Asossa University FBE Management

CHAPTER Seven
CONTROLLING
7.1 Meaning & need for Controlling Defined
Meaning OF CONTROLLING
 Controlling is the process of ensuring that actual activities conform to planned activities.
Control is more pervasive than planning. Control helps managers to monitor the effectiveness
of their planning, organizing and leading activities. An essential part of the control process is
taking corrective actions as needed.
 Controlling is the measurement and correction of performance in order to make sure that
enterprise objective and plans are accomplished.
 “Controlling means the process of gathering and ‘feeding back’ information about
performance so that decision makers can compare actual results and decide what to do about
any apparent discrepancies or problems”.

 Management control is systematic effort to set performance standards with planning

objectives, to design information feedback systems, to compare actual performance with these
predetermined standards, to determine whether there are any deviations and to measure their
significance, and to take any action required to assure that all organizational resources are
being used in the most effective and efficient way possible in achieving organizational
objectives.

Controlling begins with the framework of expectations provided by the standards. From that
point, control consists of a series of steps intended to help ensure that actual performance
conforms to expected performance. Controlling is the management function in which managers
set and communicate performance standards for people, processes, and devices. A standard is
any guideline or benchmark established as the basis for the measurement of capacity, quantity,
content, value, cost, quality, or performance. Whether qualitative or quantitative, standards must
be precise, explicit, and formal statements of the expected result

Need for Controlling

-Controlling is important in order to confirm the degree to which organization is efficient in
using its resources and to ensure the degree to which organization is successful in attaining its
objectives. A controlling system contains the measures that allow managers to assess how
effectively the organization is producing goods and services.

1
1 Introduction to Management- Lecture Note Compiled by: Abraham A
Asossa University FBE Management

7.2 Controlling Processes

One can notice that the forth definition given above divides the controlling function into four
steps: 1) establishing performance standards, 2) measuring actual performance, 3) comparing
actual performance to established standards and 4) taking corrective action, if necessary. These
steps of controlling are discussed below:

1. Establishing Performance Standards: the controlling process begins with the

establishment of standards of performance to serve as a basis for determining whether
organizational objectives are being accomplished.
The goals and objectives established during the planning process should be stated in clear,
measurable terms. Plans are the yardsticks which managers devise controls. Standards are
the criteria of performance. Precisely, worded and measurable objectives are easy to
communicate and to translate into standards and methods that can be used to measure
performance.

2. Measuring Actual Performance: after standards are established, managers must

measure actual performance to determine variations from standards. The frequency of
measurements depends on the type of activity being measured. Measurement of performance
should be done on a forward looking basis so that deviations can be detected in advance of
their occurrence, and avoided by appropriate actions. Thus, feedback of performance
measurements makes it possible to compare actual with intended results.

3. Comparing Actual Performance with the Established Standards: It

is a matter of comparing measured results with established targets or standards previously
set. It is nothing but comparing the actual results with the planned targets. If performance
matches the standards, managers may assume that ‘everything is under control’. If deviations
from the standards exist, the evaluator must decide if they are significant-if they require
corrective actions. If so, the evaluator must determine what is causing the variance.

4. Taking Corrective Actions: When a controller/evaluator determines the cause or

causes of a significant deviation from a standard, he or she must take corrective action to
avoid repetition of the problem or defect. Policies and procedures may prescribe the actions.
Such guidelines help shorten the time needed to react to deviations. The corrective action
could involve a change in one or more activities of the organization’s operations. This is an
exercise of the principle of navigational change. Correction of deviations is the point at
which control can be seen as a part of the whole system of management. Managers may
correct deviations by redrawing their plans or by modifying their goals.

Thus, controlling is a dynamic process. Unless managers go through the control process to its
end, they are merely monitoring performance rather than exercising control. The emphasis

2
2 Introduction to Management- Lecture Note Compiled by: Abraham A
Asossa University FBE Management

should always be on devising constructive ways to bring performance up to standard, rather than
on merely identifying past failures.

Take
Establish Does corrective
standards and Measure performanc No action and
methods for Performan e match re-evaluate
measuring ce the the
performance standards? standards
Yes

Do Nothing

. Basic steps in the control process

7.3 Types of Control

1. Feed Forward Control: This is a preliminary control that takes place before
operations begin and includes the development of policies, procedures and rules that are
designed to ensure that planned activities will be carried out properly. It is a future
directed control method. Feed forward systems monitor inputs into a process to ascertain
whether the inputs are as planned. If not, the inputs are changed in order to obtain
desired results. Locks on doors and bars on windows, safety equipment’s and guidelines,
employee selection procedures, employee training programs, and budgets are all feed
forward controls. McAfee and Norton antivirus computer software are other examples of
feed forward control.

