Management Science I Prof. M.

Thenmozhi

CONTROLLING

Dr.M. Thenmozhi

Professor
Department of Management Studies
Indian Institute of Technology Madras
Chennai 600 036
E-mail: mtm@iitm.ac.in

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

EFFECTIVE CONTROL
THE MEANING OF CONTROL

• By one definition, management control is the process of ensuring that actual

activities conform to planned activities. In fact, control is more pervasive than
planning.

• Control helps managers monitor the effectiveness of their planning, their

organizing, and their leading activities .An essential part of the control process is
taking corrective actions as needed.

Steps in the control process

Robert j.Mockler’s definition of control points out the essential element of the control
process:

• Management control is the systematic effort to set performance standards with

planning objectives, to design information feedback systems, to compare actual
performance with these predetermined standards, to determine whether there are
any deviations and to measure their significance, and to take any actions
required to assure that all corporate

• Resources are being used in the most effective way possible in achieving
corporate objectives.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

BUDGETING SYSTEM FOR CONTROLLING

FUNCTION

OUTPUTS MINUS
OUTPUTS INPU INPUTS
TS

REVENUE EXPENSE PROFIT INVESTMENT

CENTERS CENTERS CENTERS CENTER

OUTPUTS COMPARED
WITH ASSETS

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

ESTABLISH STANDARDS AND METHODS FOR MEASURING PERFORMANCE:

• Ideally, the goals and objectives established during the planning process will
already be stated clear, measurable terms that include specific dead lines. This
is important for a number of reasons.

• First, vaguely worded goals, such as “To improve employee skills”, are just
empty slogans until managers begin to specify what they mean by “Improve”
and what they indent to do reach this goal-and when.

• Second precisely worded goals are easier to evaluate for accuracy and
usefulness than empty slogans.

• Finally, Precisely Measurable objectives are easy to communicate and to

translate into standards and methods that can be used to measure
performance.

• This ease of communicating precisely worded goals and objectives is especially

important for control, since some people usually fulfill the planning roles and
other people are assigned to control roles.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

• In service industries standards and measurements might include the amount of

customer have to wait in line at a bank, the amount of time they have to wait near
the telephone is answered or the number of new clients attracted and
measurement can include sales and production targets, work attendance goals,
waste product produced and recycled and safety records.

MEASURE THE PERFORMANCE

• Like all aspects of control, measurement is an ongoing repetitive progress. The

frequency of measurements depends on the type of activity being measured.

• In a manufacturing plant, levels of gas particles in the air for example could be
continuously monitored for safety, whereas progress on long term expansion
objection might be reviewed by top management only once or twice year.

DETERMINE WHETHER THE PERFORMANCE MATCHES THE STANDARDS

• It’s an easiest step in the control process .

• Now it’s a matter of comparing measured results with the established targets are
standard previously set. If performance matches the standards the managers can
assume that everything is under control.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

• The figure shows that they don’t have to intervene actively in the organizations
operations. The figure illustrates another important point –namely that control is
a dynamic process.

WHY CONTROL IS NEEDED

• One reason that control is needed is that the best of plans go away. But
controls also help managers monitor environmental changes and their effects
on the organization progress.

• To create better quality

– Total quality management leads to dramatic improvements in control.

– Process flaws are spotted and the process is corrected to drive out
mistakes. Employees are empowered to inspect and improve their own
work.

• To cope with changes

– Changes are an inevitable part of any organization environment. Markets

shift.

– Competitors often from around the world-offers new products and services
that capture the public imagination. New materials and technology’s
emerge .

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

– Government regulations are enacted or amend.

– The control function aid managers in responding to the resulting threats, or

opportunities by helping managers detect changes that are affecting the
organization product and service.

• To create faster cycles:

– It is one thing to recognize that the customer demand for improved,

design, quality or delivery time. It is another to speed up the cycles
involved in creating and delivering new products and services to
customers.

• To facilitate elegation and team work:

– Key performance and key result areas (KRA) are those aspects of unit or
organization that must function effectively for the entire unit or organization
should get succeed.

– These areas usually involves major organization activities or group of

activities that occur throughout the organization or unit.

– This figure shows some of key performance areas for production,

marketing, personnel Management, and finanace, and accounting.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

– These key performance areas, in turn help define the more detailed control
systems and standards.

– In today’s organization, many KRAS are cross functional an organization

might define KRAs for a team focused on customer service in terms of
customer response to a satisfaction survey.

