UNIT-5

CONTROLLING

DEFINITION OF CONTROLLING

“Controlling is a systematic exercise which is called as a process of checking actual performance against the
standards or plans with a view to ensure adequate progress and also recording such experience as is gained as a
contribution to possible future needs.”

 Controlling consists of verifying whether everything occurs in conformities with the plans adopted,
instructions issued and principles established.

FEATURES/CHARACTERISTICS OF CONTROLLING FUNCTION

 Controlling is an end function- A function which comes once the performances are made in
conformities with plans.
 Controlling is a pervasive function- which means it is performed by managers at all levels and in all
type of concerns.
 Controlling is forward looking- because effective control is not possible without past being controlled.
Controlling always looks to future so that follow-up can be made whenever required.
 Controlling is a dynamic process- since controlling requires taking reviewable methods, changes have
to be made wherever possible.
 Controlling is related with planning- Planning and Controlling are two inseparable functions of
management. Without planning, controlling is a meaningless exercise and without controlling, planning is
useless. Planning presupposes controlling and controlling succeeds planning.

PROCESS OF CONTROLLING

Establishment of standards- Standards are the plans or the targets which have to be achieved in the course of
business function. They can also be called as the criterions for judging the performance. Standards generally are
classified into two-

 Measurable or tangible - Those standards which can be measured and expressed are called as
measurable standards. They can be in form of cost, output, expenditure, time, profit, etc.
 Non-measurable or intangible- There are standards which cannot be measured monetarily. For
example- performance of a manager, deviation of workers, their attitudes towards a concern.
These are called as intangible standards.

Measurement of performance- The second major step in controlling is to measure the performance. Finding out
deviations becomes easy through measuring the actual performance. Measurement of tangible standards is easy
as it can be expressed in units, cost, money terms, etc. Performance of a manager cannot be measured in
quantities. It can be measured only by-

 Attitude of the workers,

 Their morale to work,
 The development in the attitudes regarding the physical environment, and
 Their communication with the superiors.

.
Comparison of actual and standard performance- Comparison of actual performance with the planned targets
is very important. Deviation can be defined as the gap between actual performance and the planned targets. The
manager has to find out two things here- extent of deviation and cause of deviation. Extent of deviation means
that the manager has to find out whether the deviation is positive or negative or whether the actual performance
is in conformity with the planned performance.

Taking remedial actions- Once the causes and extent of deviations are known, the manager has to detect those
errors and take remedial measures for it. There are two alternatives here-

 Taking corrective measures for deviations which have occurred; and

 After taking the corrective measures, if the actual performance is not in conformity with plans, the
manager can revise the targets.

LEVELS OF CONTROL

Strategic control: Strategic control is concerned with tracking the strategy as it is being implemented, detecting
any problem areas or potential problem areas suggesting that the strategy is incorrect, and making any necessary
adjustments.

Operational control: Operational control, in contrast to strategic control, is concerned with executing the
strategy. Where operational controls are imposed, they function within the framework established by the strategy.

TYPES OF CONTROL:

Concurrent Controls: The process of monitoring and adjusting ongoing activities and processes is known as
concurrent control. Such controls are not necessarily proactive, but they can prevent problems from becoming
worse.

Feedback Controls: Feedback controls involve gathering information about a completed activity, evaluating that
information, and taking steps to improve the similar activities in the future. This is the least proactive of controls
and is generally a basis for reactions.

Outcome control: Outcome controls are generally preferable when just one or two performance measures (say,
return on investment or return on assets) are good gauges of a business’s health. Outcome controls are effective
when there’s little external interference between managerial decision making on the one hand and business
performance on the other.

Behavioral control: Behavioral controls involve the direct evaluation of managerial and employee decision
making, not of the results of managerial decisions.

