CONTROLLING

Source: Management - A Global Perspective

by Weihrich and Koontz 11th Edition
CONTROLLING
¢The process of measuring
progress toward planned
performance and, if necessary,
applying corrective measures
to ensure that performance is
in line with manager’s
objectives.
CONTROLLING PROCESS
1. Setting performance standards
2. Measuring actual performance
3. Comparing performance with the
standard vs. actual, and
determining deviations
4. Remedying unfavorable deviation
by taking corrective action
 CONTROLLING PROCESS
The Controlling Process

Set performance Measure actual Determine

Compare
standards performance deviation

Standards Within limits

Take corrective
No Yes
action

Continue work
progess

Video:  Controlling  Process  in  Action

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ESTABLISHMENT OF
STANDARDS
¢ Standards are simply criteria of
performance.
¢ They are selected points in an entire
planning program, at which
measures of performance are made
so that managers can receive signals
about how things are going and
thus, do not have to watch every
step in the execution of plans.
 CORRECTION OF DEVIATIONS
¢ Managers may correct deviations by:

1. Redrawing their plans or modifying their

goals;
2. Exercising their organizing function through
reassignment or clarification of duties;
3. Additional staffing;
4. Better selection and training of subordinates;
5. Ultimate re-staffing measure—firing;
6. Better leading—fuller explanation of the job
or more effective leadership techniques.
 TYPES OF CRITICAL POINT
STANDARDS
1. Physical Standards
Ø Non-monetary, quantitative measurements that
are common at the production/operating level
Ø Reflect quantities for determining labor, material
or machine requirements.
Ø They may be units of output, man hours, units of
waste etc.

They could also reflect quality ex. firmness, hardness, elasticity,

tolerance, density durability etc. These determine the financial
implications of these elements.

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 TYPES OF CRITICAL POINT
STANDARDS
2. Cost Standards
Ø Monetary values & measurements also
common at the operating level.

Ø They give monetary values to various

expenses ex. direct costs, labour costs,
machine hours cost etc. usually by
project/ service unit.

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 TYPES OF CRITICAL POINT
STANDARDS
3. Capital Standards
Ø The amount of capital or investment
that is reflected in the balance sheet.
Ø Costs that have to do with the capital
invested in the firm ex. return on
investment.

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 TYPES OF CRITICAL POINT
STANDARDS

4. Revenue Standards
Ø The monetary values from sales
Ø Examples are revenue per bus
passenger-mile, average sales per
customer, sales per capita in a given
market area, etc.

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 TYPES OF CRITICAL POINT
STANDARDS
5. Program Standards
Ø The points or criteria for evaluating a
program.

Ø Standards used to appraise the

effectiveness of a given programme.
Examples are variable budget, project
or program duration, timelines,
workforce requirements, etc.

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TYPES OF CONTROL
1. Preliminary Control (sometimes called
feed forward control) – takes place
before operations begin and includes
policies, procedures, and rules designed
to ensure that planned activities are
carried out properly.

Ex. inspection of raw materials, proper

selection and training of employees
TYPES OF CONTROL

2. Concurrent Control – takes place

while plans are being carried out.
Ex. directing, monitoring
TYPES OF CONTROL

3. Feedback Control – focuses on

the use of information about results
to correct deviations from the
acceptable standard after they
arise.
Ex. controlling
MANAGEMENT AUDITS

¢ Themeans for evaluating the

effectiveness and efficiency of various
systems within the organization, from
social responsibility to accounting
control.
TYPES OF AUDITS
1. External Audits – occurs when one
organization evaluates another
organization; used in feedback control
in the discovery and investigation of the
savings and loan scandals.
2. Internal Audits – improve the planning
process and the organization’s internal
control systems; essential functions
include periodic assessment of a
company’s own planning, organizing,
leading, and controlling.
BUDGETING
(BUDGETARY CONTROL)