IDENTIFYING STRATEGIC CONTROL POINTS:

• In addition to key performance area it is also important to determine the critical

points in the system where monitoring or information collecting should occur

• once such strategic control point should be located; the amount of information
that has to be gathered and evaluated can be reduced considerably.

• The most important in selecting strategic control point is to focus on most

significant element in the given operation.

• Usually small portion of objects, individuals causes large expense and problem
for the managers to face.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

• Examples:

– For example 10 manufactured products may well yield 60 percent of its

sales. 2 percent of an organization’s employee may account 80 percent of
its employee grievances and 20 percent of the police precincts in city may
account for 70 percent of the city’s violence and crimes.

– Another useful consideration is the identification of places where change

occurs in a productive process. For Example in an organizations system
for filling customer’s orders

• Examples:

– A change occurs when a purchase order become a invoice, when an

inventory items becomes an item to be shipped, or when the item to be
shipped becomes part of truckload. Since errors are more likely to be
made when such change occur, monitoring change points is usually a
highly effective way to control an operation.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

FINANCIAL CONTROLS

• Manager’s uses a series of controls and systems to deal with differing problems
and element of their organization.

• The method and systems can take many forms and can be intend for various
groups.

• However finance control have special prominence since money is easy to

measure and tally.

FINANCIAL STATEMENTS

• Financial statements are used to track the monetary value of goods and services
into and out of the organization .
They provide a means for monitoring three major financial condition of an
organization:

1. Liquidity: The ability to convert assets into cash in order to meet current
financial Needs and obligations.

2. General financial condition: The long Term between balance between debt
and equity.

3. Profitability: The ability to earn a profit over an extended period of time.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

• Financial statements are widely used by managers, shareholders, financial

institutions, investment analysts, union, and other stake holders to increase
the performance.

• Managers, for example, could compare company’s current performance with a

past performance and to those of competitors of how well the organization is
doing the overtime.

• Given enough information they might be able to see trends that require
corrective action.

• Bankers and financial analysts on the other hand they will use the statements
to decide whether they should invest in the firm.

• It’s important to remember that the financial statement do not show all the
relevant information.

• Recent Technological or scientific break through shows up on financial

statements For example nor changes in environment of the organization for
example shifts changes as per the consumer taste even though these could
be more crucial than a financial Performance.

• Depending on the company financial statements could cover the previous

year, previous quarter or previous month.

• The most common financial statements used by large, small organization alike
are income statement, balance sheet, cash flow statement.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

BALANCE SHEET

• In its simple form balance sheet describes the company in terms of Asset
Liabilities, and worth.

A company asset will ranges from the money in the bank to the Good will value of
its name in the market place.

• The left side of the balance sheets lists these order in the descending order of
liquidity.

• A distinction is made between current asset and fixed asset.

• Current Assets: covers items such as cash, account receivable, marketable

securities

• And inventories assets that could be turned in to cash reasonably predictable

value with in a relatively short period of time.

• Fixed Assets: show the monetary value of company’s plant, equipment,

property, plants, and other item used on a continuing basis to produce its goods
or services.

• Liabilities :are also made up two groups: current liabilities and long term
liabilities

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

• Current liabilities: are debts, account payable short-term loans and unpaid
taxes that will have to be paid off during the current fiscal period.

• Long term liabilities include mortgages, bonds, and other debts that are being
paid off gradually.

• The company’s net worth value remains as residual value remaining after total
liabilities have been subtracted from total assets.

• The Electronic spread sheet has made balance sheet much easier .

• In addition to that computer packages have been developed specifically to

process accounting transaction and prepare the resulting balance sheets and
other financial statements.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

INCOME STATEMENT

It summaries the companies financial statement at the given interval of time.

• The income statement then says “Heres how much money I have made over a
given period instead of “hears how much money we are worth now.

• Income statements starts with a figure for gross receipts or sales and then
subtract all cost the costs involved in realizing those sales, such as the cost of
goods sold, administrative expenses taxes, interest, and other operating
expenses.

• What is left is the net income available for stockholders dividends or

reinvestment in the business.

CASH FLOW

• In addition to the standard balance sheet and income statement, many

companies report financial data in the form of a statement of cash flow or a
statement of sources and uses of funds.

• Theses statements show where cash or funds came during the year and where
they are applied they should not confused with the income statement.

