CONTROLLING

INTRODUCTION:

It’s a manager sets targets and objectives and measures to find out how far they have

been achieved. It’s meant to find out whether there are deviations so that a corrective

action is taken to ensure everything is on course.

.Definitions:

According to Henry Fayol:

“Control consists in verifying whether everything occurs in conformity with the plan adopted,

the instructions issued and the principles established.”

According to Koontz and O’Donnell:

“Controlling implies measurement of accomplishment against the standard and the correction of

deviations to assure attainments of objectives according to plans.

OBJECTIVES OF CONTROLLING .

The following are the objectives that any controlling effort is meant to achieve:

- To keep checks on the expenses both direct and indirect expenses

- To find out whether the objectives set are achievable

- To ensure the company moves to the highest level possible

-To find out what is happening, why and by whom it happens

- To ensure all activities are carried out according to plan

IMPORTANCE OF CONTROLLING

1. Basis for future action:

A continuous flow of control information provides the basis for future action. It

gives correct action and gives correct picture.

2. Control helps in decision making:

The control system helps the management to take right decision. Follow-up action is essential for

successful completion of objective.

3. It helps in decentralization:

Control helps the top management to get the feedback information which helps them to ensure that the

decision taken at the lower level is helpful for implementation of policies

4. Helps in co-ordination:

It helps to each member of organization to move towards common goal with coordinate

direction. It provides boundaries for pre-determined goals and provide guidance for each

member.

5. It has positive impact on employee:

The existence of control system has positive impact on the behavior of the employee. Employees

are cautious because actual results are compared with budged one.

6. Control helps to point out Managerial weakness:

Control is depend upon proper feedback so it help in to point out managerial weakness.

CHARACTERISTICS/ FEATURES OF CONTROLLING

1 It is forward looking
It seeks to correct the future actions happening in an organization. It is based experience

of control which guides the future actions of a manager

2 It is a continuous process

Its where the organization continually evaluates its systems in terms of targets ,

objectives, goals and so forth to find out if everything is fine

3 It is a management function

It is only carried out only by managers because it involves taking corrective action which

includes, mobilizing for additional resources, employment of new staff, changes in the

company’s operations. These are issues that cannot be delegated

4 It is carried out at all level

Manager’s irrespective of their level carry out controlling. This is so because they have

targets and objectives that they are pursuing. They often ensure operations in their areas

of jurisdiction is smoothly running according to plan

5 Control is flexible and dynamic process:

It involves continuous review of standard of performance

6 Planning and Controlling are closely related:

Planning is based on control and control on planning. Control includes setting of standards and

measurement of performance. So it is more important in planning.

It helps in establishing new aims, change in structure, staff pattern and changes in the direction

technique.

7 The essence of control is action:

Process of control will finish when corrective action is taken. This action is depending upon

setting of standard and comparison of standard with actual.

STEPS TO BE FOLLOWED IN CONTROLLING

1 Establishment of the standards

This is a basis of measurement of performance which can be in quantitative and non-quantitative

terms. A standard is a benchmark on which the results are measured. There are many standards

that can be made including:

Cost standards-this ensures that costs anticipated are not surpassed

Revenue standards-this ensures that the expected revenue from an activity is indeed

realized if performance is to be rated as good

Physical standards-these are countable like the number of working hours, units of

production per machine etc.

Capital standards-this includes, rate of return on capital invested

Intangible standards-such as competency of workers and customer care success

2 Measurement of performance

It is the measurement of the actual performance in order to know what has happened or

what is likely to happen. The measurement can be done through observation of the

workers performance. It can also be in terms of reports, charts and any management

summaries. Its purpose is find out if there is anything amiss at the earliest time possible

3 Comparison of the actual performance with the standard

This is finding out what was set out at the beginning of the controlling period in terms of

targets and objectives and what has been realized at the end of the period.

4 Finding out for deviations

While comparing the actual and the standard performance, any deviations are identified.

A positive deviation means the targets were surpassed and the management requires to
identify the contributing factors so that everything can be maintained. A negative

deviation means that the targets set out were not realized and therefore a corrective action

must be under taken in order to put everything back on course. This could include

transfers of workers to other departments, re-doing the plans and increasing the funding

of the projects.

5.Taking corrective actions:

The final step in the control process is taking corrective actions so that deviations may not occur

again and the objectives of the organization are achieved. This will involve taking certain

decisions by the management, replanning or redrawing of GOALS or STANDARDS,

reassignment of classification of duties.

Thus, control function may require change in all other managerial functions. If the standards are

found to be defective, they will be set up again by observations.

ESSENTIALS OF GOOD CONTROL

The following are the requirements of effective control.

1. Control should report deviations promptly:

The ideal control system detects deviation before they actually occur. The manager should be

provided with information as early as possible.

