CH- 16
16.1 Techniques of Controls
TECHNIQUES OF CONTROLLING
• 16.1.1 Traditional Techniques of Control
• 16.1.2 Modern Techniques of Control
• 16.1.3 Comparison between PERT AND CPM
• 16.2 Financial Control
• 16.2.1 Objectives of Financial Control
• 16.2.2 Steps to conduct Financial Control
• 16.3 Budgetary Control
• 16.3.1 Objectives of Budgetary Control
• 16.3.2 Steps to conduct Budgetary Control
• 16.4 Quality Control
• 16.4.1 Importance of Quality Control
• 16.4.2 Methods of Quality Control
• 16.4.3 Quality Control in Small Scale Industries
TECHNIQUES OF CONTROLS
TRADITIONAL TECHNIQUES OF MANAGERIAL
CONTROL
STATISTICAL
REPORTS
PERSONAL TRADITIONAL BREAK-EVEN
OBSERVATION TECHNIQUES ANALYSIS
BUDGETARY
CONTROL
1. Personal Observation- This is the most traditional method of control. Personal observation is one
of those techniques which enables the manager to collect the information as first-hand information.
It also creates a phenomenon of psychological pressure on the employees to perform in such a manner
so as to achieve well their objectives as they are aware that they are being observed personally on their
job. With the help of these observations they can easily analyze the performance of employees. By
comparing the performance chart of current year with the previous year the managers can know the
progress of their performance. However, it is a very time-consuming exercise & cannot effectively be
used for all kinds of jobs.
2. Statistical Reports- Statistical reports can be defined as an overall analysis of reports and data
which is used in the form of averages, percentage, ratios, correlation, etc., present useful information to
the managers regarding the performance of the organization in various areas.
This type of useful information when presented in the various forms like charts, graphs, tables, etc.,
enables the managers to read them more easily & allow a comparison to be made with performance in
previous periods & also with the benchmarks.
3. Break-even Analysis- Breakeven analysis is a technique used by managers to study the relationship between costs, volume &
profits. It determines the overall picture of probable profit & losses at different levels of activity while analysing the overall
position.
The sales volume at which there is no profit, no loss is known as the breakeven point. There is no profit or no loss. Breakeven
point can be calculated with the help of the following formula:
With the help of break-even analysis technique manager can estimate profits at levels of cost and revenue. The formula for
calculating break-even point is:
4. Budgetary Control- Budgetary control can be defined as such technique of managerial control in which all
operations which are necessary to be performed are executed in such a manner so as to perform and plan in
advance in the form of budgets & actual results are compared with budgetary standards.
Therefore, the budget can be defined as a quantitative statement prepared for a definite future period of time for the
purpose of obtaining a given objective. It is also a statement which reflects the policy of that particular period.
Some of the types of budgets prepared by an organisation are as follows:
a. Sales budget- A statement of what an organization expects to sell in terms of quantity as well as value
b. Production budget- A statement of what an organization plans to produce in the budgeted period
c. Material budget- A statement of estimated quantity & cost of materials required for production
d. Cash budget- Anticipated cash inflows & outflows for the budgeted period
e. Capital budget- Estimated spending on major long-term assets like a new factory or major equipment
f. Research & development budget- Estimated spending for the development or refinement of products &
processes
MODERN TECHNIQUES OF MANAGERIAL
CONTROL
RATIO
ANALYSIS
RESPONSIBILITY
RETURN ON MODERN ACCOUNTING
INVESTMENT
TECHNIQUES
MANAGEMENT PERT AND CPM
AUDIT
1. Return on Investment- Return on investment (ROI) can be defined as one of the important and useful techniques. It
provides the basics and guides for measuring whether or not invested capital has been used effectively for generating a
reasonable amount of return. ROI can be used to measure the overall performance of an organization or of its individual
departments or divisions. This technique is also known as return on capital employees.
2. Ratio Analysis- It refers to evaluation and analysis of financial statements by calculating some important ratios.
➢ Liquidity ratio
➢ Solvency Ratio
➢ Profitability Ratio
➢ Turnover Ratio
3. Responsibility Accounting- Responsibility accounting can be defined as a system of accounting in which overall
involvement of different sections, divisions & departments of an organization are set up as ‘Responsibility centres. The head of
the centres is responsible for achieving the target set for his centres. Responsibility centres may be of the following types:
➢ Cost centre
➢ Revenue centre
➢ Profit centre
➢ Investment centre
4. Management Audit- Management audit refers to a systematic appraisal of the overall performance of the management of an
organization. The purpose is to review the efficiency and effectiveness of management & to improve its performance in future
periods.
The prime objective of Management Audit is to locate defects of irregularities in the areas covered by the audit and to suggest
possible improvements. It assists the management in managing the operations of an undertaking in the most efficient manner
practicable.
Thus Management Audit is concerned with evaluation and appraisal of the control system and information in the entire or in
various segments of the organizations. Its scope has been widened to appraise in detail the systems and subsystems,
procedures, job separation, authorization, accountability, quality of personnel, quality of information generation etc.
