UNIT VI

CONTROLLING
Controlling can be defined as that function of management which helps to seek planned results from
the subordinates, managers and at all levels of an organization. The controlling function helps in
measuring the progress towards the organizational goals & brings any deviations, & indicates corrective
action.
Controlling helps managers monitor the effectiveness of their planning, organizing, and leading
activities. Controlling determines what is being accomplished — that is, evaluating the performance
and, if necessary, taking corrective measures so that the performance takes place according to plans.
Control is a primary goal-oriented function of management in an organisation. It is a process of
comparing the actual performance with the set standards of the company to ensure that activities are
performed according to the plans and if not then taking corrective action.
Every manager needs to monitor and evaluate the activities of his subordinates. It helps in taking
corrective actions by the manager in the given timeline to avoid contingency or company’s loss.
Controlling is performed at the lower, middle and upper levels of the management.
Controlling is one of the important functions of a manager. In order to seek planned results from the
subordinates, a manager needs to exercise effective control over the activities of the subordinates. In other
words, the meaning of controlling function can be defined as ensuring that activities in an organization are
performed as per the plans. Controlling also ensures that an organization’s resources are being used
effectively & efficiently for the achievement of predetermined goals.
 Controlling is a goal-oriented function.
 It is a primary function of every manager.
 Controlling the function of a manager is a pervasive function.

IMPORTANCE OF CONTROLLING

After the meaning of control, let us see its importance. Control is an indispensable function of management
without which the controlling function in an organization cannot be accomplished and the best of plans
which can be executed can go away. A good control system helps an organization in the following ways:

1. Accomplishing Organizational Goals

The controlling function is an accomplishment of measures that further makes progress towards the
organizational goals & brings to light the deviations, & indicates corrective action. Therefore it helps in
guiding the organizational goals which can be achieved by performing a controlling function.

2. Judging Accuracy of Standards

A good control system enables management to verify whether the standards set are accurate & objective.
The efficient control system also helps in keeping careful and progress check on the changes which help in
taking the major place in the organization & in the environment and also helps to review & revise the
standards in light of such changes.
3. Making Efficient use of Resources

Another important function of controlling is that in this, each activity is performed in such manner so an in
accordance with predetermined standards & norms so as to ensure that the resources are used in the most
effective & efficient manner for the further availability of resources.

4. Improving Employee Motivation

Another important function is that controlling help in accommodating a good control system which ensures
that each employee knows well in advance what they expect & what are the standards of performance on
the basis of which they will be appraised. Therefore it helps in motivating and increasing their potential so
to make them & helps them to give better performance.

5. Ensuring Order & Discipline

Controlling creates an atmosphere of order & discipline in the organization which helps to minimize
dishonest behavior on the part of the employees. It keeps a close check on the activities of employees and
the company can be able to track and find out the dishonest employees by using computer monitoring as a
part of their control system.

6. Facilitating Coordination in Action

The last important function of controlling is that each department & employee is governed by such pre-
determined standards and goals which are well versed and coordinated with one another. This ensures that
overall organizational objectives are accomplished in an overall manner.

FEATURES OF CONTROLLING
 An effective control system has the following features:

 It helps in achieving organizational goals.

 Facilitates optimum utilization of resources.

 It evaluates the accuracy of the standard.

 It also sets discipline and order.

 Motivates the employees and boosts employee morale.

 Ensures future planning by revising standards.

 Improves overall performance of an organization.

 It also minimises errors.

Controlling and planning are interrelated for controlling gives an important input into the next planning
cycle. Controlling is a backwards-looking function which brings the management cycle back to the
planning function. Planning is a forward-looking process as it deals with the forecasts about the future
conditions.
Process of Controlling
Control process involves the following steps as shown in the figure:

 Establishing standards: This means setting up of the target which needs to be achieved to meet
organisational goals eventually. Standards indicate the criteria of performance.
Control standards are categorized as quantitative and qualitative standards. Quantitative standards are
expressed in terms of money. Qualitative standards, on the other hand, includes intangible items.