2. Control should be forward looking:

Managerial control is not same as mechanical or electronic control. It must exist a time lag

between recording, reporting and deviation. Those deviations are predicted well in time and

corrective actions are taken before deviations occur.

3. Control must reflect natural and needs of the activity:

Control must apply with the help of budget, break even points, and standard hours whenever

necessary.
4. Control should be objective:

The control should be definite, objective and verifiable. It should not be influenced by

personality of the superior or subordinate.

5. Control should be flexible:

Control is a dynamic process. Plans and Objectives may change according to the needs of the

situation and must adjust it to them.

TECHNIQUES/ SYSTEMS/ PROCESSES OF CONTROL

Techniques of Control

Traditional Techniques Modern Techniques

1. ABC Analysis
2. Return on investment

3. Responsibility Accounting
4. Human Resource Accounting
5. Management Audit

6.MIS
7. PERT/CPM

Budgetary control techniques Non budgetary control techniques

1. Sales Budget 1. Personal observation

2. Production Budget 2. Statistical Data
3. Material Budget 3. Special Reports and Analysis
4. Labour Budget 4. Operational Audit
5. Cash Budget 5. Financial Statement/Ratio
6. Capital Expenditure Budget 6. Break even analysis
7. Overheads Budget 7. Standard costing
8. Master Budget
9. Fixed/Flexible Budget
Traditional techniques:

a. Budgetary control

b. Non budgetary control

(a) Budgetary Control:

Budgetary control means the supervision of output and expenditure by the provision of budgets
issued to production departments before work is commenced, authorizing the amount of
expenditure to be allowed under each heading.

According to W.W. Bigg:

“The term Budgetary Control is applied to a system of management and accounting control by
which all operations and output are forecasted as far ahead as possible and the actual results
when known are compared with the budget estimates.”

Objectives of Budgetary Control:

The general objectives of budgetary control are:

1. To Plan the policy of business.

2. To co-ordinate the activities of a business.

3. To control each function so that the best possible results are obtained.

The various objectives of budgetary control may be enumerated as follows:

1. Providing an impersonal control of expenditure.

2. Defining the goals of the enterprise and providing long and short period plans for attaining
these goals.

3. Promoting co-operation between executive, in accepting policies and executing plans.

4. Eliminating departmental accumulation of cost and performance data for control purposes.

5. Securing desired performance, both in terms of money, materials, men and physical targets.

6. Helping in determining capital requirements and in controlling the cash position.

(b) Non- budgetary control techniques:

1. Personal observation:

This is the most effective means of control. Deviations are discovered much earlier and promptly
corrected. It enhances motivation and morale of the employee of the organization.

2. Statistical data:

Data presented in the form of charts, graphs and diagrams provide a quick understanding of the
problem. This technique is applied specifically in the field of quality control.

3. Special reports:

Special reports prepared by experts through special investigations, are useful in specific cases.
Sometimes statistical and accounting reports are not satisfactory to control.

4. Ratio analysis:

The control of total functioning in an organization becomes possible by an analysis of the

profitability, liquidity and solvency ratios. E.g. the “financial statement analysis” facilitates
diagnosing the suitability of a business venture

5. Break even analysis:

The break-even analysis is an analysis of the inter-relationship between cost, volume and profit.
It is also called as cost volume profit analysis.

A break even chart is prepared for this analysis. This chart presents graphically the relationship
between sales and expenses under different conditions. In other words, it examines the
interrelationship of changes in cost volume and profits.

The breakeven chart shows the breakeven points, the point of zero profits and zero losses. It can
be expressed in terms of units produced. It serves as a

control aid in a number of ways, as it predicts the profit at different levels of sales

or production volumes.
6. Operational Audit:

Internal Audit or operational audit is carried out by the special stall of the operations and
accounts of an enterprise, in order to provide overall review of performance. It is used to check
and balance on daily operations.

7. Standard Costing:

This technique is often used for cost reduction and cost control. Under standard costing standards
for materials, labor, overheads and other components of total cost are fixed and actual costs are
compared with these standard costs and variances are analyzed to find out their causes. Standard
costing is also used as the basis for budgeting and incentive plans.

Modern techniques:

1. ABC Analysis:

ABC analysis is a method of material control according to value. The basic principle is that high
value items are more closely controlled then the low value items.

The materials are grouped according to the value and frequency of replenishment during a
period.

‘A’ Class items: Small percentage of the total items, but having higher values.

‘B’ Class items: More percentage of the total items, but having medium values.

‘C’ Class items: High Percentage of the total items, but having low values.

ABC analysis is popularly known as “Always Better Control”. It is also known

as “Control by Importance and Exception”. It is based on the concept of Selective Inventory

Management.