Objective of Management Audit:
a. To ensure optimum utilization of human resources and available physical facilities.
b. To point out deficiencies in objectives, policies, procedures and planning.
c. To suggest improved methods of operations.
d. To point out weak links in organizational structure and in internal control system and suggesting improvements.
e. To help management by providing early signals of sickness, ways and means to avoid the same; and
f. To anticipate problems and suggest remedies to solve them in time.
5. PERT and CPM: Techniques of Project Management
PERT and CPM are techniques of project management useful in the basic managerial functions of planning, scheduling and
control. PERT stands for “Programme Evaluation & Review Technique” and CPM are the abbreviation for “Critical Path
Method”. These days the projects undertaken by business houses are very large and take a number of years before
commercial production can start.
The techniques of PERT and CPM help greatly in completing the various jobs on schedule. They minimise production
delays, interruptions and conflicts. These techniques are very helpful in coordinating various jobs of the total project and
thereby expedite and achieve completion of project on time.
PERT is a sophisticated tool used in planning, scheduling and controlling large projects consisting of a number of activities
independent of one another and with uncertain completion times. It is commonly used in research and development projects.
The following steps are required for using CPM and PERT for planning and scheduling:
a. Identify and distinguish the various activities required for the completion of the project and list them separately.
b. Order of precedence for these jobs has to be determined.
c. The next step is to draw a picture or a graph which portrays each of these jobs and shows the predecessor and successor
relations among them. It shows which job comes first and which next. It also shows the time required for completion of
various jobs. This is known as the project graph or the arrow diagram.
ADVANTAGES DISADVANATGES
Compels managers to plan their projects critically UncertainTy about the estimate of time and resources
Provides the management a tool for forecasting the The costs may be higher than the conventional
impact of schedule changes and be prepared to correct methods of planning and control.
such situations
A lot of data can be presented in a highly ordered Not suitable for relatively simple and repetitive
fashion processes
Improved communication
COMPARISON BETWEEN PERT AND CPM
Parameter of Comparison PERT Technique CPM Technique
Orientation Event-oriented technique. Activity-oriented technique.
Type of Model Probabilistic model characterized by Deterministic model characterized by certainty in the duration of
uncertainty in the duration of project project completion.
completion.
The Technique’s Focus Focus on the time of completion of a Focus on the time-cost trade-off in a project.
project.
The Crashing Concept The crashing concept is not applicable. The crashing concept is applicable.
Appropriateness Suitable for high precision time estimation Suitable for projects that are predictable and whose activities are
of projects that are unpredictable and repetitive. Time estimation for such projects is made under
whose activities are non-repetitive. reasonable forms.
FINANCIAL CONTROL
“Financial control may be construed as the analysis of a company's actual results, approached from different
perspectives at different times, compared to its short, medium and long-term objectives and business plans”.
Objectives of Financial Control
1. Checking that everything is running on the right lines
2. Detecting errors or areas for improvement
3. Other uses- Financial control may also serve to:
a. Implement preventive measures.
b. Communicate with and motivate employees.
c. Take action where required.
STEPS TO CONDUCT FINANCIAL CONTROL
ANALYSIS OF THE INITIAL SITUATION
PREPARATION OF FORECASTS AND
SIMULATIONS
DETECTION OF DEVIATIONS IN THE BASIC
FINANCIAL STATEMENTS
CORRECTION OF DEVIATIONS
BUDGETARY CONTROL
According to Brown and Howard, “Budgetary control is a system of controlling costs which includes the preparation of
budgets, coordinating the departments and establishing responsibilities, comparing actual performance with the budgeted
and acting upon results to achieve maximum profitability.”
Welsch relates budgetary control with day-to-day control process. According to him, “Budgetary control involves the use
of budget and budgetary reports, throughout the period to co-ordinate, evaluate and control day-to-day operations in
accordance with the goals specified by the budget.”
Thus, budgetary control involves the follows:
a. The objects are set by preparing budgets.
b. The business is divided into various responsibility centres for preparing various budgets.
c. The actual figures are recorded.
d. The budgeted and actual figures are compared for studying the performance of different cost centres.
e. If actual performance is less than the budgeted norms, a remedial action is taken immediately.
OBJECTIVES OF BUDGETARY CONTROL
ENSURE PLANNING FOR FUTURE BY SETTING UP VARIOUS
BUDGETS
OPERATE VARIOUS COST CENTRES AND DEPARTMENTS
WITH EFFICIENCY AND ECONOMY
ANTICIPATE CAPITAL EXPENDITURE FOR FUTURE.
CENTRALISE THE CONTROL SYSTEM.
