CONTROLLING

GROUP 4
Reigee Angela Carandang
Alexis Xandra Winslet Ebreo
Daniela Anne Dimatatac
Diana Guico
Arianne Magtaas
Jercy Orencia
 DEFINITION OF CONTROLLING
Controlling
- is the process of measuring & correcting activities
(plans, organization, personnel, etc.) of an organization.
- can be considered as the activity for knowing and
correcting important changes in the activities that are
planned.
- The objective of controlling is positive to achieve
the goal within stated constraints, or by means of the
planned activities.
- Controlling should never be considered negative; it
is a managerial necessity and a help, not an impediment or
a hindrance.
 NATURE OF CONTROLLING
In a situation where the other fundamental
functions of management (planning, organizing, staffing,
directing) are performed perfectly, controlling is still
inevitable, for it is used to further effect some
improvements. There can only be effective controlling if
there are the other four fundamental functions of
management.
Planning is related to controlling. Planning identifies
the things to do for future accomplishments. The failure of
controlling would mean failure of planning, and success of
planning means success of controlling.
 NATURE OF CONTROLLING
Management controls alert the managers to potentially
critical problems. At top management level, a problem occur when
the organization goals and objective are not being met.
All forms of management controls are designed to give the
manager information regarding progress. The manager can used
this information to:
1. Prevent crisis. If a manager does not know what is going on. It is
easy for small, readily solved problems to turn into crisis.
2. Standardization outputs. Problems and services can be
standardized in terms of quantity and quality through the used of
good controls.
3. Appraise employee performance. Proper controls can provide the
manager with objective information about employee performance
4. Update plans. Remember that the final step in the planning
process is to control the plan. Controls allow the manager to
compare what is happening with what was planned.
5. Protect an organization's asset. Controls can protect assets from
inefficiency, waste and pilferage.
 NATURE OF CONTROLLING
Budget Costs: The Basis for Cost Control

Types of Cost Components

Direct Labor Wages and salaries of workers who
are engaged in the direct generation
of goods and services.

Materials Cost of materials which become a

tangible part of finished goods and
services.
 NATURE OF CONTROLLING
Production Training new employees, safety
overhead-variable training, supervision and clerical,
overtime premium, shift premium,
payroll taxes, vacation and holiday,
retirement funds, group insurance,
supplies, travel, repairs and
maintenance

Production Travel, research and development, fuel

overhead-fixed (coal, gas and oil), electricity, water,
repairs and maintenance, rent,
depreciation, real estate taxes,
insurance, etc.
 THE CONTROL PROCESS
1. Establishing standards.
• Standards
- desired levels of performance
- constitute the foundation of the control process
- serve as the criteria of performance
• Precaution in determining performance
- It is not always possible to achieve or maintain
established standards
• Participative approach
- To set performance standards in an effective way
 THE CONTROL PROCESS
2. Measuring performance against the established standards.
• Measurement is easy if:
- Performance standards are clearly established and made
known to the performer of a job
• Vague standards = vague measurements
• Concept of measuring activities
- leads to knowing the accomplishments
- provides real documented information
• Most common means of measurement:
1. personal observations
2. statistical methods
 MOST HELPFUL CRITERIA IN MEASURING AN ENTITY

• Quality
- performance for each group/department
- reasonable expectancy or the EFFECTIVENESS of the
group/department
• Quantity
- find out the amount or number of the output of the
group/department
- used to judge the EFFICIENCY of the group/department
• Time
- can be employed by formulating a timetable (certain dates and
goals)
- actual performance deviates, CORRECTIVE ACTION should be
applied
• Cost
- OBJECT TOOL
- Used to predetermined the cost of production
- a guide to actual production efforts and keep them within desired
and expected limits.
 THE CONTROL PROCESS
3. Comparison of Actual Performance
• The core of the control process
• It checks whether the actual performance meets the
predetermined or planned performance
4. Taking corrective action when and where deviations
from the standards occur
• Specific action (major effort) must be taken to correct
the discrepancy between actual and planned
performance
• Minor corrections or fine tuning must be taken to
improve results.
 THE CONTROL PROCESS
5. Follow-through

