833)
0.01% of Assessable Income (B) 169
Higher of A and B is Imposed as Fee for Not 5,000
Submitting Return

Notes to Answer
A. Foreign Exchange Gain
Particulars Amount Adjustment Net Inclusion Reasons
Foreign 89,000 9,000 98,000 Only Realized Gain and
exchange Loss are allowable Sec 24
gain (4). Unrealized loss of
9,000 reduced the realized
profit and hence added
back to arrive at realized
gain.
Dividend 88,000 (88,000) - Dividend is Final
Received Withholding Payment and
hence not included in
Inclusions
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B. Cost of Trading Stock

Particulars Raw Packing Finished Total
materials Materials Goods
Opening Stock 350,000 95,000 700,000 1,145,000
Purchase 490,000 210,000 700,000
Freight and Wages 130,000 - - 130,000
on Purchase
Sub Total 970,000 305,000 700,000 1,975,000
Closing Stock 670,000 150,000 680,000 1,500,000
Cost of Trading 300,000 155,000 20,000 475,000
stock

C. Allowable Depreciation
Particulars Pool
A B C D E Total
Opening Depreciation 578,000 124,000 1,074,000 2,214,50 - 3,990,500
Base 0
Addition During The Year - 25,000 235,000 670,000 - 930,000
Allowable Addition - 25,000 235,000 223,333 - 483,333
During The Year
Depreciation Base for 578,000 149,000 1,309,000 2,437,833 - 4,473,833
Current Year

Depreciation Rate (%) 5 25 20 15

Depreciation Amount for 28,900 37,250 261,800 365,675 693,625
the year

Allowable Addition 9,633 12,417 87,267 121,892 231,208

Depreciation (1/3)
Total Depreciation For the 38,533 49,667 349,067 487,567 924,833
Year
Closing Depreciation Base 539,46 99,333 959,933 1,950,26 3,549,000
for the year 7 7
Unabsorbed Addition - - - 446,667 446,667
During The Year
Excess Repair During The
Year
Opening Depreciation 539,467 99,333 959,933 2,396,933 3,995,667
Basis for Next year

D. Allowable Repair and Maintenance

Particulars A B C D E
Depreciation Bases at Year 578,000 149,000 1,309,000 2,437,833 -
End
7% of Base 40,460 10,430 91,630 170,648 -
Actual Repair 85,000

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Allowable Repair and 85,000

Maintenance

E. Other Deductible Expenses

Particulars Amount Adjustment Deductibles Reasons
Fright and wages on Sales 167,000 - 167,000
Employee Benefit 1,200,000 230,000 970,000 Salary to Employee
Expenses not Having PAN
Administrative and 450,000 450,000 Business Renewal
office Running Tax Paid to Rural
Expenses Municipality is
allowed as
deduction
21(1)(kha)
Total other 1,817,000 230,000 1,587,000
Deductibles

2.
a) Nepal Help is registered with Kathmandu District and has taken approval from Inland Revenue
Department as tax exempt entity. The entity has earned following income for the income year
2079/80.
Please mention the provision of Exempt income of the organization and calculate the Tax
Liabilities as per Income Tax Act, 2058. 7
SN Particulars Amounts (Rs.)
1 Grant Received from Government
2,632,000.00
Rent Received from Let out the vacant
2
rooms of building 2,400,000.00
Market Value of
Laptop from an Individual person received
3 the Laptop- Rs.
as gift to the organization
320,000
Amount received from the canteen operated
4
in ground floor of the building 3,600,000.00
Membership Fee Received from members
5
of the organization 2,560,000.00
Interest on deposit received from ABC
6
Bank Ltd. 250,000.00
Interest received from other person than
7
Bank 300,000.00

b) Discuss the taxability of incomes in the following cases: 7

• “A telecommunication company in Nepal is providing international communication services to

local customers by using facilities of optical fiber and satellite service providers situated outside
Nepal. The Company pays fixed charge plus fee based on transmission of information/data
periodically against these services.”
• Mr. Ferguson, a European resident wanted to do business in Nepal and accordingly he brought
foreign currency amounting to US$ 50,000 and promoted a one-man company and purchased
agricultural land in the name of the Company equivalent to US$ 50,000 at that time. The total
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amount invested in the Company was Rs. 2,500,000 at the prevailing exchange rate. But, due to
various reasons, he could not start his operation for more than 5 years, and so he lost interest in
the project and wanted to sell the Company at an agreed price of Rs. 7,500,000 and get the money
remitted back to his country.
• Payment of compensation in the hands of the recipient under the provisions of Income Tax Act.
c) Below is the extract of the final income tax assessment order issued by the Tax Officer u/s 102 for
the income tax assessment done u/s 101 of the income tax act, 2058 for Star Trek Pvt. Ltd. Final
Assessment Order was issued on 2080.05.01. But Company received the same on 2080.06.30.
Particular Amount Reason for
Disallowance
Employee Salary 1,00,000 Payment made to
employee having no
PAN Number
Rent 40,000 One-time payment of
Rent in Cash
Vehicle provided to 20,00,000 Full Value of Vehicle
Consultant of the Company added as income
Total Disallowed 21,40,000
Tax @ 25% 5,35,000
Fee u/s 120(2) 2,67,500
Total Tax Liability 8,02,500

Contention of Company on above matter is as below:

(a) Employee Salary: The payment made to one time daily wage workers made to various workers.
The payment is made as below:
i. Payment to 1 workers @ Rs 500 to each worker
ii. Payment to 9 workers @ Rs 2,500 to each worker
iii. Payment to 10 workers @ Rs 2,600 to each worker
iv. Payment to 10 workers @ Rs 3,100 to each worker
v. Payment to 5 workers @ Rs 4,000 to each worker
(b) Rent is paid for office situated at Janakpur.
(c) Vehicle is provided for whole year for official work.

Company is willing to pay the income tax which is payable as per law and file appeal for other
items which are not as per law. You are required to:
i) Advise Management of the Company on the last date by which appeal should be filed for
Departmental review. 4
ii) Calculate minimum amount to be deposited to make appeal for Departmental review.
2

Answer
2 a) As per section 10 (Chha) of Income Tax Act, 2058, following incomes of the exempted organization
are entitled to tax exemption:
1. Donation, gift,
2. Other contributions directly related to the activities of the organization entitled for exemption
as referred to in clause (dha) of Section 2 without having consideration or expecting for
consideration.
Based on the above provision, following Incomes of Nepal Help are exempted from Income tax:

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Amounts
SN Particulars
(Rs.)
Grant Received from Government
1 assuming incompliance with Help Nepal
2,632,000.00
objective
Membership Fee Received from members
2
of the organization 2,560,000.00
Market
Laptop from an Individual person received Value of the
3
as gift to the organization Laptop- Rs.
320,000

Further, followings are the Assessable Income and Tax Liabilities of Nepal Help:
Amounts
SN Particulars
(Rs.)
Rent Received from Let out the vacant
1
rooms of building 2,400,000.00
Amount received from the canteen
2
operated in ground floor of the building. 3,600,000.00
Interest on deposit received from ABC
3 -
Bank Ltd. (Note 1)
Interest received from other person than
4
Bank 300,000.00
Total Assessable Income
6,300,000.00
Rate of Income Tax 25%
Income Tax Liabilities
1,575,000.00

Note 1:
As per section 92(1)(Nga) of Income Tax Act, 2058, the Interest received by exempted entities
from the Bank, Financial Institution or other Entities issuing Debenture or Listed entities as per
the prevailing Laws will be final withholding Income. Hence, Interest received by Nepal Help
from ABC Bank Ltd has not been included in assessable income. Further, Interest received from
other person than bank is assumed to be received from the person except mentioned in section
92(1)(Nga) of Income Tax Act, 2058.

2(b)
i) As per sec.67(6) (ja) of the Act, payments received by a person who conducts a business of
transmitting messages by cable, radio, optical fiber, or satellite communications in respect of the
transmission of messages by apparatus established in Nepal, whether or not such messages
originate in Nepal is deemed to have source in Nepal. Since in the question the optical and satellite
service provider are situated outside Nepal and naturally the equipment are also supposed to be
placed outside Nepal, their income has no source in Nepal and is not liable to tax in Nepal. If the
equipment is situated in Nepal, then the provider of service shall be liable to tax deduction at source
of 5% as per Schedule 1-clause 2(7).

ii) Section 95ka (2) states that TDS @ 25% attracts on gain on sale of shares of a company not listed
in NEPSE, if the seller is non-resident, then the responsibility of deduction & deposition of such
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TDS rests with such non-listed company. In this case, when Mr. Ferguson, a non-resident person,
sells his stake, in which his investment was Rs.25 lakhs for Rs.75 lakhs, there is gain of Rs. 50
lakhs on which the new management such non-listed company, has to collect 25% tax at source
on the gain i.e. Rs.12,50,000 and deposit it with the Tax Department.

As per section 31 of the Income Tax Act, if any person or his associated person has received any
compensation amount for the following matters including payments for insurance, such amount
has to be included, as the case may be, in computing the income earned from employment,
business or investment at the time of receipt of the amount for the compensation:

(a) Compensation for any income earned or likely to be earned by that person from any business
or investment or for any amount to be included in the computation of that income, or

(b) Compensation for any loss suffered or likely to be suffered by that person from any business
or investment or for any expenses to be deducted in the computation of that income.

Provided that,

(1) The amount of payment of compensation for physical damage of the resident individual from
personal accident shall not be included in the income and such expenses in treatment of damage
from such accident shall not be claimed for tax adjustment pursuant to Section 51.

(2) The compensation amount to be received for the death of an individual shall not be included
in the income.
2 (c)(a)
The time limit for filing of appeal for Departmental review
(i) As per section 115(1) the appeal shall be filed within 30 days of receipt of notice of order.
(ii) if the period of 30 days is expired, then the tax payer may file application for extension of time
period for filing of appeal within 7 days of such expired period. In that case, the tax officer may
extend the time period for filing appeal to maximum next 30 days on reasonable ground.
(iii) so, in the normal course, the appeal should be filed by 2080.05.30., the notice receipt date was
2080.06.30, so 30 days of receipt of notice was 2080.07.30.
(iv) if it could not be filed by 2080.07.30, then application shall be filed within next 7 days (i.e. by
2080.08.07) for extension of time limit. In that case tax office may extend time period by maximum
30 days (i.e. upto 2080.08.30) for filing of appeal.

2(c )(b)
Segregation of disputed and non- disputed items and calculation of minimum deposit amount
required for administrative review.
Particulars Disputed Undisputed Remarks
Employee Salary 49,000 51,000 One time cash Payment upto 3,000 is
allowed to the daily wages workers u/s
21(1)
Rent 40,000 0 Cash payment upto 50,000 allowed u/s
21(2)
Vehicle provided to 20,00,000 0 As per Rule 13(1) of income tax rules
Consultant of the 2059.
Company
Total 20,89,000 51,000
Income tax @ 25% 5,22,250 12,750
Fee u/s 120 0 6,375 The error is unintentional

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Total 522,250 19,125

Amount to be 19,125 U/S 115(6) 1/4th of disputed income tax
deposited 130,562.50 and 100% of undisputed income tax to
be kept as deposit for filing appeal.
Hence total amount to be deposited is Rs. 149,687.50

3.
a) Discuss about professional behavior of professional accountant in practice based on ICAN code
of ethics. 5
b) In what case the taxpayer needs to submit the income tax return other than the due time-limit of
three months of expiration of an income year? 5

Answer
3a) A professional accountant shall comply with the principle of professional behavior, which
requires an accountant to comply with relevant laws and regulations and avoid any conduct that
the accountant knows or should know might discredit the profession. A professional accountant
shall not knowingly engage in any business, occupation or activity that impairs or might impair
the integrity, objectivity or good reputation of the profession, and as a result would be incompatible
with the fundamental principles.
Conduct that might discredit the profession includes conduct that a reasonable and informed third
party would be likely to conclude adversely affects the good reputation of the profession. When
undertaking marketing or promotional activities, a professional accountant shall not bring the
profession into disrepute. A professional accountant shall be honest and truthful and shall not
make:
(i) Exaggerated claims for the services offered by, or the qualifications or experience of, the
accountant; or
(ii) Disparaging references or unsubstantiated comparisons to the work of others.

3b) According to section 96(5) of Income Tax Act, the Department may, in the following
circumstances, require any person to submit the income return of an income year or any part of the
income year within the time-limit mentioned in the written notice given by it to such person prior
to the due time-limit of three months of expiration of an income year for submission of the income
return of the income year:
(a) If that person becomes bankrupt, insolvent or is dissolved,
(b) If that person is to leave Nepal for an uncertain period of time,
(c) If that person is leaving the act being carried out by him in Nepal, or

If the Department otherwise thinks it proper. Similarly, Section 96 of the Act has provision that if
any person who has to submit an income return pursuant to Section 96 makes an application in
writing, within the time limit for the submission of such return, to the Department for the extension
of the time-limit, the Department may extend the time-limit for submission of the income return if
the reason is reasonable. The Department may extend, at one time or several times, the time-limit
for a period not exceeding three months to submit the income return. In that case, the taxpayer
needs to submit the income tax return within the extended time limit.

