Controlling techniques

Controlling Techniques
Dr. Babush Jose
Kulkarni Avanti Anil

Definition
• Controlling:
‘controlling is the measurement of accomplishment against the
standards and the correction of deviations to assure
attainment of objectives according to the plans’
-by Koontz and O'Donnell
• Controlling Techniques: various methods used by
management for controlling the various
deviations in the organization.

Control Techniques at
Operational Level
• Budgetary Control
• Control through
costing
• Break even analysis
• Responsibility
Accounting
• Internal Audit
• Quality control
• Quality control
through Quality Circle
• Inventory Control
• Time – Event
Network Analysis
• CPM / PERT

Budgetary Control
• A budget is a planning and controlling device.
• Budgetary control is a technique of managerial
control through budgets. It is the essence of
financial control.
• Budgetary control is done for all aspects of a
business such as income, expenditure, production,
capital and revenue.
• Budgetary control is done by the budget
committee.

Advantages
• Budgeting is an instrument whereby
management decides the future course of action.
• Budget is always related to a specified period.
• Budget is expressed in quantitative terms.
• Budget is only an estimated plan of action.
• Budget provides standard to be achieved.

Limitations
• Proves dangerous when based on wrong
estimates.
• Sometimes budgetary control becomes
cumbersome.
• Budget often controls wrong things.

Control through costing
• Concerned with cost determination and indicates the
approximate cost of a process or a product under existing
conditions
• It involves the control over cost in the light of certain
predetermined costs usually known as standard cost.
• Control through standard costing involves following steps:
– Fixation of standards
– Determining the actual cost
– Comparison between standard and actual cost
– Analysis and Modification (if required).

Advantages
• It helps the firm to improve its profitability and
competitiveness.
• In the absence of cost control, profits may be
drastically reduced despite a large and
increasing sales volume.
• It is indispensable for achieving greater
productivity.
• Cost control may also help a firm in reducing its
costs and thus reduce its prices.
• If the price of the product is stable and
reasonable, it can maintain higher sales and thus
employment of work force.

Limitations
• Standard cost can sometimes be expensive to set
up and difficult to operate.
• Dual cost data (standard and actual) have to be
maintained making record keeping more difficult.
• Requires frequent revisions if the conditions
change frequently, because standard costs are
applicable in a particular situation.
• Some type of resistance is expected from the
people.

Break even analysis
• Break-even point is defined as that level of
volume at which revenue exactly equals to the
total cost. Through a graphic representation the
break-even point provides a point of capacity
where operations pass from being profitable to a
loss or vice-versa. This helps management in
deciding the level of output and sales.
₹

Advantages
• Break-even analysis enables a business
organization to:
• Measure profit and losses at different levels of
production and sales.
• Predict the effect of changes in sales prices.
• Analyze the relationship between fixed and
variable costs.
• Predict the effect of cost and efficiency changes on
profitability.

Disadvantages
• Even with its advantages and uses, there are also
several demerits of break-even analysis.
• Assumes that sales prices are constant at all levels
of output.
• Assumes production and sales are the same.
• Break even charts may be time consuming to
prepare.
• It can only apply to a single product or single mix
of products.

Internal Audit
• Operational audit
• Specially appointed staff
• Broad scope, encompasses the whole range of
activities of the organization
• In addition to accounts, internal audit appraises
policies and procedures, use of authority, quality
of management, effectiveness of methods, special
problems and other phases of operations.
• Helps the managers by measuring performance
and evaluating results of aspects audited in the
light of standard.

Advantages
• Internal Audit “reports” directly to management or the
Board.
• Improves the “control environment” of the organization
• Makes the organization process-dependent instead of
person-dependent.
• Identifies redundancies in operational and control
procedures and provides recommendations to improve
the efficiency and effectiveness of procedures
• Serves as an Early Warning System, enabling deficiencies
to be identified and remediated on a timely basis (i.e. prior
to external, regulatory or compliance audits)
• Ultimately increases accountability within the
organization.

