Organization and Management

1
Controlling

Controlling

An organization is a group of persons working together for specified

purposes or goals. Top management defines these as “organizational goals”.
The behavioral aspect of control should not only narrow the gap between
personal goals and organizational goals but should motivate employees to
strive toward these organizational goals.
The design of a control system can facilitate coordination and coope ration.
The control system consists of the control process and the control structure.

Topic Outline:
• Definition and nature of management control
• The link between planning and control
• Control methods and systems
• Application of management control in accounting and marketing concepts
and techniques
• Role of budgets in planning and control.

Nature of Management Control

Controlling - The measurement and correction of performance in order to

make sure that enterprise objectives and the plans devised to attain them are
being accomplished.
In controlling, the manager evaluates how well the organization is achieving
its goals and takes corrective action to improve performance.
The outcome of controlling function is the accurate measurement of
performance and regulation of efficiency and effectiveness.

Management Control – managers influence other members of the

organization to implement the organization’s strategies.

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The Basic Control Process
Control techniques and systems are essentially the same for controlling cash,
office procedures, morale, product quality, and anything else. The basic
control process involves three steps:
1. Establishing standards
Standards are simply criteria of performance. They are the selected points in
an entire planning program at which measures of performance are made of
that managers can receive signals about how things are going and thus do
not have to watch every step in the execution of plans.
Measurement of performance
The measurement of performance against standards should ideally be done
on a forward-looking basis so that deviations may be detected in advance of
their occurrence and avoided by appropriate actions. The alert, forward-
looking manager can sometimes predict probable departures from
standards. In the absence of such ability, however, deviation should be
disclosed as early as possible.
Correlation of deviations
Standards should reflect the various positions in an organization structure. If
performance I measured accordingly, it is easier to correct deviations.
Managers know exactly where, in the assignment of individual or group
duties, the corrective measures must be applied.
Correction of deviations is the point at which control can be seen as a part of
the whole system of management and can be related to the other managerial
functions.

Importance of Controlling:
The significance of the controlling function in an organization is as follows:
1. Accomplishing Organizational Goals:
Controlling helps in comparing the actual performance with the
predetermined standards, finding out deviation and taking corrective
measures to ensure that the activities are performed according to plans.
Thus, it helps in achieving organizational goals.
2. Judging Accuracy of Standards:
An efficient control system helps in judging the accuracy of standards. It
further helps in reviewing & revising the standards according to the changes
in the organization and the environment.
3. Making Efficient Use of Resources:
Controlling checks the working of employees at each and every stage of
operations. Hence, it ensures effective and efficient use of all resources in an
organization with minimum wastage or spoilage.
4. Improving Employee Motivation:
Employees know the standards against which their performance will be
judged.
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Controlling

Systematic evaluation of performance and consequent rewards in the form of

increment, bonus, promotion andetc. motivate the employees to put in their
best efforts.
5. Ensuring Order and Discipline:
Controlling ensures a close check on the activities of the employees. Hence, it
helps in reducing the dishonest behavior of the employees and in creating
order and discipline in an organization.
6. Facilitating Coordination in Action:
Controlling helps in providing a common direction to the all the activities of
different departments and efforts of individuals for attaining the
organizational objectives.

The Link between Planning and Controlling

Planning and Controlling are inter-related within any organization. Planning
sets the goals for the organization and controlling ensures its
accomplishment.
The relationship between them is explained as under:
• Planning Originates Controlling: In planning process, the objectives or
targets are to be set, and for achieving these goals, control process is
required. So we can say that planning precedes controlling.
• Control sustains planning: Controlling directs the course of planning.
Controlling spots the areas where planning is required.
• Controlling provides information for planning: In controlling, the
performance is compared with standards and deviations. The information
collected during any type of controlling should be used for planning also.
• Planning and control are inter-related: Planning is the initial step and
controlling is in the process and required at every step. That is why both
are dependent upon each other and inter-related.

