Controlling as a

Management Function

Controlling
A process of monitoring
performance and taking action to
ensure desired results.
It sees to it that the right things
happen, in the right ways, and at
the right time.

Controlling as a
Management Function

Controlling
It ensures that the overall directions of
individuals and groups are consistent with
short and long range plans.
It helps ensure that objectives and
accomplishments are consistent with one
another throughout an organization.
It helps maintain compliance with
essential organizational rules and policies.

Controlling as a
Management Function

Cybernetic Control System

One that is self-contained in its
performance monitoring and
correction capabilities.
(thermostat)
The control process practiced in
organizations is not cybernetic,
but it does follow similar
principles.
3

The Control Process

Establish objectives and

standards.
Measure actual performance.
Compare results with objectives
and standards.
Take necessary action.
4

Establish Objectives and

Standards

The control process begins with

planning and the establishment
of performance objectives.
Performance objectives are
defined and the standards for
measuring them are set.
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Establish Objectives and

Standards

There are two types of standards:

Output Standards - measures
performance results in terms of
quantity, quality, cost, or time.
Input Standards - measures work
efforts that go into a performance
task.
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Measuring Actual
Performance

Measurements must be
accurate enough to spot
deviations or variances between
what really occurs and what is
most desired.
Without measurement, effective
control is not possible.
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Comparing Results with

Objectives and Standards

The comparison of actual performance

with desired performance establishes
the need for action.
Ways of making such comparisons
include:
Historical / Relative / Engineering
Benchmarking
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Taking Corrective Action

Taking any action necessary to

correct or improve things.
Management-by-Exception focuses
managerial attention on substantial
differences between actual and
desired performance.

Taking Corrective Action

Management-by Exception can
save the managers time, energy,
and other resources, and
concentrates efforts on areas
showing the greatest need.
There are two types of exceptions:
Problems - below standard
Opportunities - above standard
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Types of Control
Preliminary

Sometimes called the feedforward

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.
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Types of Control
Concurrent

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.
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Types of Control
Postaction

Sometimes called feedback

controls, they take place after
an action is completed. They
focus on end results, as opposed
to inputs and activities.

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Types of Controls
Managers have two broad
options with respect to control.

They can rely on people to

exercise self-control (internal)
over their own behavior.
Alternatively, managers can take
direct action (external) to
control the behavior of others.
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Types of Control
Internal

Controls

Allows motivated individuals to

exercise self-control in fulfilling
job expectations.
The potential for self-control is
enhanced when capable people have
clear performance objectives and
proper resource support.
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Types of Control
External

Controls

It occurs through personal supervision

and the use of formal administrative
systems.
Performance appraisal systems,
compensation and benefit systems,
employee discipline systems, and
management-by-objectives.
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Designing Control
System

In order to insure that the control system is effective and

serves its purpose , it must meet the following
requirements:

1.

Simple: understandable by both superior and

subordinates

2.

Clear objectives: objectives should be clearly defined,

specifically laid down and expressed in quantitative
terms leaving no scope for subjective interpretation.

3.

Appropriate: The control system should cater to the

needs and requirements of the concerned departments.

4.

Flexible: controlling should be flexible and responsive to

changing requirements of the organization and be
adaptable to environmental changes.
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Designing Control
System
5. Forward looking: control system should be directed
towards future by anticipating the possible deviations
that may occur in near future and should also think of the
corrective actions to be taken.
6. Economical: cost of introduction and operation of control
system has to be justified with respect to benefit derived
from it.
7. Motivating: control system should be devised in such a
way the it would motivate both the controller and the
controlled.
8. Principle of exception: manager should not bother about
routine activities and hence should concentrate on those
activities which have significant or major deviations.

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Designing Control
System
9. Efficient control techniques: Modern control techniques such as
break even analysis, programme evaluation review techniques,
critical path method , statistical quality control and management
audit techniques should be used to detect deviations so as to
achieve desired results.
10. Positive, constructive and helpful: The control system should be
positive, constructive and should provide necessary guidance to
subordinates.
11. Focus on strategic points: A good control mechanism should not
point out the deviations only, it should also pinpoint the material
deviations or strategic points.
12. Corrective action: control system should not only detect
deviations and also should provide solution for the correction of
deviation.

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Designing Control
System
13. Joint venture: should work as a joint
venture of both superior and subordinates.
14. Reflection of organization pattern: the
control system should conform the
organizational structure.

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Control Techniques
1. Break Even Analysis: It is done to determine the point at which revenue
equals the costs associated with receiving the revenue.

It calculates what is known as the margin of safety, the amount revenues

exceeds break even points.
This is the amount that revenues can fall while still staying above the
break-even point.
Break-even analysis is a supply-side analysis as it only analyses the
costs of sales.
It does not analyze how demand may be affected at different price levels.