Limitations
– Very expensive for small organizations.
– The reports may not get accepted due to some
deficiencies found by the higher level
management.
– The auditors might look at every event/
operation from accounting point of view.
– this not only affects the course of internal
audit.

Responsibility Accounting
• Under this system of accounting, various sections,
departments or divisions of an organisation are
set up as ‘Responsibility Centers’ . Each centre has
a head who is responsible for attaining the target
of his centre.

The various responsibility centres
are as follows:
• Cost centre, also known as expense centre, refers to a department of an
organisation whose manager is held responsible for the cost incurred in the
centre but not the revenues. For example, Production department of an
organisation may be classified as Cost Centre.
Cost Centre:
• A revenue centre refers to a department which is responsible for generating
revenues. For example, marketing department.
Revenue Centre:
• A profit centre refers to a department whose manager is responsible for both
cost and revenues. For example, Repair and Maintenance department.
Profit Centre:
• An investment centre is responsible for profits as well as investments made
in the form of assets. For judging the performance of investment centre,
return on investment (ROI) is calculated and compared with similar data for
previous years for one’s own centre as well as other similar enterprises. It is
also compared with current data of competing enterprises.
Investment Centre:

Advantages
• It establishes a sound mechanism for control.
• It forces the management to consider the organisational
structure and examines who is responsible for what and
fix the delegation of power.
• It encourages budgeting with which actual achievement
can be compared.
• It increases interest and awareness of the officers as they
are called upon to explain about the deviations for which
they are responsible.
• The exclusion of items which are beyond the scope of the
individual’s responsibility simplifies the structure of the
reports and facilitates promptness in reporting.

Limitations
• The prerequisites for a successful responsibility
accounting system are:
– A sound organisational structure where divisions can be identified
clearly as responsibility centre.
– Proper delegation of work and responsibility.
– A proper system of reporting.
• If these conditions are absent it is difficult to have a
responsibility accounting system.
• The traditional way of classification of expenses needs to
be subjected to a further analysis which becomes difficult.
• In introducing the system certain managers may require
additional classification particularly if the responsibility
reports are different from routine reports.

Quality control
• ISO 9000 defines quality control as "A part of quality
management focused on fulfilling quality requirements".
• Quality control involves testing of units and determining if they are
within the specifications for the final product. The purpose of the
testing is to determine any needs for corrective actions in the
manufacturing process. Good quality control helps companies meet
consumer demands for better products.
• Quality testing involves each step of the manufacturing process.
Employees often begin with the testing of raw materials, pull samples
from along the manufacturing line and test the finished product.
Testing at the various stages of manufacturing helps identify where a
production problem is occurring and the remedial steps it requires to
prevent it in the future.

Advantages
• Good quality products are created.
• Customer satisfaction is high.

Limitations
• It involves people and money.
• Sometimes quality control is not 100% efficient.

Quality control through Quality
Circle
• According to Maurice Alston,
"Quality Circles are small groups of people doing
similar work who, together with their supervisors
volunteer to meet for an hour a week to study and
solve work related problems which affect them.
Circle leaders and members are trained in simple
problem solving techniques which identify causes
and develop solutions. At an appropriate time,
presentations are made by the quality circles to the
management who decide whether to accept, modify
or decline the proposals".

Advantages
● Promote high level of
productivity and quality-
mindedness.
● Self and mutual development of
employees.
● Creating team spirit and unity of
action.
● Increased motivation, job
satisfaction and pride in their
work.
● Reduced absenteeism and labour
turnover.
● Developing sense of
belongingness towards a
particular organization.
● Waste Reduction.
● Cost reduction.
● Improved communication.
● Safety improvement.
● Increased utilization of
human resource potential.
● Enhancement in
consciousness and moral of
employees through
recognition of their
activities.
● Leadership development.
● Trained staff.

Limitations
• People do not like change so dislike change
management.
• People have to meet compliance levels
• Demands on partner/suppliers to achieve like for
like efficiencies are disliked.
• Nowhere to hide for people not meeting set
standards poor management are highlighted very
quickly.