¢The process of finding out what’s

being done and comparing the
results with corresponding
budget data to verify
accomplishments or to remedy
differences.
TYPES OF BUDGET
1. Sales Budget
Ø Usually data for the sales budget that are
prepared by month, sale area, and product.
2. Production Budget
Ø Commonly expressed in physical units,
required information include types and
capacities of machines, economic quantities to
produce, and availability of materials.
3. Cost Production Budget
Ø Information is sometimes included in
production budgets, comparing production
cost with sales price shows whether or not
profit margins are adequate.
TYPES OF BUDGET
4. Cash Budget
Ø Prepared after all other budget estimates
are completed, shows the anticipated
receipts and expenditures, the amount of
working capital available, the extent to
which outside financing may be required,
and the periods and amounts of cash
available.
5. Master Budget
Ø Includes all major activities of the business,
brings together and coordinates all the
activities of the other budgets and can be
thought of as a “budget of budgets”.
 SALES BUDGET EXAMPLE
¢ ABC ltd plans for the production of the bottles in
the next year ending on December 2020. It
forecasted sales to be $ 5,000 in quarter 1, $ 6,000
in quarter 2, $ 7,000 in quarter 3 and $ 8,000 in
quarter 4, where selling price of for first two
quarters is estimated to be $ 6 and for quarter 3
and for quarter 4 to be $ 7 by the manager of
company.
¢ Also, the sales discount and allowance percentage
will be 2 % of gross sales for all the quarters.
¢ Prepare the sales budget of the company for the
year ending in 2020.

CFA  Institute
FOLLOWING IS SALES BUDGET OF ABC LTD FOR
THE YEAR ENDED ON DECEMBER 31, 2020

Thus the above example shows sales forecasted by the company

for the year under consideration in both the units as well as value
with the help of the information available as the inputs from the
various sources.

CFA  Institute
 PRODUCTION BUDGET EXAMPLE
¢ XYZ ltd manufactures the bottle and makes
the forecast for the upcoming year which
ends in December 2020. It forecasted that
the sales in the next year would be $ 8,000
in quarter 1, $ 9,000 in quarter 2, $ 10,000 in
quarter 3 and $ 11,000 in quarter 4. It is also
planned by the production manager of the
company that the ending inventory will be $
1,000 at the end of each of quarter of the
company’s production. At the beginning of
the quarter 1 inventory of the company was
$ 2,500.
¢ Prepare the necessary production budget of
the company XYZ ltd for the coming year
ending in December 2020.
CFA  Institute
 FOLLOWING IS THE PRODUCTION BUDGET TEMPLATE OF XYZ
LTD FOR THE YEAR ENDED ON DECEMBER 31, 2020.

¢ Thus in the above example, the budget prepared shows the calculation
regarding the number of units that is to be produced in the organization.
¢ Also, as planned ending inventory units of the company is decreased by the
production manager from $ 2,500 to $ 1,000 even though the production of the
company is expected to get an increase every quarter, So it is the risky forecast
because there is the cut in the level of the safety stock of a company.

CFA  Institute
 CASH BUDGET EXAMPLE

TFD  by  Farlex

BALANCE SHEET – AN EXAMPLE
INCOME STATEMENT – AN EXAMPLE
 BASIC FINANCIAL STATEMENTS AND THEIR
ELEMENTS
Financial Statements are the formal reports prepared by accountants. These
statements show the financial effects of transactions and other events by grouping
them into broad classes according to their economic characteristics.

* BALANCE SHEET

- also called “statement of financial condition”, is an itemized statement of

the assets, liabilities and proprietorship of the business.

- It is a statement reflecting the financial condition (ability to meet its

obligations as they fall due) of the business, its debts to outsiders, and the
equity of the owner or members.

It answers the questions:

• How much property does the business own?
• How much does the business owe to outsiders?
• How much is the owner or owner’s worth?
¢ Balance Sheet Equation:
Ø Assets = Liabilities + Proprietorship

Where: P = C= I – W + R - E

Parts of Balance Sheet:

A. Heading – composed of the following:

- Name of the business, if any, or name of the owner, if there is no
business name.
- Name of the form or statement
- Date of the Statement

B. Body – composed of two divisions. One division contains the assets and the
other contains the liability and proprietorship section
Accounting  Elements  in  the  Balance  Sheet

I. Assets – properties owned by the business or upon which the business has a
vested equitable interest. They are comprise of anything of economic value to
the owner and which is legally free for him to dispose.

