Chapter Seven

The Controlling Functions

7.1 Meaning and need for control
 Controlling is a managerial function that provides
answer to the basic question of 'how managers ensure
that an organization performs up to standards and
actually achieves its intended goals.'
 The controlling function adds that vital regulatory
element, allowing managers to make use of a variety of
methods for monitoring performance and taking
corrective action when necessary.
 Meaning and need for control…
 Controlling involves a systematic effort to set
performance standard; with planning objectives,
 to design information feedback systems,
 to compare actual performance with the predetermined
standards,
 to determine whether there are deviations and measure
their significance, and
 Meaning and need for control…
 to take any action required to assure that all organizational
resources are being used in the most effective & efficient
way possible in achieving objectives.
 The control process involves three general steps:

1. Setting Standards;
2. Measuring and evaluating Performance, and
3. Taking Corrective Actions.
 7.2 Controlling process
7.2.1. Basic Steps in the Control Process
1. To set performance standards.
 A standard is a criterion against which actual performance
can be compared. In this respect, standards are nothing
more than yardsticks for measuring performance.
Whatever the method, standards can be classified as one
of three kinds; historical, comparative, or engineering.
 Controlling process…
 Historical Standards: These standards are based on an
organization's experience. Accordingly, previous sales,
costs, profits, or production volumes can be used as a basis
for evaluating future performance.
 The use of historical data to set standards is based on the
assumption that the future will be a continuation of the
past.
 Controlling process…
 Comparative Standards: Such standards are based on the
experiences of others. They can be applied at the corporate
or functional level.
 Engineering Standards: They are based on technical
analyses. They generally apply to production methods,
materials, machinery, parts and supplies.
 Quality limits, machine-output specifications, material
requirements, and output volume are all examples of
engineering standards.
 Controlling process…
2. Measuring and Evaluating Performance
 In this step, the actual performance is measured first &
then compared against the standards set in step 1.
 This step is essentially a comparison between "what is" and
"what should be." Consequently, the comparison result
may show that actual performance exceeds, meets, or falls
below expectation (standards).
 Controlling process…
 Accordingly:
 If performance fulfills expectations (that is, meets the
standards), no control problem exists.
 If performance exceeds or fails to meet expectations,
further investigation is required to determine the cause.
3. Taking Corrective Action
 The final step in the control process is to take action based
on the comparisons made in step 2.
 Controlling process…
 As a result, in those instances where performance falls
outside the acceptable range (upper and lower limits), one
of three actions is typically appropriate: do nothing, correct
the deviation, or revise the standard being used.
 Do Nothing: Do nothing generally is appropriate when
actual performance meets the standard.
 Correct the Deviation: If a deviation falls outside
acceptable limits (upper and lower limits), corrective action
will be necessary.
 Controlling process…
 In this regard, the manager should act on both positive
and negative deviations. Positive deviations (favorable
deviations) should be examined to have an understanding
of such successes. Negative deviations (unfavorable
deviations) should be basis for learning.
 Revise Standards: A final response when performance falls
outside acceptable range is to revise standards.
 The standards set may have been based on historical data,
which may be inappropriate to current conditions.
Controlling process…
Basic Steps in the Control Process
 Controlling process…
7.2.2. Characteristics and Levels of Control
 To be effective, controls should be cost effective,
acceptable, appropriate, strategic, and reliable and valid.
Characteristics of Control
 Cost Effectiveness: The benefits received from control
should more than offset their expense.
 Acceptability: like laws are going to be ineffective if
individuals whom they affect resent them or feel they are
harmful to their personal and psychological well being.
 Controlling process…
 Appropriateness: controls should agree to organ's plans.
 Strategic: controls should focus on a manageable number
of strategic activities. As organization becomes larger, the
need for strategic control increases because top managers
can no longer personally monitor all aspects of its
operations.
 Reliability and Validity: Controls not only must be
dependable (reliable), but they also must measure what
they intend to measure (that is, they must be valid).
 Controlling process…
7.2.3. Levels of Control
 Controlling responsibilities differ by managerial level.
Accordingly, there are three control levels: strategic,
tactical and operational.
 Strategic Control: Strategic control involves monitoring
critical environmental factors that could affect the viability
of strategic plans, assessing the effects of organizational
strategic actions, and ensuring that strategic plans are
implemented as intended.
 Controlling process…
 Control at the strategic level is mainly the domain of top-
level managers, who generally take an organization wide
perspective.
 For strategic control, managers often concentrate on
relatively long time frames.
 Tactical Control: This is a control level that focuses on
assessing the implementation of tactical plans at
department levels, monitoring associated periodic results,
and taking corrective action as necessary.
 Controlling process…
 Control at the tactical level involves mainly middle
managers, who are concerned with department level
objectives, programs, & budgets and who concentrate on
periodic or middle - term time frames and often use weekly
and monthly reporting cycles.
 Operational Control: Control type that involves overseeing
the implementation of operating plans, monitoring day-
to-day results, and taking corrective action when required.
 7.3 Types of controlling
 There are three types of controls: Pre-Controls, Concurrent
Controls, and Post Action Controls:
7.3.1. Pre-Controls
 They are also called feed forward/preventive controls.
 Pre-controls monitor inputs to ensure that they meet the
standards necessary for successful transformation.
 In doing so, they regulate the quality and quantity of