Inventory Control
• Inventory control is concerned with adequate
control over the cost, acquisition, safety and
handling of materials.
• The main techniques of inventory management
are as follows:
1. Economic order quantity (EOQ)
2. Just in time (JIT)
3. ABC analysis
4. VED analysis, etc.

Time–Event Network Analysis
• Shows time relationship between events.
• Total program goals regarded as series of inter
related supporting plans.
• Picks out more critical elements of plan.
• Breaks down project into controllable pieces.
• Milestones as identifiable segments.

Gantt Chart
• This chart system was developed by Henry L.
Gantt.
• Gantt chart- a bar chart that shows the time
relationships between the “events” of a
production program.
• Milestone budgeting or milepost- advanced
technique of Gantt chart milestone breaks a
project down into controllable pieces.

Gantt with milestones and
network of milestones
A
B
C
D
E
1 2 3 4
5 6 7 8
9 10 11 12
13 14
15 16 17 18 19
JAN MARFEB APRIL MAY JUNE JUL AUG SEP
III GANTT WITH MILE STONES AND NETWORK OF MILESTONES

Critical Path Method (CPM)
• Developed by M.R. Walker of USA in 1956.
• It is used for optimizing resource allocation and
minimizing overall cost for a given project.
• Procedure-
– Break down the project into various activities
systematically.
– Number all the events and activities.
– Calculate the earliest start time, earlier finish
time, latest start time and latest finish time.
– Determine total float time, identify the critical
activities and connect them with double line
arrow.
– Calculate total duration of project.

Advantages
• Highlights the critical activities.
• Provides a technique of planning and
scheduling.
• Gives complete information of activity.
• Helps to identify potential bottlenecks.

Limitations
• Operates on assumption of precise time.
• Does not incorporate statistical analysis in
determining time estimates.
• For every change introduced entire project
evaluation has to be repeated.
• Not suitable for a situation which does not have
definite start and finish time.

Program Evaluation And Review
Technique (PERT)
• PERT- a time event network analysis system in
which the various events in a project or program
are identified with a planned time established
for each.
• Methodology
–Preparation of the network .
–Network analysis.
–Scheduling.
–Time cost trade offs
–Resource allocation.
–Project control.

Advantages
• Forces manager to plan.
• Forces planning all the way down the line.
• Concentrates attention on critical element that
may need correction.
• Makes possible a kind of forward looking control.
• Enables managers to aim reports and pressure for
action at the right spot and level in the
organization structure at the right time.

Limitations
• Technique is not useful when the program is
nebulous and no reasonable estimates of schedule
can be made.
• Pert has its emphasis only on time and not cost.
• Not practicable for routine planning of recurring
activities.

Overall Control Techniques
• Financial Ratio Analysis
• Value added
• External Audit
• Management Audit
• Human Resource Accounting
• Responsibility Accounting

Financial Ratio Analysis
• Ratio analysis is a technique of analyzing the
financial statements of a business firm by
computing different ratios.
• Ratio-in simple words, ratio means comparison
of one figure with another relevant figure or
figures. It may also be termed as number
expressed in terms of another number.
• No analysis is possible on the basis of absolute
figures. Hence various ratios are calculated for
financial analysis and control.

Liquidity Ratios:
• Liquidity ratios are calculated to know short
term financial position of business and its
ability to pay short term liabilities. It includes
current ratio and quick ratio.
– Current Ratio = Current Assets .
Current Liabilities
– Quick Ratio = Cash + Bills Receivable
Current Liabilities

Solvency Ratios:
• Solvency ratios are calculated to know long term
solvency of the business and its ability to pay its
long term debts. It includes debt equity ratio,
proprietary ratio, interest coverage ratio etc.
– Debt Equity Ratio= Debt .
Equity Share Holders Fund
– Proprietary Ratio = Shareholders fund
Total Assets

Profitability Ratios:
• Profitability ratios like gross profit ratio, net
profit ratio, operating ratio, etc. help to analyze
the profitability position of a business.
– Gross Profit Ratio = Gross Profit × 100
Net Sales
– Net Profit Ratio = Net Profit x 100
Net Sales

Turnover Ratios:
• The various turnover ratios like Inventory
turnover ratio, debtors turnover ratio, fixed assets
turnover ratio etc. help in knowing whether the
resources are effectively used for increasing the
efficiency of operations of business or not. Higher
turnover indicates better utilization of resources.
– Inventory Turnover Ratio = Cost of goods sold
Average Stock
– Debtors Turnover Ratio = Net Credit Sales
Average Accounts Receivables

Value added
• Value chain management- It is a process of
managing sequence of activities and information
along the entire product chain. It involves
analyzing every step in process, ranging from the
handling of raw materials to servicing end users,
providing them with the greatest value at lowest
cost.