4.
a) Sona (P) Ltd. has acquired necessary license and approval from excise authorities for
manufacturing of plastic packing materials and registered itself under VAT. The company
commenced its commercial operation from 1st Kartik 2080. The company had following
transactions during the month of Kartik 2080:

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Import of plastic 90 ton granules (CIF Kalkota)

1,000,000.00
Clearing and forwarding expenses at Kalkota
80,000.00
Carriage inward
120,000.00
Factory wages
200,000.00
Other production cost
150,000.00
Stock of plastic granules at the end of Kartik 2080 - in
6500
KG
Stock of finished products at the end of Kartik 2080 -
200
in KG
The company purchased 1 Motorbike, 1 Mini Truck and 1 Van (for passengers) for Rs. 565,000
Rs. 4,520,000 and Rs. 3,390,000. Price of these vehicles is inclusive of VAT.
There is no production loss, i.einput output ratio of granules and finished product is 1:1 . Custom
duty paid @ 30% of landed cost is not included in above data .The company's directors have
formed a partnership firm of distributors. The company has appointed the firm as sole distributor
of the company's products. The company sales its product to the distributor at 50% Margin at
Factory Cost. plus excise duty and applicable VAT. The distributor firm sells the product @ Rs.
85 per kg. Normal commission to distributors/wholesaler for same product paid by other
manufacturers is Rs. 10 per kg. Transportation expenses incurred by other manufacturers for
distribution of the same product are about Rs. 4 per kg. The rate of excise duty on the product is
5% of the Value
i) Calculate amount of VAT payable for the month of Kartik 2080. 6
ii) Excise Officer is not satisfied with the excise collected and is of view that factory price is not
derived properly. Therefore excise authorities are considering imposing additional excise on the
company. You are also required to advise the company on powers of the excise authorities to
impose additional excise duty. 2
iii) VAT authorities also feel that the company is under invoicing its product and informed the
company its intention to buy the stock of finished product at price invoiced by the company. Can
IRD buy the product without consent of the company? 1
iv) VAT authorities have assessed additional VAT on packing materials sold on the ground that the
product was heavily under invoiced than prevailing market price.
1
b) Supreme Ramen Noodles Pvt. Ltd. have below transaction for the month of Shrawan 2080:
i) It has imported 100 MT of raw materials from Japan @ USD 400 per MT on FOB factory rate. It
has paid ocean freight of USD 10,000 to Maersk line. It has paid insurance premium of Rs 2,00,000
till Birgunj Customs point, and insurance premium of Rs 20,000 from Birgunj Customs point to
Factory. The goods arrived at Customs point on 2080.01.28. Company has filed Pragaypanpatra
for clearance of goods on 2080.01.25. However, Company paid duties and cleared goods on
2080.02.30. the USD rate and applicable duties on various dates were as below:
• On the date of payment to vendor 1 USD = Rs 120
• On the date arrival of goods at Customs point 1 USD = Rs 122
• On the date of filing of Pragyapanpatra 1 USD = Rs 118
• On the date of payment of duty and clearance of goods 1 USD = Rs 125
ii) The Custom Duty and Excise Duty applicable on such goods were 20% and 10% respectively till
2080.02.15. The Budget has change the Customs Duty and Excise Duty to 20% and 20%
respectively after 2080.02.15.

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 Suggested Answers June 2024 Examination (CAP III - Group II)

iii) It has also imported 10 MT of packing materials from Germany worth USD 30,000 on FOB factory
rate. It has paid ocean freight of USD 1,500 to Maersk line. It has paid insurance premium of Rs
50,000 till Birgunj Customs point, and insurance premium of Rs 5,000 from Birgunj Customs point
to Factory. The goods arrived at Customs point on 2080.03.15. Company has filed Pragaypanpatra
for clearance of goods on 2080.04.05. However, Company paid duties and cleared goods on
2080.04.30. the USD rate and applicable duties on various dates were as below:
• On the date of payment to vendor 1 USD = Rs 125
• On the date arrival of goods at Customs point 1 USD = Rs 127
• On the date of filing of Pragyapanpatra 1 USD = Rs 128
• On the date of payment of duty and clearance of goods 1 USD = Rs 130
iv) The Custom Duty and Excise Duty applicable on such goods were 25% and 10% respectively.
v) VAT is applicable on all goods. Excise Duty on finished goods is Rs 20 per KG, and Customs duty
is Rs 40 per KG..
vi) Out of the above goods, Company cleared 50% of goods by furnishing Bank Guarantee and
remaining on cash payment of duty. The Bank guarantee has been released after export of goods.
vii) Company used all the imported raw material and packing material, and manufactured 98 MT of
finished Ramen noodles.
viii) Out of above manufactured Ramen noodles, Company exported 49MT @ USD 2000 per MT to
Bangladesh and balance it sold at local market for Rs 5,00,00,000.
ix) However, after the goods were received by the importer at Bangladesh, the importer could not sell
the noodles, and the Company decides to reimport the same.

You are required to:

(a) Calculate the amount of Customs Duty, Excise Duty and VAT payable at the time of import. 4
(b) Calculate the demurrage charge payable by the Company. 2
(c) Calculate the amount of Excise Duty payable by the Company after sale of such goods assuming
all goods are manufactured and sold within the month of Shrawan 2080. 2
(d) What will be Customs Duty application at the time of re-importation of goods from Bangladesh. 2

Answer
4 a)
i. Calculate amount of VAT payable for the month of Kartik 2080
Calculation of Production;
Particulars KG
Opening Stock of of Plastic Granules -
Purchase of Plastic Granules 90,000.00
Less: Closing Stock of Plastic Granules (6,500.00)
Production 83,500.00

Calculation of Sales;
Particulars KG
Opening Stock of Finished Goods -
Production 83,500.00
Less: Closing Stock of Finished Goods (200.00)

Sales 83,300.00

Particulars Amount (Rs.)

Cost of plastic granules 1,000,000.00
Clearing and forwarding expenses 80,000.00
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Carriage inward 120,000.00

Custom Assessable Value 1,200,000.00
Custom Duty @ 30% 360,000.00
Assessable Value for VAT 1,560,000.00
VAT paid @ 13% 202,800.00
Cost of raw material consumed (Rs
1,447,333.33
15,60,000 x 83,500 Kg / 90000 kg)
Factory wages 200,000.00
Other production cost 150,000.00
Factory Cost 1,797,333.33
Factory cost per kg 21.52
Margin @ 50% of factory cost 10.76
Factory price to whole seller 32.29
Excise duty @ 5% 1.61
Sub Total 33.90
VAT per kg @ 13% 4.41
Total VAT collected on Sales
367,353
(83,300 kg x Rs 4.41)
Less VAT paid
Paid at customs 202,800
Paid in purchase of motorbike 65,000
Paid in purchase of Mini Truck 520,000
Paid in purchase of Van 156,000
Total credit to be claimed 943,800.00
Net credit to be claimed 576,447.00

Note 1.: Since VAT paid by company in other goods and services are not mentioned in the
question, VAT paid for those goods and services are not considered. VAT paid for other goods
and services, if any, shall reduce VAT payable accordingly.
Note 2: Rule 41(2)(kha) restricts VAT credit for automobiles to 40%. Motorbike (two
wheelers) and Mini truck (not for passenger) does not fall under automobiles. Therefore, only
claim of VAT on Van is restricted under this rule.

Note 3: It is assumed that excise duty is NIL on the plastic granules (Raw Materials) as in question,
it is mentioned 5% excise on Products. (If students assume 5% excise on both raw materials &
finished goods, The VAT on import of Raw Materials will be changed and full marks should be
provided)

ii.
Section 10gha (na) confers power to Excise Officer to collect excise if difference between
consumer price and factory price is not reasonable. In this case excise officer may assess and
collect excise duty after considering consumer price, commission to wholesaler or retailer,
transport expenses and taxes in nearest market. It seems excise officer is not satisfied due to
difference in consumer price and factory price. Therefore, such difference should be calculated
before opposing excise officer's view.
Consumer price 85
Normal commission to wholesalers 10
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 Suggested Answers June 2024 Examination (CAP III - Group II)

Transport expenses 4
Estimated selling cost 14
Modified consumer price 71
Factory price to wholesaler
32.29
Difference
38.71
Since the difference is unreasonable, excise officer's view is not contrary to the legal provisions.
Therefore, Excise Officer may order rightly to pay additional excise duty.

iii.
Yes, under section 23ga(1) of VAT Act, VAT authorities have power to buy stock of goods
considered to be under invoiced. Under section 23ga(2), VAT authorities may choose to buy stock
at the value sold by the company without the consent of the company and pay amount calculated
at the rate invoiced by the company.
iv.
VAT Officer is empowered to assess tax under section 20(1)(e) if he or she has reasonable ground
to believe that the product is sold by under invoicing. Since in this case it seems to be under
invoiced compared to similar products as per the above calculated modified consumer price and
factory price per unit, VAT Officer may rightly assess additional tax.

4 b)
(a) Calculate the amount of Customs Duty, Excise Duty and VAT payable at the time of
import

Particulars Raw Material Packing Material Remarks

FOB Value of Goods @ Rs 50,00,000 39,00,000 USD rate of
125 for RM and @ Rs 130 for Customs clearance
PM and duty payment
date shall be
considered
Add: Ocean Freight @ Rs 125 12,50,000 1,95,000 USD rate of
for RM and @ Rs 130 for PM Customs clearance
and duty payment
date shall be
considered
Insurance Premium 2,00,000 50,000
Customs Assessable 64,50,000 41,45,000
Value
Customs Duty 12,90,000 10,36,250 Duty rate
@20% for RM & @ 25% on applicable on the
PM date of clearance
of goods
Assessable Value for Excise 77,40,000 51,81,250
Duty
Excise Duty (20% for RM & 15,48,000 5,18,125
10% for PM)
Assessable Value for VAT 92,88,000 56,99,375
VAT @ 13% 12,07,440 7,40,918.75

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Out of the above total Custom Duty, Excise & VAT amount on both RM & PM, 50% to be paid
in cash (for Local sale) & remaining on Bank Guarantee (for Export Sale).
b. Calculation of Demurrage Charge
Particulars Raw Material Packing
Material
Arrival of Goods as Customs Point 2080.01.28 2080.03.15
Clearance of Goods 2080.02.30 2080.04.30
No. of Days Goods stayed at Customs 32 days 45 days
Demurrage Charge:
For first 7 days – free 0 0
Next 30 days @ Rs 0.40 per kg per day (25 daysx0.40 (30 daysx0.40
x100,000KG) x10,000KG)
Rs 10,00,000 Rs 120,000
Next 31 days to 60 days @ Rs 0.60 per kg per day (8 days
x0.6x10000) =
Rs. 48,000
Next > 60 days @ Rs 0.80 per kg per day
TOTAL Demurrage Charges Payable Rs. 10,00,000 Rs. 168,000

c. Excise Duty payable for the month of Shrawan 2080

Particulars Amount
Calculation of Excise Duty Payable:
Goods Sold 49 MT
Excise Duty @ Rs 20 per KG 9,80,000
Less: Excise Duty Paid on Raw Material ( 50% of 15,48,000) 7,74,000
Less : Excise Duty Paid on packing Material not allowed 0
Net Excise Duty Payable 206,000

Assumption: No any sale or purchase transaction carried between the import date of RM
(2080.02.30) to manufactured & sales month (2080 Shrawan). Excise paid on RM is been carried
forward from Jestda 2081 month and set off in Shrawan 2081.

d. What will be Customs Duty application at the time of re-importation of goods from
Bangladesh.
Section 6(1) of the Customs Act, 2064 provides that Customs duty at the normal rate will be levied
on re-importation of goods that has been exported assuming such goods has been manufactured in
such other country. Further, section 6(3) provides that if customs duty has not been paid on Raw
Materials and Packing Materials used for manufacture of such goods, then customs duty on such
raw materials and packing materials shall also be recovered.
Hence, calculation of Customs Duty payable on re-importation:
Particulars Amount
Customs Duty @ Rs 40 per KG on 49 MT of noodles (Import 19,60000
of FG)
Customs Duty on RM & PM (50% of (Rs 12,90,000+Rs 11,63,125
10,36,250) (50% of Import of RM & PM)
Total Customs Duty to be Paid 31,23,125

In addition to custom duty, 50% of Excise & VAT that were not paid during import and taken
benefit by furnishing Bank Guarantee for export purpose.

