Principles of Management

By
Dr. Amit Kamble.
Assistant Professor,
Mechanical Engineering Department,
Fr. CRCE, Bandra
 Principles of Management
Module 5: Control Systems and Processes

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 Principles of Management

Establishing standards and monitoring performance are key managerial

functions under controlling.
Controlling ensures that organizational activities are aligned with plans and
goals.
Without clear standards and effective monitoring, organizations cannot
identify deviations or take corrective action.

Standards act as benchmarks, while performance monitoring measures actual

outcomes against these benchmarks.
This ensures efficiency, quality, and timely achievement of objectives.

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 Principles of Management
Establishing Standards
Standards are predetermined criteria against which performance can be measured. They provide
clarity, direction, and accountability.

Types of Standards

Quantitative Standards
Measurable in numbers
Example: Production of 1000 units/day, 95% product quality
Qualitative Standards
Based on quality, behavior, or service
Example: Customer satisfaction rating above 90%, proper workplace behavior
Financial Standards
Budgeted costs, revenue targets
Example: Monthly sales revenue target of ₹50 lakh
Time Standards
Deadlines and time schedules
Example: Project completion in 6 months
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Steps to Establish Standards
1. Define organizational goals clearly
2. Break down goals into departmental and individual objectives
3. Determine measurable criteria (quantity, quality, time, cost)
4. Communicate standards to employees clearly
5. Ensure standards are achievable and realistic

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Monitoring Performance
Monitoring performance involves comparing actual performance with established
standards to identify deviations.

Steps in Performance Monitoring

1. Measure Actual Performance
Collect data on output, quality, and efficiency
Example: Daily production reports
2. Compare with Standards
Identify deviations and analyze causes
Example: If production is 950 units, deviation = 50 units
3. Take Corrective Action
Address deviations to bring performance back on track
Example: Increase manpower, reduce machine downtime
4. Feedback
Provide feedback to employees for improvement
Example: Inform the team about production gaps and corrective measures
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Techniques for Monitoring Performance
1. Direct Observation – Supervisors check work on the spot

2. Statistical Reports – Use KPIs, dashboards, charts

3. Budgetary Control – Compare actual expenses vs. budgeted costs

4. Management by Objectives (MBO) – Performance measured by goal

achievement

5. Quality Control Tools – FMEA, Pareto charts, control charts

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 Principles of Management
Importance of Standards and Performance Monitoring
Ensures organizational goals are achieved

Helps identify and correct deviations early

Improves efficiency and productivity

Facilitates accountability and motivation

Enhances quality of products and services

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Steps in the Control Process
1. Measuring actual performance
Personal observation, statistical reports, oral reports, and written reports
Management by walking around (MBWA)
A phrase used to describe when a manager is out in the work area interacting
with employees

2. Comparing actual performance against a standard

Comparison to objective measures: budgets, standards, goals
Range of variation
The acceptable parameters of variance between actual performance and the
standard

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Steps in the Control Process
3. Defining an Acceptable Range of Variation

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 Principles of Management
Steps in the Control Process
4. Taking managerial action to correct deviations or inadequate standards

a. Immediate corrective action

Correcting a problem at once to get performance back on track
b. Basic corrective action
Determining how and why performance has deviated and then correcting the
source of deviation
c. Revising the standard
Adjusting the performance standard to reflect current and predicted future
performance capabilities

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 Principles of Management
Types Of Control
Feedforward control
Control that prevents anticipated problems

Concurrent control
Control that takes place while an activity is in progress

Feedback control
Control that takes place after an action
Provides evidence of planning effectiveness
Provides motivational information to employees

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Principles of Management
Types Of Control

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The Qualities Of An Effective Control System
• Accuracy
• Timeliness
• Economy
• Flexibility
• Understandability
• Reasonable criteria
• Strategic placement
• Emphasis on the exception
• Multiple criteria
• Corrective action

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What Contingency Factors Affect the Design of A Control System?

