Engineering Management

A Module in CE 1: Engineering Management

Unit 6: Controlling

UNIT 6:
Controlling

I. INTRODUCTION
This unit will explain one of the main functions of management, and this is controlling. It comes
after planning, organizing, and directing. As you have learned earlier, it is also necessary to learn its
importance in a company like construction firm, because when controlling is properly implemented,
it will help the organization achieve its goal in the most efficient and effective manner possible.

 ESSENTIAL QUESTIONS

1. What is Controlling
2. What is the importance of Controlling in business or specifically in construction firm?
3. Why is controlling a very important management function?

 INTENDED LEARNING OUTCOMES

1. Students will learn the Importance of Controlling in business or specifically in construction

firm
2. Students will be familiarized with the process and types of controlling

II. DIAGNOSTIC ASSESSMENT

Answer the following:

1. How do you define controlling?
2. Is it applicable to the day to day activities of the engineer manager?
3. How important is controlling as a function of engineering management?
4. What do you think will happen if there is no function of controlling in management?
 Engineering Management
A Module in CE 1: Engineering Management
Unit 6: Controlling

III. DISCUSSION

WHAT IS CONTROLLING?

Higgins (1992) defined controlling as 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 (as cited in Medina, 1999, p. 179)." 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

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 place the viability of the firm in jeopardy (Medina, 1999, p. 179).

STEPS IN THE CONTROL PROCESS

According to Medina (1999), the control process consists of four 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.
 Engineering Management
A Module in CE 1: Engineering Management
Unit 6: Controlling

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

Adapted from Engineering Management (p. 181), by R. G. Medina, 1999, RBSI.

ESTABLISH PERFORMANCE
OBJECTIVES AND
STANDARDS

MEASURE ACTUAL
PERFORMANCE

DOES ACTUAL
PERFORMANCE
MATCH THE
STANDARDS?

TAKE
CORRECTIVE
ACTION
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A Module in CE 1: Engineering Management
Unit 6: Controlling

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. (pp. 180 – 183)

TYPES OF CONTROL

Medina (1999) distinguished three types of control, namely:

1. feed forward control

2. concurrent control, and
3. feedback control.
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A Module in CE 1: Engineering Management
Unit 6: Controlling

Figure 9.2 Types of Control and Their Relation to Operations

Adapted from Engineering Management (p. 183), by R. G. Medina, 1999, RBSI.

PRE- Feedforward
OPERATION Control
S PHASE

ACTUAL Concurrent
OPERATIONS Control
PHASE

POST Feedback
OPERATIONS Control
PHASE

Feedforward Control

When management anticipates problems and pre- vents 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.
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A Module in CE 1: Engineering Management
Unit 6: Controlling

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 over- time schedule. (pp. 183 – 185)

COMPONENTS OF ORGANIZATIONAL CONTROL SYSTEMS

Medina enumerated the parts of an organizational control system as follows:

1. strategic plan
2. the long-range financial plan
3. the operating budget
4. performance appraisals
5. statistical reports
6. policies and procedures
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A Module in CE 1: Engineering Management
Unit 6: Controlling

Strategic Plans

A strategic plan (discussed in Chapter 3) 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 (Van Horne, 1969, as cited in Medina,
1999). 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.

As presented in Chapter 3, the 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
period regarding operations. The figures appearing in the budget are used as standard
measurements for performance (Stoner, 1978, as cited in Medina, 1999).

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 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 rates

2. quality control rejects
3. accounts receivable
4. accounts payable
5. sales reports
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A Module in CE 1: Engineering Management
Unit 6: Controlling

6. accident reports
7. power consumption report

Figure 9.3 shows a sample statistical report.

Figure 9.3 A Sample Statistical Report
Adapted from Engineering Management (p. 188), by R. G. Medina, 1999, RBSI.

