MANAGERIAL CONTROL

 Control is checking current performance against predetermined

standards contained in the plans, with a view to ensuring adequate
progress and satisfactory performance. - E.F.L. Brech
Key aspects of control
• Measurement of Performance: Comparing actual performance with
planned goals.
• Standards: The benchmarks or objectives set during the planning
phase.
• Corrective Actions: Taking steps to address deviations and ensure
objectives are met.
 Aspect Feedforward Control System (Predict Feedback Control System (Correction and
and prevent) Adjustment)
A type of control system in which the A type of control system in which the corrective
Definition corrective action is taken before the action is taken after the occurrence of disturbance
occurrence of disturbance in the output in the output of the system.
of the system.

Response Timing Proactive: Acts before the disturbance Reactive: Responds after the disturbance has
impacts the process. impacted the process.

Input Dependency Requires accurate knowledge of the Relies on output measurement and comparison
disturbance and system dynamics. with the desired value.

Error Correction Does not rely on error correction; aims Detects and corrects errors by adjusting the
to prevent errors from occurring. system's inputs.
Often more complex to design due to the
Complexity need for accurate models of the process Easier to design as it only requires a mechanism to
and disturbances. measure and compare outputs.

Accuracy Accuracy depends on the precision of Typically, robust and can handle unpredicted
the model and disturbance prediction. disturbances effectively.

Thermostat in Homes: Measures room

Example Temperature control in industrial ovens temperature, compares it with the desired
Applications using heat load predictions temperature, and adjusts heating or cooling

Key Component Requires a model of the system and Requires feedback sensors and a comparator.
predictive inputs.
Disturbance Effective for known and predictable Effective for unknown and unpredictable
Handling disturbances. disturbances.

Stability May lead to instability if the model is Generally stable, as it self-corrects based on
inaccurate. output.
N O N – B U D G E T A RY C O N T R O L
TECHNIQUES
 NON – BUDGETARY CONTROL

 Non-budgetary control is a set of methods and tools that

organizations use to monitor and manage their operations without
relying solely on financial budgets.
 It uses other tools like quality checks, performance appraisals, or
standard procedures to control operations and achieve organizational
goals.
 Example: A company ensures product quality through regular
inspections and by following specific manufacturing standards, without
focusing on the cost of the quality checks.
1. Statistical data and chart

• Widely used for the purpose of managerial control.

• Statistical data are collected and presented in the form of statistical tables,
graphical charts, or special reports.

• A report is a form of systematic presentation of information and statistical

data relating to some aspect of the business.

1. Setting Standards and Benchmarks:

• Statistical data helps establish performance standards based on historical

performance, industry standards, or projections.

• Example: Setting a production efficiency target of 95% based on historical

averages.

2. Monitoring Performance:

Ongoing collection of data allows organizations to track performance against

the standards.

Example: Tracking daily defect rates in a manufacturing process.

3. Variance Analysis:

• Statistical data highlights deviations between actual

performance and set benchmarks.

• Example: Using variance analysis to identify why actual sales fell

short of projected sales.

4. Identifying Trends and Patterns:

• Trend analysis identifies long-term patterns that may require

intervention.

• Example: Analyzing monthly sales data to spot seasonal demand

fluctuations.
· Useful When

Performance Metrics:
 To monitor customer service response times, production efficiency, or sales
performance.
· Quality Control:
 To ensure consistency in product quality through statistical process control.
· Forecasting:
 To predict future trends and set targets accordingly.

Example: A call center tracks average response times. If data shows times exceeding 2
minutes, management implements additional training or hires staff.
Statistical chart displaying the average customer service response time compared to
the target response time.
1a. Statistical data an d chart:
Cost Accounting as a Control Technique

• The cost of production determines the profit earned by an

enterprise i.e. the aim of the company is to reduce the cost in
order to earn more profits.

• Cost accounting helps organizations track costs related to

production, including materials, labor, overhead, and other
expenses. It ensures that the business doesn't overspend and
helps in maintaining profitability.

• The system involves comparing actual costs to standard or

budgeted costs.

• Businesses can spot areas where expenditures exceed standards

and take corrective actions. The discrepancy is called variance.
 Break even analysis:

Purpose: Cost accounting helps businesses determine the break-even

point—the level of sales needed to cover all fixed and variable costs.
 The volume of sale at which there is no profit, no loss is known
as ‘Break even point’.
To t a l F i x e d C o s t s
B r ea k ev en :
U n i t P r i c e - U n i t Va r i a b l e C o s t s

Steps in Break-Even Analysis

[Link] Fixed Costs: Costs that remain constant regardless of output (e.g.,
rent, salaries).
[Link] Variable Costs: Costs that vary with production (e.g., raw
materials).
[Link] Selling Price Per Unit: The price at which the product is sold to
customers.
Break-Even Analysis (BEA) as a control technique

•Identifies fixed and variable costs,

enabling managers to focus on reducing
expenses. Example: If variable costs are
high, managers may negotiate better
supplier terms.