1. Size of the organization

2. The job/function’s position in the organization’s hierarchy
3. Degree of organizational decentralization
4. Type of organizational culture
5. Importance of the activity to the organization’s success

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 Principles of Management
What Contingency Factors Affect the Design of A Control System?

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 Principles of Management
Financial Controls: Budgeting, Financial Reporting, and Variance Analysis

Financial control is a managerial function that ensures an organization’s financial

resources are used effectively and efficiently to achieve organizational objectives.

It involves planning, monitoring, and controlling financial activities to prevent

misuse or wastage of funds.

Financial controls are essential for decision-making, accountability, and long-term

sustainability.

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 Principles of Management
Budgeting

Budgeting is the process of preparing quantitative plans for future income,

expenditure, and resources over a specified period. Budgets serve as standards
for performance measurement and facilitate resource allocation.

Types of Budgets

1. Operating Budget: Estimates revenue and expenses for daily operations

Example: Monthly sales and production costs
2. Cash Budget: Estimates cash inflows and outflows to maintain liquidity
Example: Ensuring enough cash for payroll and supplier payments
3. Capital Budget: Plans long-term investments in assets
Example: Purchasing machinery or new office equipment
4. Flexible Budget: Adjusts based on activity levels
Example: Adjusting material costs according to production volume 18
 Principles of Management
Budgeting
Steps in Budgeting
1. Set objectives

2. Forecast income and expenses

3. Allocate resources to departments

4. Approve budget

5. Communicate to managers

6. Monitor performance against budget 19

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Financial Reporting
Financial reporting involves preparing financial statements to
summarize the financial performance and position of the organization.
It enables stakeholders to evaluate performance, liquidity, and profitability.

Key Financial Reports

1. Income Statement (Profit & Loss Account) – Shows revenue,

expenses, and net profit
2. Balance Sheet – Shows assets, liabilities, and equity
3. Cash Flow Statement – Shows cash inflows and outflows
4. Financial Ratios and KPIs – Measures efficiency, liquidity, and
profitability 42
 Principles of Management
Variance Analysis
Variance analysis is the process of comparing actual financial performance with
budgeted standards to identify deviations (variances) and their causes.

Types of Variance
Material Variance
Material Cost Variance: Difference between standard cost and actual cost of materials
Example: Standard cost ₹200/unit, actual cost ₹220/unit → adverse variance ₹20/unit
Labor Variance
Labor Efficiency/Rate Variance: Differences due to efficiency or wage rates
Example: More overtime hours increase labor costs
Overhead Variance
Fixed and Variable Overheads compared with budgeted amounts
Sales Variance
Difference between expected and actual sales revenue
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 Principles of Management
Variance Analysis
Steps in Variance Analysis

1. Compare actual performance with budget

2. Identify significant deviations

3. Analyze reasons for variance

4. Take corrective action

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Importance of Financial Controls
1. Ensures effective utilization of financial resources

2. Helps in planning and decision-making

3. Detects financial irregularities early

4. Improves accountability among managers

5. Facilitates achievement of organizational goals

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Techniques for Effective Financial Control

1. Budgetary Control: Using budgets as benchmarks

2. Ratio Analysis: Monitoring financial health through liquidity, profitability, and

efficiency ratios

3. Internal Audit: Independent evaluation of financial operations

4. Cost Control: Monitoring and reducing unnecessary costs

5. Variance Analysis: Corrective action on deviations

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Challenges in Financial Control

1. Inaccurate forecasting of budgets

2. Delays in financial reporting

3. Resistance from managers to adopt financial discipline

4. Unforeseen economic or market changes

5. Complex accounting systems

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Components of Master Budgets

Operating Budget – leads to budgeted income statement

Sales budget
Production budget
Direct Materials budget
Direct Labor budget
Manufacturing overhead budget

Financial Budget – leads to balance sheet and cash flow statement

Cash collections
Cash payments
Purchase of assets
Payment of dividends
Borrowing and lending 48
Principles of Management
Master Budget