Financial control: Financial control involves the management of a firm’s costs and expenses to control them in
relation to budgeted amounts. Thus, management determines which aspects of its financial condition, such as
assets, sales, or profitability, are most important, tries to forecast them through budgets, and then compares actual
performance to budgeted performance.

Non financial control: nonfinancial controls track aspects of the organization that aren’t immediately financial
in nature but are expected to lead to positive performance outcomes. The theory behind such nonfinancial
controls is that they should provide managers with a glimpse of the organization’s progress well before financial
outcomes can be measured.
BUDGETARY CONTROLLING TECHNIQUES

Budgetary control is a system for monitoring an organization’s process in monetary terms. Types of budgetary
controlling techniques are;

 Financial Budgets
 Operating Budget
 Non-Monetary Budgets

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:

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.

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.

The balance sheet budget: It forecasts what the organization’s balance sheet will look like if all other budgets
are met.

OPERATING BUDGETS

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.

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.

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.

NON-MONETARY BUDGETARY CONTROLLING TECHNIQUES

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

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.
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.

Semi-variable costs: They also vary, but in a less direct fashion. Costs for advertising, repairs, and maintenance,
etc. may fall under this category.

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.

Statistical data: Statistical analyses of innumerable aspects of a business operation and the clear
presentation of statistical data, whether of a historical or forecast nature are, of course, important to control.
Some managers can readily interpret tabular statistical data, but most managers prefer presentation of the data on
charts.

Break- even point analysis: An interesting control device is the break even chart. This chart depicts the
relationship of sales and expenses in such a way as to show at what volume revenues exactly cover expenses.

Operational audit: Another effective tool of managerial control is the internal audit or, as it is now
coming to be called, the operational audit. Operational auditing, in its broadest sense, is the regular and
independent appraisal, by a staff of internal auditors, of the accounting, financial, and other operations of a
business.

Personal observation: In any preoccupation with the devices of managerial control, one should never
overlook the importance of control through personal observation.

MANAGING PRODUCTIVITY

Productivity is a measure of the efficiency of production. It is a ratio of actual output (production) to what is
required to produce it (inputs). Productivity is measured as a total output per one unit of a total input. Control
managers in a given organization are concerned with maximizing productivity through process-oriented
observations and improvements.

PROCESSES THAT AFFECT PRODUCTIVITY

Real process – Real process generates the production output from input. It can be described by the production
function. This refers to a series of events in production in which inputs of different quality and quantity are
combined into products of different quality and quantity. Products can be physical goods, immaterial services, or
combinations of both.

Income distribution – Income distribution process refers to a series of events in which the unit prices of
constant-quality products and inputs change, causing an alteration in the income distribution among those
participating in the exchange. For example, productivity gains are distributed to customers as lower prices, which
may lead to higher sales revenues. Productivity gains can also be distributed to employees in the form of higher
wages.

Production process – Production process is the real process and the income distribution process. Profitability is
both a result and a criterion of business success. Profitability of production is the share of the real process result
that the owner has been able to retain in the income distribution process (profits earned).
Monetary and market value processes – Monetary process refers to financing a business and the inputs of
production. Market value process refers to a series of events in which investors determine the market value of the
company in the investment markets.

ESTABLISHING A PRODUCTIVITY IMPROVEMENT PROGRAM (PIP):

Obtain Upper Management Support: Without top management support, experience shows a PIP likely will
fail. The Chief Executive Officer should issue a clear, comprehensive policy statement. The statement should be
communicated to everyone in the company. Top management also must be willing to allocate adequate resources
to permit success.

Create New Organizational Components: A Steering Committee to oversee the PIP and Productivity
Managers to implement it are essential. The Committee should be staffed by top departmental executives with
the responsibilities of goal setting, guidance, advice, and general control.

Plan Systematically: Success doesn't just happen. Goals and objectives should be set, problems targeted and
rank ordered, reporting and monitoring requirements developed, and feedback channels established.