MORNING STAR CHEMICAL CORPORATION

Power Consumption Report
For the First Quarter 1997
By Department
(in KWH)

Department January February March Total

A 1,000 1,100 1,200 3,300
B 900 1,400 1,010 3,310
C 1,180 1,650 1,200 4,030
D 500 1,100 600 2,200
E 600 455 632 1,687
Total 4,180 5,705 4,642 14,527

Prepared by:

CECILIA AGPALASIN
Chief Accounting Division

Policies and Procedures

Policies refer to “the framework within which the objectives must be pursued (Rue and Byars,
1985, as cited in Medina, 1999).” A procedure is "a plan that describes the exact series of actions
to be taken in a given situation (Higgins, 1992 as cited in Medina, 1999)."

According to Medina, an example of policy is as follows:

"Whenever two or more activities compete for the company's attention, the client takes
priority."

According to Medina, an example of a procedure is as follows:

Procedure in the purchase of equipment:

1. the concerned manager forwards a request for purchase to the purchasing officer;
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A Module in CE 1: Engineering Management
Unit 6: Controlling

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.
(1999, pp. 185 - 188)

STRATEGIC CONTROL SYSTEMS

To be able to assure the accomplishment of the strategic objectives of the company, strategic
control systems become necessary. According to Medina (1999), 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.

 Engineering Management
A Module in CE 1: Engineering Management
Unit 6: Controlling

Figure 9.4 A Sample Balance Sheet Statement

Adapted from Engineering Management (p. 190), by R. G. Medina, 1999, RBSI.

MORNING STAR CHEMICAL CORPORATION

Balance Sheet Statement
As of December 31,1997
(P000)

Current assets
Cash P 415
Marketable securities 1,000
Accounts receivable 3,062
Inventory 1,980
Prepaid expenses ____123
Total current P 6,580

Noncurrent assets
Gross plant and equipment P 11,500
Accumulated depreciation (2,550)
Other assets and intangibles _____50
Total assets P 15,580

Current liabilities
Accounts payable P 1,594
Notes payable 2,210
Accrued salaries and wages 63
Accrued taxes 174
Current portion of long-term debt ____220
Total current P 4,261

Noncurrent liabilities
Bank term loan 500
Mortgage 1,355
Deferred income tax __ 1,783
Total noncurrent P 3,638

Stockholders equity
Common stock (par value is P1.00) P 4,000
Pain-in surplus 1,513
Retained earnings __2,168
Total stockholders P 7,681
Total liabilities and stockholders’ equity P15,580
 Engineering Management
A Module in CE 1: Engineering Management
Unit 6: Controlling

Figure 9.5 A Sample Income Statement

Adapted from Engineering Management (p. 191), by R. G. Medina, 1999, RBSI.

MORNING STAR CHEMICAL CORPORATION

Income Statement
For the Year Ending December 31,1997
(P000)

Net sales P 12,250

Cost of good sold __8,820
Gross profit P 3,430
Operating expenses
Selling 673
Administrative 653
Depreciation and Amortization ___600
Operating prolict P 1,504
Interest expense ___350
Profit before taxes P 1,154
Taxes ___462
Net Profit P 692
----------
Common dividends P 429

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, explanations are sought in preparation for whatever action is necessary.
Financial ratios may be categorized into the following types (Gup, 1987, as cited in Medina,
1999):

1. liquidity
2. efficiency
3. financial leverage
4. profitability

Liquidity Ratios. These ratios assess the ability of a company to meet its current obligations. The
following ratios are important indicators of liquidity.
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A Module in CE 1: Engineering Management
Unit 6: Controlling

1. 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

2. 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 (Weston and Brigham, 1990,
as cited in Medina, 1999). The formula is as follows:

Acid-test ratio = current assets inventories/current liabilities

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:

1. 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

2. 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 (Manes, 1998, as cited in Medina, 1999).The
formula used is as follows:

Fixed asset turnover = net sales/net fixed assets

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:

1. 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:

