Managing Organisation - Controlling

Study Material on Managing Organisation- Controlling: Compiled by Sinmoy Goswami, Lecturer, GCMS
CONTROLLING
Controlling involves monitoring of activities, reviewing feedback information about the outcome and taking corrective action if needed. The basic purpose of a well-designed control system is to ensure that results are achieved according to plan. Control is not just score-keeping. It is not just plotting the course and getting locations reports. It is, rather, steering the ship (Rao and Krishna, 2002). Control is checking current performance against predetermined standards constrained in the plans, with a view to ensuring adequate progress and satisfactory performance. F.F.L. Breach Control, in its managerial sense, can be defined as, the presence in a business of that force which guides it to a predetermined objective by means of predetermined policies and decision.Dalton E. McFarland Controlling means that managers undertake the following actions: i. ii. iii. Developing appropriate standards Comparing ongoing performance against those standards Taking steps to ensure that corrective actions are taken when necessary. A good controlling system is generally designed to prevent any mistakes in the performance of jobs and not just correcting them afterwards (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Features of Controlling: The following are the features of controlling: i. ii. iii. iv. v. vi. vii. viii. Control is a positive force Control is a continuous process Control is forward looking Control process is universal Control process is dynamic Control is goal-oriented Delegation is the key to control Control is based on planning
Importance of Control: The management process is incomplete and, sometimes, meaningless without control function (Koontz and Weihrich, 2007; Rao and Krishna, 2002). The performance targets remain on paper, and workers tend to use resources recklessly and managers find everything in chaotic situation. The absence of control could be very costly and unproductive. A good system of control checks these and offers the following advantages: i. ii. iii. Achievement of goals Execution and revision of plans Brings order and discipline
iv. v. vi.
Facilitates decentralization of authority Promotes coordination Cope with uncertainty and change
Control Process: The control process involves the following steps (Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. Establishment of standards: Standards are the targets against which all subsequent performance will be compared for overall improvement of organizational performance. Standards are of the following types: a. Quantitative Standards: These include the following: a) Time Standards b) Cost Standards c) Productivity Standards d) Revenue Standards b. Qualitative Standards: These include standards of quality based on perfection. ii. iii. iv. Measurement of actual performance: Here actual performance of the employee is measured against fixed standards for his/her job. Comparison of actual performance with standard: This involves comparison of actual performance with standard set for a job. Taking corrective action: This involves taking corrective action for any deviations of actual performance from the standard performance. Types of Control: Depending on the time at which control is applied, controls are of three types (Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. ii. iii. Feedback control (Historical or Post-control): It is post mortem examination of events, the purpose of which is to improve performance in the future. Concurrent control: It involves control that consists of monitoring ongoing activities to ensure they are consistent with standards. Predictive or Feedforward control: It is the intelligent anticipation of problems and their timely prevention rather than after-the-fact reaction.
FEEDFORWARD CONTROL CONCURRENT CONTROL
INPUTS
PROCESSING
OUTPUTS
FEEDBACK CONTROL
Principles of Control: According to Lyndall Urwick, there are four principles of managerial control (Diwan, 1998; Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. ii. iii. iv. The principle of uniformity The principle of comparison The principle of utility The principle of exceptions
Dimensions of Control: Managers should focus attention on key or critical areas which have a significant bearing on the performance of various departments in an organization (Koontz and Weihrich, 2007; Rao and Krishna, 2002). The following ways have been found to be relevant in this regard: i. Critical or strategic point control: It puts focus on measuring performance and checking deviations in respect of key result areas which are highly critical to the success of a firm. Types of Critical Standards of control: a. b. c. d. e. f. g. ii. Physical standards Cost standards Capital standards Revenue standards Programme standards Intangible standards Goals for standards
Management by exception (MBE): It tries to focus attention on extremely serious deviations from the plans and standards. It offers the following benefits: a. It saves time b. It identifies critical problem areas c. It stimulates communication d. It reduces frequency of decision making e. It leads to concentration of efforts on important things f. It makes use of more knowledge and data g. It is necessary in big organizations
Resistance to Control: There is a natural resistance to controls, because controls take away a certain amount of individual freedom (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Employees tend to view controls in a negative way, due to various reasons: i. ii. iii. Over-control Inappropriate controls Unachievable standards
iv. v. vi.
