Controlling in Principles of Management

UNIT V – CONTROLLING
R.ArunKumar,AP/Mech,RIT

SYLLABUS
System and process of controlling – budgetary and non-budgetary
control techniques – use of computers and IT in Management
control – Productivity problems and management – control and
performance – direct and preventive control – reporting.

Objective:
 To study various techniques for controlling the functions of
management.
Outcome:
 The student will be able to describe the control techniques and
the role of technology in management.

SYSTEM AND PROCESS OF CONTROLLING
CONTROLLING:
 According to Koontz and O‟Donnell“ Managerial control implies
measurement of accomplishment against the standard and
the correction of deviations to assure attainment of objectives
according to plans”

NATURE OF CONTROLLING:
1. Controlling is forward looking

2. Controlling is goal oriented

3. Controlling is pervasive in nature

4. Controlling is a continuous process

5. Controlling enables to make quick decisions

6. Controlling is action based

7. Controlling system should be acceptable

8. Controlling should be participative

IMPORTANCE OF CONTROLLING:
 Enables managers to know whether goals are being met.
 Controlling provides a critical link back to planning.
 An effective control can provide information and feedback on
employee performance.
 Controlling protects organization and it‟s assets.
 Controlling provides effective supervision.

Planning – Controlling link:

TYPES OF MANAGERIAL CONTROL:
1. Financial control:
 Managers use financial statement such as income statement or
balance statement to monitor the progress of plans.
 Income statement shows the revenue, expense, profit, etc.
 Balance statement shows the worth of organization at a specific
time.

TYPES OF MANAGERIAL CONTROL: :
2. Budget control:
 Budget shows expectation of expense and the revenue to be
generated over a period of time.

3. Marketing control:
 Helps to monitor the progress towards the goal of customer
satisfaction.

4. Human resource control:
 Helps the manager to regulate and maintain quality of
employees in their job.
 e.g.: Training and development, performance appraisal,
disciplinary actions.

5. Computers and information control:
 Helps to maintain confidential information from the hackers.

PROCESS OF CONTROLLING:

Step 1: Measuring actual performance:
 Managers should analyze „how and ‘what to measure’.
 Employee satisfaction, turnover, absenteeism, budgets are
control criteria(What)
 Common sources of information(How) for measuring performance.

Step 2: Comparing actual performance against standard:
 Its difficult to predict exactly the acceptable range of
variation.

Step 3: Taking managerial action:
 Managers can do three possible courses of action:
 Do nothing
 Correct actual performance
 Revise the standard

 Do nothing depends on individual decisions.

 Correct actual performance can be performed by either
immediate corrective actions, basic corrective actions.
 For e.g., corrective actions for unsatisfied work are training
programs, disciplinary actions, etc.

 In some cases, variance may be due to unrealistic standards.
 Managers must be cautious about revising the standard
downward.

MANAGERIAL DECISION IN CONTROL PROCESS

CONTROL TYPES BASED ON TIME:
1. Feedback control:
 Feedback control is also called as post action control.
 Analyzes the past result and corrective actions are taken.
 e.g. Disciplinary actions

2. Concurrent control:
 Concurrent control is also called as real time control.
 Corrective actions are meant for doing adjustments.
 e.g. Organization chart

3. Feed forward control:
 This control evaluates the input and corrective measures are
implemented before the task in completed.
 e.g. Financial budgets.

4. Strategic control:
 Involves monitoring of factors that could affect strategic
plans of an organization.
 These are meant for top level managers.

5. Tactical control:
 Focuses on assessing the implementation of tactical plans at
departmental levels.
 These are meant for middle level managers.

6. Operational control:
 Overseeing the implementation of day to day activities.
 These are meant for low level managers.

BUDGETARY CONTROL
TECHNIQUES

BUDGET:
 According to Brown and Howard, ‘A budget is a pre – determined
statement of management policy which provides a standard for
comparison with actual results during a given period’.

BUDGETARY CONTROL:
 Budgetary control is the process of determining various
budgets for the business unit in future.
 It is also called as system of controlling costs through budget
preparation.

OBJECTIVES OF BUDGETARY CONTROL:
1. Helps to plan and control the income and expenditure of the
organization.

