CHAPTER 7 Controlling

Definition and Nature of Management Control

Management Control Systems
 Control: The process of monitoring activities to ensure that they are being accomplished as
planned and of correcting any significant deviations.
 Management: The process of dealing with or controlling things or people.
 System: A system is a prescribed way of carrying out any activity or set of activities.
 Management Control Systems: The system used by management to control the activities of an
organization is called management control systems.

Elements of Control System

1. A detector or sensor: a device that measures what is actually happening in the process being
controlled.
2. An assessor: a device that determines what is actually happening by comparing it with some
standard or expectation what should happen.
3. An effector: a device that alters behavior if the assessor indicates the need to do so.
4. A communication network: a device that transmit information between detector & assessor
and between assessor & effector.

Management & Management Control Process

 Management: An organization consists of a group of people who work together to achieve
certain common goals (in a business organization a major goal to earn a satisfactory profit).
Organization is led by a hierarchy of managers, with the Chief Executive Officer (CEO) at the top,
and the managers of business units, departments, sections and other subunits ranked below
him or her in the organizational chart.
 Management Control Process: It is the process by which managers at all levels ensure that the
people they supervise implement their intended strategies.
Systems - A system is a prescribed and usually repetitious way of carrying out an activity or set of
activities. Systems are characterized by a more or less rhythmic coordinated, and recurring series of
steps intended to accomplish a specified purpose

Relationship Between Planning and Controlling

The relationship between planning and control can be explained as follows:

1. Planning Originates Controlling: In planning the objectives or targets are set in order to achieve
these targets control process is needed. So, planning precedes control.
2. Controlling Sustains Planning: Controlling directs the course of planning. Controlling spots, the
areas where planning is required.
3. Controlling Provides Information for Planning: In controlling the actual performance is
compared to the standards set and records the deviations, if any. The information collected for
exercising control is used for planning also.
4. Planning and Controlling are Interrelated: Planning is the first function of management. The
other functions like organizing, staffing, directing etc. are organized for implementing plans.
 Control records the actual performance and compares it with standards set. In case the
performance is less than that of standards set then deviations are ascertained. Proper corrective
measures are taken to improve the performance in future. Planning is the first function and
control is the last one. Both are dependent upon each other.
5. Planning and Control are Forward Looking: Planning and control are concerned with the future
activities of the business. Planning is always for future and control is also forward looking. No
one can control the past, it is the future which can be controlled. Planning and controlling are
concerned with the achievement of business goals. Their combined efforts are to reach
maximum output with minimum of cost. Both systematic planning and organized controls are
essential to achieve the organizational goals.

Control Methods and System

MANAGEMENT CONTROL SYSTEMS

1. Control is one of the managerial functions like planning, organizing, staffing and directing. It is
an important function because it helps to check the errors and to take the corrective action so
that deviation from standards is minimized and stated goals of the organization are achieved in
desired manner.
a. Control is checking current performance against pre-determined standards contained in
the plans, with a view to ensure adequate progress and satisfactory performance.
b. Management control can be defined as a systematic effort by business management to
compare performance to predetermined standards, plans, or objectives in order to
determine whether performance is in line with these standards and presumably in order
to take any remedial action required to see that human and other corporate resources
are being used in the most effective and efficient way possible in achieving corporate
objectives.

Importance of Control - The concept of control is of fundamental importance to organizations. It has

been identified as a significant influence on;
 The formation of organizational strategy,
 The design of organizational structure,
 The selection, socialization and evaluation of personnel and
 The ongoing process of leadership and motivation.

Characteristics of Control - From the definitions and nature of control, the following characteristics can
be identified;
 Control is a continuous process
 Control is a management process

Role of Budget in Planning and Control

Budgeting is an operational plan, for a definite period usually a year. Expressed in financial terms and
based on the expected income and expenditure. Or Budgeting is a concrete precise picture of the total
operation of an enterprise in monetary terms.
PURPOSE OF BUDGETING:
 Mechanism for translating fiscal objectives into projected monthly spending pattern.
 Enhances fiscal planning and decision making.
 Clearly recognizes controllable and uncontrollable cost areas.
 Offers a useful format for communicating fiscal objectives.
 Allows feedback of utilization of budget.
 Helps to identify problem areas and facilitates effective solution.
 Provides means for measuring and recording financial success with objectives of organization.

