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CONTROLLING
CONTROLLING
“Managerial Control implies the measurement of accomplishment against the standard and the
correction of deviations to assure attainment of objectives according to plans.”
Koontz and O’ Donnel

MEANING
Controlling is one of the management function, which involves setting standards, measuring
actual performance and taking corrective action. Controlling involves comparison of actual
performance with the planned performance

IMPORTANCE OF CONTROLLING
1. Controlling helps in achieving organizational goals: The controlling function measures
progress towards the organizational goals and indicates deviations if any to take corrective action.
2. Judging accuracy of standards: An efficient control system enables management to verify
whether the standards set are accurate or not by carefully checking the changes taking place in an
organizational environment.

3. Making efficient use of resources: Efficient utilization of resources through controlling

process enables a manager to reduce wastage of resources.

4. Improving employees motivation: An efficient control system ensures that employees know
well in advance what they are expected to do & also the standards of performance. It thus
motivates & helps them to give better performance.

5. Ensuring order and discipline: Controlling function creates an atmosphere of order and
discipline in the organization by keeping a close check on the activities of its employees.

6. Facilitating Coordination in action: Predetermined standards are set for governing each
department and employee in an organisation.

LIMITATIONS OF CONTROLLING
1. Difficulty in setting quantitative standards: Control system loses some of its effectiveness
when standards cannot be quantified.
2. Little control on external factors: An organisation cannot control external factors such as
government policies, technological changes, competition etc.
3. Resistance from employees: Mostly employees resist controlling by managers.
4. Costly affair: Control is a costly process as it involves a lot of expenditure, time and effort.

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FEATURES OF CONTROLLING

1. Goal oriented
2. Pervasive
3. Continuous
4. Controlling is looking back the performance achieved by employees
5. Is a forward looking function
6. Depends on planning
7. Action oriented
8. Primary Function of Management
9. Brings back management cycle back to planning

RELATIONSHIP BETWEEN PLANNING AND CONTROLLING

Planning and controlling are interrelated and in fact reinforce each other in the sense that-

• Planning is a pre-requisite for controlling. Plans set the standard for controlling. If the
standards are not set in advance managers have nothing to control.

• Planning is meaningless without controlling. It is fruitful when control is exercised. It

identifies deviations if any and initiates corrective measures.

• Controlling measures the effectiveness of planning and helps in taking corrective actions.

• Planning is looking ahead and controlling is looking back. Planning is a future oriented
function as it involves looking in advance and making policies for the maximum
utilization of resources in future that is why it is considered as forward looking function.
In controlling, we look back the performance already achieved by the employees and
compare it with the set standards. If there are any deviations in actual and standard
performance or output then controlling functions makes sure that in future actual
performance matches with the planned performances. Therefore, controlling is also a
forward looking function.

• Thus, planning & controlling are inter related. Planning makes controlling effective
whereas controlling improves future planning.

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CONTROLLING PROCESS.

1) Setting performance standards

2) Measurement of actual performance
3) Comparison of actual performance with standards
4) Analysing deviations
5) Taking corrective action

1. Setting Performance Standards:

• Standards are the criteria against which actual performance can be measured.
• Standards are the benchmarks towards which an enterprise strive to work.
• Due to changes in business environment the standards should be flexible enough to be
modified according to the situation

2. Measurement of Actual Performance:

• First performance standards are set and then actual performance is measured.
• Performance should be measured in an objective and reliable manner which includes
personal observation and sample checking.
• Performance is to be measured in the same terms in which standards have been
established, this will facilitate comparison.

3. Comparing Actual Performance with Standard:

• This step involves comparison of actual performance with the standard.
• Comparison will reveal the deviation between actual and desired performance.
If the performance matches the standards it may be assumed that everything is under control.

4. Analysing Deviations:
The deviations from the standards are assessed to identify the acceptable range of deviations.
Critical Point Control: Control should focus on key result areas (KRAs) which are critical to the
success of an organisation. These KRAs are set as the critical points.
Management by Exception: Management by exception is often called as control by exception, is
an important principle of management control, based on the belief that an attempt to control
everything results in controlling nothing. In short, everything cannot be controlled at the same
times
5. Taking Corrective Action:
The final step in the controlling process is taking corrective action. No corrective action is
required when the deviation are within the acceptable limits. But where significant deviations
occur , corrective action is necessary.

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TECHNIQUES OF MANAGERIAL CONTROL

Management is dynamic and so has to be its functions. The controlling function of management
in this context has been evolved in due times. A large number of techniques are available to
enable managers to effectively control organizational activities. A manager should know these
techniques and in which situation it should be applied and how it is to be applied to gain the
maximum of the efforts.