Advantages
• The value chain is a very flexible strategy tool for looking at an
organization, its competitors and the respective places in the
industry’s value system. The value chain can be used to diagnose and
create competitive advantages on both cost and differentiation.
• It helps you to understand the organisation issues involved with the
promise of making customer value commitments and promises
because it focuses attention on the activities needed to deliver the
value proposition.
• Comparing your business model with your competitors using the
value chain can give you a much deeper understanding of your
strengths and weaknesses to be included in your SWOT analysis.
• It can be adapted for any type of business – manufacturing, retail or
service, big or small.
• The value chain has developed into an extra model, the industry value
chain or value system which lets you get a better understanding of the
much broader competitive arena.

Disadvantages
• It’s very strengths of flexibility mean that it has to be adapted to a
particular business situation and that can be a disadvantage since, to
get the best from the value chain, it’s not “plug and play”.
• The scale and scope of a value chain analysis can be intimidating. It
can take a lot of work to finish a full value chain analysis for your
company and for your main competitors so that you can identify and
understand the key differences and strategy drivers.
• Few experts
• The value chain idea has been adopted by supply chain and operations
experts and therefore its strategic impact for understanding, analysing
and creating competitive advantage has been reduced.
• Business information systems are often not structured in a way to
make it easy to get information for value chain analysis.

External Audit
• An external audit is an independent examination
of the financial statements prepared by the
organisation. It is usually conducted for statutory
purposes (because the law requires it).
• An audit results in an audit opinion about
whether the financial statements give a ‘true and
fair’ view of the:
– state of affairs of the organisation and
– operations for the period

Management Audit
• Management audit is an investigation by an independent
organization to find out whether the management is
carried performance out most effectively or not.
• In the words of Leslie R. Howard,
“Management audit is an investigation of a business
from the highest level downward in order to
ascertain whether sound management prevails
throughout, thus facilitating the most effective
relationship with the outside world and the most
efficient organization and smooth running
internally.”

Objectives
• To see whether the work at all levels is undertaken efficiently or not.
• If the management is not done effectively then suitable
recommendations are made to tone it up.
• Whether the plans and programmes are executed properly or not.
• Suggesting ways and means of increasing managerial efficiency.
• It also aims to help management at all levels in the effective and
efficient discharge of duties and responsibilities.
• The organizational structure is also reviewed to assess whether it can
achieve overall business objectives or not.
• Whether the enterprise’s share in the market is increasing or declining
and how it stands in comparison to competitors.
• Management audit assesses every aspect of managerial performance.
In case the management is not able to achieve its objectives then this
point is brought to the notice of shareholders or owners. This review
will enable the taking up of corrective measures so that the working of
the business is improved.

Human Resource Accounting
• The process of identifying and measuring data
about human resources and communicating this
information to interested parties is HRA.
• It is an attempt to identify and report investments
made on the HR of any organization that are
presently not accounted for in conventional
accounting practice.
• An information system that tells the management
what changes over time are occurring to the
human resource of the business.

Advantages
• Helps the management in decision making
process regarding to various matters:
– Employment, locating and utilization of HR.
– Transfer, promotion, training and cutback of HR.
– Planning of physical assets vis-à-vis HR.
– Evaluating the expenditure incurred for imparting
further education and training to employees in terms of
benefits derived by the firm.
– Identifying the causes of high labor turnover at various
levels and taking measures to overcome it.
– Locating the real causes of low return on investment,
that is whether it is due to improper or
underutilization of physical assets or HR or both.