Unpredictable standards Rewards for inefficiency Uncontrollable variables
Overcoming Resistance to Control: Managers can reduce negative reactions to control through the following means (Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. ii. iii. iv. v. vi. vii. viii. Employee participation Justifiable controls Precise and understandable standards Realistic standards Timely communication of findings Accurate findings Assuring support Positive reinforcement
Characteristics of an effective control system: It includes the following (Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. ii. iii. iv. v. Suitability Simplicity Selectivity Soundness and Economy Flexibility vi. vii. viii. ix. x. Forward looking Reasonable Objectivity Responsibility for failures Acceptability
Areas of Control: Control can be exercised over the following areas: i. Policies ii. Organization structure iii. Personnel iv. Costs v. Wages and Salaries vi. Capital expenditure vii. Service Departments viii. Line of products ix. Methods and Manpower x. Research and Development xi. Foreign operations xii. External relations xiii. Overall control
TECHNIQUES OF CONTROLLING: 1. Break-even Analysis: Break-even analysis or cost-volume-profit (CVP Analysis) is a specific method of presenting and studying the inter-relationships between costs, sales volume and profits. It is an important tool of financial analysis whereby the impact on profit of the changes in volume, price, costs and mix can be found out with a certain amount of accuracy. A business is said to break-even when its total sales are
equal to its total costs. It is a point of no-profit or no-loss. At this point, contribution (sale price minus variable cost) is equal to fixed costs (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Advantages of Break-even Analysis: The break-even analysis is a simple tool employed to graphically represent accounting data. The data revealed by financial statements and reports are difficult to understand and interpret. But when the same are presented through break-even charts, it becomes easy to understand them (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Break-even charts help in: i. ii. iii. iv. v. vi. vii. Determining total cost, variable cost and fixed cost at a given level of activity. Finding out break-even output or sales. Understanding the cost, volume, profit relationship. Making inter-firm comparisons. Forecasting profits. Selecting the best product mix and, Enforcing cost control.
Limitations of Break-even Analysis (Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. It is very difficult, if not impossible, to segregate costs into fixed and variable components. Further, fixed costs do not always remain constant. They have a tendency to rise to some extent, after production reaches a certain level. Likewise, variable costs do not always vary proportionately. Another false assumption is regarding the sales revenue, which does not always change proportionately. ii. iii. The break-even analysis also does not take into account the changes in the stock position and the conditions of growth and expansion in an organization. The application of break-even analysis to a multi-product firm is very difficult. A lot of complicated calculations are involved. The break-even point has only limited importance. At best, it would help management to indulge in cost reduction in times of dull business. Normally, it is not the objective of business to break-even, because no business is carried on in order to break-even. Thus, the BEP provides neither a standard of performance nor a guide for executive decisions. Further, the term BEP indicates precision or mathematical accuracy of the point. However, in actual practice, the precise break-even volume cannot be determined and it can only be in the nature of a rough estimate. Therefore, critics have pointed out that the term 'break-even area' should be used in place of BEP. iv. Break-even analysis is a short-run concept, and it has a limited application in the long-range planning.
2. Budgetary Control: The establishment of budgets, relating the responsibilities of executive to the requirements of a policy and the continuous comparison of actual with budgeted results either to secure by individual action, the objective of that policy or to provide a firm basis for its revision (Koontz and Weihrich, 2007; Rao and Krishna, 2002). The primary objectives of budgetary control may be stated, thus: i. ii. iii. iv. To provide a detailed plan of action for a business over a period of time. To coordinate the different units and activities of the organization with a view to utilize resources judiciously. To motivate organisational members to perform well. To exercise control over cost through comparison of actual results with budgeted ones and initiating rectification steps promptly. Advantages of Budgetary Control: It serves as an invaluable aid to management through planning, coordination and control (Koontz and Weihrich, 2007; Rao and Krishna, 2002): Planning: i. ii. iii. iv. v. i. ii. i. ii. iii. iv. v. Habit of thinking ahead Pooled judgement and experience Realistic goals and policies Planned way to secure economy Reduces uncertainty Establishes coordination Relates business activity with general economic trends Indicates weaknesses Prevents waste Facilitates standard costing Management by exception Motivates people
Coordination:
Control:
Limitations of Budgetary Control (Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. ii. iii. iv. Accuracy is open to doubt Constant review needed Costs may be prohibitive Impersonal approach
Types of Budgets:
Fig: Types of Budgets (Source: Rao and Krishna, 2002) Functional and Master Budgets: Master Budgets: It is the summary budget for the entire enterprise and embodies the summarized figures for various activities (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Functional Budgets: They are of the following types (Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. ii. iii. iv. v. Sales Budget: It is the forecast of the total sales expressed in terms of money and quantity. Production Budget: It is the forecast of production for the project period. Materials Budget: It shows the details of raw materials to be consumed. Labour Budget: It shows the details of labour requirements in quantity with estimated costs. Manufacturing Overhead Budget: It shows the estimated costs of indirect materials, indirect labour and indirect manufacturing expenses during the budget period to achieve the predetermined targets. vi. vii. viii. ix. Administration Cost Budget: It comprises of salaries and expenses of the administrative office and management for a specific period. Selling Expenses Budget: It includes all the expenses concerned with the sales of products to customers. Research and Development Budget: It lists all the research and development activities together with their likely costs. Capital Expenditure Budget: It shows the estimated expenditure on fixed assets.
x.