Cash flow statements show how cash or funds were used rather than how much profit
or loss was achieved.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

BUDGEDERY CONTROL METHODS

• Budget are formal quantitative statements of the resources set outside for
carrying out planned activities over give period of time.

• As such they are widely used for carrying out planned activities over given
period of time.

• As such they are widely used means for planning and controlling activities at
every level of the organization.

• Thier are number of reason for their wide usage.

• First budget: are stated in momentary terms, which are easily used as a
common denominator for a wide variety of organizational activities-hiring and
training personnel, purchasing equipment, manufacturing, advertising and
selling.

• Second: the monetary aspect of budgets means that they can directly convey
information on key organizational recourses-capital-and on a key organizational
goal-profit. They are therefore heavily favored by a profit oriented companies.

• Third budget: establish clear and unambiguous standards of performance for a

set time period.-usually year.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

• At stated intervals during that time period ,actual performance will be compared
directly with the budget.

• Deviation can detect quickly and acted upon.

• In addition to being major control devices, budgets are one of the major means
of coordinating the activities of the organization.

• The interaction between managers and subordinate that take place during the
budget development process will help define and integrate the activities of
organization members.

RESPONSIBILITY CENTERS:

Any organizational or functional unit headed by a manager who is

responsible for the activities of that unit is called a responsibility center.
All responsibility center uses the resources for something.
Typically responsibility is assigned to a revenue, expense ,profit and or invest
center.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

• Control systems can be devised to monitor organizational functions or

organizational projects. Controlling a function involves making sure that a
specified activity (such as production or sales) is properly carried out.

• Controlling a project involves making sure that a specified end result is achieved
(such as the development of a new product or the completion of a building).

• Budgets can be used for both types of systems;

• Any organizational or functional unit headed by a manager who is responsible for

the activities of that unit is called a responsibility center.

• All responsibility centers use resources (inputs or costs) to produce something

(outputs or revenues).

• Typically, responsibility is assigned to a revenue, expense, profit, and/or

investment center are 20-4).

• The decision usually depends on the activity performed by the organizational unit
and on the manner in which inputs and outputs are measured by the control
system.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

We will describe such centers briefly here.

• REVENUE CENTERS: Revenue centers are those organizational units in which

outh puts are measured in monetary terms but are not directly compared to
input costs.

– A sales department is an example of such a unit. The effectiveness of the

center is t not judged by the extent to which revenue (in the form of sales)
exceeds the cost of

– The center (in salaries or rent, for example). Rather, budgets (in the form
of sales quotas) are prepared for the revenue center and the figures are
compared with sales orders or actual sales.

– In this way, a useful picture of the effectiveness of individual salespeople

or of the center itself can be determined.

• EXPENSE CENTERS: In expense centers or cost centers, inputs are

measured by In re the control system In monetary terms, but outputs are not.
The reason is that

– These centers are not expected to produce revenues. Examples are

maintenance, administration, service, and research departments.

– Budgets will be devised only for the input portion of these centers'
operations.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

• PROFIT CENTERS: In a profit center, performance is measured by the

numerical difference between revenues (outputs) and expenditures (inputs).

– Such a measure is do used to determine how well the center is doing

economically and how well the manager in charge of the center is
performing.

– A profit center is created when- ever an organizational unit is given

responsibility for earning a profit.

– In a divisionalized organization, in which each of a number of divisions is

completely responsible for its own product line, the separate divisions are
considered profits.

• INVESTMENT CENTERS: In an investment center, the control system again

measures the monetary value of inputs and outputs, but it also assets how

– those outputs compare with the assets employed in producing

them./Assume, for X

– It example, that a new hospital requires a capital investment of $20 million

in property, buildings, equipment, and working capital.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

– In its first year, the hospital has $2 million in labor and other input
expenses and $4 million in revenue.

– For two reasons the hospital would not be considered to have earned a $2
million profit.

– First, an allowance must be made for the depreciation of building and

equipment.

– Second, management must account for the interest that could have been
earned from alternative investments.

– By assessing these factors as well, the company obtains a much more

accurate picture of profitability.

– Managers can identify the return on an investment, not merely the actual
inflow and outflow or, and submitted to the budget committee for further
review.

– Finally, the master budget is sent to top magement (the president, chief
executive officer, or board of directors) for approval.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

THE BUDGETING PROCESS

• The budgeting process usually being when the managers receive top
management economic forecasts and sales and profit objectives for the coming
year along with the time table stating when budget must be completed.