2. Maximizes the profit for the organization.

3. Provides adequate capital for working.

4. Coordinates the activities of different units in an organization.

5. Helps to evaluate the performance.

6. Decentralizes the responsibilities.

CLASSIFICATIONS OF BUDGET:
1. Classification based on function:
1a) Sales budget:
 It is the estimate of expected sales during a budget period.
 The factors to be considered are plant capacity, past sales
data.

1b) Production budget:
 Production budget is a forecast of the output for the period
analyzed.
 The factors to be considered are plant capacity, resource
availability, sales requirements.

1c) Labour budget:
 It is the forecast of requirements of direct labour essential to
meet the production targets.

1d) Capital expenditure budget:
 It includes all the initial investment cost of the organization.

1e) Research and development budget:
 Focuses on budget required to develop new products.

1f) Profit budget:
 Profit budget is also called as master budget.

2. Classification based on time:
2a) Long term budget:
 Period of time for long term budgets are 5 to 10 years.

2b) Short term budget:
 Period of time for short term budgets are less than 5 years.

2c) Current budget:
 Includes the budget expense for day to day activities.

3. Classification based on rigidity:
3a) Fixed budget:
 Budget expenses that are predefined are called as fixed budget.

3. Classification based on rigidity:
3b) Flexible budget:
 Budget expenses that tends to vary are called as flexible budget.

BUDGETARY CONTROL TECHNIQUES:
1. Planning – programme budgetary systems (PPBS):
 Analyzing the basic objectives of policies and activity of each
programme in the organization.
 Measuring the total cost and choosing the best alternative.

2. Zero – based budgeting:
 In this method, every next year budget is made on nil base.
 The expected income will be equal to the expected expenses.
 This process involves three steps: Scheduling, prioritizing and
resource allocation.

3. Variance analysis:
 Estimated budget of the organization expenditure will be
compared with actual accounting figures to measure the
variance.

4. Responsibility accounting:
 The organization is classified as cost centre, profit centre and
investment centre.
 Based on this classification employee will be assigned with a
target.
 On the basis of achievement he / she will be rewarded.

5. Fund adjustment:
 Top management will be altering the fund allocation based on
the requirement.

6. HR accounting:
 It deals with human resource control.
 Investment on HR is a long term investment for any
organization.
 e.g.: training and development programme, disciplinary
programs.

NON – BUDGETARY CONTROL
TECHNIQUES

NON – BUDGETARY CONTROL:
 Control over the organization other than the financial resources
are called as non – budgetary control techniques.
 Non budgetary control techniques are classified into:
 Traditional techniques
 Modern techniques

1. Traditional techniques:
1a. Statistical data and chart:

1b. Personal observation:

1c. Operational audit:

1d. Break even analysis:
 Used to determine the point at which all fixed costs have been
recovered and profitability begins.
CostsVariableUnit-PriceUnit
CostsFixedTotal
Breakeven:

1e. Special reports:

1f. Responsibility accounting:
 On the basis of achievement employee will be rewarded.

1g. Balanced scorecard:
 Balanced scorecard includes the details of
1. Financial expenditure
2. Customer needs and satisfaction
3. Internal process
4. People / employee’s growth

1g. Balanced scorecard:

2. Modern techniques:
2a. Linear programming:
 Helps in selecting which is the most suitable or optimistic
method to find the solution.

2b. PERT:
 A flow chart diagram that depicts the sequence of activities
needed to complete a project and the time or costs associated
with each activity.
 To understand this one must know the following terms:
1. Events: endpoints for completion.
2. Activities: time required for each activity.
3. Slack time: Time an individual activity can be delayed.
4. Critical path: Most time consuming sequence of events.

2b. PERT:
Steps in PERT Analysis:
1. Identify every significant activity that must be achieved for a
project to be completed.
2. Determine the order in which these events must be completed.
3. Diagram the flow of activities from start to finish
4. Compute a time estimate for completing each activity.
5. Determine a schedule for the start and finish dates of each
activity and for he entire project.

2b. PERT:

2c. Critical path method:

2d. Gantt Chart:

2e. Load Chart:

2f. Bench marking:

USE OF COMPUTERS AND IT IN
MANAGEMENT CONTROL

USE OF COMPUTERS IN MANAGEMENT CONTROL:
1. Sales forecast and control
SFA and CRM After Sales Service
Expense Management Payroll

2. Accounting

3. Personnel management information

4. Inventory control
e.g. Chemist retail Software

5. Banking
e.g. National Electronic Fund Transfer

USE OF IT IN MANAGEMENT CONTROL:
1. Management Information System (MIS):
 MIS is used for decision making in various functional areas of
business.

