Delegation of Authority and

UNIT 13 CONTROL Decentralisation

Structure
13.0 Objectives
13.1 Introduction
13.2 Definition of Control
13.3 Characteristics of Control
13.4 Importance of Control
13.5 Stages in the Control Process
13.6 Requisites of Effective Control
13.7 Limitations of Control
13.8 Areas of Control
13.9 Traditional Control Techniques
13.9.1 Budgetary Control
13.9.2 Standard Costing
13.10 Modern Techniques
13.10.1 Break-Even Analysis
13.10.2 PERT (Programme Evaluation and Review Technique)
13.10.3 CPM (Critical Path Method)
13.10.4 Statistical Quality Control
13.10.5 Management Audit
13.11 Let Us Sum Up
13.12 Key Words
13.13 Answers To Check Your Progress
13.14 Terminal Questions

13.0 OBJECTIVES
After studying this unit, you should be able to:
explain the nature and characteristics of control function
describe the importance of control in management
enumerate and analyse the stages in the control process
explain the requisites of effective control, and
outline the various types of control.

13.1 INTRODUCTION
In the preceding units you have learnt in detail, the planning of management.
Controlling is another very important function of management. The study of
management practices cannot be complete unless this function is also examined
in detail. In this unit, we shall discuss the nature and importance of the control
function of management, analyse the stages in control process, outline the types
of control, and explain the requisites of an effective control system.
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Management, Organisation
and Control 13.2 DEFINITION OF CONTROL
Control may be defined as the process of analysing whether actions are being
taken as planned and taking corrective measures to make them conform to the
plan of action. Control is the essence of good management. It is concerned with
ascertaining that planning, organising and directing functions result in attainment
of organisational objectives. In fact, control precipitates bad decisions and their
consequences and restores effectiveness and efficiency. It is a continuous process
which helps a manager to get the performance of his subordinates correspond to
the standard fixed. It also defects the variations as soon as they occur and takes
corrective steps to prevent them in future.

According to Henri Fayol: “Control consists in verifying whether everything

occurs in conformity with the plan adopted, instructions issued and principles
established.”

The control function of management involves determining what is to be

accomplished (the standard); what is being accomplished (the performance),
and, if necessary, applying corrective measures so that performance takes place
according to plans i.e. in conformity with the standard.
In other words controlling involves:
a) Knowing exactly what work is to be done as to quantity, quality and time
available
b) Checking whether work has been or is being carried out with the resources
available, within the time available, at a reasonable cost and in accordance
with the required standard of quality
c) Analysing deviations, if any, from the planned targets and standards to
ascertain the causes thereof
d) Adopting remedial measures to correct the deviations, and
e) Suggesting revision of plans and targets, if necessary.

13.3 CHARACTERISTICS OF CONTROL

Control is a device or a procedure which keeps the manager informed as the
activities for which he is responsible and which assures him that his plans and
policies are being carried out according to schedule. The nature of control function
will be clearly understood from the following characteristics of control:

1) Control is all pervasive function: Control is essential at all levels of

organisation. It is a follow-up action to the other management functions.
Every manager performs the control function irrespective of his rank and
nature of job. Control is the essential counterpart of planning. It is the
control function which completes the management process.

2) Control is a continuous process: Control is an ongoing and dynamic

function of management. It involves continuous review of performance
and revision of standards of operations. As long as an organisation exists,
control continues to exist. It is amenable to change with the external
environment. Therefore, it is a highly flexible process.
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3) Planning is the basis of control: Control can be exercised only with Control
reference to and on the basis of plans. Effective control is not possible
unless the management spells out clear objectives of the organisation. In
fact, measurement of performance requires certain standards which are
laid down under planning. Planning sets the course and, control ensures
that actual action conforms to the planned action.

4) Action is the essence of control: Control is an action-oriented process. A

manager initiates action which guides the operation within the sphere of
plans. In order to prevent a recurrence of deviations, a manager modifies
or improves the existing plans.

5) Control is a forward looking process: Control aims at future. Although

past experience is the criteria for future standards, control is concerned
with checking the current performance and providing guidelines for the
future. Therefore, control is both backward-looking and forward-looking.
It looks at future through the eyes of past.

6) Delegation is the key to control: Effective control requires adequate

delegation of authority. An executive can perform the control function
properly if he enjoys the authority to take remedial action and is to be held
accountable for results.

7) Control allows the organisation to cope with uncertainty: Control helps

in regulating the uncertain events of the organisation. It anticipates any
shift in task and preferences of consumers and directs the organisation to
modify its process in order to meet the contingencies of the future.