Techniques of managerial control may be classified into two broad categories:

I. Traditional Techniques
II. Modern Techniques.

I. TRADITIONAL TECHNIQUES:
Traditional techniques are those techniques that have been in use by the business organization
from the primitive era and are continued to be used still. These are effective techniques and had
not become obsolete with due change in time

1. Personal Observation:
It enables the manager to collect first hand information but it is very time consuming and cannot
be used in all kinds of job.
The most traditional technique is a personal observation of the employees or subordinates by the
manager or superior. It provides first-hand, raw, and real information. The managers need to hold
discussions with the persons whose work is being controlled and they should watch the actual
operations. It also creates positive pressure on the employees to perform well in the tasks
assigned to them as they know that their activities are being noted. Through this, managers are
able to establish discipline in the organization. The manager is given ample power to take
necessary actions as and when required in order to ensure coordination.
However, this technique is time-consuming and may reflect the effects of personal biases towards
employees. It may sound negative to an employee who does not get a regular appraisal. Thus, it
depends on the manager in how efficient is he/she is collecting the information through this
technique

2. Statistical Reports:
Statistical analysis in the form of averages, percentages, ratios, correlation, etc., present useful
information to the managers regarding performance of the organisation.
The reason behind the origin of statistics was that it made understanding concepts and
conclusions easier. Statistical analysis is done in the form of ratios, percentages, preparing graphs
in different ways, etc. present useful and easy to analyze information to the managers regarding
the work of the employees. It enables them to suggest solutions in lesser time as compared. The
preparation of statistical data enables comparison among employees’ performance over time and
also with the benchmarks set by the top-level management.

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3. Breakeven analysis:
It is a technique to study the relationship between costs, volume and profits.
It is also called –’ cost volume profit analysis.’ It analyses the relationship between the cost of
production, the volume of production, volume of sales, and profits. Here, total costs are divided
into two i.e., fixed cost and variable cost. Fixed cost is that cost that does not change with a
change in volume of production. Variable cost varies according to the volume of production. This
analysis helps in determining the volume of production or sales and the total cost which is equal
to the revenue.
Profit is termed as the excess of total revenue over the total cost. The point at which revenue is
equal to the total cost is known as ‘Break-Even Point (BEP). In other words, the break-even
point is the point at which there is no profit or loss to the organization.
The break-even point analysis helps in managerial control in several ways.

4. Budgetary Control:
It is a technique of managerial control in which all activities are planned in advance in the form
of budgets and actual results are compared with budgetary standards.
Types of budget
1. Sales budget
2. Production budget
3. Material budget
4. Cash budget
5. Capital budget
6. Research and development budget

Advantages of Budgeting
1. Helps in attainment of organisational objectives.
2. Is a source of motivation to the employees
3. Helps in optimum utilisation of resources
4. Is also used for achieving coordination among different departments

A budget is a quantitative statement for a definite period of time so that financial and other
resources can be utilized properly to achieve the objectives of the organization. It is a statement
that reflects the policy of that particular period. It is that technique of managerial control in which
all the operations are planned in advance in the form of budgets and actual results are compared
with budgetary standards. Different types of budgets include the following :

Sales budget: A statement of what an organization expects to sell in terms of quantity as well as
value.

Production budget: A statement of what an organization plans to produce in the prescribed year
or the budgeted period.

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Material budget: A statement of estimated quantity and cost of raw materials, tools required for
production

Cash budget: Anticipated level of cash inflows and outflows for the budgeted period.

Capital budget: The estimated spending on major long-term Assets such as on factories, on major
equipment.

Research and development budget: The estimated level of spending for the development and
refinement of products and processes.

Budgeting ensures optimum utilization of scarce resources by allocating them in a proper manner
to different departments of an organization. Budgeting helps in a way to focus on specific and
time-bound targets and helps in the attainment of organizational objectives.

Budgeting also helps to ensure coordination among different departments as the budget for sales
has been set according to production programs and schedules. It also facilitates Management by
exception by stressing those operations which deviate from budgeted standards in a significant
way.

However, the effectiveness of budgeting depends on how accurately estimates have been made
about the future and the budget should be flexible enough so that there is a possibility to
accommodate the environmental changes.