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5.
a) XY Pvt. Ltd, is an importer of Various Vehicles and sells within Nepal. On 15 Bhadra, 2079, it
has imported the various cars with determined transaction value of Rs. 20 million. The assessed
all related duties and taxes were paid by the Company. On 10 Magh, 2080, the custom department
wants to re-assess the transaction value of the imported cars after selling the cars to the customers
by the Company. Is it provisioned in Custom Act and Rules to re-assess the transaction value of
the imported cars? If yes or no, mention the provisions as per Custom Act and rules. The applicable
custom rate is 80 % and excise duty is 60 % for the imported cars. 7
b) Kathmandu Musical Society, a not for profit organization, is going to arrange “Kathmandu Musical
Mela 2081” for the first time. The Kathmandu Musical Society is not registered under VAT, and
it also does not wish to get registered under VAT. The organizers estimate the total income of Rs
2 crores from the Mela. Discussing the relevant provisions of Value Added Tax Act, 2052 and
Rules 2053, please advise organizers of Kathmandu Musical Mela:
i) Provisions related with temporary registertion of VAT under Value Added Tax Act, 2052 and
Rules 2059 for organizing the Mela. 1
ii) Amount to be deposited for availing such facility. 1
iii) Process for deregistration of VAT registration taken for organizing such Mela. 5

c) Professional New Gold Brewery Pvt. Ltd is a beer production company. It has filed the excise
return statement for the month of Chaitra, 2080 complying with all the provisions with the
following particulars:
Opening beer at the store 100,000 Ltr.
Production of beer as per Flow Meter 500,000 Ltr.
Beer after bottle sealed 495,000 Ltr.
Beer issued from the store 496,000 Ltr.
Closing beer at the store 90,000 Ltr.
Per Ltr excise duty is Rs. 445.
As per these information, you are asked to calculate the excise duty payable for the month
highlighting the relevant provisions of the Excise Act and Rules. 6

Answer
5 a) Yes, the Custom Department is empowered, under section 34, to order for post clearance audit of
the goods, the delivery of which has already been taken by the importer after payment of the
custom duty. The provisions under section are as follows:

(1) In order to ascertain whether the goods cleared by the Customs Office are the same as declared by
an importer or confirm to the declaration made by the importer or not, the Director General or
customs officer may audit, inter alia, the importer's books relating to the purchase, import or sale
of goods, records, books of accounts or similar other documents, bank records, computer system
and all records related to his or her business.

(2) If, upon audit made pursuant to sub-section (1), it is found that the goods imported by the importer
are different than those declared by the importer or are inconsistent with the declaration made by
the importer or the transaction value or the quantity of the goods has been declared less and by
virtue thereof lesser duty has been recovered, the Customs Officer shall immediately recover from
the importer the duty chargeable on such less value or quantity at the time of import and take action
against such importer for the declaration of less transaction value or quantity, pursuant to this Act.
However, when less transaction amount is declared hundred percent of the duty chargeable will be
collected as fine.

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(3) If, upon audit made pursuant to sub-section (1), it appears that less duty has been recovered by the
reason of difference in sub-heading of commodity classification, the concerned Customs Office
shall recover such shortfall amount of duty and fine equivalent to that of shortfall amount from the
importer.

(3a) The Director General or the Custom Officer while taking action pursuant to this section, shall use
and follow the power and procedure with respect to it, to collect additional amount pursuant to
existing laws, summon the concerned person, take his or her deposition, examine the evidence,
require the submission of documents, issue notice.
(3b) If, upon audit made pursuant to this section, the importer does not appear within the given time or
does not submit the document and evidence, the Director General or the Customs Officer shall
audit on the basis of available documents and evidence, by imposing a fine pursuant to Sub-section
(15a.) of Section 57 and withholding the import export transactions. However, if additional
document evidence is found with respect to the importer after audit is made pursuant to this section,
this section shall not be deemed to prohibit conducting re-audit based on such additional
documents.
(3c) While determining duty pursuant to this section, concerned person shall be provided fifteen days
time to submit the clarification.
(3d) The duty and fine amount determined under this section shall be deposited within thirty-five days
from receiving the order to deposit the amount by the person so ordered. Duty and fine amount not
paid within mentioned time shall bear interest at the rate of fifteen percent annually for the period
beginning with the date of order and ending with the date on which the payment is made.
(3e) If, any importer does not deposit the amount that should be deposited pursuant to sub-section (3d),
Customs officer shall freeze moveable or immoveable property of such importer and collect such
amount from the said property.
(3f) If any amount cannot be collected Pursuant to subsection (3e), the due amount shall be collected
as government debt.
(3g) Pursuant to this section, The director general or the customs officer shall, if necessary, require
submission of documents relating to the importer, businesses owned by the importer, payment of
goods, bank accounts, profit and loss statement, tax details, invoices or other such required
documents from concerned bank or Financial institution, and any other organization or individual
related to importers’ business. When asked upon, the organization or individual should compulsory
furnish the documents as required.

(4) The audit referred to in this Section may be made until four years after the date of clearance of
goods.

5 b)
(a) Provisions related with temporary registration of VAT under Value Added Tax Act, 2052
and Rules 2059 for organizing the Mela

(i) Section 10A of Value Added Tax Act, 2052 and Rule 7A of Value Added Tax Rules, 2053
provides provision related with temporary registration of VAT for organizing fairs.
(ii) the organizer of the Mela, who is not already a VAT registered party, has to get registered
temporarily before organizing Mela [Sec10A(1)]. For getting temporarily register, the party has to
file an application for temporary registration of VAT u/s 10A[Rule 7A(1)].
(iii) After getting temporary VAT registration, such person can carry goods to be placed in ‘Fair’
through stock transfer.

(b) Amount to be deposited for availing such facility

(i) Rule 7A(2) of the Value Added Tax Rules, 2059 provides that 2% of estimated income from
such fair has to be kept as deposit in the tax office.
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(ii) hence, Rs 4 lacs has to be kept as VAT deposit for taking temporary VAT registration.

(c) Process for deregistration of VAT registration taken for organizing such Mela

(i) Section 10A(3) provides that within 7 days of conclusion of ‘Fair’, a tax payer who has taken
temporary VAT registration has to file VAT return and pay the due VAT amount in full for
cancellation of VAT registration along with application for VAT deregistration.

(ii) after receipt of the application for deregistration of temporary VAT, then tax officer has to
check the VAT return and notify about deregistration within 15 days of application date.

(iii) the amount kept as a deposit can be adjusted with VAT payable amount.

(iv) The tax officer will give 3 days time for payment of balance VAT amount. If the VAT is not
paid within 3 days, then the balance amount will be recovered from organizer of the Mela.

5 c) Section 4 of the excise act states that excise duty should be paid at the time of removal for sale
after production from the enterprise. Further, rule 23A of excise rules has made the following
provisions:

1) If there is shortfall of stock of the crown cork because of breakage or damage, such that it cannot
be used in a bottle, during pasteurization, packaging or storing in the Godown, the Licensee
producing beer shall submit for remission by stating such shortfall in the monthly returns in the
format prescribed by the Department to the Excise Duty Officer.

2) Excise Duty Officer shall examine the returns submitted pursuant to Sub-rule (1) within thirty
days. While examining pursuant to Sub-rule (1) the Excise Duty Officer may grant remission not
more than two percent upon physical examination of the beer broken or damaged during
pasteurization, packaging or storing in the Godown.

Taking into account of these provisions, the excise duty shall be payable at the time of issued from
the stock: 496,000* Rs. 445 = Rs. 220,720,000. Further, it may get a remission of up to 2 %, more
than that, it has to pay the excise duty within 25 days of the following month.

Total shortage of stock

Opening stock: 100,000
Production: 500,000
Less closing stock 90,000
Less issued 496,000
Actual shortage of stock 14,000 Ltr.

Maximum remission 2 % of stock: 600,000 (Opening+ Production)*2% = 12,000

So, excise duty for 2,000 Ltr (14,000-12,000) cannot get the remission.

Additional excise duty should be paid Rs. 8,90,000 (2000*445) for the damaged stock.

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6.
a) OECD member countries and other countries have adopted arm’s length principle to arrive at the
appropriate transfer pricing range between associated enterprises. However, there are many
practical hurdles while applying arm’s length principle. Describe. 5
b) Describe the mechanism for taxation on "Government Service" in the light of Double Taxation
Avoidance Agreement between the Government of Nepal and the Government of the Republic of
India.
5

Answer
6 a) There are many significances and benefits of applying arm’s length principle such as promotion of
international trade, determination of real profit and economic contribution, minimization of double
taxation. However, some practical hurdles in applying arm’s length principle are described as
follows:
• Difficulty in true comparison
• Lack of availability of data and reliability of data
• Absence of market price
• Absence of comparable market price for intangible transactions
• Administrative burden
• Time lag
6 b) Article 19 of the Double Taxation Avoidance Agreement between the Government of Nepal and
the Government of the Republic of India has following provision regarding taxation on
Government Service: 1.a) salaries, wages and other similar remuneration, other than a pension,
paid by contracting state or political subdivision or local authority thereof to an individual in
respect of services rendered to that state or subdivision or authority shall be taxable only in that
state. b) however, such salaries, wages and other similar remuneration shall be taxable only in the
other Contracting Sate if the services are rendered in that other state and the individual is resident
of that State who: i. is a national of that state; or ii. did not become a resident of that State solely
for the purpose of rendering the service. 2. a) any pension paid by, or out of funds created by, a
Contracting State or a political subdivision or a local authority thereof to an individual in respect
of service rendered to that state or subdivision or authority shall be taxable only in that State. b)
However, such pension shall be taxable inly in the other contracting state if the individual is a
resident of, and national of, that other State. 3. The provisions of articles 15, 16, 17 and 18 shall
apply to salaries, wages and other similar remuneration and to pensions in respect of services
rendered in connection with a business carried on by a Contracting State or a political subdivision
or a local authority thereof.

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 Suggested Answers June 2024 Examination (CAP III - Group II)

Paper 7 – Advanced Cost and Management Accounting

Attempt all questions. Working notes should form part of the answer. Make assumptions
wherever necessary.

1. Diamond Pet Company Ltd. specializes in the manufacture of one litre plastic bottles. The
firm’s customers include dairy processors, fruit juice manufacturers and manufacturers of edible
oils. The bottles are produced by a process called blow moulding. A machine heats plastic to the
melting point. A bubble of molten plastic is formed inside a mould, and a jet of hot air if forced
into the bubble. This blows the plastic into the shape of the mould. The machine releases the
moulded bottle, an employee trims of any flashing (excess plastic around the edge) and the bottle
is complete.
The firm has four moulding machines, each capable of producing 100 bottles per hour. The firm
estimates that the variable cost of producing a plastic bottle is 20 paisa. The bottles are sold for 50
paisa each.
Management has been approached by a local toy company that would like the firm to produce a
moulded plastic toy for them. The toy company is willing to pay Rs.3.00 per unit for toy. The
variable cost to manufacture the toy will be Rs.2.40. In addition, Diamond Pet Company Ltd.
would have to incur a cost of Rs.20, 000 to construct the needed mould exclusively for this order.
Because the toy uses more plastic and is of a more intricate shape than a bottle, a moulding machine
can only produce 40 units per hour. The customer wants 1,00,000 units. Assume that Diamond Pet
Company Ltd. has the total capacity of 10,000 machine hours available during the period in which
the toy company wants the delivery of toys. The firm’s fixed costs, excluding the costs to construct
the toy mould, during the same period will be Rs.2,00,000.