Cash Budget: It prepared after all the functional budgets are prepared
Fixed and Flexible Budgets: Fixed Budgets: It is designed to remain unchanged irrespective of the level of activity actually attained (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Flexible Budgets: It is designed to remain change in accordance with the level of activity actually attained (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Budgets based on conditions: Basic Budgets: It is prepared for use unaltered over a long period of time (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Current Budgets: It is related to the current conditions and is prepared for use for a short period of time (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Budgets based on periods: Long term Budgets: It is prepared for use over a long period of time (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Short term Budgets: It is prepared for use over a short period of time usually less than a year (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Essentials of Effective Budgetary Control: In order to serve as an effective managerial tool, budgeting calls for the following (Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. ii. iii. iv. Budgeting should have the wholehearted support of top management. Practical and actionable budgeted level of attainment must be decided upon. The budget period should be neither too long nor too short. Managers must identify themselves with the philosophy contained in budgets. They must commit themselves to budget objectives. They must feel responsibility for actions and work under an atmosphere of self- imposed discipline and control. v. vi. vii. To promote clear communications, budget manuals must be prepared well in advance. The budget manual should indicate the responsibilities of individuals at different levels. Budgeting should be supported by a proper accounting system. Budget should not be a temporary phenomenon. It should be a continuous activity. Further, it should not be partial, covering a few business activities, but should be a comprehensive one, covering all business operations. viii. There should be no attempt to use budgets as whipping devices or as pressure tactics to control employee performance.
Zero-Based Budgeting (ZBB): The key element in ZBB is future-objective orientation of past objectives. Instead of taking the last year's budgets and adjusting them for finding out the future level of activity and preparation of budgets therefrom, ZBB forces managers to review the current on-going objectives and operations. ZBB is, therefore, a type of budget that requires managers to rejustify the past objectives, projects, and budgets and to set priorities for the future. The essential idea of ZBB that differentiates from traditional budgeting is that it requires managers to justify their budget request in detail from scratch without any reference to the level of previous appropriations. It tantamounts to recalculation of all organisational activities to see which should be eliminated, funded at reduced level, funded at the current level or increased finances must be provided (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Programme or Performance Budgeting: Performance budgeting is a work plan in terms of work done or products produced (Koontz and Weihrich, 2007; Rao and Krishna, 2002). It has the following features: i. ii. iii. It gives a broader view to the budget as a plan and programme for action rather than only as an instrument for obtaining and utilizing funds. It tries to integrate inputs with the outputs of a development programme. It seeks to get results by establishing a meaningful relationship between financial outlays and physical content of the programme. Performance budgeting consists of the following steps (Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. ii. iii. iv. Classifying activities in terms of functions, and programmes. Setting physical and financial limits. Reporting of performance at periodic intervals. Taking remedial steps, whenever and wherever necessary.
Features of Performance budgeting (Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. ii. iii. Emphasis Time Cost effectiveness
Guidelines to effective Performance Budgeting: The following guidelines may help a manager to a great extent to carry out the performance budgeting efforts effectively (Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. ii. iii. Opinions and trends Controllable aspects Achievable targets
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iv.
Focus on improving behaviours
3. Responsibility Accounting: Responsibility accounting is characterized by the following (Koontz and Weihrich, 2007; Rao and Krishna, 2002): i. ii. iii. iv. v. vi. vii. The centre is headed by a responsible official. He will be controlling the costs which are incurred while carrying out the allocated activities. The costs are assigned to responsibility centres rather than to products. A distinction is made between controllable costs (that are within the control of the head of the centre) and uncontrollable costs (that are beyond the control of the head of the centre). Both the controllable and uncontrollable costs are shown separately. Each centre is charged with responsibility for the cost over which it has control. Costs are accumulated according to the hierarchy of the responsibility centre. The cost control is exercised on the basis of who is responsible for costs; and this helps in fixing responsibility on specific individuals and obtains results. 4. Human Resource Accounting: Human resource accounting measures both, the cost and the value of people to an organization. It shows the investment the organization makes in its people and how the value of these people changes over time. According to the American Association of Accountants (AAA), HRA is a process of identifying and measuring data about human resources and communicating this information to interested parties (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Objectives of Human Resource Accounting (Rao and Krishna, 2002): i. ii. iii. iv. To provide cost/value information about acquiring, developing, allocating and maintaining human resources so as to meet organisational goals. To enable management to effectively monitor the use of human resources. To find whether human assets are appreciating or depreciating over a period of time. To assist in the development of effective management practices by classifying the financial consequence of various practices. 5. Standard Costing: Standard costing is a sophisticated technique of costing under which the standards are determined in advance, and actual costs are compared with the standards so that corrective action may be taken for any unfavourable variances (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Standard costing has the following importance: i. It is an indispensable tool for controlling costs and ensuring efficiency.