Dept to total assets ratio = total debt/total assets

2. 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 = profit before tax + interest expense

earned ratio interest expense
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A Module in CE 1: Engineering Management
Unit 6: Controlling

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:

1. 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

2. 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

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

Return on equity ratio = net income/equity

IDENTIFYING CONTROL PROBLEMS

When the operation encounters a problem, it is the duty of the engineer manager to take action.
Kreitner states three approaches:

1. executive reality check

2. comprehensive internal audit
3. general checklist of symptoms of inadequate control

Executive Reality Check

Employees at the frontline often complain that management imposes certain requirements that are
not realistic. In a certain state college, for instance, requests for purchase of classroom materials
and supplies take last priority. This is irregular because requests of such kind must be of the highest
priority considering that the organization is an educational institution. Ironically, because certain
officers of the non-academic staff have direct access to the president, their purchase requests
almost always get top priority. Later on, when the president made an inspirational speech on
quality teaching, many members of the faculty just shrugged their shoulders and listened passively.

One school, the Central Luzon State University, provides a good example on how the executive
reality check may be exercised. It requires its executives to handle at least one subject load each.
 Engineering Management
A Module in CE 1: Engineering Management
Unit 6: Controlling

What the executives will experience in the classroom will make him more responsive in the
preparation of plans and control tools.

The engineer manager of a construction firm could, once in a while, perform the work of one of his
laborers. In doing so, he will be able to see things that he never sees inside the confines of his air-
conditioned office. Because the said action exposes the engineer manager to certain realities, the
term "executive reality check" is very appropriate.

Comprehensive Internal Audit

An internal audit is one undertaken to determine the efficiency and effectivity of the activities of an
organization. Among the many aspects of operations within the organization, a small activity that is
not done right may continue to be unnoticed until it snowballs into a full blown problem.

An example is the resignation of an employee after serving the company for 15 years. After one
week, another employee with ten years of service also resigned. Both were from the same
department. If after another week, a third employee is resigning, a full investigation is in order. Even
if the source of the problem is identified, it may already have caused considerable losses to the
organization. A comprehensive internal audit aims to detect dysfunctions in the organization before
they bring bigger troubles to management.

Symptoms of Inadequate Control

If a comprehensive internal audit cannot be availed of for some reason, the use of a checklist for
symptoms of inadequate control may be used.

Kreitner has listed some of the common symptoms as follows:

1. An unexplained decline in revenues and profits.

2. A degradation of service (customer complaints).
3. Employee dissatisfaction (complaints, grievances, turnover).
4. Cash shortages caused by bloated inventories or delinquent accounts receivable.
5. Idle facilities or personnel.
6. - Disorganized operations (work flow bottlenecks, excessive paperwork).
7. Excessive costs.
8. Evidence of waste and inefficiency (scrap, rework).

It must be noted that behind every symptom is a problem waiting to be solved. Unless this problem
is clearly identified, no effective solution may be derived. Nevertheless, problems are easily
recognized if adequate control measures are in place. (1992, as cited in Medina, 1999, pp. 193 -
195)
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A Module in CE 1: Engineering Management
Unit 6: Controlling

IV. ASSESSMENT
Answer the following:

1. When the engineer manager reviews the financial statements of the company under his
supervision, what benefits does he derive?
2. Do you consider “cash shortages caused by bloated inventories or delinquent accounts
receivable” as a symptom of inadequate control? Why or why not?
3. A construction firm entered into a contract with a government to construct a 6 units pumping
station within 12 months, the management of the construction firm found out that there are
additional works that are not included in the program and plans. And these are the reasons that
the project may not be completed on time. As an engineer manager, what are the necessary
action should you do?

V. MODULE FEEDBACK

VI. REFERENCES

Medina, R. G. (1999). Engineering management. Rex Bookstore Inc. (178 - 196)

Dr. Nyambane Osano (2013) FCE 372 Engineering Management 1 Lecture Notes