2. PERT is a method to analyze the involved tasks in completing a given

project, especially the time needed to complete each task, and to
identify the minimum time needed to complete the total project.

PERT was developed primarily to simplify the planning and scheduling of

large and complex projects.
It was designed for the U.S. Navy Special Projects Office in 1957 to
support the U.S. Navy's Polaris nuclear submarine project.
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Control Techniques

3. CPM is the sequential activities from start to the end of a project.

Many projects have only one critical path but some projects may have more
than one critical paths depending on the flow of logic used in the project.
If there is a delay in any of the activities under the critical path, there
would be a delay in project deliverables.
Most of the times, if such delay is occurred , project acceleration,
resequencing is done in order to achieve deadlines.
This method is based on mathematical calculations and is used for
scheduling activities.
This method was first introduced in 1950s as a joint venture between
Remington Rand Corporation and DuPont Corporation.
The initial method was used for managing plant maintenance projects.
This method can be used in any project where there are interdepent
activities.
In this method the critical activities of a programme or project those have
direct impact on the completion date are identified.
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Control Techniques
4.

Just in time (JIT) is a production strategy that strives to improve a business'

return on investment by reducing in-process inventory and associated

carrying costs.

Just in time is a type of operations management approach which

originated in Japan in the 1950s.
It was adopted by Toyota and other Japanese manufacturing firms, with
excellent results: Toyota and other companies that adopted the approach
ended up raising productivity (through the elimination of waste)
significantly.
To meet JIT objectives, the process relies on signals or Kanban (???,
Kanban) between different points, which are involved in the process,
which tell production when to make the next part.
Kanban are usually 'tickets' but can be simple visual signals, such as the
presence or absence of a part on a shelf.
Implemented correctly, JIT focuses on continuous improvement and can
improve a manufacturing organization's return on investment, quality, and
efficiency.
To achieve continuous improvement key areas of focus could be flow,
employee involvement and quality.

23

Control Techniques
5. Statistical Process Control (SPC) is a scientific, data-driven
methodology for quality analysis and improvement.

Statistical Process Control (SPC) is an industry-standard methodology

for measuring and controlling quality during the manufacturing process.
Quality data in the form of Product or Process measurements are
obtained in real-time during manufacturing.
This data is then plotted on a graph with pre-determined control limits.
Control limits are determined by the capability of the process, whereas
specification limits are determined by the client's needs.
Data that falls within the control limits indicates that everything is
operating as expected.
Any variation within the control limits is likely due to a common cause
the natural variation that is expected as part of the process.

24

Control Techniques

If data falls outside of the control limits, this indicates

that an assignable cause is likely the source of the
product variation, and something within the process
should be changed to fix the issue before defects occur.

With real-time SPC organization can:

Dramatically reduce variability and scrap

Scientifically improve productivity

Reduce costs

Uncover hidden process personalities

Instantly react to process changes

Make real-time decisions on the shop floor

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Control Techniques
7. Management Audit is an evaluation of the management as a
whole.

It helps in critically examining the entire management process

i.e. planning, organizing, directing and controlling.

It helps in identifying the efficiency of management and for

checking efficiency of management plans framed by company,
objectives set, policies and procedures formulated, personnel
relations and system of control are examined carefully.

It is conducted by a team of experts.

They collect data from past records, members of management,

clients and employees.

The data collected is analyzed and conclusions are drawn

about managerial performance and efficiency.
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Control Techniques
8. Economic order quantity is the order quantity that
minimizes total inventory holding costs and ordering
costs.

It is one of the oldest classical production scheduling

models.
The framework used to determine this order quantity is
also known as Wilson EOQ Model or Wilson Formula.
The model was developed by Ford W. Harris in 1913, but
R. H. Wilson, a consultant who applied it extensively, is
given credit for his in-depth analysis.

27

Budgetary Control
a) Budget:

A formal statement of the financial resources set aside for

carrying out specific activities in a given period of time.
It helps to co-ordinate the activities of the organisation.
An example would be an advertising budget or sales force
budget.
b) Budgetary control:

A control technique whereby actual results are compared

with budgets.
Any differences (variances) are made the responsibility of
key individuals who can either exercise control action or
revise the original budgets.
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Budgetary Control
Budgetary control and responsibility centres:

These enable managers to monitor organisational functions.

A responsibility centre can be defined as any functional unit headed by a
manager who is responsible for the activities of that unit.

There are four types of responsibility centres:

a) Revenue centres

Organisational units in which outputs are measured in monetary terms

but are not directly compared to input costs.

b) Expense centres

Units where inputs are measured in monetary terms but outputs are not.

c) Profit centres

Where performance is measured by the difference between revenues

(outputs) and expenditure (inputs). Inter-departmental sales are often
made using "transfer prices".
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Budgetary Control

d) Investment centres
Where outputs are compared with the assets employed in producing
them, i.e. ROI.