Objections against HRA
• Human beings cannot be owned as any other
physical assets. They therefore cannot command
any value.
• Tax laws does not recognize Humans as assets.
Hence HRA remains merely a theoretical concept.
• There is no generally accepted model for
valuation of HR. The mode of presentation is yet
to be codified.
• The evaluation of HR largely depends upon
abstract factors not measurable in terms of
money. Hence the valuation lacks upon objectivity
and precision.

Management Information System:
• Management information system (MIS) is an
approach of providing timely, adequate and
accurate information to the right person in the
organization which helps in taking right decisions.
So MIS is a planned and organized approach to the
transferring of intelligence within an organization
for better management. The information is
furnished into useful quantum’s of knowledge in
the form of reports. An effective system of MIS
collects data from all possible sources. The
information is properly processed and stored for
use in future.

Types of MIS
For Middle and Lower
level managers
• Management operating
system meant for meeting
the information needs of
lower and middle level
managements. The
information supplied
generally relates to
operations of the
business.
For Top level managers
• Information is presented in
a way which enables
management to take quick
decisions. An MIS should
be so designed which helps
management in exercising
effective control over all
aspects of the organization.

Return on Investment:
• Profits are the measure of overall efficiency of a business
to the capital employed in a business efficiency is an
important control device. If the rate of return on
investment (shareholders funds) is quite satisfactory, it
will be taken as a yard-stick of good performance.
• ROI = Net Profit / Total Investment * 100.
• The return on investment can be compared over a period
of time as well as with that of other similar concerns. This
comparison will show the present performance in relation
to earlier periods and also the level of achievement of the
concern in comparison to other concerns.

• ROI is used to measure the overall efficiency of a
concern. It reveals how well the resources of a
concern are used, higher return better are the
results. It means that total assets less current
liabilities will form the capital employed.

Advantages Disadvantage
• Better Measure of
Profitability:
• Achieving Goal
Congruence:
• Comparative Analysis:
• Performance of
Investment Division:
• ROI as Indicator of Other
Performance Ingredients:
• Matching with
Accounting
Measurements:
An important drawback
of this method is the
determination of capital
employed in a concern
as this concept is open
to conflicting
interpretations.
Generally capital
employed includes
equity share capital,
preference share capital,
free reserves and long-
term loans.

Other Methods:
– Statistical Report and Analysis
– Personal Observation

Statistical Report and Analysis
• A major part of control consists of preparing
reports to provide information to the
management for purpose of control and planning.
The following are the certain type of reports
• Top Management:
 Profit and loss account
 Balance sheet
 position of work
 cash flow statement
 Position of working capital

• Sales management:
 Actual sales compared with budgeted sale to measure
performance
• Production management:
 To foreman
 To Works manager

Direct Supervision and
Observation
• It is the oldest and the most traditional technique
of controlling.
• The supervisor himself observes the employees
and their work. This brings him in direct contact
with the workers.
• The supervisor gets first hand information, and he
has better understanding with the workers.
• This technique is most suitable for a small-
sized business.

References:
• http://www.yourarticlelibrary.com/management/controlling/modern-techniques-of-
control-management/53358/
• http://www.businessmanagementideas.com/management/techniques-managerial-
control-traditional-modern-techniques/2401
• http://www.yourarticlelibrary.com/economics/cost-control-meaning-tools-
techniques-and-estimation-of-cost-control/28730/
• http://www.yourarticlelibrary.com/accounting/return-on-investment-roi-advantages-
and-disadvantages/52928/
• http://www.yourarticlelibrary.com/accounting/responsibility-
accounting/responsibility-accounting-principles-advantages-and-limitations/65286/
• http://www.differentiateyourbusiness.co.uk/the-advantages-disadvantages-of-value-
chain-analysis
• https://www.mango.org.uk/guide/externalaudit
• Quality Control Definition |
Investopedia http://www.investopedia.com/terms/q/quality-
control.asp#ixzz4WVYqqIHt
• http://kalyan-city.blogspot.in/2010/07/quality-control-total-quality.html

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