Essence and Critical Analysis of Financial Accountability

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Essence and Critical Analysis of Financial Accountability

Introduction

Q. What is financial accountability?

Financial accountability is a concept about respective accountability with in a financial process. This helps to maintain a string effective and efficient divisional financial control environment. This helps to understand the aspects of financial management and control within an organisation. Bifurcation and classification of roles and responsibilities and liabilities among organisational departments and divisions is one of the key aspect of financial accountability. With the help of financial accountability concept managers and employees become ensure each position and important role in financial process. Desired and eligible persons are appropriated and allocated financial position and roles for effective and better performance.

Financial accountability provides relevant information and data subject to better financial control and management. It reduces the level of errors and control in respect of effective management and operation. Financial process helps to maintain strong effective departmental financial control and environment. Moreover, it prevents misappropriation and fraud in business departmental financial process. Financial process of organisation would be able to produce appropriate and accurate information in order to attain financial expertises and control. A well designed and perfect financial accountability structure serves the foundation for building effective financial process with in organisation and business.

(1) Net income statement after tax

Net income after taxes (NIAT) is a bookkeeping term regularly found in an organization’s yearly report, and used to demonstrate the organization’s complete ‘primary concern’ for the bookkeeping time frame. At the end of the day, it demonstrates what the organization earned after the entirety of its costs, charge-offs, deterioration, and expenses have been subtracted. This figuring is typically appeared both an all-out dollar sum and a for every offer count.

Net income after taxes (NIAT) is basically the net gain of a business less all charges. It is the whole of all incomes less all costs, including cost of merchandise sold, deterioration, intrigue, and duties. While it is equivalent to total compensation, generally, it is utilized in budget reports to separate between salary before expense and pay after duty. Since it is the keep going line on an organization’s pay explanation, NIAT is additionally alluded to as the primary concern.

NIAT is a standout amongst the most examined figures on an organization’s budget report. The sum recorded gives a sign of the productivity of an organization which decides if the firm can remunerate its financial specialists and investors. An expansion in benefits over different periods commonly prompts an increment in the business’ stock cost. An organization with an overall gain that is negative or beneath normal might be a start-up firm, a forcefully developing firm, or a firm encountering a decrease in deals or poor cost the board.

To more readily look at organizations or businesses utilizing NIAT, it is increasingly successful to utilize the figure as a level of another. For instance, the net revenue is NIAT as a level of all out offers of an organization. The overall revenue apportions the amount of each dollar of offers an organization keeps in income. A 20% net revenue, for instance, implies that for every dollar of offers produced, an organization keeps $0.20 in benefits. The ordinarily utilized value income (P/E) proportion likewise utilizes the overall gain number to decide how much financial specialists are paying for every dollar of benefit the organization can produce.

Net income after taxes isn’t the all out money earned by an organization over a given period, since non-money costs, for example, devaluation and amortization are subtracted from income to get the NIAT. Rather, the income proclamation is the reference to how a lot of money an organization produces over a period.

While the net income after taxes calculation is a standout amongst the strongest proportions of an organization’s act, various bookkeeping embarrassments as of late have turned out to be under 100% dependable. Speculators assessing an organization’s main concern need to evaluate it for genuine and future costs that bookkeeping rules grant an organization to avoid from their current NIAT estimation.

Budgeted Income statement of OLA Plc for the year ended 2018

Particular

Amount (€)

Projected Sales

1,125,000

Projected Sales Revenues

45,000,000

Per Unit Information:

Sales Price

45000000

Variable Costs:

Direct Material

-4500000

Direct Labour (Variable)

-10125000

Variable Production Overhead

-3375000

-18000000

Contribution

27000000

Selling Expenses

Per unit information:

Sales price €45000000
Direct material = (projected sales-1125000 )*(direct material cost per unit-4)= 4500000
Direct labour = (projected sales-1125000 )*(direct labour cost per unit-9)= 10125000
Variable production overhead = (projected sales-1125000)*(variable production cost per unit-3)= 3375000
Gross profit = (sales price 45000000) – (direct material-4500000 + Direct labour 10125000+Variable production overhead 3375000) = 27000000
Net profit before tax = (gross profit 27000000) – ( manufacturing OH 2000000 + Administrative expenses 7050000 + selling expenses 10000000 + variable production overhead 33750000 ) = 4575000
Net profit after tax = (net profit before tax 4575000) – (tax 571875)=4003125

(2) Breakeven points in units

Break-even analysis is a technique widely used by production management and management accountants. It depends on ordering creation costs between those which are ‘variable’ (costs that change when the generation yield changes) and those that are ‘fixed’ (costs not legitimately identified with the volume of creation). All out factor and fixed expenses are contrasted with deals income all together with decide the dimension of offers volume, deals esteem or creation at which the business makes neither a benefit nor a misfortune (the ‘break-even point’)

Fixed Costs

Fixed expenses are those business costs that are not legitimately identified with the dimension of creation or yield. As such, regardless of whether the business has a zero yield or high yield, the dimension of fixed costs will remain comprehensively the equivalent. In the long haul fixed expenses can adjust – maybe because of interest underway limit (for example including another manufacturing plant unit) or through the development in overheads required to help a bigger, progressively complex business.