financial, physical, human, and information resources
before they are transformed into outputs.
 Types of controlling…
7.3.2. Concurrent Controls
 Also called screening or yes/no controls, concurrent
controls involve the regulation of ongoing activities by
monitoring the transformation of inputs into outputs to
ensure that they conform to organizational standards.
 When contingencies arise involving activities in a
transformation process, a "yes-no" or "go, - no-go"
decision is required.
 Types of controlling…
 That is, a decision must be made whether to continue as
before or follow an alternative course, or take corrective
action, or stop work altogether in this way, concurrent
control allows adjustments to be made while work is being
done.
 Since concurrent control involves regulating ongoing
activities or tasks, it requires a through understanding of
the specific tasks involved and their relationship to the
desired results.
 Types of controlling…
7.3.3. Post-action Controls (Feedback Controls)
 Post-action control is regulation exercised after a
product or service has been completed in order to
ensure that the final output meets organizational
standard and goals.
 Feedback controls (as their name suggests) come into
play after transformation has taken place.
 Thus, they focus on end results, as opposed to inputs and
activities.
Types of controlling…
The Three Types of Control
 7.4 Managerial Controlling Techniques
 Since the purpose of control systems is to increase the
probability of meeting organizational goals and standards,
managers use these control systems to increase their
prospects for success.
 Operations management involves controlling the process
associated with actually producing a product or services.
 Managerial Controlling Techniques…
 Finally, computer-based information systems are
increasingly being used to develop sophisticated
systems geared to maintaining better control over
information and related functions.
7.4.1. Financial Control
 Financial control can be conducted through the use of
financial statements, ratio analysis, comparative
financial analysis, and financial audits.
 Managerial Controlling Techniques…
a) Financial Statements: A financial statement is a
summary of a major aspect of an organization's financial
status.
 Financial statements are prepared at the end of
reporting periods (such as quarterly, and annually).
 There are two basic types of financial statements used by
organizations are the balance sheet and the income
statement.
 Managerial Controlling Techniques…
I. Balance Sheet:
 A balance sheet is a financial statement that depicts and
organization's assets and claims against those assets
(liabilities) at a given point in time.
II. Income Statement:
 Income Statement is a financial statement that summarizes
the financial results of company operations over a specified
time period, such as quarter or a year.
 Managerial Controlling Techniques…
b) Ratio Analysis: Ratio analysis is the process of determining
and evaluating financial ratios.
 There are four types of financial ratios that are particularly
important to managerial control, liquidity, asset
management, debt management, and profitability.
I. Liquidity Ratios:
 Liquidity ratios are financial ratios that measure the degree
to which an organization's current assets are adequate to
pay current liabilities.
 Managerial Controlling Techniques…
 A major types of liquidity ratio is the current ratio, which
measures a company's ability to meet the claims of short-
term creditors by using only current assets.
II. Asset Management Ratios
 Sometimes called Activity ratios, asset management ratios
measure how efficiently an organization manages its
assets.
 Two of the most used asset management ratios are
inventory turnover and average collection period.
 Managerial Controlling Techniques…
III. Debt Management Ratio's
 These ratios are often called leverage ratios, and they assess the
extent to which an organization uses debt to finance investments, as
well as the degree to which it is able to meet its long term
obligations.
IV. Profitability Ratios: Profitability ratios are financial ratios that help
measure management's ability to control expenses and earn profits
through the use of organizational resources. Three commonly used
profitability ratios are net profit margin, return on investment, and
return on equity.
 Managerial Controlling Techniques…
c) Financial Audits: Financial audits are means of managerial control
conducted to determine whether or not specified rules and procedures
are being followed. There are two types of financially related audits
that are used extensively external and internal.
 External Audit - External audit is a review and verification of the
fairness of an organization's financial statements that is conducted
by an independent auditor.
 Internal Audit - Internal audit is a review of both financial
statements and internal operating efficiency that is conducted by
members of the organization.
 Managerial Controlling Techniques…
7.4.2 Quality Control
 Quality control is a recent or current control issue while
budgetary control and financial control typically receive
considerable emphasis in most organizations.
 Quality is the totality of features and characteristics of a
product/service that bear on its ability to satisfy needs.
There are seven dimensions of quality.
 Performance involves the product’s primary operating
characteristics.
 Managerial Controlling Techniques…
 Features are supplements to the basic functioning
characteristics.
 Reliability addresses the probability of a product’s
working properly or breaking down altogether within a
specific period.
 Conformance refers to the degree to which a product's
design or operating characteristics agree to pre-
established standards.
 Managerial Controlling Techniques…
 Durability is a measure of how much use a person gets
from a product, before it deteriorates or breaks down.
 Serviceability refers to the promptness & ease of repair.
 Aesthetics refer to how a product, looks, feels, tastes, or
smells.
Statistical Aids to Quality Control
 There are a number of statistical techniques that could be
employed towards ensuring quality. Two of them are
mentioned in the forthcoming paragraphs.
 Managerial Controlling Techniques…
1. Acceptance Sampling - It is a statistical technique that
involves evaluating random samples from a group of
produced materials or lots to determine whether the lot
meets acceptable quality levels.
 Acceptable quality level (AQL) is a pre-determined
standard against which random samples of produced
materials are compared in acceptance sampling.
 Managerial Controlling Techniques…

