Controlling notes

◦ Controlling is a process that entails comparing actual performance to the desired outcome,
so as to ensure the successful achievement of objectives.
◦ Setting standards, measuring actual performance, and taking corrective action in case of
deviations are all part of the managerial role of controlling function.
◦ Controlling refers to the process of evaluation and assessment of the work done.
◦ Under the process of controlling, standards are set for various tasks and activities.
Accordingly, the various tasks and activities are evaluated against the set standards.
Deviations from the set targets are identified, and corrective actions to be taken are
decided.
◦ Thus, controlling refers to the process of ensuring that the various activities and tasks in the
organization are carried out according to the pre-defined goals and objectives. It ensures
that deviations if any are identified and appropriate corrective action is taken.
Definition :
Controlling is the measurement and correction of performance in order to make sure that
enterprise objectives and the plans devised to attain them are accomplished”
By Harold Koontz
Relationship between Planning and Controlling
Planning and controlling are interrelated and in fact reinforce each other in the sense
that-
1. Planning is pre-requisite for controlling.
Plans provide the standard for controlling. Thus, without planning, controlling is blind. If the
standards are not set in advance managers have nothing to control.
2. Planning is meaningless without controlling.
It is fruitful when control is exercised. It discovers deviations and initiates corrective measures.
3. Effectiveness of planning can be measured with the help of controlling.
4. Planning is looking ahead and controlling is looking back:
Planning is a future oriented function as it involves looking in advance and making policies for
the maximum utilization of resources in future that is why it is considered as forward looking
function. In controlling we look back to the performance which is already achieved by the
employees and compare it with plans.
 If there are deviations in actual and standard performance or output then controlling functions
makes sure that in future actual performance matches with the planned performances.
Therefore, controlling is also a forward looking function. Thus, planning & controlling cannot be
separated. The two are supplementary function which support each other for successful
execution of both the function.
Planning makes controlling effective whereas controlling improves future planning.
Nature of Controlling/Features of Controlling
1. Goal oriented:
Controlling is directed towards accomplishment of organizational goals in the best possible manner.
2. Pervasive:
Controlling is an essential function of every manager and exercised at all levels of management.
3. Continuous:
It is not an activity to be pursued in the end only; it has to be done on a continuous basis.
4. Controlling is looking back:
Controlling involves measurement of actual performance and its comparison with the desired
performance. It is the process of checking and verification.
5. Controlling is forward looking:
It is related to future because it seeks to improve future results on the basis of experience gained in
the past.
6. Depends on planning:
It pre supposes existence of planning because without planning no control is possible.
7. Action oriented:
Control has no meaning if no corrective action is taken; So timely action should be taken to prevent
deviations.
8. Primary Function of Management:
Controlling is performed at all levels and in all types of organizations.
9. Brings back management cycle back to planning:
Control should not be viewed as the last function. In fact it links back to planning. Controlling
involves
 Importance of Controlling
1. Controlling helps in achieving organizational goals: The controlling function measures
progress towards the organizational goals and brings to light/indicates corrective action.
2. For Evaluating/Judging accuracy of standards: A good control system enables
management to verify whether the standards set are accurate or not by careful check on the
changes taking place in the organizational environment.
3. Making efficient use of resources: By the process of control, a manager seeks to reduce
wastage of resources.
4. Improves employees motivation: A good control system ensures that employees know
well in advance what they are expected to do & also the standard of performance. It thus
motivates & helps them to give better performance.
5. Facilitating Coordination in action: In controlling each department and employee is
governed by predetermined standards which are well coordinated with one another. Control
provides unity of direction.
6. Ensuring order and discipline: Controlling creates an atmosphere of order and discipline
in the organization by keeping a close check on the activities of its employees.
Limitations of Controlling
1.Difficulty in setting quantitative standards
Control system loses its effectiveness when standards of performance cannot be defined in
quantitative terms. This makes comparison with standards a difficult task.
e.g. areas like human behavior, employee morale, job satisfaction cannot be measured
