6

Controlling
Chapter Outcomes and Learning Objectives

6-1. Describe the control process.

6-2. Contrast two types of corrective action.
6-3. Compare preventive, concurrent, and
corrective control.
6-4. Explain how a supervisor can reduce costs.

© 2016 Pearson Education Limited 6-2

Chapter Outcomes and Learning Objectives

6-5. Explain what is meant by the term just-in-

time inventory systems.
6-6. Describe what is meant by the term value
chain management.
6-7. List the characteristics of an effective
control system.

© 2016 Pearson Education Limited 6-3

Chapter Outcomes and Learning Objectives

6-8. Explain potential negatives that controls can

create.
6-9. Identify the ethical dilemmas in employee
monitoring.
6-10. Explain what is meant by employee theft
and its effect on the organization.

© 2016 Pearson Education Limited 6-4

 The Control Process
• Control process - A three-step
process that consists of:
1. measuring actual performance
2. comparing results with standards, and
3. taking corrective action

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Exhibit 6-1, The control process

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 Measuring Performance
• Personal observation provides firsthand,
intimate knowledge of the actual activity
• Statistical reports are computer outputs
including graphs, bar charts, and numerical
displays of any form
• Oral reports are from meetings, conferences,
and one-on-one conversations
• Written reports are often combined with
statistical reports
© 2016 Pearson Education Limited 6-7
Comparing Results with Standards
• Range of variation - Variation in performance
that can be expected in all activities
• Cause-effect diagram - A depiction of the
causes of a problem that groups the causes
according to common categories such as
machinery, materials, methods, personnel,
finances, or management

© 2016 Pearson Education Limited 6-8

Exhibit 6-3, Example of a cause-effect
(fishbone) diagram

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 Comparing Results with Standards
continued…
• Flowchart - Visual representation of the
sequence of events for a particular process
that clarifies how things are being done so
that inefficiencies can be identified and the
process can be improved

© 2016 Pearson Education Limited 6-10

 Comparing Results with Standards
continued…
• Scatter diagram - An illustration of the
relationship between two variables that shows
correlations and possible cause and effect
• Control chart - A statistical technique used to
measure variation in a system to produce an
average standard with statistically determined
upper and lower limits

© 2016 Pearson Education Limited 6-11

Exhibit 6-5, Example of a scatter diagram

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Exhibit 6-6, Example of a control chart

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 Taking Corrective Action
• Immediate corrective action - Action that
adjusts something right now and gets things
back on track
• Basic corrective action - Action that gets to
the source of a deviation and seeks to adjust
the differences permanently

© 2016 Pearson Education Limited 6-14

 Types of Control
• Preventive control - A type of control that
anticipates and prevents undesirable
outcomes
• Concurrent control - A type of control that
takes place while an activity is in progress

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 Types of Control
continued…
• Corrective control - A type of control that
provides feedback after an activity is finished
to prevent future deviations

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Exhibit 6-7, Three types of control

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 Focus of Control
• Major Cost Categories:
1. Direct labor costs
2. Indirect labor costs
3. Raw materials cost
4. Supportive supplies cost
5. Utility costs
6. Maintenance costs
7. Waste costs

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Exhibit 6-8, Focus of control

© 2016 Pearson Education Limited 6-19

 Cost Reduction Programs
• Here is a six-step program that can guide you
in reducing costs in your department:
1. Improve methods
2. Level the work flow
3. Minimize waste
4. Install modern equipment
5. Invest in employee training
6. Make cuts selectively

© 2016 Pearson Education Limited 6-20

 Inventory
• Just-in-time (JIT) inventory system - A system
in which inventory items arrive when they are
needed in the production process instead of
being stored in stock: see also kanban

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 Kanban
• Kanban - In Japanese, it means a “card” or
“sign;” shipped in a container, a kanban is
returned to the supplier when the container is
opened and initiates the shipment of a second
container that arrives just as the first
container is emptied

© 2016 Pearson Education Limited 6-22

 Value Chain Management
• Value chain management - The process of
managing the entire sequence of integrated
activities and information about product flows
from start to finish—when the product is in
the hands of the ultimate user

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 Value Chain Management
continued…
• Supply chain management - An internally
oriented process that focuses on the efficient
flow of incoming materials to the organization

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 Focus on Quality
• Quality control - Identification of mistakes
that may have occurred; monitoring quality to
ensure that (it) meets some pre-established
standard

© 2016 Pearson Education Limited 6-25

Characteristics of Effective Controls
• Timeliness - The best information has little
value if it is dated
• Economy - Has to justify the benefits that it
gives in relation to the costs it incurs
• Flexibility - Must be flexible enough to adjust
to adverse change or to take advantage of few
opportunities

© 2016 Pearson Education Limited 6-26

 Characteristics of Effective Controls
continued…
• Understandability - If not understood, a
system will cause mistakes and be ignored
• Reasonable Criteria - Control standards must
be reasonable and attainable
• Critical Placement – Place controls on those
factors that are critical to your unit’s
performance goals

© 2016 Pearson Education Limited 6-27

Exhibit 6-9, Characteristics of effective controls

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 Characteristics of Effective Controls
continued…
• Control by exception - A system that ensures
that one is not overwhelmed by information
on variations from standard

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 Problems with Control
• Employee Resistance - Many individuals don’t
like to be told what to do or to feel that
they’re being “checked up on”
• Misdirection of Effort - People may misdirect
their efforts to look good on the control
criteria
• Ethics and Control Devices - Difficult
questions regarding what managers have the
right to know about employees
© 2016 Pearson Education Limited 6-30
 Contemporary Control Issues
• Employee Theft - Estimated to be around
$4,500 per worker per year
• Sarbanes-Oxley Act - Establishes procedures
for public companies regarding how they
handle and report their financial picture

© 2016 Pearson Education Limited 6-31

 Sarbanes–Oxley Requirements
• Top management (the CEO and chief financial
officer [CFO]) must personally certify the
organization’s financial reports
• The organization must have in place
procedures and guidelines for audit
committees

© 2016 Pearson Education Limited 6-32

Sarbanes–Oxley Requirements continued…

• CEOs and CFOs must reimburse the

organization for bonuses and stock options
when required by restatement of corporate
profits
• Personal loans or lines of credit for executives
are now prohibited

© 2016 Pearson Education Limited 6-33

 Chapter Summary
6-1. Describe the control process.
6-2. Contrast two types of corrective action.
6-3. Compare preventive, concurrent, and
corrective control.
6-4. Explain how a supervisor can reduce costs.

© 2016 Pearson Education Limited 6-34

 Chapter Summary continued…
6-5. Explain what is meant by the term just-in-
time inventory systems.
6-6. Describe what is meant by the term value
chain management.
6-7. List the characteristics of an effective
control system.

© 2016 Pearson Education Limited 6-35

 Chapter Summary continued…
6-8. Explain potential negatives that controls can
create.
6-9. Identify the ethical dilemmas in employee
monitoring.
6-10. Explain what is meant by employee theft
and its effect on the organization.

© 2016 Pearson Education Limited 6-36