Unit V -Controlling

Nature & Purpose of Control

Control is an essential function of
management.
Control is an ongoing process
Control is forward – working because past
cannot be controlled
Control involves measurement
The essence of control is action
Control is an integrated system
Definition
Control is the process through which
managers assure that actual activities
conform to planned activities.
In the words of Koontz and O'Donnell -
"Managerial control implies measurement of
accomplishment against the standard and the
correction of deviations to assure attainment
of objectives according to plans."
Control Process
Establishment of Standards

Physical Standards – Labour Hours

Cost standard – Direct & In direct Cost
Revenue standard – Average Sale per
Customer
Capital standard – Rate of Return
Intangible standard- Competence of
managers and employees.
Measuring and Comparing Actual Results
against standards
Summary Report – Figures, Charts ,
Statements
Personal Observation
Taking Corrective Action
TYPES OF CONTROL SYSTEMS
TYPES OF CONTROL SYSTEMS
Feed forward controls: They are preventive
controls that try to anticipate problems and
take corrective action before they occur.
Concurrent controls: They (sometimes
called screening controls) occur while an
activity is taking place.
Feedback controls: They measure activities
that have already been completed. Thus
corrections can take place after performance
is over.
CONTROL TECHNIQUES
Statistical data:
Statistical analyses of innumerable aspects of a
business operation and the clear presentation
of statistical data, whether of a historical or
forecast nature are, of course, important to
control.
Break- even point analysis:
This chart depicts the relationship of sales and
expenses in such a way as to show at what
volume revenues exactly cover expenses.
Operational Audit:
Operational auditing, in its broadest sense, is
the regular and independent appraisal, by a
staff of internal auditors, of the accounting,
financial, and other operations of a business.
Personal observation:
In any preoccupation with the devices of
managerial control, one should never
overlook the importance of control through
personal observation.
Non- Budgetary Control Techniques -PERT
and CPM
PERT (Programme Evaluation and Review
Technique) and CPM (Critical Path Method)
are two important techniques used in both
planning and controlling.
Used to compute the total expected time
needed to complete a project & it can identify
the bottleneck activities that have a critical
effect on the project completion date.
PERT and CPM
(i) The project is first divided into various activities and
then these activities are arranged in a logical sequence.
(ii) A network diagram is prepared showing the sequence
of activities.
(iii)Time estimates are laid down for each activity. PERT
prepares three time estimates-(i) Optimistic (shortest time)
(ii) Most likely time & (iii) Pessimistic (longest time).In
CPM, only one time estimate is prepared. Along with this,
CPM also lays down the cost estimates for completing the
project.
(iv) The most critical path in the network is the longest
path. Longest path consists of those activities which are
critical for completing the project on time; hence the name
CPM.
(v) If required, necessary changes are made in the plan for
completing the project on time.
Budgetary Control Techniques
Budgeting
 A statement of anticipated results during a
designated time period expressed in financial
and non-financial terms
 Begins when top management sets strategies
and goals.
 Sub units prepare Budgets for their unit.
 Approved by Board of Directors
Types of Budget
Sales Budget
Selling and Distribution Budget
Production Budget
Production Cost Budget
Raw material Budget
Labour Budget
Production overhead Budget
Capital Expenditure Budget
Cash Budget
Master Budget
Advantages of Budgetary Control
Clearly indicate the limits for expenses
Possible to coordinate the work of the entire
organization
Promotes Cooperation and team spirit among
the employees.
Deviations from the predetermined standards
can be found.
Helps people learn from the past.
Improves Communication.
Limitations
1. Rigidity
2. Lack of Action
3. Time consuming
4. Estimate
Responsibility Accounting
Under this system of accounting, various
sections, departments or divisions of an
organisation are set up as ‘ Responsibility
Centers’.
Each centre has a head who is responsible for
attaining the target of his centre.
A department generates profits by selling its
output to other departments.
Prices may be fixed based on
Mark up on actual Cost, standard cost, Market
Price, Negotiated Price
Financial Statements and Ratio Analysis
(i) Liquidity Ratios:
short term financial position of business and its ability
to pay short term liabilities.
Current Ratio = Current Assets/Current Liabilities
(ii) Debt Ratio:
Ability to meet long term commitments
Debt Ratio =Total Debt/Total Assets
(iii) Profitability Ratios:
Profitability ratios like gross profit ratio, net profit ratio,
operating ratio, etc. help to analyze the profitability
position of a business.
Gross Profit Ratio = Gross Profit/Net Sales × 100
(iv) Return on Investment (ROI):
Determinines whether the capital invested in the
business has been effectively used or not for
generating reasonable amount of return.
ROI= (Net Income / Total Investment) X 100 Net
Income before or after tax can be used for calculating
ROI. Total investment includes investment in fixed
Assets as well as working capital.
It acts as an effective control device in measuring and
comparing the performance of different departments.
Break Even Analysis
Break even analysis is a useful technique to
study relationship between costs and profit,
break even point is a point of no profit no
loss.
When sales reaches break even point, it
refers to sale amount at which company is
neither earning profit nor incurring loss
Break Even Graph