quantitatively.
2. Little control on external factors:
An enterprise cannot control external factors like government policies, technological
changes, competition. etc.
3. Resistance from employees:
Control is resisted by the employees as they feel that their freedom is restricted. E.g
employees may resist and go against the use of cameras to observe them minutely.
4. Costly:
Control involves a lot of expenditure, time and effort. A small enterprise cannot afford to
install an expensive control system.
 TYPES OF CONTROL
1) Preliminary or feed forward controls
• They are accomplished before a work activity begins.
• They make sure that proper directions are set and that the right resources are available
to accomplish them.
• The active anticipation and prevention of problems, rather than passive reaction.
2) Concurrent Control
• Focus on what happens during the work process. Sometimes called steering controls,
they monitor ongoing operations and activities to make sure that things are being
done correctly.
• Monitoring and adjusting ongoing activities and processes.
• Can reduce waste in unacceptable finished products or services.
• Focus on what happens during work process
3) Feedback control
 Also called post action .
 they take place after an action is completed.
 They focus on end results, as opposed to inputs and activities.
 Checking a completed activity and learning from mistakes.
 Provide useful information for improving future operations
Process of control
Analysing deviations: Once the deviations are identified it is important to analyse them
through:
1. Critical point control: All the deviations may not be significant. Moreover, it may not be
either economical nor easy to monitor each and every activity in the organization.
Therefore, every organization identifies and states its specific key result areas (KRAs) or
critical points which require tight control are likely to have a significant effect on the working
of the business. Any deviations on these points are attended to urgently by the
management. If the expenditure on refreshment of workers goes up by 10% it can be
ignored but if the production cost goes up by 5% it may call for managerial action.
2. Management by exception: Management by exception is the principle of management
control which is based on the belief that if you try to control everything, you may end up
 controlling nothing. Therefore, only significant deviations which go beyond the permissible
limits should be brought to the notice of the management. Like the output defects upto 2%
may be considered acceptable but if goes up by 5% it may call for managerial action.
4. Taking corrective action: This is the final step involved in the controlling process. When the
deviations are within acceptable limits no corrective action is required. However, when the
deviations go beyond the acceptable range, especially in the important areas, it demands
immediate managerial attention so that deviations do not occur again, and standards are
accomplished. Corrective action might involve training of employees, buying new machinery,
increasing supervision and so on.
Organizational Control Systems
1) Management Processes
◦ Strategy and objectives
◦ Policies and procedures
◦ Selection and training
◦ Performance appraisal
◦ Job design and work structures
◦ Performance modeling, norms, and organization culture
2. Compensation and Benefits
◦ Attract talented people and retain them.
◦ Motivate people to exert maximum effort in their work.
◦ Recognize the value of their performance contributions.
3. Employee Discipline
 Discipline is defined as influencing behavior through reprimand.
 Progressive Discipline ties reprimand to the severity and frequency of the employee’s
infractions.
 Positive Discipline tries to involve people more positively and directly in making
decisions to improve their behavior.
4. Information and Financial
◦ Activity-based costing - the true cost of all products and services.
◦ Economic value added - examine the value added by all activities.
◦ Understand the implication of key financial measures of (ratios) organizational
performance
 5. PURCHASING
 Economic Order Quantity
 Automatic reorder points
 Just-In-Time Scheduling
6. PROJECT MANAGEMENT
◦ Program Evaluation and Review Technique (PERT) - Identifies and controls the many
separate events in complex projects
7. STATISTICAL QUALITY CONTROL
◦ Based on the establishment of upper and lower control limits, that can be graphically and
statistically monitored to ensure that products meet standards.
Techniques of Managerial Control
Traditional Techniques of Managerial Control
Traditional techniques are those which have been used by the companies for a long time
now. These include:
1.Personal observation
• This is the most traditional method of control. Personal observation is one of those
techniques which enables the manager to collect the information as first-hand
information.
• It also creates a phenomenon of psychological pressure on the employees to perform in
such a manner so as to achieve well their objectives as they are aware that they are
being observed personally on their job.
• However, it is a very time-consuming exercise & cannot effectively be used for all kinds
of jobs.