Bin Cards and Stores Ledger Cards are not maintained for ‘C’ class items. These are issued
directly to the production foreman concerned and controlled through norms of consumption
based on production targets. By doing this, 70% of the effort is required for maintaining the Bin
Cards and Stores Ledger Cards are eliminated. With 30% of the effort, an organization will be
able to exercise control on the 90% of the inventory values. This reduces the clerical costs and
ensures the closer control on costly items in which large amount of capital is invested.

2. Management Audit:
Management Audit is implied as an attempt to evaluate the performance of various management
functions and processes with a view to improve its efficiency and productivity on the basis of
certain pre-determined acceptable norms or standards. It is an audit, “to examine, review the
various policies and actions of the management on the basis of certain objective standards”.
According to American Institute of Management:
“Management Audit is a diagnostic appraisal process for analyzing goals, plans, policies and
activities in every phase of operation to turnover unsuspected weaknesses and to develop ideas
for improvement in areas that has escaped management attention”.
Management Audit as a Control Technique:
1. It involves comprehensive examination of organization or part thereof.
2. It is undertaken to check the operations of management and its effectiveness.
3. Such checking or examination has to be based on commonly accepted standards of objective
nature.
4. Such examination is to be carried on independently by experts in the area.
5. It involves analyzing goals, policies and activities in every phase of management operation.
6. The objective of such examination is to see whether operations of the management are being
carried on in accordance with its plans or objectives or not.
7. It seeks to identify its weaknesses, if any and suggest suitable measures and give
recommendations to bring about necessary improvements.
Benefits of Management Audit:
Management Audit is useful in following main areas:
1. Plans:
Auditor can assist in establishing and reviewing the system of planning in the organization.
Management auditor can assist in developing orderly planning system. He helps in reviewing the
progress of planning and evaluating its effectiveness against accepted standards.

2. Decision Making:
The management auditor may help in the process of decision making and find out whether
sufficient information is available to the management for the purpose of decision making.

3. Authority structure:

The management auditor may help the management in proper designing of the authority structure
including rendering assistance in strengthening and expending the flow of information between
the responsibility centers
4. Effective Communication:
He can assist the management in establishment of effective communication
network and bring about necessary improvement in this regard.
Scope of Management Audit:
1. Review of objectives, goals, plans and policies.
2. Appraisal of planning.
3. Review of organizational structure.
4. Review of systems and procedures.
5. Review of office operations.
6. Review of management control systems.
7. Review of operations such as purchasing, manufacturing, selling etc.
8. Review of personnel policies.
9. Review of management information system.
10. Appraisal of management decisions

3. Responsibility Accounting:

It is a system of accounting where each departmental head is held responsible for the
performance of his department. Each department is considered as a responsibility center and its
manager is held responsible for the target fixed for his unit.

Responsibility centers are of three types.

A The cost centers

B Profit centers

C Investment centers
Each centers are charged with those costs that are within its control.

4. PERT & CPM:

Programme Evaluation and Review Technique (PERT) and Critical Path Method (CPM) follow
the same principle.

This method was firstly introduced in American Navy in 1958. This method has been utilized to
produce equipment in Navy. This is mainly concern with to reduce process time to produce a
particular product.

Every work undergoes many processes till completion stage. Every process

requires certain time. According to this technique time required is being set. It also

shows time required for each event. A map is prepared to show the time required to

complete each process

5. Return on investment (ROI)

It is also called as Rate of Return. This technique can be used for planning and controlling. It is
derived from a ration between the total profit and the total investment of an organization. Return
on investment helps to evaluate the functioning of an organization by calculating total profit
earned so far. Besides profit planning is also useful and suitable for capital budgeting in
particular and for long term investment.
6. Human resource accounting:
Most of the control techniques calculate financial performance in terms of costs, profits,
revenues and other factors. However the most important factor is human resource that is
overlooked. The human resource accounting by Likert helps in the calculation of human
resources.

It involves

1. Accounting for people as an organizational resource

2. Involving measurement of the cost incurred in the acquisition and development of human
asset.
3. The measurement of economic value of employees to an organization. The value of any
individual or employee is defined in terms of its worth of the various services he is supposed to
provide to the organization. This value is known as “Individual’s Expected Realizable Value.”

7. Management Information System (MIS)

For the purpose of efficient control, it is necessary to have adequate, reliable accurate and timely
information or feedback or operations. It is the quality of data that determines the quality of
managerial decision. But data need to be processed to make it information. Electronic Data
processing (EDP) devices. Like computer permits economical and quick storage and processing
of huge data.

The use of electronic devices has led to the development of integrated information systems
which provide regular flow of information required for decision making and control. It is known
as MIS. Thus MIS is a system that provides relevant information in the right form and at the
right time to different managers for the purpose of planning and control.

MIS is useful is reducing time, cost and energy required for collection,

processing and supply of information to various organizational units. By improving the

quality and quantity and timeliness of information, MIS makes planning and control

more effective and efficient