II. MODERN TECHNIQUES

Modern techniques are those techniques that are very new in the management world. These
techniques provide various new and better aspects for controlling the activities of an
organization. With time, new techniques need to be adopted as the situation demands so.
1. Return on Investment:
Return on investment is also known as return on the capital employed. The rate of profitability is
ascertained by the management with the help of this technique. The amount of profits earned by
the company is different from the rate of profitability of the company. Return on Investment
(ROI) is a technique which provides the basic yardstick for measuring whether or not invested
capital has been used effectively for generating reasonable amount of return.
It can be used to measure the overall performance of an organization or of its individuals,
departments, etc. ROI proves to be an effective means of Control for analyzing performance.

Net income Sales

ROI= ----------------------- x --------------------------
Sales Total Investments

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2. Ratio Analysis:
Ratio Analysis refers to analysis of financial statements by computation of various ratios.
1. Liquidity Ratios
2. Solvency Ratios
3. Profitability Ratios
4. Turnover Ratios

Liquidity ratios: These ratios are calculated to determine and estimate the short-term solvency
of a business. In other words, it determines the number of assets available to pay off the current
debts.

Solvency Ratios: These ratios help to determine the long-term solvency of the business and
prove of immense help to the management to frame further policies and plans, especially capital
formation policies.

Profitability Ratios: These ratios help to analyze the profitability of the business operations
and involve ways and techniques to improve it further.

Turnover Ratios: These help to determine the efficiency of operations and effective utilization
of resources. There is a positive relationship between turnover and better utilization of resources.

III. RESPOSIBILITY ACCOUNTING

Responsibility accounting can be defined as a system of accounting in which the overall
involvement of different sections, divisions & departments of an organization is set up as
‘Responsibility centers’. The head of the center is responsible for achieving the target set for his
center. Responsibility centers may be of the following types:
1. Cost centre: A cost or expense centre is a segment of an organisation for which a manager is
held responsible for its operations , the cost incurred in the center but not the revenue earned., For
e.g. production department for manufacturing unit can be termed as the cost center as it is the one
that purchases raw materials and is involved in the process.
2. Revenue Centre: is a segment of an organisation which is primarily responsible for
generating revenue from the operation of an organization. For example, the marketing
department.
3. Profit Centre: is a segment of an organisation whose manager is responsible for both
revenues and costs. For e.g. repair and maintenance department.
4. Investment Centre: is responsible not only for profits but also for all investments made in
the centre. e.g. assets.

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IV. MANAGEMENT AUDIT

Management audit refers to systematic performance appraisal of the management of an
organisation. The purpose is to review the efficiency and effectiveness of management and to
improve its performance in successive periods. It is helpful in identifying the deficiencies in the
performance of Management functions. It may be defined as an evaluation of the function
performance and effectiveness of management of an organization.

It helps to locate the present potential deficiencies in the performance of managerial functions. It
helps to improve the control system of an organization by continuously monitoring the activities.
It helps to improve the coordination among the various departments and ensure the updating of
existing managerial policies in light of environmental changes.
However, conducting a management audits may sometimes be a problem as there are no standard
techniques for it but enlightened managers understand its usefulness in improving the efficiency
of the organization’s operations.

V. PERT and CPM

• PERT (Programme Evaluation and Review Technique) and CPM (Critical Path
Method) are important management techniques used to plan, schedule and control
complex project.

• These techniques are especially useful for planning, scheduling and implementing time
bound projects involving performance of a variety of complex, diverse and interrelated
activities.
• These techniques are used to compute the expected time required to complete specific
tasks & identify the major activities which directly impact the working of the
organization These techniques are mainly used in areas like construction projects, aircraft
manufacture, shipbuilding, automobile industries, etc.
The various steps involved in using these techniques are as under:
The project is first divided into various sets of activities and then these activities are arranged in a
logical sequence chronologically.
A network diagram that is easy to explain is prepared to show the sequence of activities.
Time estimates are set for each activity that has to be done.
PERT provides three-time estimates-
(A) Optimistic (shortest time)
(B) Most likely time
(C) Pessimistic (longest time).

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In CPM, only a one-time estimate is prepared. CPM also concentrates on the cost of completing a
particular project in a particular manner.
(iv) The most critical path in the network is the longest path. The 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 introduced in the pre-decided plan for completing the
project on time.
Thus, these techniques are so interconnected and are necessary to determine the speed and
efficiency of organizations’ operations. These techniques prepare the managers beforehand for
the cost and time analysis that would be required to complete the process.

VI. MANAGEMENT INFORMATION SYSTEM

Management Information System (MIS) is a computer-based information system that provides
information and support for effective managerial decision-making. It is an important control
technique.
MIS offers the following advantages to the managers:
1. It facilitates collection, management and dissemination of information
2. It supports planning and controlling at all levels
3. It improves the quality of information
4. It ensures cost effectiveness
5. It reduces information overload