•Helps to determine the sales volume

required to achieve desired profit levels.
Example: Adjusting production levels or
prices to reach profit targets.
Break even analysis- Advantage:
 It helps you identify the point of profitability.
 It ensures that you properly price a product or service - You will
know where you need to set your margins to generate the right
amount of revenue to break even and begin turning a profit.
 It clearly indicates the inter-relationship between revenue, cost and
profit in graphic form which is easily understood.
 This analysis is also helpful when you need to lower your prices to
beat a competitor. “You can also use break-even analysis to
determine how many more units you need to sell to offset a price
decrease
 A break-even analysis helps to determine how long it will take any
planned investments or changes in your business to become
profitable. These investments might be a new product or location.
Break-even calculations are used for modeling the minimum sales
needed to cover the costs of a new location.
Limitation

 The main limitation of this method is that it takes into

consideration fixed and variable costs, but the semi-variable cost
and their impact are not considered at all.

 Scope of break-even analysis is limited to cost-volume and profits

but it ignores other considerations such as capital amount,
marketing aspects and effects of government policy, etc., which are
necessary in decision-making and price determination.

 It is assumed under this method that fixed costs remain unchanged,

but in reality, they do not remain the same in the long run and
changes take place in response to technological developments, size
of the concern and other factors.
Useful Technique when

· Launching a New Product/Service:

To determine the minimum sales required to cover costs before earning a profit.
· Cost Structure Analysis:
To assess the impact of fixed vs. variable costs on profitability.
· Pricing Decisions:
To evaluate how price changes affect the break-even point and profitability.
· Investment Decisions:
To decide whether a project or expansion is financially viable.
Marginal Costing

• A cost accounting technique that focuses on variable costs, which

change with production levels. Marginal costing is also known as
variable costing.

• Marginal cost is the cost incurred when producing an additional unit of a

product. It includes only variable costs (direct materials, direct labor,
variable overheads) and excludes fixed costs.

• Fixed costs remain constant, regardless of the level of production. These

are not included in the marginal cost because they do not change with
output in the short term.

• Marginal Cost=Total Variable Costs÷Number of Units Produced

 Marginal Costing

Marginal cost is the total cost of producing 1,001 units minus total
cost of producing 1,000 units. It comes to Rs. 25 (i.e., Rs. 35,025 -
35,000), which is the variable cost of one unit
1b. Marginal Costing

• As long as the fixed cost does not change, production can be

increased and marginal cost for every extra unit of production
will be the variable cost.

• Until production at full capacity is achieved, the fixed costs are

irrelevant for managerial decisions and control.

• All the decisions are based on the variable costs of producing

additional units.

• Contribution = Sales revenue –Total Variable Costs.

• Contribution enables to meet fixed costs and contributes to the

profit.
1b. Marginal Costing

• Marginal Costing is an important tool in the hands of management

for exercising cost control.

• Since marginal costing is based on variable costs, the

responsibility for controlling variable costs can be assigned to
various departments.

• The control of fixed costs is the responsibility of the higher-level

managers.

• Marginal costing facilitates ‘management by exception’ by

focusing attention of the management on results, which are
moving out of control significantly.

• It also helps the management in evaluating the performance of

individuals responsible for variable costs.

• The impact of fixed costs is conveyed to management in a more

meaningful way under marginal costing.
Usefulness of Marginal Costing.

• This helps management to ensure better utilization of items,

which involve fixed expenditure such as plant and machinery,
furniture, installations, etc.

• Finally, marginal costing helps the management in understanding

the relationship between profit and major factors affecting profit
so that it may exercise control over these factors to achieve higher
profits.
Responsibility accounting:
 It can be defined as a system of accounting under which each
department head is made responsible for the performance of
his department .

1. Division into Responsibility Centres:

 The organization is divided into units or departments, called
responsibility centers , based on areas of responsibility.
These centers can be:
 Cost Centers: Responsible for controlling costs (e.g.,
production departments).
 Revenue Centers: Responsible for generating revenue (e.g.,
sales departments).
 Profit Centers: Responsible for both revenue generation and
cost control (e.g., a division producing and selling goods).
 Investment Centers: Responsible for returns on investments
as well as revenues and costs
Responsibility accounting:

2. Assignment of Accountability:
• Each manager is held accountable for the performance of their
respective center.
• This creates clear lines of responsibility and authority.