ELIMINATION OF WASTES AND INCREASE IN
PROFITABILITY
CORRECTION OF DEVIATIONS FROM THE ESTABLISHED
STANDARDS
FIXATION OF RESPONSIBILITY
STEPS TO CONDUCT BUDGETARY CONTROL
Organisation for Budgetary Control
Budget Centres
Budget Mammal
Budget Officer
Budget Committee
Budget Period
Determination of Key Factor
QUALITY CONTROL
J. M. Juran (1970) who is considered the father of quality research has defined quality as “the performance of the product as per the commitment made
by the producer to the consumer.”Thus,
[Link] commitment may be explicit such as a written contract or it may be implied in terms of the expectations of the average consumer of the product.
2. Second, the performance of the product relates to the ultimate functions and services which the final product must give to the final consumer.
Importance of Quality Control
1. The brand products build up goodwill or image which ultimately increases sales.
2. It helps the manufacturers/ entrepreneurs in fixing responsibility of workers in the production process.
3. Quality control also helps in minimizing the costs by increasing efficiency, standardization, working conditions, etc.
4. It also enables the entrepreneur to know the cost of his / her product quite in advance which helps him in determining competitive prices of his
product.
5. Last but not the least; the entrepreneur can confirm whether the product manufactured by him / her is in accordance with the standard set by the
Government. It further facilitates the entrepreneur to take necessary actions to comply with the standard set.
METHODS OF QUALITY CONTROL
QUALITY CONTROL
STATISTICAL QUALITY
INSPECTION
CONTROL
1. PRODUCT INSPECTION 1. ANALYSIS OF SAMPLES
[Link] INSPECTION 2. USE OF CONTROL CHARTS
[Link] ANALYSIS 3. CORRECTIVE MEASURES
1. Inspection- Inspection, in fact, is the common method used for quality control purposes not only in production but also in services. As regards
inspection in production, there are three important aspects involved in it:
a. Product Inspection- As the name itself suggests, the product inspection relates to the final product sent into the market. The main purpose of product inspection
is to ensure that the products sent into the market comply with the set standard for quality. In other words, it is to ensure that the product ready for sale is perfect and
free of defects.
b. Process Inspection- Process inspection proceeds to product inspection. It is aimed at ensuring that the raw material and machines and equipment’s used in the
production process are of prescribed quality and mark.
Process inspection benefits the unit in two ways:
i. It ensures the manufacturing of a quality product.
ii. It saves wastages of material by preventing process bottlenecks.
c. Inspection Analysis-This is a method based on the analyses of inspections made. The conclusions derived from the inspection analyses help the entrepreneur
locate the exact points in manufacturing process where faults lie. In other words, it enables the entrepreneur to identify the points at which deviations from standard
set start. Quality control through Inspection Method is shown as follows:
2. Statistical Quality Control- It is an advanced method or technique used to control the quality of a product. This method is based on statistical techniques to determine and
control the quality. Sampling, probability, and other statistical inferences are used in this method for controlling the quality of a product. It is widely used in process control in
continuous process industries and in industries producing goods on a mass scale. It is divided into three parts as mentioned below:
(i) Analysis of Samples- This is based on sampling techniques. First of all, the universe i.e., the population to be analysed, is identified. After this, following the sampling technique, the
sample representing the whole population is selected and analysed. It is important that we do not need to analyse all the units of the population, but only a few units called ‘sample units’
are studied and analysed. The result drawn from these sample units are then generalized as a whole. In other words, inspectio n of samples means statistical inspection of the whole
manufactured lot.
(ii) Use of Control Chart- Realizing that figures/ charts are always welcome to depict the fact of findings, the results obtained from analysis of samples are presented in a chart.
The method to draw a chart is as follows:
➢ Measure the quality characteristics of sample selected.
➢ Find out the mean of the sample and also measure its range of dispersion.
➢ Then, data regarding mean and dispersion are gathered.
➢ Take a graph paper and plot the gathered data on it.
Thus, you have a control chart ready to guide you about the quality deviation of your product.
(iii) Corrective Measures- Having drawn quality control chart, the entrepreneur can easily and clearly locate the points of deviations and causes of it. This enables him to evolve
corrective measures to control the quality of the product accordingly. For example, if variation in quality is caused by inferior quality raw material, the quality of raw material will be
increased. Similarly, in case of traditional machinery, new and modem machinery will be installed.
QUALITY CONTROL IN SMALL-SCALE
•
INDUSTRIES
The quality control in small-scale industries is generally based on:
a. Indian Standards specification.
b. Quality marketing schemes.
c. Company Standards in case of ancillary units.
d. Any other standard specification prescribed by the Government or other purchasing agencies.
• The Indian Standards Specifications have been playing an important role in persuading small-scale industries to adhere to the quality of their
products.
• Several State Governments have been operating quality marketing schemes and standards for various products of small-scale industries. When the
small units manufacture their products according to the standards set, the Quality Marketing Centres of the Government stamp the “Q” mark on their
products. This is an assurance for the customers that the product has been manufactured adhering to certain quality standards.
• Thus, Quality control is the mechanism by which products are made to measure up to the specifications determined from the customer’s demands
and transform into sales, engineering and manufacturing requirements. It is concerned with making things right rather than discovering and rejecting
those made wrong.