Required:
(a) If the management predicts that the demand for its bottles will require the use of 7,500 machine
hours or less during the period, should the special order be accepted? Give reasons.
(b) If the management predicts that the demands for the bottles will be higher than its ability to produce
the bottles, should the order be accepted? Why?
(c) If the management has located a firm that has just entered the moulded plastic business. This firm
has considerable excess capacity and more efficient moulding machine and is willing to
subcontract the toy job, or any portion of it, for Rs.2.80 per unit. It will construct its own toy
mould. Determine the Diamond Pet Company Ltd.’s minimum expected excess machine hour
capacity needed to justify producing any portion of the order itself rather than subcontracting it
entirely.
(d) The management predicted that it would have 1,600 hours of excess machine hour capacity
available during the period. Consequently, it accepted the toy order and subcontracted 36,000 units
to the other plastic company. In fact, demand for bottles turned out to be 9,00,000 units for the
period. The firm was able to produce only 8,40,000 units because it had to produce toys. What was
the cost of the prediction error failure to predict demand correctly?
(20 Marks)
Answer: Working Notes (i)
Diamond Pet Company Ltd
Total machine capacity: 10,000 Hrs
1) Bottles
100 bottles take 1 hr→ 1 Hr = 100 bottles
Selling Price = Rs. 0.50
(-) Variable Cost = Rs. (0.20)
Contribution/ bottle = Rs. 0.30
Fixed Cost = Rs. 2,00,000
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2) Toys
Selling Price = Rs. 3.00
(-) Variable Cost = Rs. (2.40)
Contribution/Toy = Rs. 0.6
Fixed Cost = Rs. 20,000
40 Toys/ hour
1hr = 40 toys
2,500 hours = 1,00,000 toys

ii) Total machine hrs = 10,000

(-) Required by bottles = (7,500)
Idle capacity = 2,500 hours
Therefore, 2,500 hours can be used to make 1, 00,000 toys

(a) Statement of Net benefit

Particulars Amount
Selling Price Rs. 3
(-) Variable Cost Rs. (2.40)
Contribution/ toy Rs. 0.60
No. of toys 1,00,000 toys
Total contribution Rs. 60,000
(-) Fixed Cost Rs. (20,000)
Net Benefit Rs. 40,000

Recommendation: We will accept the order as it results into positive Net Benefit

(b) If demand for bottle higher than production capacity:

In this scenario, we will have to choose between productions of bottles viz-a-viz production of
toy.
In case where hours are limited then the decision will be based on the option that gives higher
contribution/ machine hrs. Which can be calculated below:-

Bottles Toys
1 hrs.→ 100 bottles 40 toys
Contribution/ bottle; 0.30 0.6
toy
Contribution/ hour 30 i.e. 0.30*100 hr 24 i.e. 0.6*40 hr
Rank I II

i) Benefit from sale of Bottle = 75,000

ii) Benefit from sale of Toys = 40,000
35000
So, Bottle manufacture gives additional benefit.

As can be seen from above, Bottles give a higher rank and therefore we will prioritize bottles
over toys.
(c) In the given point, we have to suggest the management as regards the better option.
Option 1: Own manufacturing
Variable cost=Rs 2.40
Fixed Cost= Rs 20,000
Or
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 Suggested Answers June 2024 Examination (CAP III - Group II)

Option 2: Subcontract
Only variable cost =Rs. 2.80
In such a scenario where one option has higher fixed cost and the other has higher variable cost,
we will use the concept of cost indifference point to determine which option is to be chosen.
The Cost Indifference point will be as below-
CIP=Difference of Fixed Cost___
Difference of Variable Cost.
∴ CIP = 20,000_
2.8-2.40
=50,000 units
Converting the above units into hrs.
1hrs= 40 toys
Therefore, 50,000 toys require 1,250 hrs i.e. 50,000 toys/40 hrs

As per the CIP, if the company has in excess of 1,250 hours then the company will go into own
manufacture.

(d) As per original production, company would have 1,600 hours excess and the profit then would
be as
(1) Net Profits – Bottles
Total hrs. 10,000 hrs.
Prediction of excess 1,600 hrs.
∴ used for bottles 8,400 hrs.
Bottles manufactured = 8,400 hrs * 100 bottles =8, 40,000 bottles
Contribution / bottle =Rs. 0.30
Total Contribution = Rs. 2, 52,000 i.e. 8, 40,000*0.30
(-) Fixed Cost (2, 00,000)
Profit from Bottles = Rs. 52,000

2. Profits – toy
Total Demand of toys = 1, 00,000 units
Available hour = 1,600 hours which is more than 1,250 hours, then company will do own
manufacturing & rest can be fulfilled from sub contract .
Total own manufacturing = 1,600 hours * 40 toys= 64,000 toys
Sub contract =1, 00,000-64,000= 36,000 toys
a) Profit from own manufacturing:
Contribution / toys = Rs. 0.60
Total Contribution = 64,000 toys* Rs.0.6= Rs. 38,400
Less: Fixed Cost =Rs. 20,000
Profit = Rs. 18,400

b) Profit from Sub contract:

Profit per toy = Rs. 0.20
Total Profit = 36,000 toys *0.20=Rs. 7,200

Total Profit from Toys = 18,400+ 7,200 =Rs. 25,600

Therefore Total Profit from Bottles & Toys = Rs. 52,000+ 25,600= Rs. 77,600

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If management predicted the correct demand i.e. 9, 00,000 bottles then company would have had
spare of 1,000 hours. If we have anything less than 1,250 hrs, then in that case we will sub contract
the whole order.

Accordingly, the net profit would have been worked out as below:-
Bottles
Bottles Manufacturing 9,00,000
Contribution / bottle Rs. 0.30
Total Contribution Rs. 2,70,000
Less: Fixed Cost Rs. 2,00,000
Net Profit Rs. 70,000
Toys
Sub Contract 1,00,000
Contribution / Toy Rs 0.20
Net Profit Rs. 20,000

Total Profit = Rs. 70,000+20,000= Rs. 90,000

Final Conclusion:
As can be seen from the above workings, incorrect demand prediction has resulted into loss of
Rs. 12,400 i.e. (90,000-77,600)

2.
a. M Limited is a single product manufacturing company that produces chemical ‘M’. It had
budgeted its production at 80% of its normal capacity for 2023. But it could achieve only 80% of
its budgeted capacity and produced 20,000 units during the year. Standard cost per unit of output
was determined as below for the year:
Direct Materials (5 kg. of chemical G) Rs. 200
Direct Labor (0.5 Direct Labor Hour) Rs. 15
Variable Overhead (Based on Direct Labor Hour) Rs. 5
Fixed Overhead (Based on budgeted production) Rs. 10
Standard Cost Rs. 230
Standard Profit Rs. 170
Standard Sales Price Rs. 400
Actual production and sales data for the year was as follows:
Sales (20,000 units) Rs. 7,900,000
Direct Materials (101,000 kg. of chemical G) Rs. 4,000,000
Direct Labor (9,800 Direct Labor Hour) Rs. 313,600
Variable Overhead Rs. 90,000
Fixed Overhead Rs. 300,000
Compute cost and sales variance and reconcile the actual profit with that of budgeted profit with
reference to the cost and sales variance computed.
(10 marks)
Answer
Budgeted production = 20,000/80% = 25,000 units
Budgeted fixed overheads = 25,000 x Rs. 10 = Rs. 250,000
Budgeted Margin = Budgeted selling price per unit- standard cost per unit
= Rs. 400- Rs. 230 = Rs. Rs. 170 p.u.
Actual Margin = Actual selling price per unit- standard cost per unit
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= Rs. 7,900,000/20,000- Rs. 230

= Rs. 395- Rs. 230
= Rs. 165 p. u.
SQ of material for actual output of 20,000 units = 20,000 x 5 = 100,000 units
SP of material per kg = Rs. 200/5 = Rs. 40.00
SR of labor per hour= Rs. Rs. 15/0.5 = Rs. 30.00
SH of labor for actual output of 20,000 units = 20,000 x 0.5 = 10,000 hours
Standard Variable Overhead Rate = Rs. 5/0.5 = Rs. 10
Budgeted Profit = Budgeted Sales x Budgeted Margin
= 25,000 x Rs. 170
= Rs. 4,250,000
Actual Profit = Actual sales- Actual Cost
= 7,900,000 – (4,000,000-313,600-90,000-300,000)
= Rs. 3,196,400
Computation of variances:
1) Material Price Variance (MPV) = AQ (SP-AP)
= 101,000 (40-4,000,000/101,000)
= Rs. 40,000 (Fav)
2) Material Usage Variance (MUV) = SP (SQ for AO – AQ)
= 40 (100,000-101,000)
= Rs. 40,000 (Adv)
3) Labor Rate Variance (LRV) = AH (SR-AR)
= 9,800 (30-313,600/9,800)
= Rs. 19,600 (Adv)
4) Labor Efficiency Variance (LEV) = SR (SH for AO- AH)
= 30 (10,000-9,800)
= Rs. 6,000 (Fav)
5) Variable Overhead Spending Variance (VOSV) = AH (SOR-AOR)
= 9,800 (10-90,000/9,800)
= Rs. 8,000 Fav)
6) Variable Overhead Efficiency Variance (VOEV) = SVOR (SH-AH)
= Rs. 10 (10,000-9,800)
= Rs. 2,000 (Fav)
7) Fixed Overhead Spending Variance (FOSV) =
Budgeted Fixed Overhead – Actual Fixed Overhead
= Rs. 250,000- Rs. 300,000
= Rs. 50,000 (Adv)
8) Fixed Overhead Volume Variance (FOVV) =
Absorbed fixed overhead – Budgeted fixed overhead
= 20,000 x 10 – 250,000
= Rs. 50,000 (Adv)
9) Sales Price Margin Variance (SPMV) = AQS (Actual Margin- Budgeted Margin)
= 20,000 (165-170)
= Rs. 100,000 (Adv)
10) Sales Volume Margin Variance (SVMV) = Budgeted Margin (AQS-BQS)
=170 (20,000- 25,000)
= 850,000 (Adv)

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Statement of reconciliation of Budgeted profit and Actual Profit

Particulars Amount (Rs.) Amount (Rs.)
Budgeted profit 4,250,000
Sales Margin
Volume Variance (850,000)
Budgeted profit at Actual sales 3,400,000
Adjustment for
variances:
Sales Margin Price
Variance (100,000)
Material price
variance 40,000
Material Quantity
Variance (40,000)
Labor Rate Variance (19,600)
Labor Efficiency
Variance 6,000
Variable Overhead
Spending Variance 8,000
Variable Overhead
Efficiency Variance 2,000
Fixed Overhead
Spending Variance (50,000)
Fixed Overhead
Volume Variance (50,000) (203,600)
Actual Profit 3,196,400

b. Silsila Manufacturing Company has two manufacturing divisions-division M and division N.

Division M produces a component, which is used by division N in making of a final product. The
final product is sold for Rs. 550 each. Division M has capacity to produce 3,000 units and division
N can purchase the entire production. The variable cost of division M in manufacturing each
component is Rs. 260. Division M has just automated the production line resulting the increase in
fixed cost. So, the division M informed that it wanted to increase the price of component to be
supplied to division N to Rs. 300, however division N can buy the component from outside the
market at Rs. 280 each. The variable cost of division N in manufacturing the final product by using
the component is Rs. 200 (excluding component cost).
Present the statement indicating the position of each Division and the company as whole taking
each of the following situations separately:
(i) If there is no alternative use for the production facility of M, will the company benefit, if division
N buys from outside suppliers at Rs. 280 per component.
(ii) If internal facilities of M are not otherwise idle and the alternative use of the facilities will bring
annual cash saving of Rs. 50,000 to division M, should division N purchase the component from
outside suppliers?
(iii) If there is no alternative use for the production facilities of division M and the selling price for the
component in the outside market drops by Rs. 25, should division N purchase from outside
supplier?
(iv) What transfer price would be fixed for the component in each of the above circumstances?
(10 marks)

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Answer
i)
a) When component is purchased by division N from outside
Particulars Amount (Rs.) Amount (Rs.)
Sales of division N (3,000 x Rs. 550) 1,650,000
Less: Variable cost
Cost of purchase of component (3,000 x Rs. 280) 840,000
Other variable cost of division N (3,000 x Rs. 200) 600,000 1,440,000
a. Contribution Margin of division
N 210,000
b. Contribution Margin from
division M -
Total Contribution Margin of the
company (a+b) 210,000.00

b) When component is purchased by division N from division M

Particulars Amount(Rs.) Amount(Rs).
Sales of division
M (3,000 x Rs. 300) 900,000
Less: Variable cost
Cost of manufacture of
component (3,000 x Rs. 260) 780,000 780,000
a. Contribution Margin of
division M 120,000
Sales of division N (3,000 x Rs. 550) 1,650,000
Less: Variable cost
Cost of component from
division M (3,000 x Rs. 300) 900,000
Other variable cost of
division N (3,000 x Rs. 200) 600,000 1,500,000
b. Contribution Margin of
division N 150,000
Total Contribution
Margin of the company
(a+b) 270,000

So, it is beneficial to the company to buy the component from division M instead of buying it from
outside the market.
ii) When there is alternative use of division M facilities with given cash saving
Particulars Amount(Rs.) Amount(Rs.)
Sales of division N (3,000 x Rs. 550) 1,650,000
Less: Variable cost
Cost of purchase of
component from market (3,000 x Rs. 280) 840,000
Other variable cost of
division N (3,000 x Rs. 200) 600,000 1,440,000
a. Contribution Margin
of division N 210,000
b. Cash savings from
Division M facilities 50,000

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Total Contribution
Margin of the company
(a+b) 260,000
Even in this case, buying component from division M is beneficial by Rs. 10,000 i.e Rs. 270,000-
Rs. 260,000.

ii. When there is no alternative use of facilities of division M and selling price of
component is decreased in the market
Particulars Amount(Rs.) Amount(Rs.)
Sales of
division N (3,000 x Rs. 550) 1,650,000
Less:
Variable
cost
Cost of
purchase of
component [3,000 x Rs. (280-25)] 765,000
Other
variable cost
of division
N (3,000 x Rs. 200) 600,000 1,365,000
Contribution Margin
of division N 285,000
Contribution
Margin
from
division M -
Total
Contribution
Margin of
the
company 285,000
iv) a) If there is no alternative use for the production facility of M, transfer price shall be at variable
cost of manufacturing at division M i.e. Rs. 260 per unit.
b) If the facility of division M can be put to alternative use with given cash saving, then transfer
price shall be equal to variable cost plus loss of cash saving per unit i.e. Rs. 260+50,000/3,000 or
Rs. 260+16.67= Rs. 276.67 per unit.
c) If there is no alternative use of facility of division M and market price of component reduces by
Rs. 25 per unit, the transfer price shall be equal to the variable cost of manufacturing of the division
M i.e Rs. 260 per unit.