Advantages of budgeting and budgetary control

There are a number of advantages to budgeting and budgetary control:

Compels management to think about the future, which is probably the

most important feature of a budgetary planning and control system.
Forces management to look ahead, to set out detailed plans for
achieving the targets for each department, operation and (ideally) each
manager, to anticipate and give the organisation purpose and direction.
Promotes coordination and communication.
Clearly defines areas of responsibility. Requires managers of budget
centres to be made responsible for the achievement of budget targets
for the operations under their personal control.
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Budgetary Control

Provides a basis for performance appraisal (variance

analysis). A budget is basically a yardstick against which
actual performance is measured and assessed. Control is
provided by comparisons of actual results against budget
plan. Departures from budget can then be investigated and
the reasons for the differences can be divided into
controllable and non-controllable factors.
Enables remedial action to be taken as variances emerge.
Motivates employees by participating in the setting of
budgets.
Improves the allocation of scarce resources.
Economises management time by using the management
by exception principle.
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Budgetary Control

Problems in budgeting
Whilst budgets may be an essential part of any marketing activity they do
have a number of disadvantages, particularly in perception terms.
Budgets can be seen as pressure devices imposed by management, thus
resulting in:

a) bad labour relations

b) inaccurate record-keeping.

Departmental conflict arises due to:

a) disputes over resource allocation

b) departments blaming each other if targets are not attained.

It is difficult to reconcile personal/individual and corporate goals.

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Budgetary Control

Characteristics of a budget
A good budget is characterised by the following:
Participation: involve as many people as possible in drawing up a
budget.

Comprehensiveness: embrace the whole organisation.

Standards: base it on established standards of performance.

Flexibility: allow for changing circumstances.

Feedback: constantly monitor performance.

Analysis of costs and revenues: this can be done on the basis of product
lines, departments or cost centres.

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Budgetary Control

Budget organisation and administration:

In organising and administering a budget system the following
characteristics may apply:
a) Budget centres: Units responsible for the preparation of budgets. A
budget centre may encompass several cost centres.
b) Budget committee: This may consist of senior members of the
organisation, e.g. departmental heads and executives (with the managing
director as chairman). Every part of the organisation should be represented
on the committee, so there should be a representative from sales,
production, marketing and so on. Functions of the budget committee
include:

Coordination of the preparation of budgets, including the issue of a manual

Issuing of timetables for preparation of budgets

Provision of information to assist budget preparations

Comparison of actual results with budget and investigation of variances.

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Budgetary Control

Characteristics of a budget
A good budget is characterised by the following:
Participation: involve as many people as possible in drawing up a
budget.

Comprehensiveness: embrace the whole organisation.

Standards: base it on established standards of performance.

Flexibility: allow for changing circumstances.

Feedback: constantly monitor performance.

Analysis of costs and revenues: this can be done on the basis of product
lines, departments or cost centres.

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Budgetary Control

c) Budget Officer: Controls the budget administration The job involves:

liaising between the budget committee and managers responsible for budget preparation

dealing with budgetary control problems

ensuring that deadlines are met

educating people about budgetary control.

d) Budget manual:

This document:

charts the organisation

details the budget procedures

contains account codes for items of expenditure and revenue

timetables the process

clearly defines the responsibility of persons involved in the budgeting system.

Budget preparation

Firstly, determine the principal budget factor. This is also known as the key budget factor or
limiting budget factor and is the factor which will limit the activities of an undertaking. This limits
output, e.g. sales, material or labour.

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Budgetary Control :
Types

a) Sales budget: this involves a realistic sales forecast. This is prepared in units of each product
and also in sales value. Methods of sales forecasting include:

sales force opinions

market research

statistical methods (correlation analysis and examination of trends)

mathematical models.

In using these techniques consider:

company's pricing policy

general economic and political conditions

changes in the population

competition

consumers' income and tastes

advertising and other sales promotion techniques

after sales service

credit terms offered.

37

Budgetary Control :
Types

b) Production budget: expressed in quantitative terms only and is geared to the sales budget. The
production manager's duties include:

analysis of plant utilisation

work-in-progress budgets.

If requirements exceed capacity he may:

subcontract

plan for overtime

introduce shift work

hire or buy additional machinery

The materials purchases budget's both quantitative and financial.

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Budgetary Control :
Types

c) Raw materials and purchasing budget:

The materials usage budget is in quantities.

The materials purchases budget is both quantitative and financial.

Factors influencing a) and b) include:

production requirements

planning stock levels

storage space

trends of material prices.

d) Labour budget: is both quantitative and financial. This is influenced by:

production requirements

man-hours available

grades of labour required

wage rates (union agreements)

the need for incentives.