2.Statistical reports
• Statistical reports can be defined as an overall analysis of reports and data which is used
in the form of averages, percentage, ratios, correlation, etc., present useful information
to the managers regarding the performance of the organization in various areas.
• This type of useful information when presented in the various forms like charts, graphs,
tables, etc., enables the managers to read them more easily & allow a comparison to be
made with performance in previous periods & also with the benchmarks.
 3.Break-even analysis
• Breakeven analysis is a technique used by managers to study the relationship between
costs, volume & profits. It determines the overall picture of probable profit & losses at
different levels of activity while analyzing the overall position.
• The sales volume at which there is no profit, no loss is known as the breakeven point.
There is no profit or no loss. Breakeven point can be calculated with the help of the
following formula:
• Breakeven point = Fixed Costs/Selling price per unit – variable costs per unit

4. Budgetary control
 Budgetary control can be defined as such technique of managerial control in which all
operations which are necessary to be performed are executed in such a manner so as to
perform and plan in advance in the form of budgets & actual results are compared with
budgetary standards.
 Therefore, the budget can be defined as a quantitative statement prepared for a definite
future period of time for the purpose of obtaining a given objective. It is also a statement
which reflects the policy of that particular period. The common types of budgets used by an
organization.
Some of the types of budgets prepared by an organization are as follows:
I. Sales budget: A statement of what an organization expects to sell in terms of quantity
as well as value.
II. Production budget: A statement of what an organization plans to produce in the
budgeted period.
III. Material budget: A statement of estimated quantity & cost of materials required for
production.
IV. Cash budget: Anticipated cash inflows & outflows for the budgeted period
V. Capital budget: Estimated spending on major long-term assets like a new factory or
major equipment.
VI. Research & development budget: Estimated spending for the development or
refinement of products & processes
 Modern Techniques of Managerial Control
Modern techniques of controlling are those which are of recent origin & are comparatively
new in management literature. These techniques provide a refreshingly new thinking on the
ways in which various aspects of an organization can be controlled. These include:
1)Return on investment
• Return on investment (ROI) can be defined as one of the important and useful techniques. It
provides the basics and guides for measuring whether or not invested capital has been used
effectively for generating a reasonable amount of return. ROI can be used to measure the
overall performance of an organization or of its individual departments or divisions. It can be
calculated as under-
• Net income before or after tax may be used for making comparisons. Total investment includes
both working as well as fixed capital invested in the business.

2)Ratio analysis
• The most used ratios used by organizations can be classified into the following categories:
• Liquidity ratios, Solvency ratios, Profitability ratios, Turnover ratios

3)Responsibility accounting
• Responsibility accounting can be defined as a system of accounting in which overall involvement
of different sections, divisions & departments of an organization are set up as ‘Responsibility
centers. The head of the center is responsible for achieving the target set for his center.
Responsibility centers may be of the following types:
Cost center , Revenue center, Profit center , Investment center

Types of Responsibility Centers:

1. Cost Centers: Evaluated based on their ability to control costs within a given budget
without direct accountability for revenues or profits.
2. Profit Centers: Responsible for both costs and revenues, assessing their ability to
generate profits or achieve financial goals independently.
3. Investment Centers: Have control over costs, revenues, and investments, accountable
for profits generated and the return on invested capital
 4)Management audit
• Management audit refers to a systematic appraisal of the overall performance of the
management of an organization. The purpose is to review the efficiency &n effectiveness
of management & to improve its performance in future periods.