3.
a. A Nepalese company manufactures popular brand of fast-moving consumer goods (FMCG) in its
two factories located at Bhainsepati and Nawalparasi. The existing factories are working to near
full capacity of 12,000 and 14,000 tonnes per annum and it is not possible to increase the capacities
of these factories. The products are transported to the four distribution centers D1, D2, D3 and D4.
The demands in the distribution centers exceed current supply and are proportionately adjusted to
current production capacity.
The demand for the products of the company is expected to rise continuously over the coming
years. The company will need additional capacity of 12,000 tonnes to meet the full future demands.
Two locations, Hetaunda and Janakpur have been identified to be feasible for the establishment of
factories. Due to imminent fund limitations at present, the capacity of new factories has to be
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limited to 6,000 tonnes per annum and only one factory can be established for the time being either
at Hetaunda or Janakpur. Demand for the company's products will still be marginally above
production capacity. Proportionately adjusted transportation costs in monetary unit (MU) per unit
are shown below.

Particulars D1 D2 D3 D4
Bhainsepati 80 120 100 140
Nawalparasi 110 60 110 100
Hetaunda 140 110 150 70
Janakpur 100 130 80 140
Demand 9000 8000 10400 4600

The feasibility study has shown that the factory site at Hetauda and Janakpur will incur an annual
fixed cost of Rs. 56,00,000 MU and Rs. 60,00,000 MU respectively.
Required:
Recommend the location for the establishment of new factory based on cost. (10 Marks)

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Answer
a) Solution
Table showing Supply from Bhainsepati, Nawalparasi and Hetaunda
Destination
Factory s Supply Difference
D1 D2 D3 D4

Bhainsepat 9000 3000

i(B) 80 120 100 140 12000 20 20 20
8000 6000
Nawalparasi 110 60 110 100 14000 40 10 0
(N)
1400 460
Hetaunda (H) 140 110 0 6000 40 70 10
150 70
32000

Demand 9,000 8000 10400 4600 32000

Difference 1 30 50√ 10 30
Difference 2 30 × 10 30
Difference 3 30√ × 10 ×

Table showing Supply from Bhainsepati, Nawalparasi and Janakpur

Destinatious
Factory D1 D2 D3 D4 Snooty Difference
Bhainsepati 9000/ 3000/
(B) 80 120 00 140 12000 20 20 20 20
8000l 1400/ 4600/
Nawalparasi 110 60 110 100 14000 40 10 0 0
(N)
Janakpur 6000/
(J) 100 130 80 140 6000 20 20 20
X
. 3200
460
Demand 9,000 8000 1040 0 32000
0
Difference l 20 60√ 20 40
Difference 2 20 X 10 40√
Difference 3 20 X 10 X
Difference 4 20√ X 10 )(

Optimal Distribution Plans and

Costs

Based on BNH Based on BNJ

Cost Cost
MU MU
From To Qty "000" From To Qty "000"
D1 9000 720 D1 9000 720
B D3 3000 300 B D3 3000 300
D2 8000 480 D2 8000 480
N D3 6000 660 N D3 1400 154
D3 1400 210 D4 4600 460
H D4 4600 322 H D3 6000 480
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Statement showing total cost of setting up of New Plant

At Hetauda At Janakpur
Transportation 2692 2594
Fixed Cost 5600 6000
8292 8594

From the view point of total cost (transportation and fixed cost), setting up of new factory at
Hetaunda would be 302,000 MU lesser than establishing similar factory at Janakpur. It is therefore
recommended that the factory should be set up at Hetaunda.

b. Global Enterprise manufactures telecom antenna. It has just completed the manufacture of
its first newly designed antenna system, A-11. Manufacturing data for the A-11 are as follows:
Direct material costs per unit of A-11 (Rs.) 160,000
Direct manufacturing labour time for first unit (hours) 6,000
Learning curve for manufacturing labour time per 85%
antenna system (cumulative average time)
Direct manufacturing labour cost per direct 30
manufacturing labour hour (Rs.)
Variable manufacturing overhead cost per direct 20
manufacturing labour hour (Rs.)

Required:
i) Calculate the total variable costs of producing 2, 4, and 8 units of A-11.
ii) Define learning curve. Outline two models that can be used when incorporating learning into
the estimation of cost functions. (7+3 marks)

Answer
i) Given the assumption of a cumulative average-time learning curve of 85%, the direct
manufacturing labor-hours (DMLH) required to produce the first 2, 4 and 8 units is as follows:
Cumulative
Average Time
per unit : Cumulative Total
Labors Hours Time :Labor -Hours
Cumulative Number of Units (1) (2) (3)=(1)*(2)
1 6000 6000
2 5100 (6000*.85) 10200
4 4335(5100*0.85) 17340
8 3685(4,335*0.85) 29480

Variable Costs of Producing

Variable Costs of Producing
Particulars 2 Units (Rs) 4 Units (Rs) 8 Units (Rs)
Direct Material
(Rs. 160,000×2; 4;
8) 320,000.00 640,000.00 1,280,000.00
Direct
Manufacturing
labor
(Rs. 30×10,200;
17,340; 29,480) 306,000.00 520,200.00 884,400.00

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204,000.00 346,800.00 589,600.00

Total variable
costs 830,000.00 1,507,000.00 2,754,000.00

ii) Learning curve is a function that measures how labor-hours per unit decline as units of production
increase because workers are learning and becoming better at their jobs. Two models used to
capture different forms of learning are:
1. Cumulative average-time learning model. The cumulative average time per unit declines by a
constant percentage each time the cumulative quantity of units produced doubles.

2. Incremental unit-time learning model. The incremental time needed to produce the last unit
declines by a constant percentage each time the cumulative quantity of units produced doubles.

4.
a.Repak Ltd is a warehousing and distribution, stores the products and then re-packs them for
distribution as required. There are three customers for whom the service is provided John Ltd,
George Ltd and Paul Ltd. The products from all three customers are similar in nature but of varying
degrees of fragility. Basic budget information has been gathered for the year to 30 June and is
shown in the following table:

Products Handled (Cubic

Particulars Meter)
John Ltd 30,000
George Ltd 45,000
Paul Ltd 25,000
Costs (Rs in 000)
Packing materials (see Note -1) 1,950
Labor-Basic 350
Overtime 30
Occupancy 500
Administration and management 60

Note1: -Packaging materials are used in repacking each cubic meter of product for John Ltd,
George Ltd and Paul Ltd in the ratio 1:2:3 respectively. This ratio is linked to the relative fragility
of the goods for each customer.
Note2: -Additional information has been obtained in order to enable unit costs to be prepared for
each of the three customers using an activity -based costing approach. The additional information
for the year to 30 June has been estimated as follow:

Labour and overhead costs have been identified as attributable to each of three work centers-
receipt and inspection, storage and packing as follows:
Cost allocation Proportions:

Particulars Receipts and Inspections Storage Packing

% % %
Labour-Basic 15 10 75
Overtime 50 15 35
Occupancy 20 60 20
Administration and
Management 40 10 50
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Studies have revealed that the fragility of different goods affect the receipts and inspection time
needed for the products for each customer. Storage required is related to the average size of the
basic incoming product units from each customer. The re-packing of goods for each customer have
been evaluated as follows: -
(All Data are provided for each cubic meter for each customer).
John George
Particulars Ltd Ltd Paul Ltd
Receipt and Inspections
(minutes) 5 9 15
Storage (square meters) 0.3 0.3 0.2
Packing (minutes) 36 45 60

Required: -
Calculate the, budgeted average cost per cubic meter of packaged products for each customer in
each of the following two circumstances:
i) Where only the basic budget information is to be used,
ii) Where the additional information enables an activity-based costin approach to be applied.
(2+6=8 Marks)

Answer
The packaging material requirements are as follows:

John Ltd 30,000 Units (30,000 *1)

Gorge Ltd 90,000 Units (45,000*2)
Paul Ltd 75,000 Units (25,000*3)
195,000 Units

Cost per unit of packing= Rs 19,50,000 ÷ 195,000 =Rs .10

Product Cost per

Cubic meter
John Ltd George Ltd Paul Ltd
Packing Materials Rs 10 Rs 20 Rs 30
Labour and Overhead Rs 9.40 Rs 9.40 Rs 9.40
Total Rs 19.40 Rs 29.40 Rs. 39.40
Note: Labour and overhead average cost per meter= Rs 940,000/100,000 Meter

(b) The costs are assigned to the following activities:

In Rs
Receipt
and
Particulars Inspections Storage Packing
Labour
52,500
Basic (15%) 35,000 (10%) 262,500 (75%)
15,000
Overtime (50%) 4,500(15%) 10,500(35%)
100,000
Occupancy (20%) 300,000(60%) 100,000 (20%)

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Administration 24,000
and Management (40%) 6,000 (10%) 30,000(50%)
Total 191,500 345,500 403,000

The resource usage for each of the cost drivers is:

Receipt and inspection
Particulars (hour) storage (m^2) Packing hours
18000
John Ltd 2500 (30,000*5 mins) 9000(30,000*0.3) (30,000*36 min)
33750
George Ltd 6750 (45,000*9 mins) 13500(45,000*0.3) (45,000*45 min)
25000
Paul Ltd 6250 (25,000*15 mins) 5000(25,000*0.20) (25000*1hrs)
15,500 27,500 76,750

The driver rates are:

Rs.12,355 per receipts and inspection hour (Rs.191,500 /15,500 hours)
Rs.12,564 per m^2 of materials stored (Rs.345,500 / 27,500 m^2)
Rs.5.251 per packing hours (Rs.403,000 / 76,750 hrs.)
Product cost per cubic meter
In Rs
Particulars John Ltd George Ltd Paul Ltd
Packing materials 10 20 30
Receipt and Inspections 1.03 1.85 3.09
Storage Cost 3.77 3.77 2.51
Packing Cost 3.15 3.94 5.25
17.95 29.56 40.85
Notes
Rs.12,355× 5/60 hrs. = Rs.1.03;
Rs.12,355 × 9/50 hrs. = Rs.12,355× 15/60 hrs. = Rs.3.09
Rs.12,564×0.3 m = Rs.3.77; Rs.12,564 X 0.2m = Rs.2.51.
Rs.5.25 × 36/60 hrs. = Rs.3.15; 5.25× 45/60 hrs. = Rs.3.94; Rs.5.25 X 1 hrs.

b. A Multinational company runs a Public Medical Health Centre. For this purpose, it has
hired a building at a rent of Rs. 100,000 per month with 5% of total taking. Health centre has three
types of wards for its patients namely; general ward, cottage ward and deluxe ward. Following
information is provided to you:

i. The number of beds of each type is general ward 100, Cottage Ward 50, and Deluxe Ward 30.
ii. The rent of cottage ward bed is to be fixed at 2.5 times of the general ward bed and that of deluxe
ward bed as twice of the cottage ward bed.
iii. The occupancy of each type of ward is as follows:
General ward cent percent occupied but cottage ward and deluxe ward are occupied respectively at
20% and 40 % less than their capacity. But, in General Ward there were occasions when beds are
full, extra beds were hired at charge of Rs. 200 per bed. The total hire charges for the extra beds
incurred for the whole year amount to Rs. 120,000.
iv. The health centre engaged a heart specialist from outside and on an average fees paid to him was
Rs. 45,000 per trip. He makes four trips for in the whole year.
v. The other expenses for the year were as under:
Salary of Supervisors, Nurses, Ward boys Rs. 425,000
Repair and Maintenance Rs. 90,000
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Salary of Doctors Rs.

