Control-

The managerial control implies the measurement of accomplishment against the standard and the correction of deviation to assure attainment of objectives according to plans.

To control is to :

(a) keep track of the system operation and ensure progress according to set standards of quality, quantity and pace;

 (b) find out the existence and the extent of any deviation from the plan and norms; and

(c) suggest and effect remedial measures in time so that the goal is reached according to schedule.

In practice, the control system has evolved in two ways:

1) Overall control of plans, policies and directives of the entire organisation exercised by top management.

2) Part or specific control designed for departments or components such as materials and stores, salaries and wages, production and products, sales, manpower and training.

Control is possible only when what is to be achieved and how it is to be achieved, are known.

Thus the plan forms the primary control document. Controlling is intimately linked with exercise of authority and accountability based on the organisation structure.

CHARACTERISTICS OF CONTROL

 On the basis of the above given concept of control, we can identify the main characteristics of Controlling as follows :

1. Controlling is forward looking: A manager cannot control the past. A manager can take corrective action only about future operations. By reviewing past events, a manager applies the advantages of previous experience to future corrections. Control is usually preventive as presence of control system tends to minimize wastage, losses and deviations from standards.
2.  Controlling exists at every management level: Controlling is a function of every manager in the organization – right from the Chairman of the Board of Directors down to the first-line supervisor. For example, top management is involved in exercising strategic control, middle management concentrates on tactical control, and operational control is the responsibility of supervisory management.
3.  Controlling is a continuous activity: Control is not a one-step process but a continuous one. It involves constant revision and analysis of standards resulting from the deviations between actual and planned performance.
4. Purpose of controlling is positive: Controlling serves a positive purpose both at the organizational level as well as the individual level. At the organizational level, the purpose of control is to make things happen– to achieve organizational goals within stated constraints or by means of planned activities. At the individual level, the purpose of control is to make individuals give up a part of their independence so that common goal and objectives may be accomplished

Controlling Process Controlling is a systematic process involving the following steps.

 1. Setting performance standards

Standards are the norms against which any performance is measured to find out its results. The first essential element of any control process is to know what should be the result. Standards may be :

 – tangible or specific (like production of 200 units per day or sale of 1500 units per day)

– intangible or abstract (to be the most preferred employer)

2. Measurement of actual performance

Once the standards are set, the second basic step in control process is the evaluation of performance. This requires measuring the work in terms of control standards, and communicating the appraisal with the persons responsible for taking corrective actions. Measurement of performance must be in units similar to those in which standards are expressed

3. Comparison of actual performance with standards

When a significant discrepancy occurs between the actual output or performance and the planned or predetermined performance standards, specific action must be taken to correct the situation.

(i). The Operation Phase

(a) Prompt investigation of the causes of the deviation.

(b) Decisions concerning the required corrective action.

(c) Prompt direction for correcting the situation in accordance with the decision.

 (d) Close supervision of the corrective action to ensure that it takes place according to the instructions and is effective.

 4. Analysing  deviations

(ii). The Administrative Phase

 (a) Further investigation of recurring difficulties to determine the basic factors, either human or physical, that are responsible.

(b) Disciplinary action, either positive or negative, as the situation requires.

(c) Creative planning to prevent a recurrence of the situation.

 (d) Recognition of the situation and introduction of the planned measurement

 5. Taking corrective action

Recommending corrective actions for underperformance is not enough in itself. The managers responsibility does not end here. Often the control proves ineffective or fails because the corrective actions recommended are not allowed through

Some examples of Corrective Action

Causes of deviation                  Corrective action to be taken

1. Defective material               Change the quality specification for the material used

2. Defective machinery           Repair the existing machine or replace the machine if it cannot be repaired

 3. Obsolete machinery           Undertake technological upgradation of machinery

4. Defective process                Modify the existing process

5. Defective physical               Improve the physical conditions of work

    conditions of work

Feedback Control

 Feedback control includes monitoring the state of the actual functioning and performance of the system, comparing it with the set norms and transmitting the conditions and deviations, if any, to the operator. Controlling the flow of information items in selective dissemination of information (SDI) following continuous evaluation by the user of their usefulness is an example of feedback control.

Real-Time Information and Control Perfect control is possible only when steps for detection and diagnosis of the causes for deviation and corrective measures are taken as soon as an error occurs. This needs access to real-time information on the occurrence of error. However, in practice, perfect management control in real time is not possible, except in very simple operations, as normally there is considerable time gap between detecting a deviation, diagnosing the causes and devising and applying corrective measures. The cost of collection and transmission of real-time data may often be so high as to offset the advantages.

