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Sunday, January 06, 2013

Management Control

Introduction:
Control is one of the managerial functions. These functions start with planning and end at controlling. The other functions like organizing, staffing, directing act as the connecting like between planning and controlling. Planning will be successful only if the progress planning and controlled, Planning involves setting up of goals and objectives while controlling seeks to ensure.
In the words of Koontz and O'Donnel, “The measurement and correction of the performance of activities of subordinates in order to make sure that enterprise objectives and plan devised to attain them are being accomplished." The accomplishment of organizational goals is the main aim of every management. The performance of subordinates should be constantly watched to ensure proper implementation of plans. Co-ordination is the channel through which goals can be achieved and necessary.
According to Henry Fayol, “In an undertaking, control consists in verifying whether everything occurs in conformity with the plan adopted, the instructions issued and principles established. It has to point out weakness and errors in order to rectify them and prevent recurrence”.
According to George Terry “Controlling is determining what is being accomplished, that is, evaluating the performance and, if necessary, applying corrective measures so that the performance takes place according to plans”.
Thus, controlling implies determining and stating specifically what is to be accomplished, then checking performance against such standards prescribed with a view to supplying the corrective action required to achieve the planned objectives. The end objective of controlling is, therefore, to ensure that the people’s   effort   in   the   organization   is   continuously   directed   towards   the attainment of the predetermined objectives.

Nature or Characteristics of Control
1)      Managerial Function
2)      Dynamic Process
3)      Continuous Activity
4)      Forward Looking
5)      Control is related to planning

1)      Control is a function of management: It is, in fact, a follow-up action to the other functions of management. All the managers in the organization to control the activities assigned to them perform this function.
2)      Control is a dynamic process: It involves continuous review of standards of performance and results in corrective action, which may lead to changes in other functions of management.
3)      Control is a continuous activity: It does not stop anywhere. According to : Koontz and O’Donnell, “Just as the navigator continually takes reading to a planned action, so should so should be the business s manager continually take reading to assure himself that his enterprise or : department is on course”.
4)      Control is forward looking: It is related to future, as past cannot be controlled. It is usually preventive as the presence of control systems leads to minimize wastages, losses, and deviations from standards. It should be noted that control does not curtail the rights of the individuals. It simply keeps a check on the performance of individuals.
5)      Planning and Controlling are closely related with each other: Managerial planning seeks consistent and integrated while managerial control seeks to compel events to conform to plans. As a matter of fact, planning is based on control and control is based on planning. The process of control uses certain standards for measuring performance, which are laid down by planning. The control process, in turn, may reveal the deficiency of planning and may lead to the revision of planning. It may also lead to setting of new goals, changing the organizational structure, improving staffing and making major changes in the techniques of directing.


Steps in Controlling Process
1)      Establishing Standards
2)      Measurement of Performance
3)      Comparison
4)      Taking Corrective Action.

In order to perform his control functions, a manager follows three basic steps. First of all, he establishes the standards of performance to ensure that performance is in accordance with me plan. After this, the manager will appraise the performance and compare it with predetermined standards. This step will lead the manager to know whether the performance has come up to the expected standard or if there is any deviation. If the standards are not being met, the manager will take corrective actions, which is the final step in controlling.

1)      Establishing standards: A standard acts as a reference line or basic of comparison of actual performance. Standards should be set precisely and preferably in quantitative terms. It should be noted that setting standards is also closely linked with and is an integral part of the planning process. Different standards of performance are set up for various operations at the planning stage, which serve as the basis of any control system. Establishment of standards in terms of quantity, quality or time is necessary for effective control. Standards should be accurate, precise, acceptable and workable. Standards should be flexible, i.e., capable of being changed when the circumstances require so.

2)      Measurement of performance: This step involves measuring of actual performance of various individuals, groups or units and then comparing it with the standards, which have already been set up at the planning stage. The quantitative measurement should be done in cases where standards have been set in quantitative terms. In other cases, performance should be measured in terms of quantitative factors as in case of performance of industrial relations manager. Comparison of performance with standards is comparatively easier when the standards are expressed in quantitative terms.