1,350,000
Food Supplied to Patients Rs. 40,000
Laundry Charges for their bed lines Rs. 80,500
Medicine Supplied Rs. 74,000
Cost of Oxygen, X-ray etc. other than directly borne for Rs. 49,500
treatment of patients
General Administration charges Rs.63,000
vi. Profit margin is 20% on total taking.
vii. The Health Centre imposes 10% service tax on rent received.
viii. Health centre care operated 360 days in a year.
Required: Rent to be charged to each bed-day for different types of ward. [7]

Answer
Statement of Total Cost
Descriptions of Cost Amount (in Rs.)
Salary of Supervisor, Nurses, Ward
425,000
boys
Repair and Maintenance 90,000
Salary of Doctors 1,350,000
Food Supplied to patients 40,000
Laundry charges for their bed lines 80,500
Medicine Supplied 74,000
Cost of Oxygen, X-ray etc. other than
49,500
directly borne for treatment of patients
General Administration Charge 63,000
Building Rent (100000x12) 1,200,000
Hire charges of extra bed 120,000
Fees to Heart Specialist (4x45000) 180,000
Total 3,672,000
Add: Building Rent (5% of total
5% on Total Taking
taking)
Profit 20% on Total Taking
Total Taking Rs. 3,672,000+25% of Total Taking
Total Takings (assuming X to be the rent per day) 105,000 Ward Days x X

Now,
Total Taking = Rs. 105,000 x X
105,000 x X = Rs. 3,672,000+5% of ( Rs. 105,000 x X)+20% of (Rs.105,000 x X)
105,000 X = Rs. 3,672,000+25% of ( Rs. 105,000 x X)
105,000 X = Rs. 3,672,000+26,250X
105000 X -26250X = Rs.3,672,000
78750X = Rs. 3,672,000
X = Rs. 3672000/78750
X = Rs. 46.63
So, Rent to be charged per day = Rs. 46.63

Occupancy
General Ward Cent percent 100%

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20% less than

Cottage Ward 80%
capacity
40% less than
Deluxe Ward 60%
capacity

No. of beds with Equivalent Rent

Nature of Wards Occupancy Weight of Rent Ward Days
General Ward 100 x 360 x 100% 36,000 x1 36,000
Additional General Ward 12,000/2 600 x 1 600
Cottage Ward 50 x 360 x 80% 14,400 x2.5 36,000
Deluxe Ward 30 x 360 x 60% 6480 x 5 32,400
Total Ward Days 105,000

Rent to be charged
Service Tax @
Ward Basic Weight Rent Total Rent
10%
General Ward 46.63 1 46.63 4.663 51.29
Cotttage Ward 46.63 46.63*2.5 116.58 11.6575 128.23
Deluxe Ward 46.63 46.63*2.5*2 233.15 23.315 256.47

Note: Total taking may be assumed to include Service Tax also. In this case, rent per day will
be calculated as below: (Alternative)
105000 x 1.10X = Rs. 3,672,000+25% of ( Rs. 105,000x1.10X)+10% of 105,000X
115500 = Rs. 3,672,000+28,875+10,500X

X Rs. 48.326
So, Rent to be charged per day = Rs. 48.326

Rent to be charged
Service Tax @
Ward Basic Weight Rent Total Rent
10%
General Ward 49.26 1 49.26 4.926 53.06
Cotttage Ward 49.26 46.63*2.5 123.15 12.315 132.65
Deluxe Ward 49.26 46.63*2.5*2 246.30 24.63 265.30

5. Write Short Notes: [5X3=15]

a. Advantages of Balanced Score Card

Answer
1. It brings strategy and vision as the center of management focus.
2. It brings together in a single management report, many of the seemingly desperate elements like
customer oriented, shortening response time, improving quality etc. of a competitive agenda.
3. Balanced Score Card provides management with a comprehensive picture of business operations.
4. The methodology of balance score card facilitates communication and understanding of business
goals and strategies at all level of an organization.

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5. The balance score card provides strategic feedback and learning. The balance score card guards
against subordination. It emphasis an integrated combination of traditional and non-traditional
performance measures. It helps senior manager to consider all important performance measures
together and lets them to see whether and improvement in one area may have been achieved at all
expense of another.

b. Impact of JIT on Overhead Costs

Answer
The costs of material handling, facilities, and quality inspection decline when a JIT systemis
installed. In addition, the reduction of all types of inventory results in a massive reduction in the
amount of space required for the warehouse facility. Since all costs associated with the warehouse
are assigned to the overhead cost pool, the amount of overhead is reduced when the costs of staff,
equipment, fixed assets, facilities, and rent associated with the warehouse are sharply cut back.
There is also a shift of costs from the overhead cost pool to direct costs when machine cells are
introduced. The reason for this change is that a machine cell generally produces only a small range
of products making it easy to assign the entire cost of each machine cell to theseitems. This means
that the depreciation, maintenance, labour and utility costs of each cellcan be changed straight
to a product, which is preferable to the traditional approach of sending these costs to an overhead
cost pool from which they are assigned to products in much less identified manner. Though this
change does not represent a cost increase or reduction, it does increase the reliability of a allocation
for any more costs than that was previously the case.
Despite the shift of many overhead costs to direct costs, there is still an overhead cost pool left
over that must be allocated to products, However, given the large number of changes implemented
as part of the JIT system, cost accountants may find that there are now better allocation bases
available than the traditional direct labour allocation. For example, the amount of time a product
takes in each work cell may be a better measure for allocating costs, instead of amount of space
occupied in the work cells that create each product. No matter what allocation system is used, it is
somewhat different from the old system, so there is a shift in the allocation of costs between
different products.
In short, overhead costs decline as some costs are eliminated, while other shift between products
as more costs are charged directly to products and the remaining overhead costs are charged out
using different allocation methods.

c. Forms of Price Discrimination

Answer
Price discrimination means charging different prices and it takes various forms according to
whether the basis is customer, product, place or time. These are illustrated as under:
i. Price discrimination on the basis of customer: In this case, the same product is charged
at different places to different customers. It is, however, potentially disruptive of customer
relations.
ii. Price discrimination based on product version: In this case, a slightly different product is
charged at a different price regardless of its cost-price relationship. If, for example, a table with
wooden top can be sold at Rs. 400, a table with sunmica top costing Rs. 175 extra is sold at Rs
575. The higher premium in the latter case does not necessarily reflect the higher production cost.
iii. Price discrimination based on place: An example of this method is the seats in cinema theater
where the front seats are charged at lower rates than the back seats.
iv. Price discrimination based on time: An example of this method is the practice of giving off-
season concession in sale of fans or refrigerators just after the summer season.

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d. Single plan under Standard Costing

Answer
The main purpose of standard costing is cost control. To achieve this purposes, the variancesshould
be analyzed according to their use. Analysis should be timely so that much time is not lost in
taking corrective action wherever needed. The single plan system envisages the posting of all items
in the debit side of work in progress account and the standard cost leaving in the credit side to
represent the standard cost of finished production and work in progress. This system enables the
ascertainment of variances as and when the transaction is posted in work in progress account.
In other words the analysis of variance is done from the original document like invoices, labour
sheet etc. send this method of analysis is known as source analysis. Since the single plan system
contemplates the analysis of variance at source, the installation of this system requires more
planning so that effective documentation at each stage is introduced forproper recording and
analysis of variances.

e. Facility sustaining cost

Answer
Facility-sustaining costs are the costs of activities that cannot be traced to individual products or
services but that support the organization as a whole. For example, the general administration costs
(including top management compensation, rent, and building security) are facility-sustaining costs.
It is usually difficult to find a good cause-and-effect relationship between these costs and the cost-
allocation base. This lack of a cause-and-effectrelationship causes some companies not to allocate
these costs to products and instead to deduct them as a separate lump-sum amount from operating
income. Some companies allocate facility-sustaining costs to products on some basis—for
example, direct manufacturing labor-hours. Allocating all costs to products or services becomes
important when management wants to set selling prices on the basis of an amount of cost that
includesall costs.

6.
a. Raman fabricating company has received an assignment of fabrication of 8 special tools which is
completely new task for the company. Raw material requirement for the fabrication is estimated
Rs.12,500 per special tool. Labor is estimated to take 100 hours to fabricate first unit of it and 80%
learning ratio will be applicable and considered for the labor cost. Labors are paid @ Rs. 50 per
hour. Overheads are recovered @ Rs. 10 per labor hour. 20% mark up in the total cost has been
assured for the job. Compute the sales value of the assignment.
(5 marks)
Answer
Computation of labor hour requirement considering the 80% Learning Ratio effectiveness
Units produced Average labor hour per unit at 80% Learning Cumulative labor hours for
Ratio application the production
1 100.0 100.0
2 80.0 160.0
4 64.0 256.0
8 51.2 409.6

Statement of Cost and revenue for the assignment of the fabrication of 8 special tools
Direct Material (Rs. 12,500 x
8) 100,000.00
Direct Labor (409.6 x Rs. 50) 20,480.00
Overheads (409.6 x Rs. 10) 4,096.00
Total Cost 124,576.00

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Add: 20% mark up on total

cost 24,915.20
Sales price of the
assignment 149,491.20

b. Rainbow Corporation Limited is engaged in production of Biscuits & cookies items made from
wheat flour. It purchases the wheat flour from single supplier and average supply price to the
factory gate comes to Rs. 45 per kg. It spends annually Rs. 4,500,000 for quality inspection and
control for wheat flour at its own laboratory. Quality control being of significant concern, the
company is seeking way for quality assurance from the source of supplies. The supplier has
proposed the company that if wheat flour price is fixed at Rs. 48 per kg, they will take the
responsibility of quality inspection and control at their own laboratory at their factory. This will
reduce the quality inspection and control cost of the Rainbow Corporation by Rs. 3,000,000
annually. Annual requirement of wheat flour is 1,200 tons. Should the offer of the supplier be
accepted? If not, at what level of annual requirement would the offer be acceptable?
(5 marks)
Answer
Annual cost saving from shifting the quality inspection and quality control function
= Rs. 3,000,000
Increase in per unit purchase cost due to the shifting of inspection and quality control function
= Rs. 48- Rs. 45 = Rs. 3
Increase in purchase cost at 1,200 ton annual purchase due to price increase
= Rs. 3 x (1200 x 1,000) = Rs. 3,600,000
Net increase in cost due to the shifting of inspection and quality control function
= Rs. 3,600,000- Rs. 3,000,000 = Rs. 600,000
Since acceptance of the proposed offer increases the cost by Rs. 600,000 annually, it should not
be accepted.
Indifference point of annual purchase requirement
= Decreased annual fixed cost/ increased per unit purchase cost
= 3,000,000/3
= 1,000,000 kg
= 1,000 ton
At 1,000 tons of annual purchase requirement, there will be no loss or gain on acceptance of the
proposal. Beyond this point, every kg additional purchase will result Rs. 3 loss to the company.
So, the proposal is beneficial only when annual purchase requirement is below 1,000 ton.

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Paper 8 – Strategic Management and Decision Making Analysis

Attempt all questions

1. Read the following case and answer the questions that follow:

Nepal’s healthcare system is evolving, with both public and private sectors are working to address
challenges and improve health outcomes However, it often suffers from inadequate infrastructure,
outdated medical equipment, shortage of healthcare workers, and limited resources. This has
hindered the delivery of quality healthcare services especially to the poor and marginalized portion
of the population.
In the above context, Saswat Healthcare (SH) was established in 2022 with the vision of creating
an equitable, integrated, decentralized, responsive and participatory health system within a just
and empowered society. Its mission is to ensure healthy communities through a team of committed
and value-based professionals. Accountability, transparency, trust & mutual respect, equity, and
making a difference are its core values.
SH’s strategy is to expand into new markets. Hence, it is focused on growth through alliances and
collaboration with the provincial government, municipalities and local communities. SH follows
a selective hiring practices, conducts trainings for employees, and has created a swift
communication system within the organization. It has created a more cohesive, productive,
respectful and successful workplace by taking a holistic approach. It embraces a culture of
innovation and appreciation by encouraging risk-taking, experimentation, and creative problem-
solving. The employees in SH seems highly empowered and satisfied.
The managers lead by example, demonstrating integrity, transparency, and empathy and encourage
collaboration across teams and departments.
Currently, SH operates 3 health centers in the Kathmandu valley. It aims to expand its operations
to 10 major cities of Nepal within 5 years from now.
SH has adopted differentiation strategy. Hence, it charges premium price to the customers. It has
invested in advanced medical equipment or telemedicine capabilities and it claims that it offers
unique services to the customers.
Questions
a. Which corporate level and business level strategies have been adopted by SH. Do you suggest
these strategies are suitable for SH? Give your opinion. 10
b. Write how the organizational culture of SH is reflected? Do you think the culture and strategy
of SH are in synchronization? Write. 10

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Answer:1(a)
SH has adopted both corporate-level and business-level strategies to achieve its vision and mission.
• Corporate-level strategy: SH's corporate-level strategy revolves around growth and expansion into
new markets. This is evident from its mission to ensure healthy communities through expansion
into 10 major cities of Nepal within 5 years. This growth-oriented strategy aligns with SH's vision
of creating an equitable and decentralized health system within society. By expanding its reach,
SH aims to make a broader impact on healthcare accessibility and equity.
• Business-level strategy: At the business level, SH has adopted a differentiation strategy. This
involves charging premium prices to customers by offering unique and advance services by
investing in advanced medical equipment and telemedicine capabilities. This strategy sets SH apart
from competitors and allows it to provide high-quality healthcare services to its target market.
The corporate level strategy of SH is suitable given its vision, mission, and values. The growth
strategy aligns with its goal of creating a more equitable and decentralized health system by
reaching more communities across Nepal. However, it's essential for SH to ensure that its premium
pricing does not include the marginalized and low-income people from accessing essential
healthcare services. Balancing profitability with accessibility and equity should remain a priority
as SH expands its operations. Hence, the differentiation strategy may not be taken as suitable to
support the corporate level strategy as well as pursue its vision. Hence, SH is advised to adopt cost
leadership or hybrid strategy so that it can expand its operations by taking its operations to
everyone’s access.