13.4 IMPORTANCE OF CONTROL

The necessity of control in business organisation cannot be over-emphasised.
Proper control smoothens the working of an organisation. Absence of control
leads to lowering of efficiency of the employees, since there is no check on their
performance. Existence of an efficient system of control creates an atmosphere
of order and discipline and helps greatly in minimising the chances of work
being defective or being delayed. The importance of control function also arises
from the following benefits derived from it.

1) Adjustment in operations: A control system acts as a device for adjustment

of organisational operations. There are various objectives which serve as
the basis of control. It is through the control function that these objectives
are achieved. Control provides the means of determining whether plans
are being implemented and there is progress towards the achievement of
objectives. It facilitates measures to be taken, if necessary, to correct any
deviations.

2) Managerial responsibility: In every organisation, managerial responsibility

is created through assignment of activities to various individuals. This
process starts at the top level and then goes to the lower level. While
manager assigns work to be carried out by his subordinates, he remains
responsible for the performance of their activities. It is quite natural that
when a person is responsible for the performance of his subordinates, he
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Management, Organisation must exercise some control over them. Thus, controlling enables managers
and Control
to discharge their responsibilities.
3) Psychological effect: The process of control induces individuals towards
better performance. The performance of individuals is evaluated in the
light of targets set for them. A person is likely to act according to the plan,
if he is aware that his performance will be evaluated against the planned
targets. Thus, he is more inclined to achieve the results according to the
standards fixed for him, particularly when there is provision of reward or
punishment on the basis of the performance. Since performance
measurement is one of the basic elements of the process, it ensures that
every person in the organisation contributes to his maximum ability.
4) Coordination in action: Though coordination is the essence of management
and is achieved through the proper performance of all managerial functions,
control affects this aspect significantly. Controls are designed in such a
way that they focus not only on the operating responsibility of a manager,
but also on his ultimate responsibility. So this forces a manager to coordinate
the activities of his subordinate in such a way that each of them contributes
positively towards the objectives. Since this follows throughout the
organisation, coordination is achieved in the organisation as a whole.
5) Organisational efficiency and effectiveness: If the control function is
carried out properly, it results in organisational efficiency and effectiveness.
By making manager responsible, motivating them for higher performance,
and achieving coordination in their performance, control ensures that the
organisation works efficiently. As regards effectiveness, the organisation
is effective if it is able to achieve its objectives. Since control focuses on
the achievement of organisational objectives, it necessarily leads to
organisational effectiveness.

13.5 STAGES IN THE CONTROL PROCESS

Controlling is the final step in the process of comparing actual performance
with the plans and taking steps to initiate corrective action. The basic control
process, wherever it is found and whatever it controls, involves the following
steps:
1) Setting standards: The total workload of the business is broken down into
departments, sections and individuals. Each of them has specific objectives
for detailed operation. These objectives are set in physical terms, such as
quantities of products, units of service, labour-hours, speed or volume of
[Link] may be expressed in monetary terms, such as volume of
sales, costs, capital expenditures or profits or it may be expressed in any
other verifiable qualitative terms. These standards must be clear so that the
checking of performance becomes possible. At the same time, it is essential
that the responsibility should be identified with definite individuals in the
organisation and he is accountable for the lapse, if the performance varies
from the standard laid down.
Establishment of standard may be discussed with S-O-G-P chain. Standard
is a measuring rod for the attainment of organisational objectives. These
objectives aim at accomplishing the organisational goals, which is the
ultimate purpose of every organisation.
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 Standards - Objectives - Goals - Purpose Control

As shown above, standards are used to control objectives, objectives are

used to control goals, and goals are used to control purpose.
2) Measurement of performance : The second step is to measure actual
performance of various individuals, groups or units in the light of standards.
Management should not depend upon the guess that standards are being
met. It should measure the performance and compare it with the standards.
Quantitative measurement is done in those cases where standards have
been set in numerical terms. This makes evaluation easy and simple. In all
other cases, the performance is measured in terms of qualitative factors.
For instance, performance of Industrial Relations Manager may be measured
in terms of attitudes of workers, frequency of strikes, and morale of workers.
Attitude and morale of workers are not capable of being measured
quantitatively. They have to be measured qualitatively. If standards are
appropriately drawn and if means are available for determining exactly
what subordinates are doing, appraisal of actual or expected performance
is fairly easy.
3) Comparing performance with standards and ascertaining the causes
of difference, if any: The responsibility of a manager does not end with
measuring the performance. Deviations from the standard, if any, must be
noted and the causes of deviation ascertained. Comparing performance
with the standard and ascertaining the causes of deviation involve the third
stage of control. The causes of factors responsible for deviations may be
defective material, machinery, process, slackening of efforts, etc. The
comparative analysis should be done as close to the point of performance
as possible. It assists in quick location of defects and results in correction
with minimum losses.
4) Adopting corrective measures: The final step in the control process
consists of remedial actions so that deviations may not occur again and the
objectives of organisation are achieved. Towards that end, managers must
take appropriate decisions so as to meet immediate needs, or revising the
existing targets and standards, or changing the methods of selection and
training of workmen, or even drawing up revised plans.
The above stages in the control process are shown in the Figs. 13.1 and 13.2.
(1) Establishing standards