Control Methods and Systems

Principles of Critical Point Control
− control, one the more important control principle, states that effective
control requires attention to those factors critical to evaluating
performance against plans. another way of controlling is comparing
company performance with that of other firms through
benchmarking.

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Different types of critical points standards:
1. Physical standards
Physical standards are nonmonetary measurements and are common at the
operating level, where materials are used, labor is employed, services are
rendered, and goods are produced. They may reflect quantities, such as
labor-hours per unit of output, units of production per machine-hour, or feet
of wire per ton of copper. Physical standards may also reflect quality, such as
hardness of bearings, durability of a fabric, or fastness of color.
2. Cost standards
Cost standards are monetary measurements, and like physical standards, are
common at the operating level. They attach monetary values to specific
aspects of operations. Illustrative of cost standards are such widely used
measures as direct and indirect costs per unit produced, labor cost per unit
or per hour, material cost per unit, machine-hour costs, and cost per seat-
mile.
3. Capital standards
There are a variety of capital standards, all arising from the application of
monetary measurements to physical items. They have to do with the capital
invested in the firm rather than with operating costs and are therefore
primarily related to the balance sheet rather than to the income statement.
Perhaps the most widely used standard for new investment, as well as for
overall control, is return on investment. The typical balance sheet will
disclose other capital standards, such as the ratios of current assets to
current liabilities, debt to the net worth, fixed investment to total investment,
cash and receivables to payables, and bonds to stocks, as well as the size and
turnover of inventories.
4. Revenue standards
Revenue standards arise from attaching monetary values to sales. They may
include such standards as revenue per bus passenger-mile, average sales per
customer, and sales per capita in a given market area.
5. Program standards
A manager may be assigned to install a variable budget program, a program
for formally following the development of new products, or a program for
improving the quality of sales force. Although some subjective judgment may
have to be applied in appraising program performance, timing and other
factors can be used as objective standards.
6. Intangible standards
More difficult to set are standards not expressed in either physical or
monetary measurements. What standard can a manager use for determining
whether the advertising program meets both short and long-term objectives?
Or whether the public relations program is successful? Are supervisors loyal
to the company’s objectives? Such questions show the difficulty of
establishing standards or goals for clear quantitative or qualitative
measurement.
7. Goals as standards
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With the present tendency for better managed enterprises to establish an

entire network of verifiable qualitative or quantitative goals at every level of
management. The use of intangible standards, while still important, is
diminishing. In complex program operations, as well as in the performance of
managers themselves, modern managers are finding that through research
and thinking it is possible to define goals that can be used as performance
standards. While the quantitative goals are likely to take the form of the
standards outlined above, the definition of qualitative goals represents an
important development in the area of standards.
8. Strategic plans as control points for strategic control
Strategic control requires systematic monitoring at strategic control points
and modifying the organization’s strategy based on this evaluation. As
pointed out earlier, planning and controlling are closely related. Therefore,
strategic plans require strategic control. Moreover, since control facilitates
comparison of intended goals with actual performance, it also provides
opportunities for learning, which in turn is the basis for organizational
change. Finally, through the use of strategic control, o ne gains insights not
only about organizational performance but also about the ever -changing
environment by monitoring it.
Strategic control – Systematic monitoring at strategic control points and
modifying the organization’s strategy based on this evaluation.

Benchmarking
Benchmarking is an approach for setting goals and productivity measures
based on best industry practices.
There are three types of benchmarking:
Strategic benchmarking – compares various strategies and identifies the
key strategic elements of success.
Operational benchmarking – compares relative costs or possibilities for
product differentiation.
Management benchmarking – focuses on support functions such as market
planning and information systems, logistics, human resource management,
and so on.

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Management control
Management control is usually perceived as a feedback system similar to the
common household thermostat.

Figure 12. 2 – Feedback Loop of Management Control

This system places control in a more complex and realistic light than if it is
regarded merely as a matter of establishing standards, measuring
performance, and correcting for deviations. Managers do measure actual
performance, compare this measurement against standards, and identify and
analyze deviations. But then, to make the necessary corrections, they must
develop a program for corrective action and implement this program in
order to arrive at the performance desired.