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Basic Operating Budget Steps
1. Prepare the Sales Budget
2. Prepare the Production Budget (in Units)
3. Prepare the Direct Materials Usage Budget and Direct Materials Purchases Budget
4. Prepare the Direct Labor Budget
5. Prepare the Manufacturing Overhead Budget
6. Prepare the Cost of Goods Sold Budget
7. Prepare the Selling and Administrative Expense Budget
8. Prepare the Budgeted Income Statement

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Basic Financial Budget Steps
Based on the Operating Budgets:

1. Prepare the Cash Budget

2. Prepare the Budgeted Balance Sheet
3. Prepare the Budgeted Statement of Cash Flows

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First-Level Variances
The first-level variance for a cost item is the difference between the actual costs and
the master budget costs for that cost item

Variances are favorable (F) if the actual costs are less than estimated master budget
costs

Unfavorable (U) variances arise when actual costs exceed estimated master budget
costs

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Planning Variances

A flexible budget adjusts the master budget to reflect the actual volume by
using standard costs
Standard costs are budgeted unit costs
Standards are established per unit of product as well as per unit of input

Cost differences between the master and the flexible budget are called planning
variances
Reflect the difference between planned output and actual output
Arise entirely because the planned volume of activity was not realized
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 Principles of Management
Flexible Budget Variances
• Flexible budget variances are the differences between the flexible budget and the
actual results
• Flexible budget variances reflect:
• Quantity variances -- the difference between the planned and the actual usage of inputs
per unit of output
• Cost variances -- the difference between the planned and the actual price or cost per unit
of the various cost items

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Second & Third-Level Variances
• The second-level variances are the planning variance and the flexible budget variance

• The direct material flexible budget variances and direct labor flexible budget variances
can be decomposed further into third-level variances:
• Efficiency variances
• Price variances

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Direct Material Variances
• The material quantity variance is calculated as:
Quantity variance = (AQ-SQ) x SP
Where:
AQ = actual quantity of materials used
SQ = standard (estimated) quantity of materials required
SP = standard (estimated) price of materials

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 Principles of Management
Direct Material Variances
• The material price variance is calculated as:
Price variance = (AP-SP) x AQ
Where:
AP = actual price of materials
SP = standard (estimated) price of materials
AQ = actual quantity of materials used

• The price variance may, however, be calculated using the quantity purchased rather than
the quantity used

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Direct Labor Variances
Efficiency variance = (AH-SH) x SR
Rate variance = (AR-SR) x AH
Where:
AH = actual number of direct labor hours
AR = actual wage rate & SR = standard rate
SH = standard (estimated) number of direct labor hours
• The sum of the rate variance and the efficiency variance equals the total flexible budget direct labor variance
• Standard hours of DL reflects the total hours allowed for the actual output level given standard direct labor hours per
output unit

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Overhead Variances
• Variable
• Fixed
• The quantity of capacity-related costs may not change from period to period,
but the spending on them may fluctuate
• Monitoring spending variances on capacity-related resources is possible and
desirable

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Variable Overhead Cost Variances
• consist of
• a quantity component called the efficiency variance
• and a price component called spending variance
• Variable overhead cost variances may be analyzed in a manner similar to direct
material or direct labor variances when they are assigned to products in the
traditional way – by the direct labors

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Fixed Overhead variances
• Since fixed costs are flexed to reflect the actual capacity level; but fixed within a range
there is no price variance but a budget variance
• Actual fixed costs – budgeted fixed costs

• Volume variance to reflect the change in capacity

• Fixed overhead rate per driver unit=(actual driver units – driver units allowed for the actual output
level)

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Types of variances 1. Material 2. Labour 3. Overhead 4. Other
Variance Variance Variance Variances

Material Cost Labour Cost Overhead Cost Calendar

variance Variance Variance Variance

Types of
Variances Material Price Labour Rate Variable Sales Value
Variance Variance overheads Var. variance

Labour
Material Usage Variable o/h Sales price
Efficiency
Variance efficiency var. variance
Variance

Labour Mix
Material Mix Variance Variable o/h Sales volume
Variance expenditure var. variance
Idle Time
Variance
Material Yield Fixed overhead
Profit Variance
Variance variance
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 Principles of Management
Quality Management: Introduction to Quality Control Techniques and
Continuous Improvement

Quality management is a managerial approach that ensures products

and services meet customer expectations and organizational
standards.