(4) Taking corrective action (2) Measuring performance

(3) Comparing actual performance with expected performance

(1)
Objectives
(2)
Standards
(6) (3)
No abnormal

Corrected Performance Performance

Common
Deviation

(5)
Corrective (4)
action (if Measurement
necessary)
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Fig.13.1: Control process
Management, Organisation Check Your Progress A
and Control
1) Define ‘Control’ as a function of management.
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
2) Which of the following statements are True and which are False.
i) Control relieves managers of their responsibilities.
ii) Control is necessary only when there is deviation of performance from
standards.
iii) Organisational efficiency is ensured with the help of controls.
iv) Controlling mainly involves punishing people and putting pressure
on employees for efficient performance.
v) The process of control is relevant at all levels of management.
3) Enumerate the stages in control process.
i) ..............................................................................................................
ii) ..............................................................................................................
iii) ..............................................................................................................
iv) ..............................................................................................................

13.6 REQUISITES OF EFFECTIVE CONTROL

To be effective and to serve its purpose, the system of control must satisfy certain
requirements. These may be regarded as the prerequisites of effective control.
The requirements of an effective control system may be enumerated in brief as
under:

1) Definition of objectives: Before planning a control system, it is essential

to clearly define the objectives of the organisation. The control system
must be directed towards the potential or actual deviations from plans early
enough to permit corrective action.

2) Efficiency of control techniques: Control techniques are said to be efficient

when they detect deviations from plans and make possible corrective action
at an early stage with the minimum of unsought consequences.

3) Responsibility of control: The primary responsibility for the exercise of

control should rest with the manager charged with the implementation of
plans.

4) Direct control: Any control system should be designed to maintain direct

86 contact between the controller and the controlled.
5) Organisation suitability: Controls should be tailored to fit the organisation. Control
The flow of information concerning current performance should correspond
with the organisational structure. If superior is to control overall operations,
he must find a pattern that will provide control for individual parts.

6) Flexibility: A good control system must keep-pace with the continuously

changing pattern of a dynamic business world. It-must be responsive to
changing conditions. It should be adaptable to new developments including
the failure of the control system itself. Plans may call for an automatic
system to be backed up by a human system that would operate in an
emergency; likewise, an automatic system may back up a human system.

7) Self-control: Units may be planned to control themselves. If a department

can have its own goals and control system, much of the detailed controls
can be handled within the department. These sub-systems of self-control
can then be tied together by the overall control system.

8) Strategic point control: Effective and efficient control can be achieved if

critical key or limiting points can be identified and close attention can be
directed to adjustment at those point. This is known as ‘Control by
exception’. It is called control by exception because according to this
principle only significant deviations from standard, whether positive or
negative, require management’s attention as they constitute exceptions.
An attempt to go through all deviations tends to increase unnecessary efforts
and to decrease attention on important problems.

9) Corrective action: Merely pointing out deviations is not sufficient in a

control system. It must lead to timely corrective action to be taken to check
deviations from standards through appropriate planning, organising and
directing.

10) Forward-looking control: The control system should be directed towards

future. It should report the deviations from the plans quickly in order to
safeguard the future. If the control reports do not relate to the future, then
the reports are of no use as they will not be able to suggest the type of
measure to be taken to rectify the past deviations.

11) Human factor: A good system of control should be worker centred rather
than work centred as the control is exercised on the workers who do the
work. It must find the persons accountable for results whenever large
deviations take place and they must be directed accordingly. So the human
factor must be given proper attention while controlling. A ‘technically fit’
well-designed control system may fail because the human beings may react
unfavourably to the system.

12) Economical: The system of control must be worth its cost. The controls
must justify the expenses involved. A control system is justifiable if the
savings anticipated from it exceed the expected costs in its working. Small-
scale production units cannot afford elaborate and expensive control system.

13) Objective standards: As far as possible, standards should be objective,

that is based on factual information. If they are subjective, a manager’s or
subordinate’s personality may influence judgement of performance
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Management, Organisation inaccurately. Effective control requires objective, accurate and suitable
and Control
standards. Objective standards may be quantitative or qualitative. However,
in either case, the standard should be factually determinable and verifiable.
Although we have explained how the ‘Control Function’ can be effective
with various requirements as mentioned above, even then there are some
limitations of control. Let us now examine the limiting factors.