Real-time information and Control – Information about what is happening

while it is happening.
Feed forward, or Preventive, Control – Managers need for effective control
a system that will tell them potential problems, giving them time to take
corrective action before those problems occur.
Feed-forward versus Feedback Systems
• Feedback systems measure outputs of a process and feed into the system
or the inputs of the system corrective actions to obtain desired outputs.
• Feed-forward systems monitor inputs into a process to ascertain if the
inputs are as planned; if they are not, the inputs or the process is changed
in order to obtain the desired result.
Requirements for Feed-Forward Control
1. Make a thorough and careful analysis of the planning and control system,
and identify the more important input variables.
2. Develop a model of the system.
3. Take care to keep the model up to date.
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4. Collect data on input variables regularly, and put them into the system.
5. Regularly assess variation of actual input data from planned-for inputs,
and evaluate the impact on the expected end results.
6. Take action.

Reasons for Control of Overall Performance

• Overall planning must apply to enterprise or major division goals.
• Decentralization of authority-especially in product of territorial divisions-
creates semi-independent units.
• Overall control permits the measurements of an integrated area
manager’s total effort.
Profit and Loss Control
• Income statement is useful for determining the immediate revenue or
cost factors that have accounted for success or failure.
• The profit and Loss statement shows all revenues and expenses for a
given time, so it is a true summary of the results of business operations.
• Profit and loss control, when applied to divisions or departments, is
based on the premise that, if it is the purpose of the entire business to
make a profit, each part of the enterprise should contribute to this
purpose. Thus, the liability of a part to make an expected profit becomes a
standards for measuring its performance.
• Limitation of Profit and Loss Control
• Profit and loss control suffers from the cost of the accounting and paper
transactions involving intra-company transfer of costs and revenues. But
the use of computers has greatly reduced this cost. Duplication of
accounting records, efforts involved in allocating the many overhead
costs, and the time and effort required to calculate intra-company sales
can make this control costly if it is carried too far.

Control through Return on Investments

ROI Control measures both the absolute and the relative success of a
company or company unit by the ratio of earnings to investment of capital.
This tool regards profit not as an absolute but as a return on capital
employed in the business. The goal of a business seen, accordingly, not
necessarily as optimizing return from capital devoted to business purposes.
This standard recognizes the fundamental fact that capital is a critical factor
in almost any enterprise and, through its scarcity, limit progress. It also
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emphasizes the fact that the job of managers is to make the best possible use
of assets entrusted to them.

Bureaucratic and Clan Control

Bureaucratic Control is characterized by the wide used of rules, regulations,
policies, procedures and formal authority.
 Rules and standard operating procedures (SOPs) tell the worker what to
do.
 Still need output control to correct mistakes.
Clan Control is based on norms, shared values, expected behavior and other
cultural variables.
Requirements for Effective Controls
1. Tailoring controls to plans and positions:
Control techniques should reflect the plans they follow, and reflect the
place in the organization where responsibility for action lies. This enables
managers to take action when controls differ from their plans.
2. Tailoring controls to individual managers:
When controls are tailored to individual managers, individual managers
carry out their functions of control more effectively. The system of
control shouldn't be too ambiguous to people who will utilize it.
3. Making sure the control point up expectations at critical points:
Controls that point out exceptions help managers detect areas that
require attention. It is best to look for exceptions at critical points, and
the exception principle should be accompanied by principle of critical
point control.
4. Seeking objectivity of controls:
An objective, accuracy, and suitable standards are required for effective
control technique.
5. Ensuring flexibility of controls:
Controls should remain in place despite unexpected plans, unforeseen
circumstances, or outright failures.
6. Fitting the control system to the organizational culture:
Systems that fit within the organizational culture are deemed to do best.
7. Achieving economy of controls:
Control techniques are most effective when they achieve maximum
output at minimum cost.
8. Establishing controls that lead to corrective action:
Controls are useful only if they can correct plans through better planning,
organization, staffing and leadership.
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Controlling

Application of Management Control in Accounting and Marketing Concepts

and Techniques
Operation Control Tools or Techniques
− are concerned with the process that the organization uses in the
performance of an activity related to specific operations such as
production scheduling, determination inventory level or
determination of minimum cash balance for the firm.
Management Control Tools or Techniques
− monitor and evaluate overall operations of the firm and are
commonly financial in nature.
Operational control Tools
Control tools have been develop that are applicable to practically all aspects
of a firm’s operating task. Table 12.1 lists some control tools for some
operating tasks of a manufacturing firm.