• Recommendations or recommending corrective actions

are not sufficient.
• Recommendations must be followed through
- to see whether the individual participates and makes
progress
- to see if he extends what he has learned to the actual
work situation
 CHARACTERISTICS OF CONTROL
• Attuned to the activity. Controls should reflect the needs
of people using them. For instance, manufacturing people
may require a kind of control which may not be applicable
for marketing people.
• Deviations must be identified quickly. What is the use of
checking the process or parts after they break down?
• Control must be forward-looking. Rather than relying on
past indicators or historical reports all the time, forecasts
and other forward- looking devices must be used. For
instance, focusing on probable problem areas and thus
drawing attention for corrective action improved
effectiveness.
 CHARACTERISTICS OF CONTROL
• Control must be strategically oriented. This involves selecting
of the crucial points at which control is applied. Care should be
exercised in selecting these crucial points.
• Control should be flexible. Controls should permit for
unexpected changes or, situations. Rigidity destroys
effectiveness of control.
• Control should be economical. The cost of establishing and
maintaining controls should not exceed the benefits to be
derived from them.
• Control should be easy to understand. Unless people under
stand their purpose and the operations, they become useless.
• Control should indicate corrective .action. Who or what is
causing deviations and What should be done about it is the
important aspect of control.
 TYPES OF CONTROL
1. Controls used to standardize performance. This
helps to increase efficiency and decrease costs.
Control mechanisms used for this purpose are: motion
and time studies, inspection, written procedures, and
production schedules.
2. Controls used to safeguard company assets. The
assets of a company must be protected from theft,
vandalism, wastage, and misuse. An adequate system
of record keeping, custodial, and maintenance
activities serves as control mechanisms.
 TYPES OF CONTROL
3. Controls used to standardize quality. These help to
maintain the specified quality level of products. Examples
include blue prints, inspection, and statistical quality
control methods.
4. Controls designed to set limits within which delegated
authority can be exercised without further top
management approval. Manuals, procedures, policy
statements and internal audits are some examples of this
category.
5. Controls used to measure job performance. Special
reports, output data, performance appraisals, and internal
audits are typical examples.
 TYPES OF CONTROL
6. Controls used for planning and programming
operations. This type of controls include sales and
production forecasts, budgets, cost standards and
standards for work measurement.
7. Controls necessary to allow top management to keep
the firm's various plans and programs in balance. Master
budgets, policy and organizations manuals, committee
approaches, and the use of out side consultants come
into this category.
8. Controls designed to motivate individuals. Such
controls would involve methods of recognizing
achievement through promotions, awards and so on.
 TYPES OF CONTROL
Hodges and Ziegler point out specific
controls used in various areas of the
organization. These specific controls are
listed under five types of control such as,
company wide controls, divisional controls,
departmental controls, operational
controls, and functional controls. This
comprehensive list includes every aspect
of the organization and the control network
covering these aspects.
 CONTROL METHODS AND SYSTEMS
Two Kinds of Control

O Behavior or Personal Control - is based on direct,

personal surveillance. The first- line supervisor who
maintains a close personal watch over subordinates is
using behavior control.

O Output or Impersonal Control - is based on the

measurement of outputs. Tracking production records or
sales are examples of output controls.
 CONTROL METHODS AND SYSTEMS
Budget - is statement of expected results or requirements
expressed in financial or numerical terms.
O Flexible Budgets - In order to overcome many of the
shortcomings resulting from inflexibility, flexible
(variable) budgets are designed to vary with the volume
of sales or some other measure of output.
O Zero- Base Budgeting - is one approach to budgeting
that has received attention over the last several years. It
requires each manager to justify an entire budget
request in detail, from scratch. Under zero-base
budgeting, each activity under a manager's discretion is
identified, evaluated, and ranked by importance.
 CONTROL METHODS AND SYSTEMS
O Direct Observation - A store manager's daily tour of the
facility, a company president's annual visit to all
branches, a methods study by a staff industrial
engineer. All of these are examples of control by direct
observation. Although it is time consuming, personal
observation is sometimes the only way to get an
accurate picture of what is really happening.
O Written Reports - can be prepared on a periodic or "as
necessary" basis.
Two basic types of written reports:
Analytical Reports - interpret the facts they present.
Informational Reports - only present the facts.
 CONTROL METHODS AND SYSTEMS
Preparing a report is a four or five step process,
depending on whether it is informational or analytical.