CHARACTERISTICS OF BUDGETING:
 Should be flexible.
 Should be synthesis of past, present and future.
 Should be product of joint venture and cooperation of executive/department head at different
level of management.
 Should be in the form of statistical standard laid down in the specific numerical terms.
 Should have support of top management throughout the period of its planning and
implementation.

IMPORTANCE OF BUDGETING:
 Needed for planning future course of action and control over all activities in the organization.
 Facilitates coordinating operation of various departments and sectors.
 Helps to weigh values and make decision when necessary.

TYPES OF BUDGETING:
 OPERATING BUDGET (Revenues and Expenses): Provides an overview of agency function by
projecting the planned operation for upcoming year. Deals with salaries, medical-surgical
supplies, office supplies, laundry services, books periodicals, recreation and contractual services.
 CAPITAL EXPENDITURE BUDGET: Related to long range planning. Includes physical changes
(replacement and expansion of plant, major equipment and inventories). They are major
investment and reduce flexibility in budgeting.
 CASH BUDGET: Planned to make adequate funds available and to use extra funds profitably.
Should not have too much cash on hand during budgetary period.
 LABOR OR PERSONNEL BUDGET: Estimate cost of direct labor necessary to meet agency
objectives. Determine the recruitment, hiring, assignment, layoff, discharge of personnel. Nurse
Manager has to decide number of aids, orderlies required during a shift months and areas.
 FLEXIBLE BUDGET: Some costs are fixed; others change with volume of business. Some expenses
are unpredictable and can be determined only after change has begun. Periodic reviews
required to compensate for changes.
 STRATEGIC PLANNING BUDGET: Long range budget for long range planning. Projected for 3-5
years. Programmed budget is a part of this budget.

Preparation of Budget Plan

Steps in Preparing a Budget
1. Update budget assumptions. Review the assumptions about the company’s business
environment that were used as the basis for the last budget, and update as necessary.
2. Review bottlenecks. Determine the capacity level of the primary bottleneck that is constraining
the company from generating further sales, and define how this will impact any additional
company revenue growth.
3. Available funding. Determine the most likely amount of funding that will be available during the
budget period, which may limit growth plans.
4. Step costing points. Determine whether any step costs will be incurred during the likely range of
business activity in the upcoming budget period, and define the amount of these costs and at
what activity levels they will be incurred.
5. Create budget package. Copy forwards the basic budgeting instructions from the instruction
packet used in the preceding year. Update it by including the year-to- date actual expenses
incurred in the current year, and also annualize this information for the full current year. Add a
commentary to the packet, stating step costing information, bottlenecks, and expected funding
limitations for the upcoming budget year.
6. Issue budget package. Issue the budget package personally, where possible, and answer any
questions from recipients. Also state the due date for the first draft of the budget package.
7. Obtain revenue forecast. Obtain the revenue forecast from the sales manager, validate it with
the CEO, and then distribute it to the other department managers. They use the revenue
information as the basis for developing their own budgets.
8. Obtain department budgets. Obtain the budgets from all departments, check for errors, and
compare to the bottleneck, funding, and step costing constraints. Adjust the budgets as
necessary.
9. Obtain capital budget requests. Validate all capital budget requests and forward them to the
senior management team with comments and recommendations.
10. Update the budget model. Input all budget information into the master budget model.
11. Review the budget. Meet with the senior management team to review the budget. Highlight
possible constraint issues, and any limitations caused by funding limitations. Note all comments
made by the management team, and forward this information back to the budget originators,
with requests to modify their budgets.
12. Process budget iterations. Track outstanding budget change requests, and update the budget
model with new iterations as they arrive.
13. Issue the budget. Create a bound version of the budget and distribute it to all authorized
recipients.
14. Load the budget. Load the budget information into the financial software, so that you can
generate budget versus actual reports.