13.7 LIMITATIONS OF CONTROL

The limitations of control are discussed below.

1) No control over external factors: Control is intended to be exercised on

factors which are internal to an enterprise. But there are external factors
like government action, change of market conditions, discovery and
invention of new techniques and material of production, innovation and so
on, which are often beyond the control of management. So, controls may
be ineffective in the face of changing external factors.

2) Want of satisfactory standards: Satisfactory standards help control

operations. But there are many areas and activities with intangible nature
of performance which do not permit accurate measurement. No satisfactory
standards can be established for them, e.g. results of management
development, public relations, human relations, advice of staff service,
loyalty of workmen, and such other human behaviour.

3) Measurement of imperfections: Intangible performance presents

difficulties in setting up standards. It is also a complicated matter to measure
its results in quantitative or qualitative terms. It is then left to managerial
judgement and interpretation which cannot be taken as perfect measurement.
Moreover, results of day-to-day activities involving uneconomic
expenditure cannot be evaluated or measured properly on grounds of
economy.

4) Limitations of corrective actions: Business can be run on an even keel if

all deviations and mistakes can be corrected properly in time. This will
guard against losses. Control operations are carried out in assumption of
fixed personal responsibility and the person concerned is expected to adopt
necessary corrective and remedial actions. It is not uncommon that many
deviations occur, but nobody in particular can be held responsible for them.
Control becomes ineffective in such cases.

5) Adverse reaction against control: Control operations as a rule are not

liked by the subordinates over whom they are exercised. Such operations
curtail their freedom of action and interfere with their individual thinking
and initiative. Control thus invites opposition and adverse reaction of the
subordinates.

6) Practical impediments to application: Control involves analysis of

deviations to find out their causes. But it faces great obstacles in such
analytical work. First of all, it involves considerable expenditure. Secondly,
it requires skilled and experienced staff to cope with the situation. Thirdly,
corrections and deviations may require some time and even stoppage of
88 work which may result in loss to the concern.
 Control
13.8 AREAS OF CONTROL
For effectiveness, it is important to decide on the critical areas where control
should be exercised. There are many advantages of identifying these areas of
control (also known as types of control) so as to enable management to:
i) Delegate authority and fixing responsibility;
ii) Reduce the burden of supervising each activity in detail; and
iii) Secure means of achieving satisfactory results.
Controls are actually needed in every area where performance and results directly
and vitally affect the survival and prosperity of the organisation. These areas
need to be specially mentioned. In this connection, Peter Drucker has identified
eight key result areas where objective should be set and controls should be
exercised. These are:
1) Market standing
2) Innovation
3) Productivity
4) Physical resources
5) Financial resources
6) Profitability
7) Manager’s performance and attitude
8) Public responsibility
Apart from the identification of key areas, control may be distinguished on the
basis of their nature and purpose. Let us discuss them one by one.
1) Physical and Financial Control: Physical controls refer to controls over
the safety and maintenance of properties and assets, stocks of materials,
stores, spare parts, and other articles on the task of quantitative and
numerical measures. Financial controls include control over cash receipts
and payments, fixed and working capital, income and expenditure as well
as profits and the value of assets and liabilities.
2) Control Over Actual and Anticipated Performance: Day-to-day
operations need to be controlled to achieve the short-run objectives, targets
and standards as well as continuing goals. This is another category of
controls.
3) Control Over Activities or Areas of Operations
i) Control over policies and procedures: Policies are formulated,
procedures laid down to govern the behaviour and action of personnel
in the organisation. These are generally controlled through manuals
which are prepared by top management. Each individual in the
organisation is expected to function according to manuals.
ii) Control over organisation: Organisation Charts and Manuals are used
to keep control over organisation structure. Organisation manuals
attempt at solving organisational problems and conflicts, making long-
range organisational planning possible, enabling rationalisation of the 89
Management, Organisation organisation structure, helping in proper designing and clarification
and Control
of each part of the organisation, and conducting periodic check on
facts about organisation practice.
iii) Control over personnel: Generally the Personnel Manager or Head
of the Personnel Department, whatever his designation may be, keeps
control over personnel in the organisation. Sometimes, a personnel
committee is constituted to act as an instrument of control over key
personnel.
iv) Control on wages and salaries: Control over wages and salaries is
exercised through job analysis and job evaluation. The functions are
carried out by personnel and industrial engineering departments. Often,
a wage and salary committee is constituted to provide help to these
departments.
v) Control over costs: Control over costs is exercised through making
comparison between standard costs and actual costs. Standard costs
are set in respect of different elements of costs. Cost control is also
supplemented by budgetary control system which includes different
types of budgets. The Controller’s department provides information
for setting standard costs, calculating actual costs, and pointing out
differences between these two.
vi) Control over methods and manpower: Control over methods and
manpower is required to ensure that each individual is working
according to schedule. For this purpose, periodic analysis of activities
of each department is conducted. The functions performed, methods
adopted, and time consumed by every individual are studied to
eliminate non-essential functions, methods and time. Many
organisations create a separate department or section known as
‘Organisation and Methods’ to keep control over methods and
manpower.
vii) Control over capital expenditure: Control over capital expenditure
or acquisition of fixed assets exercised through the system of evaluation
of projects and ranking of projects on the basis of their importance,
generally on the basis of their earning capacity. A capital budget is
prepared for the business as a whole. The budget is reviewed by the
budget committee or appropriation committee. For effective control
over capital expenditure, there should be a plan to identify the
realisation of benefits from capital expenditure and to make comparison
with anticipated results. Such comparison is important in the sense
that it serves as an important guide for future capital budgeting
activities.
viii) Control over service departments: It is effected:
a) through budgetary control within operating departments,
b) through putting limits upon the amount of service an individual
department can ask for, and
c) through authorising the heads of service departments to evaluate
the request for service made by other departments and to use
90 discretion about the quantum of service to be rendered to a
 particular department. Sometimes, a combination of the methods Control
may be used.
ix) Control over line of products: Control over line of products is
exercised by a committee whose members are drawn from production,
sales and research departments. The committee controls the product-
mix on the basis of studies about market needs. Efforts are made to
simplify and rationalise the line of products.
x) Control over research and development: Control over research and
development is exercised in two ways:
1) by providing a budget for research and development, and
2) by evaluating each project keeping in view savings, sales or profit
potentialities.
Research and development being a highly technical activity is also
controlled indirectly. This is done by improving the ability and
judgement of the research staff through training programmes and other
devices.
xi) Control over foreign operations: Foreign operations are controlled
in the same way as domestic operations. The tools and techniques
applied are the same. The only difference is that the chief executive of
foreign operations has relatively greater amount of authority.
xii) Control over external relations: External relations are regulated by
the public relations department. This department may prescribe certain
measures to be followed by other departments while dealing with
external parties.
xiii) Overall control: Control over each segment of the organisation
contributes to overall organisational control. However, some special
measures are devised to exercise overall control. This is done through
budgetary control, project profit and loss account and balance sheet.
A master budget is prepared by integrating and coordinating budgets
prepared by each segment. The budget committee reviews such budget.
This budget acts as an instrument for overall control. Profit and loss
account and balance sheet are also used to measure the overall results.