The steps are:

1. planning, the attack on the problem;
2. collecting the facts;
3. organizing the facts;
4. interpreting the facts ( this step is omitted with
informational reports);
5. writing the report.
 CONTROL METHODS AND SYSTEMS
Audits - can be conducted either by internal or external
personnel. External audits are normally done by outside
accounts and are limited to financial matters. Most are to be
done to certify that the organization's accounting methods
are fair, consistent and conform to existing practices. Most
outside audits do not focus into nonfinancial matters such as
management practices. The internal audit, similar to the
external audit, is performed by the organization's own
personnel.
- when an audit looks at areas other than finances and
accounting, it is known as management audit. Management
audits attempt to evaluate the overall management practices
and policies of the organization. They can be conducted by
inside staff and can easily result in a biased report.
 CONTROL METHODS AND SYSTEMS
Break-Even Charts - depict graphically the relationship of
volume of operations to profits. The break- even point
(BEP) is the point at which sales revenues exactly equal
expenses. Total sales below the BEP results in a loss,
total sales above the BEP results in a profit.
Time Related Charts and Techniques - Gantt charts, the
critical path method (CPM), and the program evaluation
review technique (PERT) are tools used to plan and
schedule. These same tools can also be used for
controlling once the plans have been put into action. By
tracking actual progress compared to planned progress,
activities that fall behind schedule can quickly be
spotted.
 CONTROL METHODS AND SYSTEMS
Management by objectives (MBO) - is an effective means for
setting objectives. It also can be used for control purposes. As
with many of the control techniques discussed in this chapter,
the development of an MBO system is part of the planning
function. However, once MBO is implemented, it is used for
control purposes.
Management Information System - In recent years, the term
management information system (MIS) has become popular. The
Management Information System is a formal system for
providing information to managers. While not essential, most
management information systems include the use of a
computer. The basic idea behind each MIS is to provide
information in a systematic and integrated manner, rather than
in a sporadic and piecemeal manner. A good MIS aids
managerial control by giving managers better information on a
timely basis.
O
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
• Responsibility accounting
- responsibilities for each manager are identified
and accounting records are designed to suit these
responsibilities. Thus, each manager can see the
accounting analysis related to his responsibilities.
• Cost accounting
- helps to provide information and control costs.
This approach deals with detailed analysis of
costs and show the cost of providing particular
products and operating particular departments.
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
• Standard costs are estimated for each product
prior to production and after production they
are compared against actual costs.
• Direct costing
- takes only labor and material cost as variable
costs. Analysis through the use of ratios are also
utilized by managers as control mechanism..
• Charts and other visual devices may be used
to present the analysis more effectively.
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
1. Tests of liquidity - These measures are used to determine a firm's
ability to meet short-term obligations, and to remain solvent in the
event of adversities.

a. Current ratio = Current asset?

Current liabilities

b. Quick or acid-test ratio = Current asset - inventories

Current liabilities

c. Liquidity of inventories = Cost of sales

Average Inventory

d. Defensive position = Cash + marketable securities. + receivables

Projected operating expenditure/No. of days
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES

2. Tests of debt service - These tests are employed to

present the project's ability to meet long-term obligations.

a. Debt-to-net worth ratio = Total Liabilities

Total Equities

b. Total capitalization = Long-term liabilities

Long-term liabilities & equities
3. Tests of profitability - These show the operational
performance and efficiency of the project.

a. Net profit margin = Net income after tax

Sales

b. Operating profit margin = Profit before income and taxes

Sales
c. Gross profit margin = Gross profit
Sales

d. Return on financier's investment = Net income + interest

Stock equity &c long-term liability
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES

e. Return on owner's investment = Net in going

Stock Equity

f. Return on net operating profit = Profit before interest & taxes

Total tangible assets
g. Asset turnover = Sales
Total tangible assets

h. Return on assets, or earning power = Net income

Total tangible assets
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
4. Test of total debt coverage

= Profit before interest and taxes

(interest + principal payments)
(1/1 - income tax rate)

5. Funds-flow analysis
- This technique is employed to determine the major uses
and sources of funds.
a. Cash-flow analysis:
1) Sources of funds:
a) Net decrease in any asset other than cash
b) Net increase in any liability
c) Proceeds from the sales of stocks
a) Funds provided by operations
2) Uses of funds:
a) Net increase in any asset other than cash and fixed
asset
b) Gross increase in fixed asset
c) Net decrease in any liability
d) A retirement of stock
e) Cash dividends
b. Working-capital flow analysis:

1) Sources of funds:
a) Net decrease in any asset other than current assets
b) Net increase in long-term liabilities
c) Proceeds from the sale of stock
d) Funds provided by operations