 Control Instruments

Several devices are used by managers for exercising control.

These may be broadly divided into three groups:

1. budgetary control,
2. non-budgetary control and statistics,
3. network-based control.

Controlling techniques can also be defined as per-

1. Traditional techniques
2. Non- Traditional techniques

Traditional Techniques

These include:

(a) Personal observation

(b) Statistical reports

 (c) Breakeven analysis

(d) Budgetary control

(e) Standard Costing

(f) Internal Audit

Modern techniques

(a) Return on investment

(b) Ratio analysis

(c) Responsibility accounting

 (d) Management audit

 (e) PERT and CPM

(f) Management information system

(g) Zero Base Budgeting

Traditional method

(a) Personal observation

Personal observation  enables the manager to collect first hand information. It also creates a psychological pressure on the employees to perform well as they are aware that they are being observed personally on their job. However, it is a very time-consuming exercise and cannot effectively be used in all kinds of jobs.

(b) Statistical Reports

Statistical analysis in the form of averages, percentages, ratios, correlation, etc., present useful information to the managers regarding performance of the organisation in various areas. Such information when presented in the form of charts, graphs, tables, etc.,

(c)Break-even point analysis:

 Most of the, enterprises at the plan or product development stage use the capacity utilisation of a plant as a measure of balancing income with expenditure, thus showing the profit-yielding stage. It forms a yardstick to measure the rate of production and corresponding profit or loss, and indicates the variables available to the manager for effective control. The same concept can be developed for library projects to determine the stage or point at which a new information service envisaged (e.g., SDI or translation) reaches a self-supporting stage. The break-even point is reached when the value of services in terms of money balances the cost of inputs.

Breakeven point can be calculated with the help of the following formula:

Breakeven Point =                  Fixed Costs

                                Selling price per unit – Variable cost per unit

 Breakeven analysis helps a firm in keeping a close check over its variable costs and determines the level of activity at which the firm can earn its target profit.

(d) Budgetary Control

 Budget serves two purposes:

(a) as a plan input to produce goods and services as outputs, and

 (b) as an instrument of control.

 As an instrument of control, a budget including non-financial is used to evaluate the progress towards achieving targets. The components of such a control are: setting guidelines, measuring progress, tracing the factors responsible for non-fulfillment of tasks, and variance from set standards. The remedial measures may include reallocation of resources, restructuring of costs, economy drive, and organisational change. Timely availability of data on all aspects of a budget, actual and forecast, and their interpretation, is a pre-requisite for effective control. This is the task of the management information system. The traditional budget has many limitations as a control device.

Types of Budget

 Budgets are drawn on the basis of plans, and since an average enterprise has a large variety of plans, there are many types of budgets currently in use in business organizations. The following are the important types of budgets.

 – Sales budgets including selling and distribution costs budgets.

– Production and manufacturing budgets.

 – Purchase Budget.

 – Capital Expenditure Budget.

 – Administration Expenses Budget.

 – Research and Development Budget.

 – Cash Budget.

A master budget is frequently prepared to combine all other budgets in a summary form. The components of the master budget are the various functional budgets. The summary plan of master budget is generally divided into two parts- a forecast income statement and a forecast balance sheet

To overcome these limitations, more versatile forms of budgeting, such as the

 programme planning and budgeting system (PPBS) and

 zero-based budget have been introduced

(e) Standard Costing

Expenses/costs associated with every activity are recorded and classified and then compared with the standard or budgeted costs. The concerned manager takes corrective action if any deviation is found. This technique helps in finding out which activity is profitable and which is not

(f) Internal Audit

 It is another effective and widely used tool of managerial control. Internal auditing signifies regular and independent appraisal of the accounting and financial and other operations of a business by a staff of internal auditors. There is no denying the fact that internal auditors mostly limit themselves to the integrity of accounts and corporate assets. But the horizon of internal auditing can be widened just by bringing under them some more appraisal areas, as policies, procedures, methods and quality of management.

 Preventive Control

 Feedback control depends on the past data transmitted after the occurrence of an unwanted event. Often, this turns out to be of post-mortem interest. Since real-time control is difficult to effect and uneconomical, except in mechanical systems, opting for preventing control will be more practical.

Preventive control systems may be built around forecasts, PERT and other network techniques or feed forward systems.

Feed forward control: Unlike feedback, feed forward control monitors the input data and portrays its effect on output. If it is unlikely that the set objectives will be attained, planned input variables maybe changed and processes modified. Such a control system is built on a dynamic model reflecting the changes that may occur and their effects at all stages of the operation. Project tailored information systems can well adopt feed forward control.