5)PERT & CPM

 PERT (programmed evaluation & review technique) & CPM (critical path method) are
important network techniques useful in planning & controlling.
 These techniques, therefore, help in performing various functions of management like
planning; scheduling & implementing time-bound projects involving the performance of
a variety of complex, diverse & interrelated activities.
BUDGETARY CONTROL DEVICES V/S NON-BUDGETARY CONTROL DEVICES.
(A) BUDGETARY CONTROL DEVICES : Budgetary control devices include budgets such as
production budget, cash budget, capital budget, sales budget etc., while non-
budgetary control devices consist of managerial statistics, break-even analysis, internal
audit, cost accounting, etc.
Budgetary control is a system which uses budgets as a means of planning and controlling all
aspects of producing and/or selling commodities or services". Thus, budgetary control is
planning in advance of the various aspects of business can be controlled.
The important characteristics of budgetary control are: planning of activities of each
department, co-ordination among various departmental plans, recording of actual performance,
comparison between budgets standards and actual performance, determining the deviations, if
any, finding out the reasons for deviations and taking of follow-up action.
For example most University departments are given annual chest budgets for general
equipment. By regularly comparing actual expenditure on this budget to planned expenditure a
department will be aware of whether a particular item can be afforded. If the account is in
deficit a department will need to identify an alternative source of funds (e.g. departmental
reserves or charging to a research grant or contract). This process of monitoring expenditure
and taking appropriate action is known as budgetary control.
Essentials of Effective Budgetary control
1) Effective Organization: The concern should be effectively organized and the
responsibilities of each departmental managers are clearly defined and the line of authority
sharply drawn
2) Quick reporting: The subordinates must send reports on performance without any delay.
The managers on their part must analyze the report and take necessary action immediately.
 (3) Support of top management: The top management must have a clear idea of the
objectives of budgetary control and should implement the budgetary control programme
seriously in order to infuse a sense of seriousness among the subordinates
(4) Reward and Punishment: The employees whose performance is according to the budget
plans should be suitably rewarded and the employees whose performance is not as per
budget should not go unpunished.
(5) Appropriate Authority: The employees who are entrusted with the responsibilities of
implementation of budgetary control should also be given appropriate authority to do so. If
a person lacks authority to enforce his decision, it is difficult for him to fulfill his
responsibilities
(6) Flexibility: If the circumstances warrant, the management should not hesitate to alter the
budget figures. But at the same time, care must be taken to see that the budget figures are
not altered too much or too often.
Process of Budgetary Control
1. Preparation of various budgets.
2. Continuous comparison of actual performance with budgetary performance.
3. Revision of budgets in the light of changed circumstances
Budgetary control serves 4 control purposes:
1. They help the manager’s co-ordinate resources;
2. They help define the standards needed in all control systems;
3. They provide clear and unambiguous guidelines about the organization’s resources
and expectations, and
4. They facilitate performance evaluations of managers and units.
Types of Budgetary Controlling Techniques
Budgetary control is a system for monitoring an organization’s process in monetary terms.
Types of budgetary controlling techniques are;
1. Financial Budgets.
Such budgets detail where the organization expects to get its cash for the coming period and
how it plans to spend it. Usual sources of cash include sales revenue, the sales of assets, the
issuance of stock, and loans.
Financial budgets may be of the following types:
1. Cash budget
 This is simply a forecast of cash receipts and disbursements against which actual cash
“experience” is measured
 It provides an important control in an enterprise since it breaks down incoming and
outgoing cash into monthly, weekly, or even daily periods so that the organization can
make sure it can meet its current obligations.
 The cash budget also shows the availability of excess cash, thereby making it possible to
plan for profit-making investment of surpluses.
2. Capital expenditure budget
 This type of financial budget concentrates on major assets such as a new plant, land or
machinery. Organizations often acquire such assets by borrowing significant amounts
through, say, long-term bonds or securities.
 All organizations, large or small, business or non-business, pay close attention to such a
budget because of the large investment usually associated with capital expenditure.
3. The balance sheet budget
 It forecasts what the organization’s balance sheet will look like if all other budgets are
met.
 Hence it serves the purpose of overall control to ensure that other budgets mesh
properly and yield results that are in the best interests of the organization.

2. Operating Budget.
This type of budget is an expression of the organization’s planned operations for a
particular period. They are usually of the following types:
1. The sales or revenue budget
 It focuses on the income the organization expects to receive from normal operations.
It is important since it helps the manager understand what the future financial
position of the organization will be.
2. The expense budget
 It outlines the anticipated expenses of the organization in a specified period. It also
points out upcoming expenses so that the manager can better prepare for them.
3. The project budget
 It focuses on anticipated differences between sales or revenues and expenses i.e. profit. If
the anticipated profit figure is too small, steps may be needed to increase the sales budget
or cut the expense budget