39

Budgetary Control :
Types

e) Cash budget: a cash plan for a defined period of time. It summarises

monthly receipts and payments. Hence, it highlights monthly surpluses
and deficits of actual cash. Its main uses are:
to maintain control over a firm's cash requirements, e.g. stock and
debtors
to enable a firm to take precautionary measures and arrange in
advance for investment and loan facilities whenever cash surpluses or
deficits arises
to show the feasibility of management's plans in cash terms
to illustrate the financial impact of changes in management policy, e.g.
change of credit terms offered to customers.

Receipts of cash may come from one of the following:

cash sales/ payments by debtors/ the sale of fixed assets/the issue of new shares

the receipt of interest and dividends from investments.

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Financial Control

Financial Management and Control is a comprehensive system of internal controls

put in place by and under the responsibility of budget user heads, which, by way of
managing risks, provides reasonable assurance that budget and other resources
will be used in a regular, ethical, economical, effective and efficient manner
towards the achievement of objectives.
This means that they will be used in keeping with laws and other regulations,
safeguarding the assets and resources against loss, abuse and damage.
In simpler terms, Financial Management and Control may be defined as a system
which directs and controls the financial effects of budget users operations in a
way that makes them supportive of the achievement of objectives.

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Financial Control

Financial Management and Control covers all business

transactions, and especially those relative to:

Revenue

Expenditure

Asset

Commitments

Tendering procedures and contracting

Recoveries of unduly and illegally spent budget resources

Key persons who are accountable for the way the system of
financial management and control functions and how efficiently
include managers, especially the heads of budget users and
heads of individual organisational units within the scope of their
authorities and responsibilities.

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Financial Control

Those who are in charge of organising the operations, proposing

and making decisions as the groundwork for conducting the
activities need to be aware that they are accountable for:

The manner in which the operations are being managed

Financial effects arising from such operations

Risks associated with such operations

Control activities to be put in place and applied

Ongoing monitoring of the management system and its timely

updating
An organisational unit in charge of budget and finance shall be
competent for coordinating the activities relative to financial
management and control at budget user level.

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Benchmarking

Benchmarking is the process of comparing one's business processes

and performance metrics to industry bests or best practices from
other companies.
Dimensions typically measured are quality, time and cost.
In the process of best practice benchmarking, management
identifies the best firms in their industry, or in another industry
where similar processes exist, and compares the results and
processes of those studied (the "targets") to one's own results and
processes.
In this way, they learn how well the targets perform and, more
importantly, the business processes that explain why these firms are
successful.
Benchmarking is used to measure performance using a specific
indicator (cost per unit of measure, productivity per unit of measure,
cycle time of x per unit of measure or defects per unit of measure)
resulting in a metric of performance that is then compared to others.
44

Benchmarking

Strategic benchmarking looks at what other companies are doing

in terms of top management capabilities, strategic initiatives,
competitive product development and other long-term qualities and
processes that have proved successful.
Determining what a company is doing strategically is sometimes
easier than trying to learn how they manage individual procedures.
Top management capabilities are often evident in the operations of
the company.
Leaders that are savvy in terms of technology tend to implement
technology-rich processes.
Strategic direction can be found in annual reports, if the company
is public.
Selecting a company to study that is not a direct competitor
makes it easier to approach management and ask for advice and
information on how the company built its success.

45

Benchmarking

Operational benchmarking compares firms internal operations to

the operations of other similar companies.
It gives a clear picture of expense improvement opportunities and
areas to increase investment.

The primary benefits of operational benchmarking include:

Reduce expenses

More effective management

Optimize resource allocation

Precision focus on top priorities

Balance the pay for performance equation

Understand economics of different geographies and product mixes

Support risk management, regulatory pressures

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Benchmarking

Management Benchmarking identifies best

management practices with respect to
Management Processes
Strategy and objectives
Policies and procedures
Selection and training
Performance appraisal
Job design and work structures
Performance modeling, norms, and organization
culture

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Auditing

Auditing is defined as a systematic and independent examination of

data, statements, records, operations and performances (financial or
otherwise) of an enterprise for a stated purpose.
In any auditing the auditor perceives and recognizes the propositions
before him for examination, collects evidence, evaluates the same and
on this basis formulates his judgment which is communicated through
his audit report.
Any subject matter may be audited.
Audits provide third party assurance to various stakeholders that the
subject matter is free from material misstatement.
The term is most frequently applied to audits of the financial information
relating to a legal person.
Other areas which are commonly audited include: internal controls,
quality management, project management, water management, and
energy conservation.
As a result of an audit; stakeholders may effectively evaluate and
improve the effectiveness of risk management, control, and the
governance process; over the subject manner.

48