 MIS is defined as ‘ a system of obtaining, abstracting, storing and
analyzing data to produce effective information for the use in
planning, controlling and decision making process’.

Objectives of MIS:
 Providing right information at right time

Objectives of MIS:
 To allocate appropriate resources

Objectives of MIS:
 To provide sales forecasting, planning and better controlling

Objectives of MIS:
 To provide information confidentially

Objectives of MIS:
 To provide adequate information for better managerial
activities.

Pre – requisites of MIS:
 Information must be clear and concise.

 Information must be relevant to business organization.

 Information must be simple and understandable.

 Information must facilitate decision making and taking
corrective actions.

 Information must help in solving complicated problems.

Need for MIS:
1. Internal factors:
 Provides information about resource availability.
 Provides information for preparing budgets, sales forecast,
marketing strategies, etc.
 Plays vital role in evaluating the overall performance.

Need for MIS:
2. External factors:
 Provides information about governmental policies, laws, etc.
 Provides information about economic scenario.
 Provides information about recent technological up gradation.

Resources used in MIS:

Installation of MIS:
Data collection
Data feeding
Data storage and retrieval
Data analysis
Output
Decision making
Implementation

Functions of MIS:
1. Determination of information need:
 MIS determines, kind of information required.
 Identifies the person who requires the information.
 Information needed for various functions of organization
(planning, performance evaluation, etc.)

Functions of MIS:
2. Information gathering:
 Internal sources: Documents, surveys, observation, operational
manual, etc.
 External sources: Reference journals, newspapers, surveillance,
etc.

Functions of MIS:
3. Processing:
 Processing includes evaluation, abstraction, dissemination
and storage.

Functions of MIS:
4. Information usage:
 Usage depends on factors like accuracy, timely supply and
format.

Tools of MIS:
 Speech recognition software
 Network server

Role of MIS in management:
1. Strategic planning:

2. Tactical planning:

3. Operational planning:

Applications of MIS:
1. Marketing
 Sales planning and forecasting.

2. Manufacturing
 Production planning and cost control.

3. Logistics
 Inventory control.

4. Finance and accounting
 Revenue and expenditure details.

5. Top management
 Policy formulation, resource allocation.

CONTROL AND PERFORMANCE

PROBLEMS IN MEASUREMENT OF PRODUCTIVITY:
 Greater proportion (ratio of output to input).
 Growing affluence (relaxation in job) of people.
 Personal reasons.
 Government policies and regulation.
 Labour skills.

PRODUCTION AND OPERATION MANAGEMENT:
PRODUCTION:
 Production is defined as step by step conversion of raw
materials into finished products through a sequence of
process.

OPERATION MANAGEMENT:
 Operation management is defined as activities necessary to
produce and deliver a service or physical activities.

OPERATION MANAGEMENT SYSTEM:
Environment
Input Process Output
Feedback
Objectives:
 Right quality and quantity of product.
 Low manufacturing cost.
 Scheduled maintenance.

PRODUCT DEVELOPMENT:
 Product development is defined as up gradation of present
product quality and quantity, by improving the process,
technology, skills, etc.

PRODUCT DEVELOPMENT PROCESS:
1. Create ideas:
 Ideas will be generated by imitation, adaptation, R&D and
other sources.

2. Screening the alternatives:
 Various ideas will be collected, analyzed and filtered to come up
with preferable alternative (product).

3. Preparation of preliminary design:
 After selecting a specific product, preliminary designs are
performed with aid of financial and other resources.

4. Process selection:
 Management will optimize the preferable process.

5. Implementation:

PRODUCT ANALYSIS:
 The factors influence the product analysis are:
1. Marketing
2. Economical
3. Production
4. Government policy
5. Technology

PRODUCT ANALYSIS:
1. Marketing analysis:
 In marketing analysis, an organization must focus on factors like
customer acceptance, competitor, advertising, demand for
the product, distribution channel.

PRODUCT ANALYSIS:
2. Economical analysis:
 In economic analysis, the factors to be considered are, profit
margin, volume of sales, investment analysis and pricing
policy.