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ii. iii.
It serves as an important benchmark for controlling, coordinating, planning and directing various activities in an organization. Standard costs are normative or specific costs, these are predetermined costs based on a technical estimate for materials, labour, and overhead for a prescribed set of conditions. These are, therefore, scientifically pre-determined costs of products, processes, components and operations.
6. Management Audit: Management audit is the systematic appraisal of the overall performance of the management. It is a systematic and indepth review of the effectiveness and efficiency of management. It is a critical examination of the entire management process as a whole (Koontz and Weihrich, 2007; Rao and Krishna, 2002). The purpose of Management Audit is as follows: i. To identify deficiencies in the performance of management functions. Here, the total job management is evaluated and therefore an adhoc staff or outside experts are called on to conduct the audit. ii. Appraisal of the general performance of management functions as well on specific organisational areas. Management audit is a periodic and diagnostic activity that is undertaken on a regular basis in order to appraise the effectiveness of operating and managerial functions. 7. Social Audit: Social audit, in simple terms, is concerned with social performance of an organization (Koontz and Weihrich, 2007; Rao and Krishna, 2002). Social audit may holds different meanings: i. ii. iii. iv. v. Total expenditure for social activities. Value of productive capability of organizations human resources and value of various parties external to the organization but interacting with the organization. Activities which cover only social performance. Covering those activities which the organization is doing in each area that it recognizes as important from the society's point of view. A cost-benefit approach which tries to quantify values contributed to comparable to the typical financial balance sheet. 8. Pert and CPM (Network Techniques): PERT and CPM represent two most popular catch phrases in management parlance. i. PERT (Programme Evaluation and Review Technique): It is a scheduling tool that is essentially a network of project activities showing estimates of time necessary to complete the society and detriments to the society for actions taken or not taken, and arranges them in a fashion
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each activity and the sequential relationship of activities that must be followed to complete the project (Koontz and Weihrich, 2007; Rao and Krishna, 2002). ii. CPM (Critical Path Method): It shows the sequence of events and activities within a programme evaluation and review technique network that requires the longest period of time to complete (Koontz and Weihrich, 2007; Rao and Krishna, 2002). 9. Management Information System (MIS): MIS is an integrated technique for gathering relevant information from whatever source it originates, and transferring it into usable form for the decision-makers in management. It is a system of communications primarily designed to keep all levels of organisational personnel abreast of the developments in the enterprise that affect them. MIS provides working tools for all the management personnel in order to take the best possible action at the right time with respect to the operations and functions of the enterprise for which they are largely responsible. The emphasis of MIS is on information for decision-making (Rao and Krishna, 2002). MIS and its role can be summarized thus: i. ii. iii. Three-pronged service- data generation, data processing and information transmission. Facilitates total performance (of the total management process) Takes into account several critical dimensions including: a. Real time requirement b. Frequency requirement c. Accuracy requirement d. Data reduction requirement e. Distribution requirement f. Storage requirement iv. Reduces overload of information
10. Total Quality Management (TQM): TQM is a way of creating an organisational culture, committed to the continuous improvement of skills, teamwork, processes, product and service quality and customer satisfaction. TQM is anchored to organisational culture because successful TQM is deeply embedded in virtually every aspect of organisational life (Koontz and Weihrich, 2007; Rao and Krishna, 2002). TQM is built around four main ideas (Rao and Krishna, 2002): i. ii. iii. iv. Doing things right in the first time Being customer centered Making continuous improvement a way of life Building teamwork and empowerment
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TQM Tools/Techniques: The implementation of TQM involves the use of the following techniques (Rao and Krishna, 2002): i. ii. iii. iv. v. Benchmarking which is a continuous process of comparing an organizations strategies, products or processes with of best-in-class organizations. Quality Circles which is a group of volunteer employees who meet regularly to discuss and solve problems affecting the quality of their work. Empowerment which involves empowerment of employees as well as the contributions of suppliers and customers in the decision-making process. Outsourcing which involves contracting out of a companys in-house function to a quality and preferred vendor in a particular task area. Reduced cycle time which involves removal of unnecessary steps in the process and the acceleration of activities into a shorter time frame. 11. Kaizen: Kaizen is a Japanese word which stands for continuous and never ending improvement involving all people in an organization (Rao and Krishna, 2002). It can be broadly divided into three parts: i. ii. iii. Management oriented Kaizen involving managers. Group oriented Kaizen involving quality circles, other small groups etc. Individual oriented Kaizen involving improvement of the efficiency of individuals. Features of Kaizen (Source: Rao and Krishna, 2002) Features
Effect Pace
Kaizen
Long-term and long lasting but not dramatic. Small steps; built around existing facilities and technology.