2. Statistical Process Control (SPC) - A statistical technique

that uses periodic random samples taken during actual
production to determine whether acceptable quality levels
are being met or production should be stopped for remedial
action.
 Managerial Controlling Techniques…
7.4.3. Inventory Control
 Inventory control is another type of control system found
in most organizations.
 Inventory is a stock of materials that are used to facilitate
production or to satisfy customer demand.
 There are three major types of inventory:

1. Raw materials inventory: The stock of ingredients, and

other basic inputs to a production process.
 Managerial Controlling Techniques…
2. Work-in-process inventory: The stock of items that are
currently in production process.
3. Finished-goods inventory: The stock of items that are
transformed into a final product.
 The major types of inventory control systems are
economic order quantity and just-in-time inventory.
 Managerial Controlling Techniques…
1. Economic Order Quantity (EOQ) –
 The economic order quantity is an inventory control
method developed to minimize ordering plus holding
costs, while avoiding stock out costs.
 Ordering costs are the expenses involved in giving an order
(such as telephone, tax and postage).
 Holding costs are expenses associated with keeping an item
on hand (such as storage). Stocks out costs are economic
consequences of running out of stock.
 Managerial Controlling Techniques…

2. Just-in-Time Inventory Control (JIT) –

 JIT is an approach to inventory control that emphasizes
having materials arrive just as they are needed in the
production process.
 This approach minimizes holding costs and saves storage
space by having materials arrive only as needed.
Thank You!