Operating tasks General Specific

• Selling • Internal control for • Merchandise claim

cash and counter system
merchandise
• Office uniform
• Stock cards

• Production  Linear programming • EOQ and Re-Order

Point
• internal control for
raw materials, factory • PERT/Gantt Chart
supplies and spare • Critical Path Method
parts
• Quality control
• Scheduling system

• Accounting • Internal control • Voucher system

for cash
• Petty cash fund
disbursements

Table 12.1

Merchandise Claim Counter System

− assures management that all sales are recorded in the cash register at
the merchandise claim counter area. At the end of each working day,
cash should equal the recorded sales. The system also protect stocks
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 from shoplifters because only those stocks claimed at the counter are
wrapped with the invoice attached to the package.
Office uniform
− Employees commonly are required to wear uniforms. This
requirement could be viewed by management as an employee benefit
because the costs are borne by the company. It also serves as a control
tool since it identify employees in the work area.

Stock cards
− in the production area, the internal control system should focus on the
protection of raw materials, work-in process inventory, finished
goods inventory, factory supplies, and machine spare parts. Inventory
records, (i.e., stock cards, should be maintained). Stock cards show the
record of all receipts and releases for each items in the inventory. The
balance shown in the stock card can be compare with the physical
count from time to time.
Economic Order Quantity
− Economic Order Quantity (EOQ): identify the optimal order quantity
by minimizing the sum of certain annual cost that vary with order
size.

Assumptions of EOQ Model

 Only one product is involved.
 Annual demand requirements known.
 Demand is even throughout the year.
 Lead time does not vary.
 Each order is received in a single delivery.
 There are no quantity discounts.

Annual carrying cost is computed by multiplying the average amount of

inventory on hand by the cost to carry one unit for one year, even though any
given unit would not necessarily be held for a year. The average inventory is
simply half of the order quantity. The amount on hand decreases steadily
from Q units to 0, for an average of (Q + 0)/2. Using the symbol H represent
the average carrying cost per unit.

Annual ordering cost is a function of the number of orders per year and the
ordering cost per order.
Formula:
Total Cost = Annual carrying cost + Annual Ordering cost
𝑸 𝑫
𝑻𝑪 = 𝑯 + 𝑺
𝟐 𝑸
where:
Q = Order quantity in units
H = Holding (carrying) cost
D = Demand, usually in units per year
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S = Ordering cost

To Derived EOQ formula:

2DS 2(Annual Demand)(Order or Setup Cost)
Q = =
H Annual Holding Cost

When to Reorder with EOQ Ordering

 Reorder Point - When the quantity on hand of an item drops to this
amount, the item is reordered. It is also to note that when the reorder
point has been reach, a perpetual inventory is required.
 Safety Stock - Stock that is held in excess of expected demand due to
variable demand rate and/or lead time.
 Service Level - Probability that demand will not exceed supply during
lead time.
Determinants of the Reorder Point
 The rate of demand
 The lead time
 Demand and/or lead time variability
 Stockout risk (safety stock)
 If demand and lead time are both constant, the reorder point is
simply:
ROP = d x LT
Where;
d = demand rate (units per day or week)
LT = lead time in days or weeks
Note: demand and lead time must be expressed in the same time units.
Safety Stock
When variability is present in demand or lead time, it creates the possibility
that actual demand will exceed demand. Consequently, it becomes necessary
to carry additional inventory called safety stock.
 Safety stock and safety lead time are both hedges.
 Safety lead time is more based on the uncertainty in the timing rather
than the quantity.