It involves planning, controlling, and improving quality through

systematic processes.

Effective quality management improves customer satisfaction, reduces

costs, and enhances organizational reputation.
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 Principles of Management
Importance of Quality Management

1. Ensures products/services meet standards

2. Reduces defects and rework

3. Increases customer satisfaction and loyalty

4. Enhances competitiveness

5. Promotes efficient use of resources

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 Principles of Management
Quality Control (QC)
Quality control is the process of monitoring and inspecting products/services to ensure they conform to quality
standards.
QC Techniques
1. Statistical Process Control (SPC)
Uses control charts to monitor production processes
Detects variations before they become defects
2. Inspection
Checking products at various stages of production
Example: Inspecting raw materials, semi-finished, and finished goods
3. Sampling
Testing a representative sample instead of entire batch
Example: Checking 10% of smartphones in a production batch
4. Cause-and-Effect Diagram (Ishikawa/Fishbone)
Identifies root causes of defects
Example: Fishbone diagram for defective packaging
5. Pareto Analysis
Focuses on vital few causes of defects (80-20 rule)
Example: 80% of product defects caused by 20% of machine issues
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Process improvement tools (Seven QC Tools)

1. Flow charts
2. Check sheets
3. Histograms
4. Pareto diagrams
5. Cause-and-effect diagrams
6. Scatter diagrams
7. Control charts

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Process improvement tools (Seven QC Tools)
Check Sheets

Check Sheets are simple documents

that are used for collecting data in
real-time.
A Check Sheet is typically a blank
form that is designed for the quick,
easy and efficient recording of the desired information, which can be either
quantitative or qualitative.
When the information is quantitative, the check sheet is called a Tally
Sheet.

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 Principles of Management
Process improvement tools (Seven QC Tools)
Histograms
A histogram divides
up the range of
possible values in a
data set into classes or
groups.
For each group, a
rectangle is constructed
with a base length equal to the range of values in that specific group, and
an area proportional to the number of observations falling into that group.

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Process improvement tools (Seven QC Tools)
Scatter Diagrams
Scatter Diagrams are
used to present
measurements of two
or more related variables.
A Scatter Diagram does
not specify dependent or
independent variables.
Either type of variable can be plotted on either axis.
Scatter Diagrams represent the association (not causation) between two
variables.

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 Principles of Management
Process improvement tools (Seven QC Tools)

Control Charts
A control chart consists
of the following:
CL

A Centre Line (CL) drawn

at the process mean value.

Lower and Upper Control Limits that indicate the threshold at which the
process output is considered statistically unlikely. 70
 Principles of Management
Process improvement tools (Seven QC Tools)
Run Charts
Run Charts are
similar in some
regards to Contol
Charts, but do
not show the
control limits of
the process.
They are therefore
simpler to produce, but do not allow for the full range of analytic techniques supported
by Control Charts.

• Run chart: Measurement against progression of time.

• Control chart: Add Upper Control Limit and Lower Control Limit to the run chart.

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Process improvement tools (Seven QC Tools)
Also called fishbone diagrams (because of their shape) or
Ishikawa diagrams.
Ishikawa Diagram Helps in identifying root causes of the quality failure.
(Helps in the diagnostic journey.)

Machine Manpower

Problem

Method Material

Ishikawa Diagram is also called Cause-and-Effect Diagram. Often are

four generic heading used: 4 M´s!
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 Principles of Management
Process improvement tools (Seven QC Tools)
Pareto Diagram
The purpose of the Pareto Diagram is to highlight the most important set of
factors among a typically large amount of causes for a problem.

In order to develop the Pareto Diagram for a specific process, the knowledge
of Frequncy, Relative Frequency, Cumulative Frequency and Percentage
Frequency is needed.