Critical control points:

Continuous observation of complete performance is not possible for most managers; in fact, it is not desirable. In every sphere of work or operation, there will always be certain characteristic events and limits which can be used as control indicators or danger signals. Such factors are called critical points. They range from physical standards to verifiable goals through cost standards, capital standards, and intangible standards. The gap between the time a publication should come out of processing and the time at which it is actually made available to the patron is a critical control point in procurement and processing of publications.

Non traditional techniques-

(a) Return on Investment

Return on Investment (RoI) is a useful technique which provides the basic yardstick for measuring whether or not invested capital has been used effectively for generating reasonable amount of return. RoI can be used to measure overall performance of an organisation or of its individual departments or divisions. It can be calculated as under.

RoI = Net Income/ Sales  × Sales/ Total Investment

Net Income before or after tax may be used for making comparisons. Total investment includes both working as well as fixed capital invested in business. According to this technique, RoI can be increased either by increasing sales volume proportionately more than total investment or by reducing total investment without having any reductions in sales volume.

(b) Ratio Analysis Ratio Analysis refers to analysis of financial statements through computation of ratios. The most commonly used ratios used by organisations can be classified into the following categories:

1. Liquidity Ratios: Liquidity ratios are calculated to determine short-term solvency of business. Analysis of current position of liquid funds determines the ability of the business to pay the amount due to its stakeholders.

 2. Solvency Ratios: Ratios which are calculated to determine the long-term solvency of business are known as solvency ratios. Thus, these ratios determine the ability of a business to service its indebtedness.

 3. Profitability Ratios: These ratios are calculated to analyse the profitability position of a business. Such ratios involve analysis of profits in relation to sales or funds or capital employed.

 4. Turnover Ratios: Turnover ratios are calculated to determine the efficiency of operations based on effective utilisation of resources. Higher turnover means better utilisation of resources

(c) Responsibility Accounting

Responsibility accounting is a system of accounting in which different sections, divisions and departments of an organisation are set up as ‘Responsibility Centres’. The head of the centre is responsible for achieving the target set for his centre. Responsibility centres may be of the following types:

1. Cost Centre: A cost or expense centre is a segment of an organisation in which managers are held responsible for the cost incurred in the centre but not for the revenues. For example, in a manufacturing organisation, production department is classified as cost centre.

 2. Revenue Centre: A revenue centre is a segment of an organisation which is primarily responsible for generating revenue. For example, marketing department of an organisation may be classified as a revenue center.

 3. Profit Centre: A profit centre is a segment of an organisation whose manager is responsible for both revenues and costs. For example, repair and maintenance department of an organisation may be treated as a profit center if it is allowed to bill other production departments for the services provided to them.

 4. Investment Centre: An investment centre is responsible not only for profits but also for investments made in the centre in the form of assets. The investment made in each centre is separately ascertained and return on investment is used as a basis for judging the performance of the centre.

(d) Management Audit

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

(e) PERT and CPM

Network analysis is a technique for planning and controlling complex projects and for scheduling the resources required on such products. It achieves this aim by analyzing the component parts of a project and assessing the sequential relationships between each event. The results of this analysis are represented diagrammatically as a network of interrelated activities. Broadly speaking, there are two network techniques. (a) Critical Path Method Critical Path Method, an important network technique for management control, was developed by Walkar of Dupont to reduce time for periodic maintenance. It is used for planning and controlling the most critical activities to accomplish any project. Under this technique a project is broken into different operations or activities and their relationships are determined. These relations are shown with the help of a diagram known as network diagram. The Network diagram or flow plan may be used for optimizing the use of resources and time. CPM technique is based on the assumption that activity times are proportional to the magnitude of resources allocated to them; and by making a change in the level of resources, the activity time and the project completion time can become varied. The application of CPM leads to the following advantages:

1. It provides an analytical approach to the achievement of project objectives which are defined clearly.
2. It identifies most critical elements and pays more attention to these activities.
3.  It assists in avoiding waste of time, energy and money on unimportant activities.
4. It provides a standard method for communicating project plans, schedule and cost.

 Programme Evaluation and Review Technique (PERT) PERT is an important technique in the field of project management. It involves basic network technique which includes planning, monitoring and controlling of projects. In addition to its use in schedule planning and control, the network concept in PERT provides framework for treating a wide range of project management problems. Thus, PERT system is directed towards the dynamic management of projects. It specifies techniques and procedures to assist project managers in:

 (i) Planning schedules and costs;

 (ii) Determining time and cost status;

(iii) Forecasting manpower skill requirements;

(iv) Predicting schedule slippages and cost overruns;

(v) Developing alternate time-cost plans;

(vi) Allocating resources among tasks.