3. Non-Monetary Budgets.
Budgets of this type are expressed in non-financial sales or revenues and expenses, i.e.
profit. If the anticipated profit figure is too small steps may be needed to increase the
sales budget or cut the expense budget.
Fixed and variable budgets
Regardless of their purpose, most budgets must account for the three following kinds of
costs:
1. Fixed costs
They are the expenses that the organization incurs whether it is in operation or not.
Salaries of managers may be an example of such a cost.
2. Variable costs
Such costs vary according to the scope of operations.
The best example may be the raw materials used in production. If $5 worth of material is
used per unit. 10 units would cost $50, 20 units would cost $100 and so on.
3. Semi-variable costs
They also vary, but in a less direct fashion. Costs for advertising, repairs, and maintenance,
etc. may fall under this category.
All these categories of cost must be accurately accounted for in developing a budget. Fixed
costs are usually the easiest to deal with. Variable costs can also be forecast, although
with less precision from projected operations.
Semi-variable costs are the most difficult to predict because they are likely to vary, but not
in direct relation to operations. For these costs, the manager must often rely on
experience and judgment.

(B) NON-BUDGETARY CONTROL DEVICES: non-budgetary control devices consist of

managerial statistics, break-even analysis, internal audit, cost accounting, etc
Non-Budgetary Control Techniques
There are, of course, many traditional control devices not connected with budgets, although
some may be related to, and used with, budgetary controls. Among the most important of
these are statistical data, special reports and analysis, analysis of break- even points, the
operational audit, and the personal observation.
i) Statistical data: • Analysing the numerical data
ii) Break- even point analysis • chart depicts the relationship of sales and expenses
iii) Operational audit: • internal audit
iv) Personal observation • one should never overlook the importance of control through
personal observation.
v) PERT(Program (or Project) Evaluation and Review Technique): • one should never
overlook the importance of control through personal observation
vi) GANTT CHART: • a type of bar chart that illustrates a project schedule • Gantt charts
illustrate the start and finish dates of the terminal elements and summary elements of a
project
Cost control
Cost control is the measure taken by management to assure that the cost objectives set
down in the planning stage are attained
Steps involved in designing process of cost control system:
1. Establishing norms: To exercise cost control it is essential to establish norms, targets or
parameters.
2. Appraisal: The actual results are compared with the set norms.
3. Corrective measures: The variances are reviewed and remedial measures or revision of
targets, norms, standards etc., as required are taken.
PURCHASE CONTROL
Purchase control is an element of material control.
Material procurement is known as the purchase function. The functional responsibility of
purchasing is that of the purchase manager or the purchaser.
Purchasing is an important function of materials management because in purchase of
materials, a substantial portion of the company's finance is committed which affects cash
flow position of the company.
Success of a business is to a large extent influenced by the efficiency of its purchase
organization.
 In short, the basic objective of the effective purchase control is to ensure continuity of
supply of requisite quantity of material, to avoid held up of production and loss in
production and at the same time reduces the ultimate cost of the finished products.
The advantages derived from a good and adequate system of the purchase control are as
follows:

a) Continuous availability of materials

b) Purchasing of right quantity
c) Economy in purchasing
d) Works as information centre
e) Development of business relationship
f) Finding of alternative source of supply
g) Fixing responsibilities

MAINTENANCE CONTROL
Maintenance department has to exercise effective cost control, to carry out the maintenance
functions in a prespecified budget
• First line supervisors must be apprised of the cost information of the various materials
• A monthly review of the budget provisions and expenditures actually incurred in respect of
each center/shop
• The total expenditure to be incurred can be uniformly spread over the year
• The controllable elements of cost such as manpower cost and material cost can be discussed
QUALITY CONTROL
Quality control refers to the technical process that gathers, examines, analyze & report the
progress of the project & conformance with the performance requirements
1) Determine what parameter is to be controlled.
2) Establish its criticality
3) Establish a specification for the parameter to be controlled
4) Produce plans for control
5) Organize resources to implement the plans
6) Install a sensor at an appropriate point
7) Collect and transmit data to a place for analysis
8) Verify the results and diagnose the cause of variance.
9) Propose remedies and decide on the action
10) Take the agreed action and check that the variance

Question:
1. Write a short note on budgetary control?
2. explain how management audit serves as an effective technique for controlling?
3. Management control begins with planning. Do you agree? Give your views.
4. Describe briefly the relationship between controlling and planning.
5. highlight the importance of ‘controlling’ function of management.
6. How does controlling help in “Judging accuracy of standards” and “Ensuring order and
discipline”