Time frame Continuous and incremental. Involvement An ongoing and never-ending process that involves everyone in the organization. Approach Needs Collectivism, group efforts and systems approach. Needs very little investment but huge effort to keep it going.
Orientation People-oriented and cross-functional approach. Feedback 5-S movement Comprehensive feedback offered to all at regular intervals.
i. Seiri: To straighten up work-in-progress, eliminate unnecessary tools and machinery,

defective products; papers and documents.
ii. Seiton: To put things in order so that they are readily available, whenever needed. iii. Seiso: To keep the workplace clean; clean the workspot before starting work and after
finishing the day's work.
iv. Seiketsu: To maintain personal cleanliness; a healthy mind in a healthy body. v. Shitsuke: To follow procedures and observe discipline strictly.
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12. Financial Ratio Analysis: Financial Ratio Analysis involves the analysis of the following: i. Liquidity Ratio: They indicate the organizations ability to pay short term debts. Some of the commonly used liquidity ratios are as follows: a. Current Ratio = Current Assets / Current Liabilities b. Quick Ratio = Liquid Assets / Current Liabilities ii. Activity Ratio: They indicate the manner of utilization of funds in an organization. Some of the commonly used activity ratios are as follows: a. Inventory Turnover Ratio = Cost of goods sold / Average inventory b. Debtors Turnover Ratio = Net credit sales / Average sundry debtors c. Fixed Turnover Ratio = Net sales / Average net fixed assets iii. Leverage Ratio: They indicate the relative amount of funds in the business supplied by the creditors/ financers and shareholders/ owners. Some of the commonly used leverage ratios are as follows: a. Debt Equity Ratio = Debt / Equity b. Debt Asset Ratio = Debt / Asset c. Interest Coverage Ratio = Profit before interest and taxes / Interest iv. Profitability Ratio: They indicate the ability of organization to earn profit in relation to its sales and/or investment. Some of the commonly used profitability ratios are as follows: a. Gross Profit Margin Ratio = Gross Profit / Net Sales b. Net Profit Margin Ratio = Net Profit / Net Sales c. Return on Assets = Profit after tax / Average total assets d. Return on Equity = Equity earnings / Average equity e. Return on Capital Employed = Profit before interest and taxes (1 Tax Rate) Average total assets v. Control through return on investment: It is indicated by Rate of return = Profit / Total investment Other Methods of Control (Diwan, 1998): i. ii. Self-control: Self-control stems from the employees ego, orientation, training and work attitudes. Group control: It affects individuals both in output and behaviour. Group norms of doing a good job exert pressures on the individual to perform and to follow work rules.
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iii.
Policies and procedures: They are guides to action for managers to use in controlling behaviour and output of employees.
Questions: 1) 2) 3) Explain. 4) budgeting? References: Diwan, P (1998). Management Principles and Practices (1st Edition). New Delhi: Excel Books. Rao, V S P and Krishna, V H (2002). Management: Text and Cases (1st Edition). New Delhi: Excel Books. Stoner, J.A.F., Freeman, R.E. & Gilbert, D.R. (2007), Management (6th Edition), New Delhi: Prentice Hall of India Pvt. Ltd. Weihrich, H. & Koontz, H. (2007). Management: A Global Perspective (11th Edition). New Delhi: Tata McGraw Hill Publishing Company Pvt. Ltd. Explain the concept of Zero Based budgeting. How is it different from Performance What do you mean by controlling? State the importance of controlling. Explain the techniques of controlling. MIS is an integrated technique for gathering relevant information from whatever
source it originates, and transferring it into usable form for the decision-makers in management

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Study Material on Managing Organisation- Controlling: Compiled by Sinmoy Goswami, Lecturer, GCMS

Unpredictable standards Rewards for inefficiency Uncontrollable variables

Focus on improving behaviours

i. Seiri: To straighten up work-in-progress, eliminate unnecessary tools and machinery,

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