3)      Comparison: This is the core of the control process. This phase of control process involves checking to determine whether the actual performance meets the predetermined or planned performance. Manager must constantly seek to answer, “How well are we doing?” When a production supervisor checks the actual output or performance of his department with the production schedule, he is performing comparison aspect of control. When-an executive calculates the performance of his subordinates once in six months or   annuity, he is performing comparison aspect of control. Checking return on in investment is a comparison phase of control.

4)      Taking corrective action: The final step in the control process is taking corrective actions so that deviations may not occur again and the objectives of the organization are achieved. This will involve taking certain decision by the management like re-planning or redrawing of goals or standards, assignment of clarification of duties. It may also necessitate reforming the process of selection and the training of workers. Thus, control function may require change in all other managerial functions. If the standards are found to be defective, they will be modified in the light of the observations.



Techniques of Control or Methods of Establishing Control
A number of techniques or tools are used for the purpose of managerial control. Some of the techniques are used for the control of the overall performance of the organisation, and some are used for controlling specific areas or aspects like costs, sales, etc. The various techniques of control can be classified into categories, viz.,
(1) Traditional or Conventional techniques and
(2) Modern or Contemporary techniques.

The important Traditional or Conventional techniques are:
a.       Budgetary Control
b.      Standard Costing
c.       Break-even Analysis
d.      Inventory Control
e.      Internal Audit
f.        Statistical Data Analysis
g.       Personal Observation
h.      Production Planning and Control

The Important Modern or Contemporary techniques are:
a.       Financial Statement Analysis
b.      Return on Investment Control
c.       Management Information System
d.      Management Audit
e.      Zero-base Budgeting
f.        Human Resources Accounting
g.       Responsibility Accounting.

Traditional Techniques
a.      Budgetary Control: According to J.A. Scott, “Budgetary control is the system of management control and accounting in which all operations are forecasted and so far as possible planned ahead, and the actual results compared with the forecasted and planned ones”.

b.      Standard Costing: According to the ICMA, England, “Standard cost is a pre-determined cost which is calculated from management’s standards of efficient operation and the relevant necessary expenditure”.
c.       Break-even Analysis or Cost-Volume-Profit Analysis: Cost-Volume-Profit Analysis or Break-even Analysis is the study of the interrelationship between the cost (i.e., cost of production), volume (i.e., the volume of production and sales), the prices and the sales value, and the profits. In other words, it is the study of the inter-relationship between the cost (i.e., cost of production), volume (i.e., volume of production and sales), prices (i.e., selling prices) and profits.
d.      Inventory Control: Inventory is the stock of raw materials, work-in-progress, finished goods, consumable stores and spare parts and components at any given point to time. So, inventory control means control over different items of inventory or stock. “It is defined as physical control of stock items and implementing the principles and policies relating thereto”.
e.       Internal Audit: Internal audit is a continuous and systematic review of the accounting, financial and other operations of a concern by the staff specially appointed by the management for the purpose. In other words, it is the auditing for the management conducted by the staff specially appointed for the purpose to ensure that the work of the concern is going on smoothly, efficiently and economically.
f.        Statistical Data Analysis: It is a technique under which statistical data of the past and the present relating to the important aspects of the business are used for managerial control. The statistical data are collected from books and registers of the concern and presented to the management in a systematic manner in the form of tables, charts, graphs, etc.,
g.      Personal Observation: Under the technique of personal observation, the managers keep a close personal observation of the employees. In other words, the manager observes whether the workers are doing what they are expected to do.
h.      Production Planning and Control: According to S. Elon, “Production planning and control may be defined as the direction and co-ordination of the firm’s material and physical facilities towards the attainment of pre-specified production goals in the most efficient and valuable way”.