2. Concurrent Control: Concurrent control is the heart of any operating control

system. Concurrent control takes place during the action phase of carrying out the plans
and includes direction, monitoring and adjusting the activities as they occur. Concurrent
plan can assist in achieving that the plan will be carried out at the specified time and
under required conditions. Consider word processing software, which allows a writer to
change a document before storing or printing. The soft ware provides concurrent control.
A word processor’s spelling checker also provides concurrent control. Some concurrent
controls are designed to provide readouts or audible warnings. Most photocopiers and
computer printers, for example, have display panels that alert their users to malfunctions
during operations. Many of the devices on the dashboard of an automobile are concurrent
controls.

3
3 Introduction to Management- Lecture Note Compiled by: Abraham A
Asossa University FBE Management

3. Feedback Control: feedback control measures outputs of a process and feed into
the system or inputs for corrective action to obtain desired outputs. Feedback system is
similar to that which operates in the usual household thermostat. Managers measure
actual performance, compare the measurement with actual standards, and identify and
analyze deviations. They develop a progress for corrective action and implement it to
achieve the desired performance. At the end of a year, for example, a manager should
carefully review the budget control report. Which accounts were overdrawn? Which
accounts retained a surplus? , etc.
7.4 Techniques of Control
Managers use a series of control methods and systems to deal with the different problems and
elements of their organizations. The methods and systems can take many forms and can be
intended for various forms: budgetary methods, non - budgetary control devices and modern
methods.

a) Budgetary Methods: budgets are formal quantitative statements of the

resources set aside for carrying out planned activities over given periods of time.
 Operating Budgets: The most common types of operating budgets are the expense, revenue
and profit budgets.
- Expense Budgets: are of two types: engineered cost budgets and discretionary cost budgets.
Engineering cost budgets usually describe the material and labor costs involved in each
production item as well as the estimated overhead costs. Discretionary cost budgets are
typically used for expense centers- administrative, legal, accounting, research etc.
- Revenue Budgets: are meant to measure marketing and sales effectiveness. It is the most
critical part of a profit budget. They consist of the expected quantity of sales multiplied by
the expected unit selling price of each product.
- Profit Budgets: combine cost and revenue budgets in one statement. They are also called
master budget, which consists of a set of projected financial statements and schedules for
the coming year. They serve as annual profit plans.

 Variable Budget: Variable budgets are cost schedules that show how each cost should vary as
the level of output varies. Variable budgets are used where operations are repetitive, where
there are a large number of different expenses and where these expenses can be accurately
estimated. Three types of costs are considered when developing variable budgets: Fixed,
Variable, and semi-variable costs.
- Fixed costs: are those that are unaffected by the amount of work being done Example:
monthly salaries, insurance payments, rent etc.
- Variable costs: are expenses that vary directly with the quantity of work being performed
ex: raw material.
- Semi variable costs: are those that vary with the volume of work performed but not in a
directly proportional way ex: short term labor costs.
4
4 Introduction to Management- Lecture Note Compiled by: Abraham A
Asossa University FBE Management

 Zero Base Budgeting: The enterprise’s programs are divided into packages composed of goals
and activities and then costs are calculated from the base. By starting the budget of each
package from base zero, costs are calculated afresh for each budget period, without referring
the changes from the previous period.

b)Non Budgetary Control Methods:

 Statistical Data: Statistical analysis with wider application of tools and techniques, and
the clear presentation of statistical data, whether of a historical or a forecast nature, are
important to control. It is easy when data are presented in a graphical or chart form to
highlight the trends and relationships.

 Special Reports and Analysis: For control purposes, special reports and analyses help in
particular problem areas. Although routine accounting and statistical reports furnish a good
share of information, there are areas in which they are inadequate. Reports should be
reviewed periodically to be sure that they are useful.

 Auditing: Auditing validates the honesty and fairness of financial statements to provide a
critical basis for management decisions. It is a process of appraisal. External audit is largely
a verification process involving the independent appraisal of the organization’s financial
accounts and statements. The audit is conducted by accounting personnel employed by an
outside firm or by chartered accountants. Internal audit or operational auditing is carried out
by members of the organization. Its objectives are to provide reasonable assurance that the
assets of the organization are being properly safeguarded and that financial reports are kept
reliably and accurately enough for the preparation of financial statements. Internal audits also
assist managers in evaluating the organization’s operational efficiency and the performance of
its control system.