Check Your Progress B

1) Which of the following statements are True and which are False.
i) Control techniques may be said to be efficient if subordinates like
them.
ii) Past deviations can be corrected only if controls are forward looking.
iii) Expenses on control should not matter because control relieves the
manager of their worries.
iv) Manager having no control over external factors should not try to
control internal disturbances.
v) Identifying critical areas of control enables manager to delegate
authority.
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Management, Organisation 2) Enumerate the critical or key result areas where control should be exercised
and Control
by managers.
i) ……………………………….. v) ………………………….......
ii) ……………………………….. vi) ……………………………
iii) ……………………………….. vii) ………………………........
iv) ……………………………….. viii) …………………………..

13.9 TRADITIONAL CONTROL TECHNIQUES

The control function of management is a systematic effort to set performance
standards with planned objectives, to compare actual performance with the
predetermined standards, to determine whether there are any deviations and to
adopt suitable measures to ensure that performance is in conformity with the
plans.

A variety of tools and techniques have been developed and used over the years
for purposes of managerial control. Some of these techniques are termed as
traditional and others as modem. The traditional techniques of control have been
found useful for a long period of time in the past and some of these are still used
by organisations. Two such techniques commonly used are: Budgetary Control
and Standard Costing. Let us discuss about them in detail.

13.9.1 Budgetary Control

Simply stated, a budget refers to the plan of an enterprise expressed in financial
or physical terms. It lays down financial estimates relating to various programmes
or activities for a defined period on the basis of given objectives. These estimates
are intended to serve as targets or standards for the purpose of controlling actual
performance. For a business firm, budgets generally include plans to produce
and sell goods at costs and prices which will bring the desired profit. Thus,
budgeting consists of formulation of plans for future activity. It lays down
objectives and programmes of action. It also provides yardsticks by which
deviations from planned achievements can be measured.

Budgetary Control, as a technique of managerial control, refers to the

principles, procedures and practices of achieving given objectives through
budgets. Thus, budgetary control involves preparation of budgets, relating the
responsibilities of managers to budgeted activities, and the continuous
comparison of actual with budgeted results. It aims at securing the objectives as
per the budget and providing a basis for its revision, if necessary.