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  Safety stock tends to be used in MRP where uncertainty about
quantities is the problem-scarp.
o Safety stock reduce the risk of running out of inventory (a
stockout) during lead time.
o Safety stock challenges
 Safety stock set because of a onetime event.
 Safety stock still active on an obsolete item
 Safety stock levels inconsistent.
o ROP = Expected demand during lead time + safety stock
Linear Programming
− typically deals with the problem of allocating limited resources among
competing activities in the best possible way or optimal way.
− LP could be used by a manufacturing firm in allocating production
facilities to products or in allocating common raw materials use in
several products.
− The control function of linear programming is to optimize the
objectives by the simultaneous solution to a set of linear equations
representing objectives and constraints.
Gantt Chart
− it developed by Henry L. Gantt. The Gantt chart can be use to compare
actual progress in production with scheduled progress.
− is popular tool for planning and scheduling simple projects. It enables
a manager to initially schedule project activities and then to monitor
progress over time by comparing planned progress to actual progress.
The advantage of Gantt chart is its simplicity. However, Gantt chart
fail to reveal certain relationships among activities that can be crucial
to effective project management.

Figure 12.3

Critical Path Method (CPM)

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− This control tool is appropriate for large and complex projects in

which many interdependent tasks are involved. For example
construction of a building. Its objective is to identify the most time
consuming series of tasks which is calling the critical path. The
minimum amount of time to complete the project will be determined
by the most time consuming sequence of job. Every job in the path is
considered critical since any delay in the completing of this jobs will
increase the total time require to complete the whole project.

Total Job Description Required Time Immediate task

(Days) Predecessor
0 -
A - Start
4 A
B - Purchasing &
Preparation of Materials
3 A
C - Typesetting/ Lay
outing
6 B
D -Printing of Cover
5 C
E - Printing of Inside
Pages
2 D and E
F - Sorting
1 F
G - Binding
0 G
H - Finish
Table 12.2 - Critical Path Method Application In Job Analysis

B, 4 D, 6

A, 0 F, 2 G, 1 A, 0

C, 3 E, 5

Critical Path
Figure 12.5 - Critical Path Chart
PERT

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 PERT(Program Evaluation and Review Techniques) was developed by the
United States Navy for the Planning and control of the Polaris Weapon
System in 1958.
− it is reinforcement of the Critical Path Method (CPM) in the sense that
three time estimates are made for each task:
1. the earliest possible time of completion,
2. the target completion time, and
3. the latest possible time of completion.
These estimates are made because it is not possible to determine
accurately the exact time of completing a task, especially for new
projects. The average time, te, is computed using the three time estimates
as follows:
te = 𝑎 +4𝑚+𝑐
6
Where:
a = earliest completion time
m = target completion time
c = latest possible time

The "critical path" for the project is then determined by using the
computed "average" times for each task - the sequence of events which
takes the longest time and which involves, therefore, zero slack time.
Voucher System
this system requires that every liability should be recorded as soon as it is
incurred and that only checks be used in payment of approved liabilities.
− a voucher is prepared for each expenditure assuming that every
expenditure is systematically reviewed and verified before payment is
made.
− the verification process includes the examination of documents like
Purchase Orders, Sales Invoices and Delivery Receipts.

Petty Cash Fund System

 if a voucher system is maintained, it will be convenience to have a
small amount of cash on hand with which to make some expenditures
in small amounts. for example, transportation expenses, postage
stamps and emergency supply purchases. internal control over these
small cash payments can best be achieved through a petty cash fund
system.
 The Petty cash fund should always contain cash and/or vouchers
totalling the exact amount of the amount of the fund originally
established. expenditures are replenish regularly by check.
Role of Budgets in Planning and Control
Budget
A budget is a quantitative expression of a plan for a defined period of time.
• It may include planned sales volumes and revenues, resource quantities,
costs and expenses, assets, liabilities and cash flows.
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Zero-base Budgeting – dividing enterprise programs into packages