Variable Costs

Variable expenses are those costs which change straightforwardly with the dimension of yield. They speak to instalment yield related sources of info, for example, crude materials, direct work, fuel and income related costs, for example, commission.

A qualification is frequently made between ‘Direct’ factor costs and ‘Circuitous’ variable expenses.

Direct factor costs are those which can be straightforwardly inferable from the creation of a specific item or administration and allotted to a specific cost focus. Crude materials and the wages those taking a shot at the generation line are genuine models.

Aberrant variable expenses can’t be straightforwardly inferable from creation however they do shift with yield. These incorporate devaluation (where it is determined identified with yield – for example machine hours), support and certain work costs.

Breakeven point = (fixed cost 19050000) / (selling price 40 – variable cost 19) = 907142.85

(3) Breakeven points in monetary value

Profit volume ratio: profit volume ration defines the connection between the commitment and deals cost. There is a rate determined among commitment and deals for deciding benefit volume proportion. Deducting level of variable expense is another strategy to assess benefit volume proportion. With the assistance of benefit volume proportion records and administrators become qualified to bifurcate the variable cost edge for figuring commitment. Benefit volume proportion assumes indispensable job in regard of figuring earn back the original investment deals in money related esteem. This is likewise determined by estimating change in benefit and change in deals volume proportion (Green, 2011). This fundamentally remain related with minimal expense for better computation of commitment. There is one corresponding relationship found between deals edge and commitment which is on the off chance that the deal cost increment all the more similarly peripheral cost, at that point commitment rates goes higher. Same according to on the off chance that deal value decline, at that point commitment rate get decline.

Breakeven point of in monetary value = Total Fixed Cost 19050000 / (Selling price per unit 40 – Variable cost per unit 19 / Selling price per unit 40)= €36285714

(4) A calculation of target volume in units in order to generate profit before tax of €6000000

Desired sales: this is calculated on the basis of fixed cost and considering desired profit. Organisation calculated desired amount of production for getting targeted or projected profit for a particular period. This is also a part of break-even analysis (Costa, Ramus and Andreaus, 2011). This helps to analyse the cost of operation and analysis of evaluation of optimum quantity of sales.

With the help of fixed cost desired sales units are calculated in given scenario. Fixed cost for is €19050000 for the year 2018. As per above business problem OLA plc desired sales is calculated as follows:

Formula = (Fixed cost + Desired or targeted profit) / contribution per unit

= (€19050000 + €6000000) / 21 = 1192857.143 units

as per above analysis of break-even sale if organisation wants to earn €6000000 for the year 2018 then it has to produce 1192857 units for the year 2018.

(5) A calculation of target in monetary value in order to generate profit before tax of €6000000

Calculation of sales monetary value on the basis of €6000000 profit are as

Target volume in units = Total Fixed Cost 19050000+ Target Profit Amount 6000000 / (Selling price per unit 40 – Variable cost per unit 19/ Selling price per unit 40)= 47714286

(6) A calculation of the margin of safety % assuming that the annual sale of 1125000 units are achieved

Margin of safety = (Projected sales 1125000 – Breakeven point 907142.85 / Projected sales1125000) * 100 = 19.36%

This shows that the margin of safety of Ola Plc is 19.36% after assuming the annual sale of 1125000 units.

(7) A calculation of how many units must be sold to earn profit after tax €5000000

Target units to be sold = Total Fixed Cost 19050000+ Target Profit Amount 5000000 / Selling price per unit 40 – Variable cost per unit 19 = 1145238

To achieve profit €5000000 OLA plc have to sell at least 1145238 units.

(8) Based on changes, calculation of breakeven points in units and revenue for 2019

According to report, the selling price of Ola Plc will be increasing by 10%, the variable costs will be increasing by 205 and the fixed costs will increase by around €2,500,000.

As per the report for 2019, Selling price per unit will be € 44,Variable cost per unit will be € 22.8,Total fixed costs will be € 21,550,000.

Breakeven point = (fixed cost 21550000) / (selling price 44 – variable cost 22.8) = 1016509 units

Breakeven point of in monetary value (revenue) = Fixed Cost 21550000 / (Selling price per unit 44 – Variable cost per unit 22.8 / Selling price per unit 44)= €44726415

Conclusion

This report is prepared to analyse financial accountability for subject to presenting financial performance. Financial accountability is measured by analysing profit subject to adjustment of variable and fixed expenditure. Concept of accountability is elaborated in respect of Ola Plc which is largest manufacturer of an oil based products. Profit is evaluated on the basis of accounting techniques. Break even analysis and margin of safety also defined in this context. How financial accountability helps to maintain finance management and better control of financial resources also defined in this context.

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