Modern Techniques
a.      Financial Statement Analysis: Financial statements are a means of managerial control. They can be used by the management for measuring and controlling the profitability, liquidity and the financial position of the business. By comparing the financial statement of the current year with those of the previous years and also by comparing the financial statement of their concern with those of other concerns engaged in the same industry.
b.      Return on Investment Control: Profits are the measure of overall efficiency of business. Profit earned in relation to the capital employed in a business is an important control device. ROI is used to measure the overall efficiency of a concern. It reveals how well the resources of a concern are used, higher the return better are the results.
c.       Management Information System (MIS): Management Information System (MIS) is an approach of providing timely, adequate and accurate information to the right person in the organisation which helps in taking right decisions.
d.      Management Audit: Management audit is an investigation by an independent organisation to find out whether the management is carried out most effectively or not. In case there are drawbacks at any level then recommendations should be given to improve managerial efficiency.
e.       Zero-Base Budgeting (ZBB): In the words of Peter A Pyher, “Zero-base budgeting is a planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch and shifts the burden of proof to each manager to justify why he should spend money at all. The approach requires that all activities be analysed in ‘decision packages’ which are evaluated by systematic analysis and ranked in order of importance”. From his definition, it is clear that Zero-base budgeting is a technique of preparing the budget in which the previous year is not taken as the base, and every year is taken as a new year for preparing the current year’s budget.
f.        Human Resources Accounting: The American Accounting Association has defined human resources accounting as “the process of identifying and measuring data about human resources and communicating this information to interested parties”.
g.      Responsibility Accounting: Responsibility Accounting is defined as “a system designed to accumulate and report costs by individual levels of responsibility. Each supervisory area is charged only with the cost for which it is responsible and over which it has control.”


Essentials of an Effective control system:
The following are the essentials or basic requirements of an effectively control system:
1)      Suitable: The control system must be suitable for the kind of activity intended to serve. Apart from differences in the systems of control in different business, they also vary from department to department and from one level in the organization to the other. A system of control useful at a higher level of management will be different in scope and nature from that in use at the operative level. Several techniques are available for control purposes such as budgets, break-even points, financial ratios and so on. The manager must be sure that he is using the technique appropriate for control of the specific activity involved.
2)      Understandable: The system must be understandable, i.e., the control information supplied should be capable of being understood by those who use it. A control system that a manager cannot understand is bound to remain ineffective. The control information supplied should be such as will be used by the managers concerned. It is, therefore, the duty of the manager concerned to make sure that the control information supplied to him is of a nature that will serve his purpose.
3)      Economical: The system must be economical in operation, i.e., the cost of a control system should not exceed the possible savings from its use. The extent of control necessary should be decided by the standard of accuracy or quality required. A very high degree or standard of accuracy or quality may not really be-necessary. Undue complexity of the control system should be avoided to keep a check on the costs of control. It, therefore, becomes necessary to concentrate the control system on factors, which are strategic to keep the costs down and the system economical.
4)      Flexible: The system of control must be flexible, i.e. workable even if the plans have to be changed. In case the control systems can work only on the basis of one specific plan, it becomes useless if the plan breaks down and another has to be substituted. A good control system would be sufficiently flexible to permit the changes so necessitated.
5)      Expeditious: Nothing can be done to correct deviations, which have already occurred. It is, therefore, important that the control system should report deviations from plans expeditious. No useful purpose can be served by a deviation detected months after its occurrence. The objective of the control system should be to correct deviations in the immediate future.
6)      Forward Looking: The control system must be forward looking, as the manager cannot control the past. In fact, the control system should be so designed so as to anticipate possible deviations, or problems. Thus deviations can be forecast so that corrections can be incorporated even before the problem occurs.
7)      Organizational Conformity: Since people carry on activities, and events must be controlled through people, it is necessary that the control data and system must conform to the organizational pattern. The control data must be so prepared that it is possible to fix responsibility for the deviations within the areas of accountability.
8)      Indicative of Exceptions at Critical Points: The management principle of exception should be used to show up not only deviations but the critical areas must also be fixed for most effective control.
9)      Objectivity: As far as possible the measurements used must have objectivity, particularly while appraising a subordinate's performance, the subjective element cannot be entirely removed. Here die personality of both the manager as well as his subordinately would be reflected in the final judgment and ca/j bias the appraisal. These of indefinite terms can frustrate the subordinate like being told that he is not doing a good job. He is likely to react more favourably to objective standard.
10)   Suggestive Of Corrective Action: Finally, an adequate control system should not only detect failures must also disclose where they are occurring, who is responsible for them and what should be done to correct them. Overall summary information can cover up certain fault areas. For instance, it is insufficient to show merely a decline in the profits. The reason for such declined or which also is indicated, such drop in the sales volume or an increase in the costs. Even this is insufficient. The information should also disclose in which market areas the sales decline which specific costs had increased. Where a system merely detects deviations but does not indicate corrective action, the control system becomes an exercise in futility.