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 training,
overhead-variable 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.