Republic of the Philippines

UNIVERSITY OF EASTERN PHILIPPINES

LAOANG CAMPUS
Laoang, Northern Samar
Web: uep.edu.ph

Engineering Management
 Module 9: CONTROLLING
Overview
This module helps students to understand the process of controlling in an organization.
It further provides the importance of controlling, gives them an idea of the control process, the
types of control and determine the strategic control systems.

Learning Outcomes

1. Define Controlling
2. Determine the importance of controlling
3. Explain the steps in the control process
4. Identify the types of control
5. Determine the strategic control systems

WHAT IS CONTROLLING?
Controlling refers to the "process of ascertaining whether organizational objectives
have been achieved; if not, why not; and determining what activities should then be taken to
achieve objectives better in the future." Controlling completes the cycle of management
functions. Objectives and goals that are set at the planning stage are verified as to
achievement or completion at any given point in the organizing and implementing stages.
When expectations are not met at scheduled dates, corrective measures are usually
undertaken.

IMPORTANCE OF CONTROLLING
When controlling is properly implemented, it will help the organization achieve its goal
in the most efficient and effective manner possible.
Deviations, mistakes, and shortcomings happen inevitably. When they occur in the
daily operations, they contribute to unnecessary expenditures which increase the cost of
producing goods and services. Proper control measures minimize the ill effects of such
negative occurrences. An effective inventory control system, for instance, minimizes, if not
totally eliminates losses in inventory.
The importance of controlling may be illustrated as it is applied in a typical factory. If
the required standard daily output for individual workers is 100 pieces, all workers who do not
produce the requirement are given sufficient time to improve; if no improvements are forth
coming, they are asked to resign. This action will help the company keep its overhead and
other costs at expected levels. If no such control is made, the company will be faced with
escalating production costs, which will the viability of the firm in jeopardy.

STEPS IN THE CONTROL PROCESS

The control process consists of 1our steps, namely:

1. Establishing performance objectives and standards

2. Measuring actual performance
3. Comparing actual performance to objectives and standards, and
4. Taking necessary action based on the results of the comparisons.
Establishing Performance Objectives and Standards
In controlling, what has to be achieved must first be determined. Examples of such
objectives and standards are as follows:
1. Sales targets – which are expressed in quantity or monetary terms;
2. Production targets – which are expressed in quantity or quality
3. Worker attendance – which are expressed in terms of rate of absences
4. Safety record which is expressed in number of accidents for given periods;
5. Supplies used -which are expressed in quantity or monetary terms for given
periods.

Once objectives and standards are established, the measurement of performance will
be facilitated. Standards differ among various organizations. In construction firms, project
completion dates are useful standards. In chemical manufacturing firms, certain pollution
measures form the basis for standard requirements.
After the performance objectives and standards are established, the methods for
measuring performance must be designed. Every standard established must be provided with
its own method for measurement.
Figure 9.1 Steps in the Control Process
Measuring Actual Performance
There is a need to measure actual performance so that when shortcomings occur,
adjustments could be made. The adjustments will depend on the actual findings.
The measuring tools will differ from organization to organization, as each have their
own unique objectives. Some firms, for instance, will use annual growth rate as standard basis,
while other firms will use some other tools like the market share approach and position in the
industry.
Comparing Actual Performance to Objectives and Standards
Once actual performance has been determined, this will be compared with what the
organization seeks to achieve. Actual production output, for instance, will be compared with
the target output. This may be illustrated as follows:
A construction firm entered into a contract with the government to construct a 100-
kilometer road within ten months. It would be, then, reasonable for management to expect at
least 10 kilometers to be constructed every month. As such, this must be verified every month,
or if possible, every week.

Taking Necessary Action

The purpose of comparing actual performance with the desired result is to provide
management with the opportunity to take corrective action when necessary If in the illustration
cited above, the management of the construction firm found out that only 15 kilometers were
finished after two months, then, any of the following actions may be undertaken:
1. hire additional personnel;
2. use more equipment, or
3. require overtime.

TYPES OF CONTROL
Control consists of three distinct types, namely:
1. feedforward control
2. concurrent control, and
3. feedback control.