 Measurement of actual performance: The actual performance of the employee is measured against
the target. With the increasing levels of management, the measurement of performance becomes
difficult.

 Comparison of actual performance with the standard: This compares the degree of difference
between the actual performance and the standard.

 Taking corrective actions: It is initiated by the manager who corrects any defects in actual
performance.
Controlling process thus regulates companies’ activities so that actual performance conforms to the
standard plan. An effective control system enables managers to avoid circumstances which cause the
company’s loss.

TYPES OF CONTROL
There are three types of control viz.,

1. Feedback Control: This process involves collecting information about a finished task, assessing that
information and improvising the same type of tasks in the future.
2. Concurrent control: It is also called real-time control. It checks any problem and examines it to take
action before any loss is incurred. Example: control chart.
3. Predictive/ feedforward control: This type of control helps to foresee problem ahead of occurrence.
Therefore action can be taken before such a circumstance arises.

TECHNIQUES OF CONTROLLING:
There are many controlling techniques which were also commonly known as controlling aids.
Generally these controlling techniques can be categorized into two types i.e., Traditional Techniques and
Modern Techniques. Now in this article we can concentrate on both the techniques in detail. So that one
can understand them well and can practice well in their organizations to achieve their predetermined
objectives.
1. Traditional Control Techniques:
The essence of control function is to confirm whether the actions are going according to plans or not. If
they are not accordance with the plans then management should take a corrective action to overcome
such deviations. For this purpose management should determine standards so that they can easily be
compared with them.
For this purpose many techniques have been developed. Among them traditional such as Budgeting and
Budgetary Control, Cost Control, Production Planning and Control, Inventory Control etc. are the best
examples. Though modern techniques have been developed to improve the quality of controlling
process but still today these techniques are being used extensively in the organizations.

I. Budgeting and Budgetary Control:

Budgeting:
A widely used tool for management control is budget. It is a quantitative expression of plan of action. It
refers to the plan of an organization expressed in financial terms. It determines financial estimations
relating to various activities of an organization for a fixed period of controlling actual performance.
The following are the important definitions of a budget:
“A budget is pre-determined statement of management policy during a given period provided a
standard for comparison with the results actually achieved”. — J. L. Brown & L.R. Howard
“A budget is a financial or quantitative statement prepared prior to a defined period of time of the
policy to be pursued during that period for the purpose attaining a given objective”.— I. C. W. A England
From the above definitions the following characteristics can be summarized:
(1) A budget generally relates to a given future period
(2) It differs from objectives or policies because it is set down in specific numerical terms
(3) It should be flexible
(4) It is fundamental to the organization and hence, it receives the attentions and support of the top
management.
Importance of Budgeting:
(1) Budgeting involves drawing up budgets based on well-defined plans of action.
(2) It serves another important purpose i.e., coordinating plans and activities of various departments
and sections.
(3) It facilitate control over expenses, income, costs and profits.
Types of Budget:
There are many types of Budgets which are generally used in an organization.
They are:
(i) Sales budget – It represents the plan of sales for a given period.
(ii) Purchase budget – It presents the quantities of raw materials and other consumable items to be
purchased by a manufacturing company.
(iii) Cash budget – It is a statement of the anticipated receipts and payments for a given period along
with the resulting surplus or deficit.
(iv) Expense budget – It lays down the estimates of the standard or norm of operating expenses of an
enterprise for a given period.
(v) Capital budget – This type of budget outlines the anticipated expenditure on plant, machinery,
equipment and other items of a capital nature.
(vi) Revenue budget – It indicates the income or revenue expected to be earned from sale of goods
produced or purchased for re-sale.
(vii) Production budget – It shows the volume of production to be undertaken for a given period
together with the material, labour and machinery requirements sometimes production budgets also
show the anticipated cost of production.
(viii) Labour budget – It indicates the types of skills of labourers and the numbers in each category
estimated to be required in a given period along with the standard wages payable.
(ix) Master budget – This is prepared for the whole enterprise by compiling the different sectional
budgets which is finally adopted and worked upon.
Budgetary Control:
It is the process of preparing various budgeted figures for the organization for the future period and
then comparing with the actual performance for finding out variances. This enables management to find
out deviations and take corrective measures at a proper time. Hence, a budget is a means and
budgetary control is the end result.
(1) “Budgetary control is system which uses budget as a means of planning and controlling all aspects of
producing and or selling commodities or services”.
(2) “Budgetary control is the planning in advance of the various functions of business so that the
business as a whole can be controlled”.
From the above two definitions, the following characteristics of budgetary control can be extracted:
(1) It implies the planning of activities for each department.
(2) It involves recording of actual performance for sake of comparison and control.
(3) It involves taking the necessary steps to improve the situation and to prevent further deviations.
(4) It involves the co-ordination among various department plans and budgets.
Advantages:
(1) The budgetary control aims at the maximization of profits of an organization.
(2) It provides the management with a means of control over planned programmes.
(3) It facilitates co-ordination among various activities of an organization.
(4) Wastage is minimized and hence efficiency can be achieved.
(5) Budgetary control enables the introduction of incentives schemes of remuneration.
(6) It creates consciousness among the employees.
(7) The national resources will be used economically and wastage will be eliminated.
(8) It provides an effective means by which top management can delegate authority and responsibility
without disturbing overall control.
Limitations of Budgetary Control:
(1) The future uncertainties reduce the utility of budgetary control system.
(2) Budgetary control may lead to conflicts among functional departments.
 (3) The lack of co-ordination among different departments results in poor performance.
(4) The cost of employing additional staff for budgeting increases the expenditure of an organization
which generally cannot be afford by small enterprises.