The commonly used budgets are: Expense budget, Revenue budget, Cash budget,
Capital budget, Sales budget, Production budget, Purchase budget, Labour
budget, Master budget, etc.

13.9.2 Standard Costing

Standard costing as a technique of control may be defined as a system which
involves the use of predetermined ‘standard costs’ relating to each item of cost
and for each line of product, manufactured or service rendered.

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Standard cost refers to a predetermined estimate of cost which can be used as a Control
standard or yardstick. It suggests what the cost should be under given conditions.
Standard costs form the basis of control under standard costing. Actual costs are
compared with the standards, variations, if any, are analysed, and suitable action
is taken to correct adverse tendencies. Thus, standard costing may be regarded
essentially as a tool of cost control.

Standard costing is an essential part of budgeting and budgetary control. It may

be noted that budgetary control is a broader function. It consists of setting
objective and planning business activities for all departments; it lays down
standards of cost and expenses as well as targets of sales income. Standard costing
provides the basis of framing the expense budgets particularly in respect of
direct material and labour costs.

13.10 MODERN TECHNIQUES

Besides the traditional techniques of budgetary control and standard costing,
there are several other techniques of control which have been developed in
modern times. These techniques may also be called non-budgetary techniques.
One or more of these techniques may be adopted alongwith budgetary control
and srandard costing. Let us discuss the more important techniques in detail.

13.10.1 Break-Even Analysis

Break-even analysis as a technique of control consists of the analysis of costs in
relation to changes in the volume of sales and its impact on profit. It is basically
concerned with determining the relationship between cost, volume of sales and
profit. One of the major concerns of the management of an enterprise relates to
the impact of changes in the volume of sales on profits. It is of interest to them
to know the volume of sales at which costs will be fully covered and beyond
which profits will be earned. For this purpose, two types of costs are distinguished.
Variable costs (like direct material cost, direct wages, etc.) and Fixed costs (like
factory and office rent, managers’ salary, etc.). If production and sales increase,
variable cost per unit remains constant but fixed cost per unit decline. Suppose,
the direct materials cost of a product is Rs. 10 per unit and direct wages per unit
comes to be Rs. 5, whereas fixed cost upto the total production capacity is Rs.
400. Then, for 100 units produced and sold, the variable cost will amount to Rs.
(10 + 5) × 100 i.e., Rs. 1500. For 200 units, the variable cost will be double the
amount i.e., Rs. 3000 Fixed cost remains the same. Total cost for 100 units will
thus be Rs. 1900, and for 200 units it would be Rs. 3400, not Rs. 3800. Hence,
the total cost is found to rise less than proportionately to the increase in sales
revenue. If the volume of production and sales decrease, there is a reverse effect.
Thus, for 50 units the total cost will be Rs. (15 × 50) + 400 i.e. Rs. 1150. It will
not be half of Rs. 1900 (total cost of 100 units). In other words, the total cost
decreases less than proportionately to the decrease in sales revenue.

Further, suppose the selling price of the product per unit is fixed at Rs. 17. In
that case, for each unit sold there will be a margin of Rs.2 after meeting the
variable cost of Rs. 15. To recover the fixed cost of Rs. 400, the firm must sell at
least 200 unit. The total sale price (200 × Rs. 17) will then be equal to the total
cost i.e. Rs. 3400.

93
Management, Organisation Thus, sale of 200 units (or Rs. 3400 sales revenue) may be regarded as the
and Control
volume at which there is neither any profit nor any loss. This is known as the
break-even volume. It indicates the-number of units that must be sold if the
business is to be run without loss. Each unit of product sold above the break-
even volume is expected to yield profit. If 250 units are sold, the profit earned
will be Rs. 100 (50 x Rs. 2). This is because, the variable cost will increase by
Rs. 15 per unit while sales revenue will rise by Rs. 17 per unit and there being
no increase in fixed costs, there will be a margin of Rs. 2 per unit on 50 units as
the profit.

The difference between the selling price and variable cost per-unit is known as
the contribution margin. The amount of this difference contributes towards the
recovery of fixed costs. Hence, the break-even volume of sales in units can be
calculated by dividing the total fixed cost by the contribution margin. In the
above example, the contribution margin is Rs. 2 (Rs.17 - Rs. 15), and the fixed
costs are Rs. 400. So, the break-even volume is Rs. 400 ÷ 2 i.e. 200 units.