Application of PERT requires that management should know the goals to be achieved, determine the actions necessary to achieve those goals, determine the sequence in which these activities must be performed and carefully establish the time that will elapse at each of the successive stages of actions required to achieve the goals. PERT uses ‘probability’ and ‘linear programming’ for planning and controlling the activities. Probability helps in estimating the timings of various activities in the project and linear programming is used to maximize the achievement of the project objectives. With the help of these tools, PERT can foretell the probability of achieving the project targets leading to project’s main objective. PERT is employed in construction of ships, buildings and highways, in planning and launching of new projects, in publication of books and, in installation and debugging of computer systems. Frequently, PERT systems are used in conjunction with computers. A computer programme is employed that permits calculations to be made without reference to a flow chart or diagram.

(f) Management Audit

Companies get their accounts audited at least once a year. This statutory audit is intended to ensure that the company’s records and reports reflect sound accounting principles. Such an audit looks at the past and at the historical records of past performance. However, some of the progressive companies appear to have recognized the importance and utility of management audits. And management audits are becoming increasingly significant in connection with control of overall performance of an enterprise and its management.

Financial Audit and Management Audit

Management audit should not be confused with accounting or statutory audit. Accounting audit is concerned with the verification and confirmation of financial data, and is essentially historical in character. But management audit looks at the past, the present and the future. Its basic purpose is to appraise the management performance of the various departments and of the company as a whole.

Statutory audit is conducted by an independent qualified auditor but management audit may even be undertaken by management itself; the qualifications of those conducting management audit are not prescribed by any law.

Appraisal Areas Management audit consists of two distinct parts-systematic compilations of relevant data and its analysis with a view to appraise management’s overall performance. The American Institute of Management has identified ten categories of appraisal areas to be used under any comprehensive management audit programme.

 (i) Economic Function: This category includes appraising public value of the company in relation to different interests like consumers, shareholders, employees, suppliers and the communities in which that company operates.

(ii) Corporate Structure: Under this category is appraised the effectiveness of the corporate structure through which the management seeks to accomplish its objectives.

 (iii) Health of Earnings: It is concerned with determining the income itself and also appraising the extent to which profit potential of the company’s asset has been realized.

(iv)Service of Shareholders:Here, the management audit team determines the company’s service to the shareholders w.r.t. (with reference to) minimization of risk, reasonable return, capital appreciation over a period of time.

(v) Research and Development: For giant companies, particularly, evaluation of their research policies is crucial to management audit. Research and development success is evaluated in terms of the part played by them in the company’s past progress and also in terms of how successfully research policies are preparing the company for future progress and improvement of its position in the industry.

 (vi) Directorate Analysis: In this appraisal area three elements usually considered are –

(i) the quality of each director and his contribution to the board.

(ii) the extent to which directors work as a team.

(iii) whether the directors act as trustees for the organization.

(vii) Fiscal Policies: The key factors under this category of appraisal are providing, controlling and managing thriftily the use of funds.

(viii)Production Efficiency:

Production or operating efficiency is equally vital to manufacturing as well as nonmanufacturing companies. The first part under this category, which is frequently overemphasized, is the appraisal of machines and materials management.

 (ix)Sales Vigour:

There are significant variations in sales practices and marketing principles followed by different companies even in the same industry. Still, sales vigour can be evaluated if marketing goals are properly determined. The extent to which past sales potential has been realized, the development of sales personnel, and the extent to which present sales policies of the company will enable its management to realize future sales potential are the three important bases that can be used to appraise the sales vigour.

(g) Zero Base Budgeting

Zero base budgeting is a new approach to budgeting, which was first introduced by Peter Pyhrr in 1970 in the United States. It is defined as an operative planning and budgeting process which requires each manager to justify his entire budget in detail from scratch (hence zero base). It shifts the burden of proof on each manager to justify why he should spend any money at all. The following steps are implied in zero-base budgeting. First, managers at all levels have to define the objective of each programme of activity that they supervise, and prepare alternative spending plans as ‘decision packages’. There should be at least three, if not more, such packages:

 – one involving expenditure of (say) 20% below the present level of expenditure or the minimum expenditure which will permit the programme to continue meaningfully;

– another package indicating resources in terms of men, materials and money which will be needed to continue the present levels of performance and objectives;

 – and a third package indicating what more could be achieved, if additional funds were available to the extent of (say) 10% or more. The executives at the next higher level have then to consolidate these decision packages and rank them in order of priorities.