Answer:1(b)
The organizational culture of SH has been reflected in the following way.
• Vision driven: SH's culture is deeply rooted in its vision and mission of creating an equitable,
integrated, decentralized, responsive, and participatory health system within a just and empowered
society.
• Values based: Accountability, transparency, trust & mutual respect, equity, and making a
difference are the core values that underpin SH's culture.
• Employee empowerment: SH prioritizes employee empowerment through selective hiring
practices, continuous training programs, and a supportive work environment.
• Holistic approach: SH takes a holistic approach to fostering a cohesive, productive, respectful, and
successful workplace.
• Leadership: Managers at SH lead by example, demonstrating integrity, transparency, and empathy
in their interactions with employees.
• Growth-Oriented: The organization is focused on expanding into new markets and differentiating
itself by offering unique services.
The culture and corporate strategy of SH appear to be in synchronization. The company's culture
emphasizes values such as accountability, transparency, trust, and empowerment, which are
reflected in its strategy of expanding into new markets while maintaining a focus on growth for
the attainment of the vision.
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However, the business strategy of SH is not in line with the vision of providing equitable and
participatory healthcare services. SH’s differentiation strategy is based on premium price which
may not be affordable to all people. Hence, SH should work on hybrid or cost leadership strategy.
2.
a) What is portfolio analysis? Why is it important for strategy formulation? Explain BCG matrix as
a tool of portfolio analysis. (2+3+5)
b) What are the differences between the Red Ocean and Blue Ocean strategies in terms of strategy
development and market positioning? 10

Answer:2 (a)
Portfolio analysis is an approach to corporate strategy in which top management views its product
lines and business units as a series of investment from which it expects a portfolio returns. It
enables an organization to revise and refresh the portfolio by closing down the unprofitable
business units or products and adding new investment in profitable way. The aim of this analysis
is to achieve the highest overall return on investment. Based on this view, organization with
multiple product lines or business units undertake portfolio analysis to formulate corporate strategy
i.e. to find out possibility of its future growth and profitability.
Portfolio analysis is commonly used in strategy formulation because of its following advantages.
• It encourages top management to evaluate each of the business units individually and to set
objectives and allocate resources for each.
• It stimulates the use of externally oriented data to supplement management’s judgment and
decisions.
• It raises the issue of cash-flow availability for use in expansion and growth.
• Its graphic depiction facilitates communication.
BCG matrix helps to analyze the portfolio of investment. The matrix assumes that key to success
of business is market, and thus it should be expanded. It is quantifiable and easy to use. It is
important for a business unit seeking to dominate market. It provides a balance mix in portfolio
selecting the better strategic business units.
The four cells on BCG matrix are:

Market Share
High Low

Stars Question
High Marks
Market
Growth
Low Cash Dogs
Cows

Fig: BCG Growth share Matrix

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1. Stars are those business units which have rapidly growing markets with large market share. They
represent the best long run opportunities i.e. growth and profitability in the firm's portfolio. They
represent the organization’s best long-run opportunities for growth and profitability. The strategies
options for stars are forward, backward and horizontal integration; market penetration; market
development; and product development. When their market growth rate slows, stars become cash
cows.
2. Cash cows are those business units which have high market share but low market growth rate.
Cows were yesterday’s Stars. They generate enough cash needed to maintain their market share.
Product development, diversification, retrenchment, and divestiture may be strategic options for
strong Cash Cows. However, when they become weak, retrenchment or divestiture can become
more appropriate strategies.
3. Dogs are the business units with low market share and low growth rate. They need more cash to
survive. They pose very low competitive position because of high costs, low quality, and low
profit. They have no future prospects because low market growth and low market share.
Retrenchment, liquidation, and divestiture may be suitable strategies for these business units.
4. Question marks are the business units or products with the potential for success, but they need a
lot of cash for development. They are the business units with high market growth but low market
share. They require a high investment for advertisement, product reformulation and distribution.
They have uncertain future, so they should develop or stop the business. Market penetration,
market development, product development, and divestiture are the strategic options suitable for
question marks.
Answer: 2(b)
The Red Ocean and Blue Ocean strategies represent two distinct approaches to strategy
development and market positioning, each with its own set of characteristics and implications.

The Red Ocean strategy focuses on competing within existing market spaces, where competition
is intense and market boundaries are well-defined. In a Red Ocean scenario, companies typically
engage in head-to-head competition, often resulting in a zero-sum game where one company's gain
is another's loss. To gain a competitive advantage over rivals, this strategy focuses on factors such
as price, product differentiation, and market share. On the other hand, the Blue Ocean strategy
involves creating uncontested market spaces where competition is irrelevant or largely
nonexistent. The Blue Ocean strategy encourages companies to innovate and create new market
demand by offering unique value propositions that differentiate them from existing competitors.
Rather than focusing on beating the competition, companies employing the Blue Ocean strategy
seek to make competition irrelevant by creating new market spaces where they can capture value
without directly competing with others.

In terms of strategy development, the Red Ocean strategy typically involves a more incremental
and iterative approach, where companies focus on optimizing existing products, processes, and
market positions. This often involves analyzing competitors' strategies and seeking ways to
outperform them within existing market constraints. In contrast, the Blue Ocean strategy requires
a more innovative and creative approach to strategy development. Companies adopting this
strategy must identify untapped market opportunities, challenge conventional industry norms, and
develop new business models or value propositions that resonate with customers in unique ways.

When it comes to market positioning, the Red Ocean strategy typically involves positioning the
company within existing market segments based on factors such as price, quality, or target
demographics. Companies employing this strategy aim to carve out a competitive niche within the
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existing market landscape. In contrast, the Blue Ocean strategy involves creating entirely new
market segments or redefining existing ones. Companies adopting this strategy seek to differentiate
themselves by offering products or services that address unmet customer needs or create entirely
new demand. This often necessitates a radical shift in market positioning, which may include
targeting non-traditional customer segments or addressing previously overlooked customer pain
points.

In summary, while both the Red Ocean and Blue Ocean strategies aim to achieve competitive
advantage and drive business success, they differ significantly in their approaches to strategy
development and market positioning. The Red Ocean strategy focuses on competing within
existing market spaces through incremental improvements and competitive positioning, while the
Blue Ocean strategy involves creating new market demand by offering innovative and unique
value propositions that differentiate the company from competitors.

3.
a) What is project planning? What is the use of project planning? As a professional accountant,
explain the process of project planning with suitable examples (2 + 3 + 5)
b) Discuss the different stages of the project life cycle. Point out the importance of the project life
cycle in project management.
(5 + 5)

Answer:3 (a)
Project planning
Project planning is the process of identifying the objectives, tasks, scope, and resources required
to complete a project successfully. It is a crucial phase of the project management lifecycle. It
creates the foundation for the project's overall execution. Project planning is also concerned with
the development of projects for investment. It identifies and addresses the tasks required to achieve
the project's objectives. It serves as a guide for project management. It determines how the project
objectives will be met. It involves the detailed design, budgeting, scheduling, and resource
allocation for a project.
Use of Project planning
Project planning is useful for the following reasons:
a. It controls risks and uncertainty in the project environment.
b. It allocates resources in a coordinated manner.
c. It establishes standards of performance for project monitoring and control against which project
progress can be measured; resource usage and expenditure can be monitored, and project viability
can be assessed.
d. It provides a structured basis for executing the project work and to sequence and schedule the work
based on the work breakdown structure (WBS).
e. It establishes procedures to make corrections in project work.
f. It achieves project results on time, to the budgeted cost, and the desired level of quality
performance.
g. It improves the efficiency of project operations by minimizing waste.

Process of project planning

The project planning process necessitates systematic approaches to project tasks. It is made up of
the following steps:
a. Understand project objectives: This is the first step in the project planning process. The project
objectives are clearly understood and defined at this stage.
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b. Identify key project stages: This stage of project planning identifies key stages in a project. A
project's key stages are usually formulation, planning, implementation, and termination.
c. Prepare work breakdown structure: It identifies the various activities that must be completed
at each stage of a project. The work breakdown structure (WBS) is used to divide the work into
smaller components. A structure like this creates a detailed list of the steps needed to complete a
project.
d. Determine logical sequence of activities: Using Network Analysis and other tools, the logical
sequence of activities is determined. The project's critical path is established.
e. Estimate time and resource requirement: Project planning relies heavily on accurate estimates
of time, cost, and other resources. Experts, historical data, and experience can all be beneficial.
Quantitative methods and computer simulations can also be useful.
f. Allocate responsibilities for each activity: Each project activity must be owned by a specific
person or department. For project activities, responsibilities are carefully assigned. It is kept a
record of the responsibilities that have been assigned.
g. Finalize project plan: The final schedule is optimized for the sequenced activities of all project
stages. Each activity receives its own set of resources. The project plan is finalized.

Answer:3(b)
Stages of the project life cycle
The project life cycle refers to the sequence of stages or phases that a project goes through from
the beginning to the end. It offers a framework for comprehending how a project moves forward
and what happens at each stage. The project life cycle is divided into four phases. Each of these
project phases represents a collection of interconnected processes that must occur. Each phase
specifies the deliverables or results.
1. Formulation phase
This is the project's conceptualization stage. It identifies the project. It is concerned with the
project's preliminary planning. This phase's primary responsibilities include:
a. Project identification: It is the conception stage. It is the project's identification. Many project
ideas are created in this stage.
b. Project formulation: It specifies the parameters of the selected project. It is concerned with the
scope of work and the project proposal. It develops the project's objectives and outputs, as well as
preliminary estimates of the project's schedule, costs, and other resources. During the project's
formulation phase, a project manager is appointed.
2. Planning phase
This phase plans resource utilization, prepares detailed plans, and estimates time, cost and quality.
The basic tasks in the planning phase of the project are
a. Feasibility study: This determines the project's feasibility. The areas in which analysis is done
are: technical analysis, financial analysis, management analysis, marketing analysis, economic
analysis, and environmental analysis.
b. Appraisal: It is an assessment of the project's viability. It is based on a review of the feasibility
analysis findings. It addresses the project's ability to achieve its objectives as well as its
comparability with other projects in terms of investment, cost/benefits, job creation, profit, etc.
c. Design: It is concerned with the creation of blueprints of engineering design and specifications for
buildings, facilities, and equipment, etc. It also develops a detailed implementation plan as well as
work schedules.

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3. Implementation phase
The project plan is put into action and the project work is completed during the third phase, the
implementation phase. During implementation, it is important to maintain control and
communicate as needed. Progress is constantly monitored, and necessary adjustments are made
and recorded as deviations from the original plan. A project manager will spend the majority of
his or her time on this step in any project. People carry out the tasks during project implementation,
and progress is reported through regular team meetings. The project manager uses this information
to keep control of the project's direction by comparing progress reports to the project plan to
measure the performance of project activities and take corrective action as needed.
4. Termination phase
This is the final stage in the life cycle of a project. The emphasis during the final closure, or
completion phase, is on releasing the final deliverables to the customer, handing over project
documentation to the business, terminating supplier contracts, releasing project resources, and
communicating the project's completion to all stakeholders. The final step is to conduct lessons-
learned studies to determine what worked and what didn't. This type of analysis transfers
experience wisdom back to the project organization, which will benefit future project teams.
Importance of Project Life Cycle
Understanding the project life cycle and its project management phases—formulation, planning,
implementation, and termination—will assist project managers in achieving consistent and
repeatable project success.
Project life cycle is important in effective project management for the following reasons:
a. It offers an organized framework for managing projects from start to finish.
b. It facilitates the efficient use and distribution of resources, including money, labor, and supplies.
It makes resource planning and management more effective by outlining resource requirements
and dependencies at each stage.
c. There are certain deliverables, milestones, and objectives for every stage of the project life cycle.
This clarity promotes successful communication and decision-making by assisting stakeholders
and project teams in understanding what has to be done at each stage.
d. It facilitates the efficient use and distribution of resources, including money, labor, and supplies.
e. It enables proactive risk management by identifying possible risks and uncertainties at each stage
of the project.
f. It offers a foundation for tracking and managing project progress.
g. It helps guarantee the caliber of project deliverables by including quality management procedures
and checks at every stage.
h. It makes stakeholder participation and engagement easier throughout the project.
i. It promotes the documentation of project decisions, actions, and lessons discovered at every stage.