PRODUCT ANALYSIS:
3. Production analysis:
 Includes analysis of suitable process, sequence of operation
and application of new methodology.

PRODUCT ANALYSIS:
4. Government policy: 5. Technology:

CONTROL AND PERFORMANCE:
 In order to exhibit better performance, an organization must focus
on various aspects of control.
 e.g.: Likert analysis.

1. INVENTORY / PURCHASE CONTROL:
 Inventory is defined as process in which goods and stocks are held
for a specific time period in an unproductive state.
 Inventory control deals handling of stock.

Importance of inventory control:
 Proper resource utilization
 Helps in minimizing loss
 Economically benefit in purchasing
 Improves coordination among departments.
 Better customer satisfaction.

Inventory costs:
a) Item cost:
 Deals the purchase price of raw materials.

Inventory costs:
b) Ordering cost:
 Cost associated with transportation and quality check.

Inventory costs:
c) Holding cost:
 Includes holding cost of inventory (inventory storage)

Inventory costs:
d) Shortage cost:
 Includes the cost associated when shortage in stock occurs.

Inventory costs:
e) Fixed overhead cost:
 Include the investment cost.

Effective inventory control system:
 Should provide a proper check against loss.
 Better identification.
 Well equipped ware house.
 A proper record maintenance.
 Waste elimination.
 Optimized storage.
 Should deploy qualified human resource.

Economic order quantity (EOQ):
 EOQ = ⌡[(2DS)/C]
where, D = demand per year
S = ordering cost
C = annual carrying cost

Just in Time (JIT):
 It is also called as zero inventory and stockless production.
 Supplier delivers the materials to the customer just in time to be
assembled.
 Inventory requirement is very less in JIT.

Essentials of Just in Time (JIT):
 Trained and skilled work force.
 Smooth relationship with suppliers.
 Location of the supplier must be close.
 Effective maintenance.
 Reduction in batch size.

Advantages of Just in Time (JIT):
 Inventory cost is reduced.
 Leads to job satisfaction.
 Better balancing of machines.
 Quality product.
 Eliminates wastes.

Disadvantages of Just in Time (JIT):
 Failure in machineries leads to failure in delivery.
 Unskilled employees affects the process.
 Receiver must completely rely on supplier.

2. MAINTENANCE CONTROL:
 Maintenance control is defined as the process of proper
execution of pre – determined maintenance function in
proposed budget.

 For an effective maintenance control, maintenance department
must focus on following measures:
i) Cost information
ii) Monthly review
iii) Proper handling
iv) Failure detection
v) Reduction in overhead expenditures

i) Cost information:
 Line supervisors must be explained about the material and
machinery cost.

ii) Monthly review:
 Head of the department can review the expenditure details
against proposed budget through monthly meeting.
 Some budgetary provisions must be provided to meet out
unforeseen exigencies.

iii) Proper handling:
 Better handling of machines reduce the frequency of repair
leading to effective maintenance control.

iv) Failure detection:
 Carrying out scheduled maintenance can eliminate total failure
of the machinery.

v) Reduction in overhead expenditure:
 Head of the department can have a discussion with concern
personnel, which may help in reducing the operational cost.

3. QUALITY CONTROL:
 Quality control refers to the technical process that gathers,
analyze and report the progress of the work and conformance
against the requirements.

3. QUALITY CONTROL:
Steps in quality control process:
1. Identifying the parameter to be controlled.

3. QUALITY CONTROL:
2. Analyze the risk factor and time to be controlled (before or after).

3. QUALITY CONTROL:
3. Establish the specification / limits for the parameter to be
controlled.

3. QUALITY CONTROL:
4. Frame the plans and methods for control.

3. QUALITY CONTROL:
5. Organize resources to implement the plans.

3. QUALITY CONTROL:
6. Monitor the process.

3. QUALITY CONTROL:
7. Collect the data and analyze with standards.

3. QUALITY CONTROL:
8. Verify and diagnose the cause of variation.

3. QUALITY CONTROL:
9. Corrective actions.

3. QUALITY CONTROL:
10. Cross check.

4. COST CONTROL: (Financial control)
Steps in cost control process:
1. Establishing norms / targets:

4. COST CONTROL:
2. Analysis:

4. COST CONTROL:
3. Corrective measures:

4. COST CONTROL:
Financial statements:
 Reflects the company’s financial health for a given period of
time.
 e.g.: SEBI, government budget

4. COST CONTROL:
Advantages of financial statements:
 Helps the management to analyze , frame future budgets.
 Helps the share holders to know the financial ability of an
organization .