13.10.2 PERT (Programme Evaluation and Review Technique)

The key to success of most organisations is to clearly examine the projects or
activities for the achievement of an objective within stipulated time and cost.
Management is then required to determine detailed activities and their
interrelationships, to estimate resources required and the time needed to complete
these activities as per schedule, and to monitor and control the time and cost of
the project.
Network analysis is a technique which is concerned with minimising the total
completion time of the project, as well as minimising the over-all project costs.
The network analysis is eminently suitable to projects which are not routine or
repetitive and which may be conducted only once or a few times, such as
construction of buildings, dams, research and development, marketing of new
products, building a ship, construction of factories, missile production, etc. PERT
and CPM are the two very popular types of network analysis used in modem
management.
PERT is basically a technique of project which is useful in the following
managerial functions related to planning, scheduling, controlling, etc.
The first and most important condition for using PERT is the breaking up of the
project into jobs or activities and determining the order of precedence for these
jobs, that is, deciding which jobs are to be completed before another can be
started.

13.10.3 CPM (Critical Path Method)

CPM was developed by the engineers of the Du Pont Company in the 1950s for
its application in all scheduling work, construction projects, research and
development programmes and in many other situations that require estimates of
time and performance. It calls for dividing a programme or project into its
elementary parts in their chronological order of sequence. By breaking a project
into interconnecting parts, the CPM technique is helpful in finding out the more
strategic elements of a plan for the purpose of better designing, planning,
coordinating and controlling the entire project.

94
Let us examine the concept of critical path to appreciate the significance of the Control
critical path method as a technique of control.

In a network of activities one can enumerate a number of sequences of operations

(paths) from starting event to end event of the project. Each sequence contains
different combinations of activities with different durations. The study of the
duration of various paths in a project can tell us the minimum time in which a
particular project can be completed. The sequence of activities (path) for which
the duration is the maximum indicates the minimum duration for the completion
of the project.

This path is known as the ‘Critical Path’ being the path of maximum duration
and reflects the minimum time necessary for the completion of the project. The
critical path is so called because any delay in the completion of the activities
lying on this path would cause a delay in the whole project. To finish the
project in time, the activities lying on the critical path should be given top priority.

13.10.4 Statistical Quality Control

The purpose of quality control is to ascertain whether the quality of a product or
service is being maintained or if there is any variation in size, weight, finish etc.
In every production process there are always some standard specifications laid
down either by the producer or the consumer. A good quality item is one which
conforms to these specifications. However, variation in the quality of a product
is inherent in every production process due to a number of factors. So, it is
necessary to ascertain the variation which may be quantitative and qualitative.
Quantitative characteristics are those which can be directly measured, e.g. weight,
height, diameter etc. and such variations can be noted with the help of specific
instruments. On the other hand in qualitative characteristics, direct quantitative
measurement is not possible, e.g. cracks, breakage, colour etc. These can be
determined by inspection only or by distinguishing between defective and non-
defective items. But variation in the quality of products being an inherent
characteristic of manufacturing process, irrespective of all possible precautions
and measures, there are possibilities of random disturbances responsible for
deviations in the quality of the product from the set [Link] sources of
these disturbances are known as chance causes, e.g. changes in machine speed
due to sudden changes in temperature or voltage of power supply etc. The
presence of these causes in the system is due to multitude of reasons which are
difficult to identify and uneconomic to eliminate. There may be other sources of
variations which further cause the product to deviate from set standards. These
causes are individual and can be identified and eliminated economically. The
magnitude of variability due to these causes varies with the conditions of the
production process, nature of raw material, behaviour of operation etc. These
causes are known as assignable causes.

Statistical quality control refers to the technique of ascertaining whether the

variation in the quality of the product is due to chance causes or due to assignable
causes. If the variation is due to assignable causes, it is detected and some
corrective action is planned to improve the quality of the product. Statistical
quality control is carried out with the help of control charts. To prepare a control
chart the whole production line is divided into a number of sub-groups. The
basis of selecting these sub-groups is such that variation in the quality of items
within each sub-group is attributed due to chance causes, whereas the 95
Management, Organisation corresponding variation between various sub-groups can be due to assignable
and Control
causes. The variation of quality characteristic within and between the sub-groups
is analysed by some method to identify whether the process is in control or not.

Briefly speaking, statistical quality control is based on statistical estimation of

errors or possible variation from the average (normal) proportion of errors. In
its simple operation it involves specifying the quality levels and limits on control,
and then plotting the variations.

13.10.5 Management Audit

Management audit is a systematic and impartial examination, analysis and
appraisal of management’s overall performance. It is basically a procedure of
appraisal of management’s total performance by means of an objective and
comprehensive examination of the organisation structure, its objectives, plans
and policies, its operation and its use of physical and human resources, and
methods of operation. Thus ‘management audit’ signifies a critical assessment
of management of the enterprise from the broadest point of view. It may be
undertaken by the management itself or it may be carried on with the help of
management consultants.

One very important feature of management audit it that instead of comprehensive

audit, company may even apply it to a specific section of the organisation. As
regards its scope, ‘production efficiency’ or ‘investment appraisal’ may be the
subject matter of ‘management audit’. It may even be used to provide guidance
on critical assessment of capital budgeting or profit performance.