4.
a) What is strategic control? Why is it important in strategic management? Write. (2+5=7)

b) Discuss the role of a CEO as a chief strategist. 8

Answer:4 (a)
Strategic control is concerned with tracking a strategy as it is being implemented, detecting
problems or changes in its underlying premises, and making necessary adjustments. It is largely a
subjective criteria intended to verify that the firm is using appropriate strategies for the conditions

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in the external environment and the company’s competitive advantages. Strategic control is
essential to monitor performance and take corrective actions when needed.
The importance of the evaluation and control are listed below.
◼ Guides for the implementation of strategy
◼ Provide early signals of the obstacles in the process of strategy implementation.
◼ Provide the future direction to the strategy.
◼ Allows organizations to adapt to these changes promptly.
◼ Regular monitoring ensures timely corrective actions.
◼ By actively monitoring strategy execution, organizations can mitigate risks.
◼ Effective control ensures optimal resource allocation and prevents wastage and ensures resources
are channelled toward strategic priorities.

Answer:4 (b)
The CEO is responsible for the organization’s strategic management, but he or she relies on a team
of top-level executives- including members of the board of directors, vice presidents, and even
various line and staff managers. The role of CEO as a chief strategist are mentioned below.
a. Determining strategic direction: Strategic direction involves specifying vision, mission,
objectives and strategies. It is framed within the environmental conditions (opportunities and
threats). It motivates and encourages employees towards the strategy implementation process.
Hence, the strategic direction should be clearly communicated to all affected parties in the
organization.
The CEO fosters stakeholders’ commitment to the new strategic direction. He/she has to consider
the organization’s strengths when making changes towards the new strategic direction.
b. Effectively managing the firm’s resource: Effectively managing the firm’s resources is the most
important task of the CEO. The CEO manages and integrates each type of resource. He/she is
entitled to manage the firm’s resources by utilizing them to build competencies and create
customer value. The role of the CEO as resource manager includes exploiting core competencies
and developing human capital. The CEO ensures that the firm’s competencies are emphasized
when implementing strategies. He/she also facilitates development of human capital for successful
implementation of the strategies.
c. Sustaining an effective organizational culture and ethical practices: Organizational culture is
a complex set of ideologies, symbols, and core values that are shared throughout the firm. Culture
influences the way business is conducted. Effective organizational culture shapes employees’
behavior towards successful implementation of strategy. The CEO takes several actions to sustain
an organizational culture based on ethical practices.
d. Establishing balanced organizational controls: Organizational controls remain an important
part of strategy implementation processes. They ensure that firms achieve their desired outcomes.
They provide the standards for implementing strategies as well as the corrective actions to be taken
when implementation-related adjustments are required. The CEO ensures that firm is emphasizing
controls so that firm performance improves. The balanced score card is a tool that helps the CEO
to assess the effectiveness of the controls.

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e. Managing conflict: Conflict can be defined as disagreement between two or more parties on a
certain issue. Establishing annual objectives can lead to conflict. For example, finance
department’s objective of reducing bad debts by 50 percent in a given year may conflict with the
sales department’s objective to increase sales by 20 percent. Establishing objectives can lead to
conflict as whether to emphasize short-term profits or long-term growth, profit margin or market
share, growth or stability, and high risk or low risk. Conflict is unavoidable in organizations, so it
should be managed and resolved. Conflict is not always bad. It can serve to energize opposing
groups into action and may help managers identify problems. The role of CEO is prominent in
managing conflict.
f. Managing resistance to change: People may fear change due to economic loss, inconvenience,
uncertainty, and a break in normal social patterns. Resistance to change can be considered the
single greatest threat to successful strategy implementation. People often resist strategy
implementation because they do not understand why changes are taking place. The CEO has to
orient the managers and employees so that they view change as an opportunity rather than as a
threat.

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

a) Strategic advantage profile (SAP)
b) Core Competencies
c) Key Features of unique resources
d) Negotiation modalities for resolving project conflict
e) Cost-benefit analysis

Answer
5 a)
Strategic Advantage Profile (SAP)
Strategic advantage profile (SAP) is a summary statement, which provides an overview of the
advantages and disadvantages in key areas likely to affect future operations of the firm. It is a tool
for making a systematic evaluation of the strategic advantage factors, which are significant for the
company in its environment. SAP shows the strengths and weaknesses of an organization. The
preparation of such a profile assumes detailed analysis and diagnosis of the factors in each of the
functional areas (such as Production or Operations, Finance or Accounting, Marketing or
Distribution, Human Resources and Corporate Planning, and Research and development). These
functional areas are listed to identify their relative strengths and weaknesses in SAP.

5 b)
Core Competencies
Core competencies are the specific characteristics, capabilities, and skills that differentiate
organizations and allow them to provide higher value to consumers. These competencies are tough
for competitors to replicate and frequently span multiple functions inside the firm. A strategic
focus on identifying, developing, and using core talents is critical for long-term competitive
advantage and success. Continuous investment in developing these competencies ensures that
firms remain relevant and adaptive in rapidly changing market contexts.

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5 c)
Key Features of unique resources
Unique resources are those that critically underpin competitive advantage. They sustain the ability
to provide value in the product, are better than competitors' resources, and are difficult to imitate.
They are sources of strength for an organization. They are organization-specific. Some key
characteristics of unique resources are as follows:
i. Valuable: Unique resources are valuable. They provide value to sustain strategic advantage. They
fulfill customers' needs better than competitors. They provide value to the customers.
ii. Non-substitutable: Unique resources are non-substitutable. They cannot be replaced by other
resources. The organization possessing them can exploit them to its advantage.
iii. Costly to Imitate: Unique resources are difficult and costly to imitate. Competitors cannot easily
copy or acquire them. For example, patents, unique locations, brand loyalty, etc., are costly to
imitate.
iv. Rare: Unique resources are rare. The acquisition and development of such resources are not easy.
Competitors do not possess them. They are scarce and in short supply.
5 d)
Negotiation modalities for resolving project conflict
The major negotiation modalities for resolving project conflict are:
a. Partnering: With this modality, projects enter into partnering agreements for the outsourcing of
parts of the project through negotiation. This reduces the likelihood of litigation and encourages
cooperation.
b. Chartering: A project charter is used as a written agreement between the project manager and
functional managers in this modality. It describes the project's outputs, budget, schedule, and
human resource needs.
c. Scope change: Negotiation is used in this modality to reach an agreement on changes to the
project's scope.
5 e)
Cost-benefit analysis
A cost-benefit analysis (CBA) is the process of calculating the benefits of a decision or action
minus the costs associated with that decision or action. It includes measurable financial metrics
such as revenue earned or costs saved as a result of the project decision. Intangible benefits and
costs, as well as the effects of a decision, such as employee morale and customer satisfaction, can
be included in a CBA. Simply, CBA is an important technique for assessing the overall economic
impact of a project. It is used to ascertain whether or not a specific project should be undertaken.
It is also used to ascertain which project should be selected from an array of projects. The cost-
benefit analyst adds up the potential rewards of a situation or action and then subtracts the total
costs of taking that action.

6.
a) How do the threats of new entrants and substitute products or services influence the competitive
dynamics of the Nepalese banking industry, as per Porter's Five Forces Model?" Describe in brief.
5
b) Discuss the trend of strategic decision making practices widely prevalent in Nepalese
organizations. 5

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The Institute of Chartered Accountants of Nepal
 Suggested Answers June 2024 Examination (CAP III - Group II)

Answer
6a.
Porter's Five Forces Model suggests that the competitive dynamics in the business sector are
greatly affected by the prospect of new entrants and substitute products or services. The banking
sector is dealing with a similar issue in Nepal. Some of the examples are given below:
Threat of New Entrants:
a. Regulatory Barriers: Nepal Rastra Bank (NRB), the country's central bank, has strict regulations
governing the banking sector. Entry barriers for new banks include high capital adequacy ratios,
license regulations, and compliance standards.
b. High Capital Requirements: Establishing a bank in Nepal requires a substantial initial
investment. It can be distressing for new entrants.
c. Brand Loyalty: Since established banks frequently have high levels of customer loyalty and brand
recognition, it is difficult for new competitors to capture market share.
Threat of Substitute Products or Services:
a. Informal Financial Services: Even with the expansion of the formal banking sector, some
populations—especially those in rural areas—continue to benefit from informal financial services
like money lenders, cooperatives, and remittance agencies.
b. Emerging Fintech Sector: Traditional banking services are coming under increasing pressure
from the emergence of fintech companies providing alternative financial services including peer-
to-peer lending, digital payments, and mobile banking.

Answer
6b.
Strategic decision is guided by policies, available resources and the insights of the strategists. It is
normally about trying to achieve some advantage for the organization over competitors and
concerned with the scope of an organization's activities. It deals with knowing organizational
objective, resources availability, customers to be served and the competitors to be faced; and
preparing alternative strategies to select one of the most appropriate.
The widespread trends of making strategic decisions in Nepal are;
1. Market orientation: Nepalese organizations are increasingly focusing on understanding customer
needs, market trends, and competitive dynamics.
2. Technology adoption: Organizations in Nepal are embracing technology to gain a competitive
edge. This includes investing in new technologies, adopting digital platforms for business
operations, and leveraging data analytics for decision-making.
3. Strategic alliances and partnerships: Nepalese organizations are forming strategic alliances and
partnerships with domestic and international firms to expand their market reach, access new
resources, and enhance competitiveness.
4. Corporate social responsibility (CSR): Nepalese organizations have started realizing the
importance of sustainability and CSR practices and incorporate them in strategic decision-making
5. Talent management and leadership development: Organizations in Nepal are placing greater
emphasis on talent management and leadership development.

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The Institute of Chartered Accountants of Nepal
 Suggested Answers June 2024 Examination (CAP III - Group II)

Examiner’s Commentary on Students' Performance in June 2024

Examinations.
Paper: 5 Management and Information System
List of Questions Specific Comments on the Performance of the Students
Question no. 1 a. Students have no idea to effectively use RAD approach.
b. Students are good to answer the question.
Question no. 2 a. Students have no idea about CASE tools.
b. Ok
c. Ok
Question no. 3 a. Most students have not answered second part of question.
b. Students have answered properly.
Question no. 4 a. Students have not answered first part appropriately.
b. Students are good to answer the question.
Question no. 5 a. Most of the students have answered properly.
b. Have not answered second part properly.
Question no. 6 Ok

Paper: 6 Advanced Taxation

List of Questions Specific Comments on the Performance of the Students
Question no. 1 Most of the students failed to derive the applicable rate of tax.
Question no. 2 • Very little knowledge on taxation rate applicable.
• No knowledge of separation of disputed and undisputed amount.
Question no. 3 Students did not understand the question. Not prepared
Question no. 4 Most students failed to apply correct exchange rate applicable.
Question no. 5 It seems students ignore the provisions of the law.
Question no. 6 Students have little preparation.

Paper 7: Advanced Cost and Management Accounting

List of Questions Specific Comments on the Performance of the Students
Question no. 1 Some students did not understand the question properly. The
presentation of the answer was poor.
Question no. 2 a. Well attempted and answered by most of the students.
b. Presentation of the solution was not satisfactory for most of the
students.
Question no. 3 a. Well attempted and solved by students.
b. Correctly answered by most of the students.
Question no. 4 a. Most of the students could not correctly calculate Cost Driver
Ratio.
b. Most of the students could not calculate Total Takings correctly.
Question no. 5 Many students did not answer or inadequately answered part of
this question. Students lack theoretical understanding.
Question no. 6 Most of the students answered both part of the question. This
question seemed easy to many students.

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The Institute of Chartered Accountants of Nepal
 Suggested Answers June 2024 Examination (CAP III - Group II)

Paper 8: Strategic Management

List of Questions Specific Comments on the Performance of the Students
Question no. 1 Students failed to link between organizational culture and strategy
of Saswat Healthcare.
Question no. 2 Students need to practice more on defining strategy development
and market positioning in Red Ocean strategies and Blue Ocean
strategies.
Question no. 3 a. Explanation of process of project planning is not acquarate and
they couldn’t provide suitable examples.
b. Some students deal it as product life cycle instead of Project Life
Cycle.
Question no. 4 Students only focus on general role of CEO.
Question no. 5 Negotiation modalities described by students are not specific.
Question no. 6 a. Many students describe generic strategies of Porter’s model which
is not correct.
b. Only operational level issues are presented.

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The Institute of Chartered Accountants of Nepal