Figure 9.2 Types of Control and Their Relation to Operations

Feedforward Control
When management anticipates problems and prevents their occurrence, the type of
control measure undertaken is called feedforward control. This type of control provides the
assurance that the required human and nonhuman resources are in place before operations
begin. An example is provided as follows:
The manager of a chemical manufacturing firm makes sure that the best people are
selected and hired to fill jobs. Materials required in the production process are carefully
checked to detect defects. The foregoing control measures are designed to prevent wasting
valuable resources. If these measures are not undertaken, the likelihood that problems will
occur is always present.
Concurrent Control
When operations are already ongoing and activities to detect variances are made,
concurrent control is said to be undertaken. It is always possible that deviations from standards
will happen in the production process. When such deviations occur, adjustments are made to
ensure compliance with requirements. Information on the adjustments are also necessary
inputs in the pre-operation phase.
Examples of activities using concurrent control are as follows:
The manager of a construction firm constantly monitors the progress of the company's
projects. When construction is behind schedule, corrective measures like the hiring of
additional manpower are made.
In a firm engaged in the production and distribution of water, the chemical composition
of the water procured from various sources is checked thoroughly before they are distributed
to the consumers.
The production manager of an electronics manufacturing firm inspects regularly the
outputs consisting of various electronics products coming out of the production line.

Feedback Control
When information is gathered about a completed activity, and in order that evaluation
and steps for improvement are derived, feedback control is undertaken. Corrective actions
aimed at improving future activities are features of feedback control.
Feedback control validates objectives and standards. If accomplishments consist only
of a percentage of standard requirements, the standard may be too high or inappropriate.
An example of feedback control is the supervisor who discovers that continuous
overtime work for factory workers lowers the quality of output. The feedback information
obtained leads to some adjustment in the overtime schedule.

COMPONENTS OF ORGANIZATIONAL CONTROL SYSTEMS

Organizational control systems consist of the following:

1. Strategic plan
2. The long-range financial plan
3. The operating budget
 4. Performance appraisals
5. Statistical reports
6. Policies and procedures

Strategic Plans
A strategic plan provides the basic control mechanism for the organization. When there
are indications that activities do not facilitate the accomplishment of strategic goals, these
activities are either set aside, modified or expanded. These corrective measures are made
possible with the adoption of strategic plans.

The Long-Range Financial Plan

The planning horizon differs from company to company. Most firms will be satisfied
with one-year Engineering firms, however, will require longer term financial plans. This is
because of the long lead times needed for capital projects. An example is the engineering firm
assigned to construct the Light Rail Transit LRT within three years. As such, the three-year
financial plan will be very useful.
Financial plan recommends a direction for financial activities. If the goal does not
appear to be where the firm is headed, the control mechanism should be made to work.

The Operating Budget

An operating budget indicates the expenditures, revenues, or profits planned for some
future operations. The figures appearing in the budget are used as standard measurements
for performance."

Performance Appraisals
Performance appraisal measures employee performance. As such, it provides
employees with a guide on how to do their jobs better in the future. Performance appraisals
also function as effective checks on new policies and programs. For example, if a new
equipment has been acquired for the use of an employee, it would be useful to find out if it
had a positive effect on his performance.

Statistical Reports
Statistical reports pertain to those that contain data on various developments within
the firm. Among the information which may be found in a statistical report pertains to the
following:

1. Labor efficiency rate

2. Quality control rejects
3. Accounts receivable
4. Accounts payable
5. Sales reports
6. Accident reports
7. Power consumption report
Figure 9.3 shows a sample statistical report.

Policies and Procedures

Policies refer to "the framework within which the objectives must be pursued. A
procedure is "a plan that describes the exact series of actions to be taken in a given situation.
An example of policy is as follows:
"Whenever two or more activities compete for the company's attention, the client takes
priority."
An example of a procedure is as follows:

Procedure in the purchase of equipment:

1. the concerned manager request for purchase to the purchasing officer;

2. the purchasing officer forwards the request to top management for approval;
3. when approved, the purchasing officer makes a canvass of the requested item; if
disapproved, the purchasing officer returns the form to the requesting manager;
4. the purchasing officer negotiates with the lowest complying bidder.

It is expected that policies and procedures laid down by management will be followed.
When they are breached once in a while, management is provided with a way to directly inquire
on the deviations. As such, policies and procedures provide a better means of controlling
activities.

STRATEGIC CONTROL SYSTEMS

To be able to assure the accomplishment of the strategic objectives of the company,
strategic control systems become necessary. These systems consist of the following:

1. financial analysis
2. financial ratio analysis
Financial Analysis
The success of most organizations depends heavily on its financial performance. It is
just fitting that certain measurements of financial performance be made so that whatever
deviations from standards are found out, corrective actions may be introduced.
A review of the financial statements will reveal important details about the company's
performance. The balance sheet contains information about the company's assets, liabilities,
and capital accounts. Comparing the current balance sheet with previous ones may reveal
important changes, which, in turn, provide clues to performance.
The income statement contains information about the company's gross income,
expenses, and profits. When also compared with previous years' income statements, changes
in figures will help management determine if it did well.
Figures 9.4 and 9.5 show samples of financial statements.