3. Performance Measurement: Financial metrics are used to

evaluate performance.
• Cost centers are evaluated on budget adherence.
• Profit centers are assessed on profitability.
• Investment centers are judged on ROI or residual income.

4. Budgets and Standards: Pre-determined budgets or

standards serve as benchmarks for evaluating performance.
Variances between actual and budgeted figures are analyzed to
identify deviations.
5. Focus on Controllable Costs: Managers are only held responsible
for costs or activities that they can control, preventing unfair
evaluations.
Responsibility accounting:
 Responsibility Accounting is a system of control where
responsibility is assigned for the control of costs. The persons
are made responsible for the control of costs.
 Example: John is a manager of a department, and he prepares the
cost budget of his department. He is responsible for keeping the
budgets under control. John will be supplied with full
information of costs incurred by his department. In case the
costs are more than the budgeted costs, then John must find out
reasons and take necessary corrective measures. A will be
personally responsible for the performance of his department.
Responsibility accounting:
 The organization is classified as cost centre, profit centre an d
investment centre.
 Based on this classification employee will be assigned with
a target.
 On the basis of achievement he / she will be rewarded.
 Allocating budgets to different responsibility centers and holding
managers accountable for the financial performance of their respective
centers.
Responsibility accounting:
 The organization is classified as cost centre, profit centre an d
investment centre.
 Based on this classification employee will be assigned with
a target.
 On the basis of achievement, he / she will be rewarded.

Fu n d adjustment:
 Top management will be altering the fund allocation based on
the requirement.
Network Models
 N etwo rk m o d els are us ed in p lan n ing an d c o n tro llin g
large, c o m p lex p ro jec ts .
 T h e P E RT invo lves the d is p lay o f a c o m p lex p ro jec t as
n etwo rk o f events an d ac tiv ities with tim e es tim ates us ed
to c alc ulate the ex p ec ted tim e fo r eac h ac tivity.
 T h e o bjec tive o f P E RT is to red u c e the entire p ro jec t
c o m p letio n tim e by a c ertain am o u nt at the leas t c o s t .
 T h e C P M als o invo lves the d is p lay o f a c o m p lex p ro jec t , a
n etwo rk but with
 P E RT :

T h e P E RT t e c h n i q u e i s v e r y u s e f u l f o r c o n s t r u c t i o n
projects, publication of books
Critical path method (CPM):
 C P M is us ed fo r p ro jec ts where tas k d u ratio n s are p red ic table
an d d eterm inis tic .
 I t id entif ies the c r itic al p ath , th e s equ en c e o f tas ks that
d eterm ines the m inim um tim e required to c o m p lete a p ro jec t .
S te p s in C P M:
• L is t Ac tivities: Id entif y all tas ks required fo r p ro jec t
c o m p letio n.
• D eterm ine D ep end enc ies : I d en tif y whic h tas ks d ep end o n
o thers .
• E s tim ate D uratio ns: A s s ign a f ixed d u ratio n to eac h ac tivity.
• C reate a N etwo rk D iagram : Us e arrows fo r tas ks and no d es
fo r events .
• I d en tif y the C ritic al Path : C alc u late th e lo nges t p ath thro ugh
th e n etwo rk .
Example:
A construction project involves the following tasks:

A: Design (5 days)
B: Lay foundation (10 days)
C: Build walls (15 days)
D: Install roof (7 days)
E: Painting (3 days)

The critical path is A → B → C → D → E, as it is the only path in this

case.

Critical Path: The total duration is 5+10+15+7+3=40days. Any delay

in tasks on the critical path will delay the project.
 Program Evaluation and Review Technique (PERT)

PERT is used for projects with uncertain activity durations. It

incorporates probability into time estimates by using three values:
•Optimistic Time (O): Best-case scenario.
•Most Likely Time (M): Expected duration.
•Pessimistic Time (P): Worst-case scenario.

The Expected Time (TE) for each activity is calculated.

• Project Management:
o To prevent delays in construction, software development,
or event planning.
• Resource Optimization:
o To allocate resources effectively to critical tasks.
Example: A construction company uses CPM to build a shopping
mall. They identify laying the foundation and erecting the
structure as critical tasks to avoid delays.
Management audit

• M anagem ent aud it is an ind ep end en t p ro c es s .

• I t aim s at p o inting o u t the in ef f ic ien c y in the p erfo rm an c e o f

m an agem ent f unc tio ns s uc h as p lan nin g o rgan is in g, s taf f ing,

d irec tin g, c o ntro lling and s ugges tin g p o s s ible

im p rovem ents .

• I t h elp s the m anagem ent to h and le th e o p eratio n s in an

ef fec tive m anner.

• M anagem ent aud it is no t a c o m p uls o ry au d it an d n o t

en fo rc ed by law.