composed of goals, activities, and needed resources and calculating the costs
for each package from base zero.
Key Purposes of Budgets in management
• A method of planning the use of resources
• A vehicle for forecasting
• A means of controlling the activities of various groups within the firm
• A means of motivating individuals to achieve performance levels agreed
and set.
• A mean of communicating the wishes and aspirations of senior
management
• A mean of resolving conflicts of interest between groups with the
organization.
Budgeting as a Control Tool:
A budget serves as a control tool to provide standards for evaluating
performance.
A budget can cover any of the following:
• Profit planning – forecast of revenues and expenses
• Cash budgeting – forecast of cash needs and sources
• Balance sheet forecasting – anticipating future assets, liability and net
worth position of the business
Types of Control Reports

Financial Accounting Measurements Reports Responsibility

Reports Accounting Reports

Balance sheet Budget reports Cost center reports

Income statement Variance Analysis reports Profit center reports

Investment center report

Table 12.3
Balance sheet
as a Financial Accounting report is a statement of the company's financial
condition as of the date of the statement. this report consists of the total
assets of the firm and the corresponding claims against these assets as
represented by the liabilities and stockholder's equity.

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Balance sheet as a control tool can be used to appraise performance of
managers by comparing the current statement with those of the
corresponding period of previous years.

Pro-forma Balance sheet

XYZ Company
Balance Sheet
As of December 31, 2015

Assets

Current assets:

Cash Pxxx

Account Receivable xxx

Inventories Xxx

Other current assets Pxxx

Long-term investment xxx

Property, plant and equip. xxx

Total Asset Pxxx

Liabilities and stockholder's equity

Current Liabilities xxx

Long-term debt xxx

Stockholder's Equity

Capital Stock xxx

Retained Earnings xxx

Total stockholder's Equity xxx

Total Liabilities and stockholders' Equity Pxxx

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Table 12.4
Income Statement
− summarize the results of operations of the company for a period of
time.
− This statement reports the revenues and expenses of the company for
that period. Revenues are the amount earned by the company from
the goods and services that the company provides to each customers.
Expenses are the cost of the resources used in providing the goods
and services. Net income (net loss) is the most important item
reported in the income statement. Net income (net loss) is the
difference between revenues and expenses.

Pro-Forma Income Statement

XYZ Company
Income Statement
For the Year Ended 2015

Sales P350,596.00
Cost of sales 207,811.00
Gross Profit P142,785.00
Operating Expenses
General Administrative Expenses 46,950.00
Selling expenses 10,984.00
Depreciation 12,235.00 70,269.00

Operating Income P72,516.00

Interest and Other changes 1,095.00
Income Before Tax 71,421.00
Provision for Income Tax (35%) 24,997.00
Net Income P46,234.00
Table 12.5
Cash Budgeting
A Cash Budget is used to determine anticipated cash inflows and outflows so
that the business maintains the optimum level of cash (cash on hand being a
non-earning asset). It also provides information on whether or not
additional financing is required to address cash shortfalls.

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 Pro-Forma Statement of Cash Flows (Table 12.6)
XYZ Company
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flow from operating activities:
Cash flow received from client P560,750
Cash paid for operating expenses (320,445) P240,305
Cash flow from investing activities:
Proceeds from sale of equipment at a gain of P5,000 P25,500
Purchase of tools and equipment (37,540) (12,040)
Cash flow from financing activities:
Payment of loan to the bank P(151,200)
Additional Investment of the proprietor 100,00
Withdrawals of the proprietor (150,000) (201,200)
Net income in cash balance P27,065
Cash balance, January 1,2015 48,260
Cash balance, December 31, 2015 P75,325

References
Rodriguez, R.A., "Fundamentals of Management"
Wiehrich, H., Cannice, M.V., Koontz, H., "Management, A Global and Entrepreneurial
Perspective, 13th Ed."

Other sources
http://www.businessmanagementideas.com
http://www.slideshare.net
http://www2.ivcc.edu
http://www.smetoolkit.org