Financial Ratio Analysis

Financial ratio analysis is a more elaborate approach used in controlling activities.
Under this method, one account appearing in the financial statement is paired with another to
constitute a ratio. The result will be compared with a required norm which is usually related to
what other companies in the industry have achieved, or what the company has achieved in
the past. When deviations occur, explanat1ons are sought in preparation for whatever action
is necessary.

Figure 9.4 A Sample Balance Sheet

Statement
Figure 9.5 A Sample Income Statement

Financial ratios may be categorized into the following types:

1. Liquidity Ratios. These ratios assess the ability of a company to meet its current
obligations. The following ratios are important indicators of liquidity:

a. Current ratio – This shows the extent to which current assets of the
company can cover its current liabilities. The formula for computing current
ratio is as follows:

Current ratio = current assets/current liabilities

b. Acid-test ratio – This is a measure of the firm's ability to pay off short-term
obligations with the use of current assets and without relying on the sale of
inventories." The formula is as follow:

Acid-test rati0 = Current assets – inventories /current liabilities

2. Efficiency Ratios. These ratios show how effectively certain assets or liabilities are
being used in the production of goods and services. Among the more common
efficiency ratios are:

a. Inventory turnover ratio - This ratio measures the number of times an

inventory is turned over (or sold) each year. This is computed as follows:

Inventory turnover ratio = cost of goods sold/inventory

b. Fixed asset turnover - This ratio is used to measure utilization of the
company's investment in its fixed assets, such as its plant and equipment.
The formula used is as follows:

Fixed asset turnover = net sales/net fixed assets

 3. Financial Leverage Ratios. This is a group of ratios designed to assess the balance
of financing obtained through debt and equity sources. Some of the more important
leverage ratios are as follows:

a. Debt to total assets ratio – This ratio shows how much of the firm's assets
are financed by debt. It may be computed by using the following formula:

Debt to total assets ratio = total debt/total assets

b. Times interest earned ratio – This ratio measures the number of times that
earnings before interest and taxes cover or exceed the company's interest
expense. It may be computed by using the following formula:

Times interest earned ratio = (profit before tax + interest expense)/ interest
expense
4. Profitability Ratios. These ratios measure how much operating income or net
income a company is able to generate in relation to its assets, owner's equity, and
sales. Among the more notable profitability ratios are as follows:

a. Profit margin ratio - This ratio compares the net profit to the level of sales.
The formula used is as follows:

Profit margin ratio = net profit/net sales

b. Return on assets ratio – This ratio shows how much income the company
produces for every peso invested in assets. The formula used is as follows:

Return on assets ratio = net income/assets

c. Return on equity ratio - This ratio measures the return on the owner's
investment. It may be arrived at by using the following formula:

Return on equity ratio = net income/equity

You’ve got a problem! Module 9

Instruction: Answer the following questions thoroughly.

9.1 QUESTIONS FOR REVIEW AND DISCUSSION

9.1.1 Why is controlling a very important management function?

9.1.2 Why is the establishment of performance objectives and standards an important step in
the control process?
9.1.3 Compare and contrast the three distinct types of control.
9.1.4 How do strategic plans provide a basis for control?

9.2 RESEARCH WORK

9.2.1 List down the control activities that may be useful to any of the following:
a) the construction of a bridge
b) the manufacture of microchips
c) the installation of a power plant
d) the manufacture of tricycles
Feedback

At this moment, you’ve already finished module 9 of our subject. Looking back on the
discussion, do you have difficulty understanding the topics? Which part is unclear? Tell me
about it.

SUMMARY
Controlling is one of the main functions of management. It comes after planning,
organizing, and directing. Controlling is aimed at determining whether objectives were realized
or not, and if not, by providing means for achievement.
Controlling is important because it complements the other management functions.
Controlling is a process consisting of various steps, namely: establishing performance
objectives and standards, measuring actual performance, comparing actual performance with
objectives and standards, and taking necessary action based on the results of the comparison.
Control may be classified either as feedforward, concurrent, or feedback.
Organizational control systems consist of the strategic plan, the long-range financial
plan, the operating budget, performance appraisals, statistical reports, policies and
procedures.
Strategic control systems consist of financial analysis, and financial ratio analysis.

References:

Max Fajardo, (2000), Project Construction Management Second Edition, 5138 Trading,
Filinvest Holes II, Quezon City.
Roberto G. Medina, (2002), Engineering Management, Rex Bookstore Inc., Nicanor Reyes,
Sr. St., Sampaloc, Manila.