 ZBB as a technique of budgeting based on continuous evaluation of the current activities. It provides a convenient reference plan that can be used for controlling activities during the budget period. It is an effective managerial tool to ensure sound planning and efficient budgeting. It can be used more meaningfully in those areas where there exists a direct relationship between the expenditure on an activity and its consequent benefit to the enterprise. However, the process of ZBB involves additional time and effort to be devoted during the initial years.

 Non-budgetary control:

A budget is primarily a financial control instrument. The management has to take into account various factors of operations and objectives which are not easily noticeable through budgetary control. In such cases, statistical analysis and inferences of operations, reports on the functioning of specific areas of enterprise or tasks, procedures, guidelines, policy statements, break-even point analysis, operation audit and the human asset are used as control devices.

Internal audit:

Industrial organisations employ internal auditors to carry out regular and independent audit of accounts. Unlike statutory audit, this has the advantage of forewarning the manager of danger areas in the functioning of the enterprise. For overall assessment and control, the corporate sector uses parameters like profit and loss account, return on investment, and ratio of profit to gross sale.

 2.6.3 Management by Exception

This is a technique where attention is directed to those items, actions or results which become exceptions to the desired course. Data on exceptions serve as a control signal which points out where action is necessary. Management by exception depends on pre-specification of framework or limits. When an operation does not progress according to set standards, information about the: deviation reaches the manager for taking corrective action. Feedback information about such exceptions and the actions based on them is the essence of management by exception. This involves shifting data about non-occurrences from the mass of data that conform to the desired standards or occurrences. Computers now transmit online data on exceptions. A typical example of management by exception is sending of reminders to publications not returned by borrowers, in the circulation department, on the basis of data on borrowers who have not returned rather than those who have returned.

 2.6.4 Management Information System (MIS) Control relies on information relating to the progress of various operations of the enterprise. Timely transmission of such information and data is the function of MIS. For further discussion, see under the section planning in this unit.

2.6.5 Human Element in Control

 So far, we have seen control as relating mostly, to part, product or functional control. Ultimately, however, it is the control of overall performance which ensures attainment of planned enterprise targets and goals. The instruments generally used for controlling the overall performance are financial control methods, such as the budget, profit and loss statements, and return on investment data.

ESSENTIALS OF A GOOD CONTROL SYSTEM

 Certain ideas are basic to the development of an effective control system and every manager, irrespective of the level at which he is operating must be guided by these considerations.

(i) Feedback: Feedback is the process of adjusting future actions based upon the information about past performance. It is based upon interdependence of different parts of a system.

(ii) Control should be Objective: Evaluation of the performance of a subordinate should not be a matter of subjective determination. That is, control, should be definite and objective. A subordinate will respond favourably to the objective standards and impartial appraisal of his work performance.

 (iii) Prompt Reporting of Deviations:Control system should be devised so as to detect deviations before they actually occur. The manger should be provided with information as soon as possible so that he can hive off failures.

 (iv) Forward Looking Control: Ideal control is instantaneous, self-correcting and forward-looking. However, managerial control is not exactly similar to the mechanical or electronic control.

 (v) Flexible Control:Control must be flexible in the sense that it should respond favourably to the conditions. In consequence of unforeseen circumstances when plans are changed, control should reflect corresponding changes to remain operative under new conditions

(vi) Organizational Suitability: Control is exercised through managerial positions, and as such they should reflect the organizational pattern. Each managerial position should be provided with adequate authority to exercise selfcontrol and take corrective actions. Flow of control information should be consistent with organization structure employed.

(vii) Control should be Economical: A control system should be economical in the sense that the cost of its installation and maintenance should be justified by its benefits. Simply stated, control must be worth its cost.

(viii) Strategic Point Control: Deviations cannot be eliminated altogether. However, all deviations are not of equal importance and do not require same account of attention. Thus, if postal expenses rise by just 10 per cent, the deviation is insignificant and carries very little meaning for the management. If, on the other hand, labour cost rises by only 5 per cent, this must occupy full attention of management.

(ix) Control should be Simple to Understand: Those who administer control should understand it. Control specialists very often recommend sophisticated and advanced techniques of control on the pretext of proving their expertise and tend to overlook the question which are understood by the managers in the organization.

(x) Control should Suggest Corrective Action:An essential requirement of the effective control system is that it should indicate deviations and suggest corrective actions promptly and in time. Simple recording of deviations and errors and fixing responsibility for their occurrence is not sufficient, if it is not followed by suitable actions to prevent its further occurrence.

 (xi) Control should be Worker-Focused : Modern control system is worker-focused rather than work or job oriented. Control is affected on people who handle material resources for producing certain work results. If any corrective action is called for, persons accountable for results are to be located for initiating remedial actions.