2) Uses of funds:
a) Net increase in other assets
b) Fixed increase on fixed assets
c) Net decrease in long-term liabilities
d) Retirement of stock
e) Cash dividends
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
6. Tests of operating leverage
- These functions indicate how the projects employ assets for
which it pays a fixed cost. Before these tests are applied, a
clarification should be made on what "variable" and "fixed"
costs are.
Generally, "fixed" costs are expenses which affect net income
despite the fact that they are incurred by the company
irrespective of the production volume.

a. Break-even-volume analysis
BEV = Fixed costs
Selling price - variable cost/unit
b. Break-even cash analysis
BEC = Cash fixed costs
Selling price - cash variable cost/unit

c. Break-even-selling-price analysis
BESP = Variable costs + fixed costs
Unit volume
= Total cost x Selling price
Sales
d. Break-even-sales analysis
BES = BESP x unit volume
= Fixed Cost
1 - (Variable cost/net sales)
 ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES

7. Test of financial leverage

- These techniques present how a project employs funds
which pay a fixed return.

a. Earnings per share = Net income

Shares

b. Dividends per share

= Net income-pref. stocks divided-retained earnings
Common share
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
8. Tests of capital investment
- These financial tools evaluate the justification for investing in
the project.

a. Average rate of return = Average net income

Average net investment

b. payback period in years= Initial year cash outflow

Succeeding annual net cash flow

c. Capital recovery or cash pay off period in years

= Stock
Annual cash dividends
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
O Quality Control
- deals with setting up a quality standards in
advance in such areas, as physical characteristics,
composition of the products, weight, size, color,
strength and performance, and comparing these with
actual standards.
O Production Control
- it is the backbone of any production system. The
aim of production control is to produce the right product
in the proper, quantity and quality, at the right time and
by the best and least costly methods.
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
Tools used in Production Control
O Gantt Chart – graphical illustration of production
scheduling and controlling the work of various
production departments and machines. From these
chart, it can be easily seen which department or
machine is functioning according to schedule and which
one is falling behind.
O PERT (Program Evaluation Review Technique) – is an
arrow diagram showing pictorially diagram helps to
identify the CPM (Critical Path Method) to achieve goals
most effectively.
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
O Inventory Control
- is an essential sequence of a business operation. By
maintaining an excess inventory, huge sums of money are
tied up, resulting in lost of interest or gain. By not maintaining
adequate inventory, delays are caused in the production
process and as a result products do not reach the market in
time and sales are lost. In order to run an efficient and
effective production system, a balance must be maintained
between these two conditions. Inventory control techniques
help to strike this balance.
- by comparing inventory cost with cost of sales,
inventory turnover rate can be computed. Relating this rate to
industry standards or with previous turnover rates will give an
idea as to the effectiveness of inventory control.
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES

Cost of goods sold

Inventory turnover =
Cost of average inventory
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
O Economic Order Quantity
- Economic order quantity (EOQ) is issued to
determine the most economic level of inventory. At this
level, the purchase quantity minimizes total cost of
purchase by balancing costs associated with small
orders.
EOQ = 2 Sc
Vi
Where EOQ = Economic Order Quantity
S = Sales of the firm
c = Cost of placing an order
V = Value of each unit of inventory
i = Inventory cost
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
O Maintenance of Inventory
- when the inventory is received, people in the receiving
department check the number and quality of the inventory and
compare it with orders. The inventory is sent to the stockroom.
Proper arrangement of inventory in stockrooms saves costs and
delays.
- when inventories are large, proper identification such as the
following are used:
O Alphabetical: Based on same predetermined scheme, a letter or
group of letters are used.
O Mnemonic: The use of letters in some combination such that they
suggest the classification name of the particular item.
O Numerical: The use of numbers to identify the item.
O Sign: The use of symbols or signs to identify the items.
O Combination: The use of any two of the above methods
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
O Control by Reports
- a manager, supervisor or a foreman cannot be
everywhere to check everything at all times. He has to
defend any reports for feedback of information. Reports
constitute the backbone of control. As part of training,
managers learn to write reports of various sorts and
interpret them. Failure to handle the reports would
affect their decision making ability because feedback of
information provided through the reports serves as input
for many supervisory and managerial decisions.
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES
Types of Reports
 Profit and loss-statements
 Balance sheets
 Budgets
 Performance appraisal
 Annual reports
 Project reports
 Sales reports
ACCOUNTING CONCEPTS AND TECHNIQUES
AS CONTROL DEVICES

If reports are issued without much delay and supply

enough information to enable the manager to determine
why and where deviations from, standards and plans
occur. A great deal of control can be exercised through
these reports.