CHAPTER 06

CONCEPTS OF CONTROLING
1. CONCEPT
 Effective Controlling assists in
the effort to regulate the planned
performance to assure that
performance takes place as
planned.
 According to Koontz and O’Donnell,
the managerial function of controlling
is the measurement and correction of
the performance of activities of
subordinates in order to make sure
that enterprise objectives and the
plans devised to attain them are being
accomplished. It is thus the function of
every manager, from president to
foreman.
 According to Robert Mockler,
controlling is a systematic effort by
business management to compare
performance to predetermined
standards, plans, or objectives to
determine whether performance is in
the line with these standards and
presumably to take any remedial
action required to see that human and
other corporate resources are being
used in the most effective and
efficient way possible in achieving
corporate objectives.
Control Process
1. Establishing the standard
performance
2. Measuring the performance
3. Comparing the performance with
standard
4. Correcting unfavorable deviation by
means of remedial action.
Measuring

1. Total Achievements
2. Output per Direct Labor
2. PHASES OF CONTROL
 Control activity can take picture of
three points: before, during and after.

 Thus you can prevent the problem,

deal with the problem or see that
problem doesn’t happen again.
1. Pre-Control (Preventive Maintenance)
2. Concurrent controls take place while
activity continues
3. Post-Control (poor approach but
common)
4. Correction of deviations (to make
corrections in incorrect procedure,
the sooner original goal can be
achieved).
3. TYPES OF CONTROL
a. PRODUCTION CONTROL

b. INVENTORY CONTROL

c. QUALITY CONTROL

d. FINANCIAL CONTROL
a. Production Control

 Consists of Six Functions:

1. Routing – Sequence – Path of Flow of
material through series of operations
2. Loading – assigning work to machine or
department in advance
3. Scheduling – determines time at which
each operation takes place
4. Estimating – in advance cost of production
5. Dispatching – process of ordering work to
be done
6. Expediting – follow-up and checks
whether plans are executed
b. Inventory Control

Deals with:

1. Raw Materials
2. Work in process
3. Finished goods
Following questions are to be
answered by Inventory Controller:
1. What is optimum amount of
inventory to carry?
2. What is economic lot size for an
order?
3. What is record system for showing
inventory in hand?
C. Quality Control

 To keep/maintain quality standard of

the product.

 By conducting tests.
d. Financial Control
 Budges, Profit Loss and Return on
Investment.
5. BUDGETS
a. Budgeting is tool to achieve goals:
i. Revenue and expenses budgets
ii. Time, space, material and product
budgets
iii. Capital expenditure budgets
iv. Cash budgets and
v. Balance sheet budgets
B reakeven Analys is
 C. Ratio Analysis
(In comparing growth rates, ratio analysis is helpful)

1. Check list of Financial Ratio Analysis

1. Liquidity Ratio (measuring ability of firm to meet its maturing obligations)

Current Ratio Current Assets

Current Liabilities 2.6

Acid Test Ratio Cash & Equivalent

Current Liability 1.0

Cash Velocity Sales

Cash & Equivalent 12 times

Inventory to net working capital Inventory

current assets – current liabilities 85%
2. Leverage Ratios (Measuring contribution of financing by owners compared with financing provided by creditors)

Debt to Equity Total Debt

Net Worth 56%

Coverage of fixed charge Net profit before fixed charges

Fixed charges 6 times

Current liability to net worth Current liability

Net worth 32%

Fixed assets to net worth Fixed asset

Net worth 60%
3. Activity Ratios (measuring the effectiveness of the employment of resources)
Inventory Turnover Sales
Inventory 07 times

Net working capital turnover Sales

Net working capital 5 times

Fixed assets turnover Sales

Fixed assets 6 times

Average Collection period Receivables

Average sales per day 20 days

Equity capital turnover Sales

Net worth 3 times

Total Capital turnover Sales

Total assets 2 times
4. Profitability Ratio (indicating degree of success in achieving desired profit levels)

Gross Margin Gross Margin

Sales 30%

Net operating margin Net operating profit

Sales 6.5%

Sales margin Net profit after taxes

Sales 3.2%

Productivity of assets Net income less taxes

Total assets 10%

Return on capital Net profit after taxes

Net worth 7.5%

Net profit on working capital Net profit after taxes

Net working capital 14.5%
d. Return on Investment
Figure:

The concept of return on investment

. Inventories
100,000
Sales
1,000,000

Turnover
2.0
Plus Divided by
Accounts Working capital Total investment
Receivable 200,000 500,000
50,000

Plus Plus
Cash Permanent
50,000 Investment
300,000
Return on
Multiplied by= Investment
(40%)
Product Cost Sales
500,000 1,000,000

Earnings
200,000
Plus Minus
Selling Expense Cost of Sales Earnings as percent
150,000 800,000
Divided by of sales
20%
Sales
Plus 1,000,000

Delivery Expense
50,000

Plus
Administration
expense
100,000
5. DIRECT MANAGEMENT CONTROL
(Control by Manager)

It is based on four assumptions:

1. Trained Managers make few errors
2. Managerial activities can be reduced
3. Principles of Management can serve
clear standard for comparison with
status quo.
4. Manager with expertise following
good management rules.
6. DIRECT CONTROL
(Through key Result Areas: Eight Areas)

1. Profitability
2. Market Position
3. Productivity
4. Product Leadership
5. Personnel Development
6. Employees Attitudes
7. Public Responsibility and
8. Balance between short and long-range
goals
7. CHARACTERISTICS OF A GOOD
CONTROL SYSTEM (Koontz & O’Donnell)
1. Controls must reflect the nature of
activity
2. Controls should report deviations
promptly
3. Controls should focus on the future
4. Controls should point up exceptions
at critical points
5. Controls should be objective
6. Controls should be flexible
7. Controls should reflect the organized
pattern
8. Controls should be economical
9. Controls should be understandable
10.Controls should avoid obsolescence
11.Controls should seek employee
commitment
12.Controls should seek rapid feedback
13.Controls should indicate corrective action