 Personal Observation: Managers have the risk of seeing that enterprise’s objectives
are accomplished by people and go to the area of activities and taking notice of what is being
done. This is nothing but “Management by Walking Around”.

c) Modern Methods of Control

 Program Evaluation and Review Technique (PERT): PERT is a refinement of the original
Gantt charts, which were designed to show in bar chart form, the various things that must be
done, and when in order to accomplish a program, using the sequence of events and the times
required for each program, one can determine the critical path.
 Management Information system (MIS): MIS is a formal system of gathering, integrating,
comparing, analyzing and dispersing information internal and external to the enterprise in an
effective and efficient manner.

5
5 Introduction to Management- Lecture Note Compiled by: Abraham A
Asossa University FBE Management

 Computers: computers are extensively used and their impact on managers at various
organizational levels differs. Computer networks link work stations with each other.

7.5 Making Control Effective

Controls at every step focus on inputs, processes and outputs; but what characteristics make
controls effective? Effective controls are focused on critical points integrated into the
organizational culture. They are timely and accepted by those who use them or abide by them. In
addition, controls are economically feasible, accurate and comprehensive.

 Focus on critical points: critical control points are all the operations that directly
affect the survival of an organization and the success of its most essential activities.
Critical control points exist in many areas of business activity-production, sales, customer
service, and finance, for example. Controls should focus on those points at which failures
can not be tolerated and where time and money costs are greatest. The objective is to apply
controls to the essential aspects of a business, not the peripheral ones.

 Integration: controls exhibit integration when the organizational culture supports and
enforces them and when they work in harmony, not at cross purposes. When controls and
the need for them are congruent with the organization’s values, the control will be
effective. Coordinated controls do not impede work; they function harmoniously to give
people what they need to make informed judgments. When managers and employees trust
each other and workers at all levels believe that the controls are necessary, employees can
be relied on to implement the controls.
 Acceptability: people must agree that controls are necessary, that the particular kinds
of controls in use are appropriate, and that the controls will not have negative impacts on
individuals or their efforts to achieve personal goals. Controls that seem to be arbitrary,
subjective or an invasion of privacy will not elicit the support of those they affect. Too
many controls, confusing controls, and too few controls create stress and resistance.
Frustration, fear, and loss of motivation and initiative can result.
 Timeliness: controls must ensure that information reaches those who need it when they
need it; only then can a meaningful response follow. One reason for setting deadlines is to
ensure that information flows promptly. If deadlines are treated causally or unrealistically,
people will soon come to ignore them.
 Economic Feasibility: the costs of a control system must be weighed against its
benefits. If the resources expended on the controls do not return an equal or greater value,
the controls are better left unimplemented. Suppose a costly security system includes
highly trained personnel, sophisticated electronic surveillance equipment, and fingerprint

6
6 Introduction to Management- Lecture Note Compiled by: Abraham A
Asossa University FBE Management

scanning. Such a system is suitable for capital equipment and facilities, but not the office
supply cabinet.
 Accuracy: information is useful if it accurate. Accuracy relates to concurrent controls
used to diagnose deviations from standards. Controls that offer inaccurate assessments feed
decision makers the wrong input, which causes them to give inappropriate responses.
 Comprehensibility: the more complex a control system becomes, the more likely it
is to create confusion. The simpler the control, the easier it will be to communicate and
apply. Controls in the form of instructions are often complex because more than one
person created, implemented, or interpreted them. Complexity can also result when control
users lose sight of the purposes of the controls.

 Tailoring controls to plans and positions: All control techniques and

systems should reflect the plans they are designed to follow. Every plan and every kind
and phase of an organization has unique characteristics. Likewise controls should be
tailored to positions. A small business will need some controls that differ from those in a
large business. The very nature of control emphasizes the fact that the more controls are
designed to deal with and reflect the specific nature and structure of plans, the more
effectively they will serve managerial needs.

 Tailoring controls to individual managers: Control systems and

information systems are intended to help individual managers carry out their function of
control. Adequate authority should be given. Taking the proper corrective action
necessitates sufficient authority to accomplish this task.

7
7 Introduction to Management- Lecture Note Compiled by: Abraham A