Classifications of Assets:
A. Current assets – easily converted to cash within an accounting period

Examples:
üCash and Cash Equivalents
•Currency - Any form of money that is in public circulation . It
includes in both hard money (coins) and soft money (paper money).
•Bank balances - The amount of money in a bank account
•Negotiable money orders - financial instrument, issued by a bank or
other institution, allowing the individual named on the order to receive
a specified amount of cash on demand.
•Checks. Demand draft drawn on a bank against its maker's (drawer's)
funds, to pay the stated amount of money to the bearer or named party
 üAccounts receivable
Normally abbreviated as A/R, these are funds that customers currently owe to a
company. They've received the company's products, but haven't yet paid for those goods
or services.

ü Notes Receivable
Loans made to others.

üPrepaid Insurance
Premiums that are paid in advance.

üOffice Supplies
Are assets from purchase to use.

üInventories
These are the components and finished products that a company has currently
stockpiled to sell to customers
B. Non-current or fixed assets – are permanent in nature and they are acquired for use
rather than reselling. They are not expected to be consumed or converted into cash any
sooner than at least one year's time.

Examples:
• Land
Land is considered a fixed asset but, unlike other fixed assets, is not
depreciated, because land is considered an asset that never wears out.
• Buildings
Buildings are categorized as fixed assets and are depreciated over time.
Your place of business - garage, plant, store.

• Office equipment
This includes office equipment such as copiers, fax machines, printers, and
computers used in your business.
• Machinery
This figure represents machines and equipment used in your plant to produce
your product. Examples of machinery might include lathes, conveyor belts, or a
printing press.
• Vehicles
This would include any vehicles used in your business.
II. Liabilities – the things owed by the business. They are financial obligations or
debts of the business in favor of persons or parties other than the owner/s.

Classification of Liabilities:
A. Current Liabilities
• Accounts payable
This is comprised of all short-term obligations owed by your business to
creditors, suppliers, and other vendors. Accounts payable can include supplies
and materials acquired on credit.
• Notes payable
This represents money owed on a short-term collection cycle of one year or
less. It may include bank notes, mortgage obligations, or vehicle payments.

• Accrued payroll and withholding

This includes any earned wages or withholdings that are owed to or for
employees but have not yet been paid.
•Unearned Revenue
- You've been paid, but haven't delivered.

• Salaries Payable
- Salaries you owe employees.

• Interest Payable
- Interest you owe.

• Taxes Payable
- Taxes you owe.
B. Non-Current Liabilities:
•Bonds Payable
Bond - is a promise to repay the principal along with interest (coupons) on
a specified date (maturity).

A debt instrument issued for a period of more than one year with the
purpose of raising capital by borrowing.

•Mortgage payable
Mortgage -The long-term financing used to purchase property . The
property itself serves as collateral for the mortgage until it is paid off.

Obligation listed as a long-term liability in a firm's balance sheet, except

the obligation's current portion (due within a year of the balance sheet date)
which is listed as a current liability.

•Long-term notes
III. Capital/ Owner’s Equity - represents the residual interest in the assets of the
enterprise. If there are no debts, business property is the capital. Therefore, at any
time, capital is equal to property less total debts of the business.
- net worth - owners’ equity
- proprietorship - equity
INCOME STATEMENT
¢Also called Profit and Loss Statement, an
itemized financial statement of the income and
expenses of the company’s operations during the
accounting period.
o one of the three (along with balance sheet and
statement of cash flows) major financial
statements that reports a company's financial
performance over a specific accounting period
INCOME STATEMENT - REPORTS THE REVENUES EARNED BY A COMPANY DURING A GIVEN
PERIOD OF TIME AND ALL THE EXPENSES WHICH WERE INCURRED IN EARNING THOSE REVENUES.

a. Revenue - refers to the sales and other income generating activities.

Effect:
- increasing assets or decreasing liabilities

b. Expenses - refers to necessary operating costs such as salaries, expenses and

other operating expenses (material, labor, overhead)
CHARACTERISTICS OF AN
EFFECTIVE CONTROL SYSTEM
1. Valid Performance Standards
Ø Standards should be expressed in
quantitative terms, should be objective
rather than subjective.
2. Adequate Information to Employees
Ø Information should be accessible as possible,
particularly when people must make
decisions quickly and frequently.
3. Acceptability to Employees
Ø Control systems should emphasize positive
behavior rather than trying to control
negative behavior alone.