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Process improvement tools (Seven QC Tools)
Pareto Diagram

It can be noted that the 3 defects of out-of-dimension, poor surface finish

and loose joints account for 75% of the rejections.
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 Principles of Management
Process improvement tools (Seven QC Tools)
Quality as a Function of Time and Methods
Total Quality
Management (TQM)

Quality
Through
Quality

Design

Statistical
Process Improved
Control Design
Inspection (SPC)

1920 1940 1960 1980 2000

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 Principles of Management

Other tools: Flow charts

Process map identifies the sequence of activities or the flow in a process.
Objectively provides a picture of the steps needed to accomplish a task.
Helps all employees understand how they fit into the process and who are their
suppliers and customers.
Can also pinpoint places where quality-related measurements should be taken.
Also called process mapping and analysis.
Very successfully implemented in various organizations. e.g. Motorola reduced
manufacturing time for pagers using flow charts.

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 Principles of Management

Additional process improvement tools

Poka-Yoke (Mistake proofing)
Approach for mistake-proofing processes using automatic devises or methods to
avoid simple human error.
Developed and refined in the 1960s by the late Shigeo Shingo, a Japanese
manufacturing engineer who developed the Toyota production system.
Focused on two aspects:
1. Prediction – Recognizing that a defect is about to occur and provide a warning.
2. Detection – Recognizing that a defect has occurred and stop the process.

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Quality Assurance (QA)

Quality assurance ensures that processes are designed to prevent defects rather
than only inspecting products.

Involves process standardization and audits

Uses ISO standards (e.g., ISO 9001)

Example: Documented procedures for consistent pharmaceutical production

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Continuous Improvement Processes
Continuous improvement (CI) is the ongoing effort to improve products, services, or processes.

Popular CI Methodologies

1. Kaizen
Japanese philosophy: “Change for the better”
Small, incremental improvements

2. PDCA Cycle (Plan–Do–Check–Act)

1. Plan: Identify problem and plan solution
2. Do: Implement solution on small scale
3. Check: Monitor and measure results
4. Act: Standardize improvement or revise plan

3. Six Sigma
Data-driven methodology for reducing defects (DMAIC: Define, Measure, Analyze, Improve, Control)

4. Total Quality Management (TQM)

Organization-wide quality focus involving every employee
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DMAIC - 5 Step Problem Solving Approach

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Toyota Production System(TPS)

Developed by Toyota Motor Corporation to

Provide best quality
Lowest cost
Shortest lead time
It consist of two pillars
Jut in Time
Jidoka
TPS - Taiichi Ohno
Jidoka - Automation with Human touch
Heijunka – Production Smoothing

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Some Areas covered under Kaizen
Quality
Better product/service, reduced cost, process and methods

Cost
Reduction of expense and waste of manpower, better use of energy etc.

Delivery
Reducing delivery time, elimination of non-value adding activity

Management
Training, planning, documentation, information flow
Management support and action is of prime importance

Safety
Reducing hazardous process/methods, unsafe working condition, damage to environment etc.

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Execution of Kaizen
• Kaizen should be preceded by a careful consideration of the three states
• Now: Present Condition
• Next: Desired State
• New: How to Reach that State
• A possible three stage implementation process
• Encourage participation: Promoting kaizen specific activities through monetary
or other benefits
• Training and Education: Desired training to understand principles and problem
solving techniques
• Quality Level Improvement: Focus on alignment with organizational objective
and planning objective

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Role of Managers in Quality Management

1. Set quality standards and policies

2. Monitor and control production processes

3. Promote quality culture among employees

4. Encourage continuous improvement initiatives

5. Ensure compliance with regulatory and ISO standards

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Benefits of Effective Quality Management

1. Reduced production costs due to fewer defects

2. Increased customer trust and satisfaction

3. Improved efficiency and productivity

4. Competitive advantage in the market

5. Enhanced employee morale and involvement

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Challenges in Implementing Quality Management

1. Resistance to change

2. High implementation costs

3. Lack of skilled workforce

4. Difficulty in measuring intangible quality aspects

5. Coordination across departments

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Problems on Variance Analysis

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