• The forecasts and objectives provided by top management with in which other
managers budget will be developed.

• In a few organizations the presence is for “top-down” budgeting. Budget are

imposed by top managers but little or no consultation with lower level managers
.

• Most companies, however most companies how ever prefer the process of
bottom up budgeting; budgets are prepared at least initially by those who
implemented by them.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

(ii). THE ROLE OF BUDGET Personnel.

• Although developing is the responsibility of managers, they may receive

information and technical assistance from the staff of a planning group or from a
formal budget department or committee.

• These groups are likely to exist in large, divisionalized organizations in which

the division budget plays a key role in planning, coordinating, and controlling
activities.

• 17 The budget department, which generally reports to the corporate controller,

pro-vides budget information and assistance to organizational units, designs
budget systems and forms, integrates the various departmental proposals into a
master budget for the organization as a whole, and reports on actual
performance relative to the budget

• The budget committee, made up of senior executives from all functional areas,
reviews the individual budgets, reconciles divergent views, alerts or approves
the budget proposals, and then refers the integrated package to the board of
directors.

• Later, when the plans have been put into practice, the committee reviews the
control reports that monitor progress.

• In most cases, the budget committee must approve any revisions made during
the budget period.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

SOME PROBLEMS IN BUDGET DEVELOPMENT

• During the budget-development process. when the organization's limited

resources are allocated, managers could fear that , they will not be given their
fair share.

• Tension can grow as competition with other. Managers increases.

• Anxieties might also arise because managers know they will J be judged by
their ability to meet or beat budgeted standards.

• Hence, they are concerned about what those standards will be and may
overstate their needs to create some slack.

• Conversely, their senior managers are concerned with establishing aggressive

budget objectives.

• As a result, the senior managers will often try to trim ADITING

• To much of the general public, the-term auditing is associated with detecting

fraud.

• Although the discovery of fraud is, in fact, one important facet of auditing, it is
from the only one.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

• Auditing has many important uses, from validating the honesty and irness of
financial tamnts.

• To providing a critical sis for man- agreement decisions.

• Will discuss two types put; audit external c auditing and internal auditing.2O

EXTERNAL AUDITING

• The traditional external audit is largely a verification process involving the in-
dependent appraisal of the organization's financial accounts and statements.

• Assets and liabilities verified, and financial reports are checked for
completeness and accuracy.

• The audit is conducted by accounting personnel employed by chartered

accountants.

• The auditors' purpose is not to pre- pare the company's financial reports.

• Their job is to verify that the company, in preparing its own financial statements
and valuing its assets and liabilities, has followed generally accepted
accounting principle’s and applied them correctly.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

• The external audit plays a significant role in encouraging honesty, not only in
the preparation of statements, but also in the actual operation of the
organization.

• It is, in fact, a major systematic check against fraud within the organization.

• For people outside the organization, such as bankers and potential investors,
the ex- ternal audit provides the major assurance that publicly available
statements are accurate.

EXTERNAL AUDIT

• The external audit takes place after the organization’s operating period is
finished and its financial statements are completed.

• For this reason, and also because it generally focuses on a comparatively

limited set of financial statements and transactions, the external audit does not
usually make a major contribution to control of the ongoing operations of the
organization.

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

INTERNAL AUDIT

• However, knowing that the audit will inevitably occur is a strong deterrent
against actions that may lead to embarrassment if they are discovered during or
after the audit.

• The internal audit is carried out by members of the organizations .

• Its objectives are to Provide reasonable assurance that the assets of the
organization are being properly Safe guarded and that financial records are
being kept reliably and accurately enough For the preparation of financial
statements.

• Internal auditing also assists managers in evaluating the organization s

operational efficiency and performance of its control system.

• Because it concentrates on the operation of the organization this process is

also known as operational auditing

Indian Institute of Technology Madras

Management Science I Prof. M.Thenmozhi

• In this role the we can see the management process is a self correcting.

• The internal audit may be carried out as a separate project by assigned

members of the financial department or in large organizations, by full time
internal auditing staff.

• The range and depth of audit will also vary, depending on company size and
policy.

• It can range from a relatively narrow survey to a board comprehensive analysis

that gone beyond appraising the control system to look at policies, procedures,
the use of authority, and the overall quality and effectiveness of the managerial
methods being used .

Indian Institute of Technology Madras