4. COST CONTROL:
Limitations of financial statements:
 Approximate data.
 Change in asset value.
 Change in currency value.

4. COST CONTROL:
Contents of financial statements:
i) Income statement:
 Income statement include the revenue, expenditure, profit and
loss of the organization.
 Helps in analyzing the business progress.

4. COST CONTROL:
ii) Balance sheet:
 Balance sheet includes the organization’s assets, stockholder’s
equity and legal liabilities.
 It is also defined as the statement showing the sources and
application of capital.

4. COST CONTROL:
ii) Balance sheet:
 Balance sheet shows the clear idea of financial position of an
organization.
 Reflects the result of all recorded accounting transaction
since the beginning of an organization.

4. COST CONTROL:
iii) Cash flow statement:
 It includes all the cash transaction of an organization during
given period of time.
 It analyzes the source and uses of cash in the company.

4. COST CONTROL:
iii) Cash flow statement:
 Helps in analyzing the cash position of the organization.

4. COST CONTROL:
Rate of investment (ROI):
 The objective of ROI is to obtain a satisfactory return on
capital investment.
 ROI can be calculated by:
1. Investment turnover = (Sales / Capital investment)
2. Percentage of profit on sales = (Profit / sales) * 100
3. Return on capital investment = (Profit / Capital) * 100

4. COST CONTROL:
Rate of investment (ROI):
Advantages:
 Shows business efficiency.
 Used for better comparison.
 Helps the management in decision making.
Limitations:
 In ROI, factors such as inventory valuation, depreciation cannot
be considered.

REPORTING

REPORTING:
 Report is a part of management system through which
information is provided to the management as statement at
regular interval.

REPORTING:
 Management report is defined as, “system of communication,
normally in written form of facts which should be brought to
attention of various levels of management who use them to
take suitable actions”.

OBJECTIVES OF MANAGEMENT REPORTING:
1. To facilitate proper resource utilization

2. For effective decision making

3. To ensure better organizational efficiency

4. To obtain information

5. To have better financial control

ESSENTIALS OF GOOD REPORTING SYSTEM:
1. Proper format:
 Should have good format with title, sub titles, page alignment,
etc.

2. Promptness:
 System should ensure the report is prepared and submitted at
right time.

3. Accuracy:
 There shouldn’t be any deviation.

4. Comparability:
 Report system provide comparative information about proposed
and actual performance.

5. Relevancy:
 Report must have relevant information to disclose the fact in
clear terms.

6. Simplicity:
 Report should avoid technical jargons, duplication of
information, etc.

7. Flexibility:
 Should be capable of being adjusted according to requirement
of users.

8. Cost benefit analysis:
 For better financial performance, every report must include
cost benefit analysis.

TYPES OF REPORT:
 Periodic report
 Situational report
 Progress report
 Investigative report
 Compliance report
 Feasibility report
 Yardstick report
 Recommendation report

TYPES OF REPORT:
1. Periodic report:
 Typical elements of periodic reports are monitoring and integrity.
 Periodic report helps management to make policies, procedures, operations
and product according to customer requirement.

TYPES OF REPORT:
2. Situational report:
 Reported regarding certain issues, do not have a pattern of
occurrence.
 Reports about new procedures, equipments and laws and supply
information affecting products operation and service.

TYPES OF REPORT:
3. Progress report:
 Describes about performance.
 This report explains project status and progress.

TYPES OF REPORT:
4. Investigation report:
 Focuses on examining a problem.

TYPES OF REPORT:
5. Compliance report:
 Present data in compliance with local, state and central laws.

TYPES OF REPORT:
6. Feasibility report:
 Analyses the problem and predict whether alternatives will be
practical or advisable and it helps in decision making among
alternatives.

TYPES OF REPORT:
7. Yardstick report:
 It is used as a test or standard of measurement.

TYPES OF REPORT:
8. Justification/Recommendation report:
 Justification report recommends the management and provide
data to solve problems and make decisions.

Controlling in Principles of Management

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