Open Communications: Increasing productivity means changing the way things are done. Desired changes
must be communicated. Communication should flow up and down the business organization. Through
publications, meetings, and films, employees must be told what is going on and how they will benefit.

Involve Employees: This is a very broad element encompassing the quality of work life, worker motivation,
training, worker attitudes, job enrichment, quality circles, incentive systems and much more.

Measure and Analyze: This is the technical key to success for a PIP. Productivity must be defined, formulas
and worksheets developed, sources of data identified, benchmark studies performed, and personnel assigned.

COST CONTROL

Cost control is a tool of management executives to regulate the working of the manufacturing concern. Under the
globalize economy, mere planning is not enough.

CHARACTERSTICS OF COST CONTROL

Delegation of Authority: If persons are charged with responsibility without authority, the cost control will be
ineffective. Hence, proper or adequate delegation of authority is necessary for proper cost control.

Measurement of Performance: A performance is to be measured with the help of reasonable criteria. Standard
costing can be used as reasonable criteria. The person whose performance is being measured should participate in
setting the standards.

Relevance of Controllable Cost: Only few costs are controllable at different levels of management. The
management evaluates the performance of an employee with the help of costs incurred that are controllable.

Cost Reporting: Cost report provides a basis for effective cost control. Hence, if the cost reports is not prepared
and submitted in time, the cost control cannot be exercised.

Constant Efforts: The measurement of performances, knowing functioning of manufacturing department and
analysis of costs require constant efforts. This type of constant efforts leads to cost consciousness and result in
cost control.
Policies and General Objectives: All the employees of the organization are communicated the policies and
general objectives. If so, cost control is very easy.

STEPS INVOLVED IN COST CONTROL

Planning: Planning may be done as in the form of budget, standard, estimate and the like. The past events have
been considered for proper planning. The planning is expressed both in physical as well as monetary terms. The
standards are used as yardsticks.

Communication: The planning and policy should be communicated to the employees. If so, they can assume
the responsibility and do the work properly. Communication has two directions. They are upward direction and
downward direction. Instructions flow from the top level to lower level. Likewise, report on performance move
towards upwards.

Motivation: The performance is evaluated; costs are ascertained and reported to the management regarding the
results of performance. Such report may be act as motivating force and leads to better performance in the days to
come.

Appraisals and Reporting: The actual performance is compared with preplanned standard and finds the
deviations. The causes for such deviations are also analyzed. Finally, the deviations with reasons are reported to
the top level of management for cost control.

Decision Making: The top management may review the report on many directions. Lastly, the management
takes necessary corrective actions. Finally, the existing standard or budget may be revised according to the
prevailing situations.

MAINTENANCE CONTROL

 Maintenance department has to exercise effective cost control, to carry out the maintenance functions in a
pre-specified budget, which is possible only through the following measures:
 First line supervisors must be apprised of the cost information of the various materials so that the
objective of the management can be met without extra expenditure on maintenance functions
 A monthly review of the budget provisions and expenditures actually incurred in respect of each
center/shop will provide guidelines to the departmental head to exercise better cost control.
 The total expenditure to be incurred can be uniformly spread over the year for better budgetary control.
 The controllable elements of cost such as manpower cost and material cost can be discussed with the
concerned personnel, which may help in reducing the total cost of maintenance

QUALITY CONTROL

Quality control refers to the technical process that gathers, examines, analyze & report the progress of the project
& conformance with the performance requirements

The steps involved in quality control process are:

 Determine what parameter is to be controlled.

 Establish its criticality and whether you need to control before, during or after results are produced.
 Establish a specification for the parameter to be controlled which provides limits of acceptability and
units of measure.
 Produce plans for control which specify the means by which the characteristics will be achieved and
variation detected and removed.
 Organize resources to implement the plans for quality control.
 Install a sensor at an appropriate point in the process to sense variance from specification.
 Collect and transmit data to a place for analysis.
 Take the agreed action and check that the variance has been corrected.