Check Your Progress C

1) What do you mean by standerd costing?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) What is break-even analysis?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) Distinguish between PERT and CPM
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
96
 Control
13.11 LET US SUM UP
The study of management practices cannot be complete unless the controlling
function is clearly understood. Control may be defined as the process of analysing
whether actions are being taken as planned and taking corrective measures to
make these conform to the plan of action. It is a continuous process which helps
a manager to get the performance of his subordinates correspond to the standards
fixed, to detect the variations as soon as they occur, and to take corrective steps
to prevent them in future.

The characteristic features of control include: Control is all pervasive function,

control is a continuous process, planning is the basis of control, action is the
essence of control, control is a forward-looking process, delegation is the key to
control and control allows the organisation to cope with uncertainty.

Proper control smoothens the working of an organisation. Existence of an efficient

system of control creates an atmosphere of order and discipline and helps greatly
in minimising the chances of work being defective or being delayed. The
importance of control function also arises from the various benefits derived
from it. Like adjustment in operations, managerial responsibility, psychological
effect, coordination in action and organisational efficiency and effectiveness.

The process of control involves (l) establishing standards (2) measurement of

performance (3) comparing performance with the standards and ascertaining
the causes of differences, if any, and (4) correcting deviations by remedial action.

To be effective and to serve its purpose, the system of control must satisfy certain
requirements, which includes: (1) Definition of objectives in clear terms: (2)
Efficiency of control techniques; (3) Assigning responsibility for control; (4)
Direct contact; (5) Suitability of the system to the organisation; (6) Flexibility;
(7) Encouragement of self-control; (8) Strategic point control; (9) Timely
corrective action; (10) Forward-looking control; (11) Attention to human factor;
(12) Economical; and (13) Specifying objective standards .

Despite all precautions, controls are not always perfect since there are several
limiting factors which restrict the effectiveness of controls.

Controls may be distinguished on the basis of the key result areas where controls
should be exercised. Controls may also be distinguished on the basis of their
nature and purpose. Thus, controls may be divided into several categories, such
as: (1) Physical and financial controls (2) Control over actual and anticipated
performance, and (3) Control over activity or areas of operation.

The traditional control techniques are: Budgetary control and standard costing.
The modern control techniques are: Break-even analysis, PERT, CPM, statistical
quality control and management audit.

13.12 KEY WORDS

Control : Process of verifying whether performance of work is
in conformity with plan and correcting it where
necessary.
97
Management, Organisation Control by Exception: Attending only to significant or exceptional deviations
and Control
in the process of control.
Financial Control : Control over cash flows, capital, income, expenditure
and profits.
Forward-looking : Correcting deviations to safeguard the future
Control operations in the concern.
Physical Control : Control over the safety and maintenance of properties,
assets and physical quantifiable objects.
Standards : Norms of work performance.
Strategic Point : Identifying and directing closer attention to key or
Control limiting factors and points in the process of control.

13.13 ANSWERS TO CHECK YOUR PROGRESS

A) 2. i) False ii) False iii) True iv) False v) True
3. i) Establishing standards of performance.
ii) Measuring performance.
iii) Comparing performance with standards and ascertaining the
causes of differences, if any.
iv) Adopting corrective measures.
B) 1. i) False ii) True iii) False iv) False v) True
2. i) Market standing ii) Innovation iii) Productivity
iv) Physical resources v) Financial resources
vi) Profitability vii) Manager’s performance and attitudes
viii) Public responsibility.

13.14 TERMINAL QUESTIONS

1) What do you mean by controlling function of management? Describe salient
characteristic features of control.
2) “Control is a fundamental management function that ensures worth
accomplishment according to plans.” Discuss.
3) Explain the importance of control in a business enterprise. What are the
requirements of an effective control system?
4) Explain in detail various stages in the control process.
5) Enumerate the various requisites of an effective control system and outline
the limitations of control.
6) Discuss various types of control or control areas.

Note: These questions will help you to understand the unit better. Try to
write answers for them. But do not send your answers to the
university. They are for your practice only.

98
 Control
SOME USEFUL BOOKS
Basu C. R. (2017), Business Organisation and Management, Mc Graw Hill
India.

Tulsian. P.C. (Recent Edition), Business Organisation and Management, Pearson.

Gupta C.B. (2018), Business Organisation and Management, Sultan Chand and
Sons.

Singh B. P. and T. N. Chhabra, Business Organisation and Management, Dhanpat

Rai and Co.

99
NOTES
 BCOC-132
Indira Gandhi National Open University
Business Organisation and
School of Management Studies
Management

Foundation of Indian Business 1