II. Cost Control:

The cost of production is an important factor in calculating the income of an organization. Hence, every
organization tries it level best to keep the cost within the reasonable limits. The techniques of cost
control involve the setting of cost standards for various components of cost and making comparison of
actual cost data with standard cost. This process is known as standard costing. This standard costing
refers to a pre-determined estimate of cost with can be used as a standard.
This standard cost forms the basis of control under standard costing. Actual cost is compared with the
standards, variations are analysed and suitable action are taken to overcome such variations. Thus
standard costing may be regarded essentially as a tool of cost control.
Advantages:
(1) It helps in discovering efficient and inefficient activities in an organization.
(2) It provides valuable information for submitting tenders or quoting prices of products and services.
(3) It reduces cost of an organization.
(4) Cost records become a basis for planning future production policies.
(5) The reasons for variations in profit can be ascertained.
Limitations:
(1) It is very expensive to apply.
(2) The success of this method depends on the reliability and accuracy of standards.

III. Production Planning and Control:

It is an important function of production manager. This is the function of looking ahead, estimating
difficulties to be occurred and remedial steps to remove them. It guides and directs flow of production
so that products are manufactured in a best way.
Following techniques are helpful in production planning and control:
(i) Routing – It is the determination of exact path which will be followed in production. It determines the
cheapest and best sequence of activities to be followed.
(ii) Scheduling – It is the determining of time and date when each operational activity is to be started
and completed.
(iii) Dispatching – It refers to the process of actually ordering the work to be done.
(iv) Follow up and Expediting – It is related to evaluation and appraisal of work performed.
(v) Inspection – It is to see whether the products manufactured are of requisite quality or not.

IV. Inventory Control:

It refers to the control of materials in an efficient manner, which ensures maximum return on working
capital. It is very important for the smooth functioning of production department. Its main objective is
to maintain a suitable supply of material at the lowest cost.
This control is exercised at three phases:
(i) Purchasing of materials
(ii) Storing of materials
(iii) Issuing of materials.
This can be exercised by establishing various criteria such as:
(i) Safety inventory level
(ii) Maximum inventory level
(iii) Reordering level
(iv) Danger level

V. Profit and Loss Control:

It is a simple and commonly used overall control tool to find out the immediate profit or cost factors
responsible for either the success or failure of business. As a controlling device it enables the
management to influence in advance revenues, the expenses and consequently even profits.
The sales, expenses and profit of different departments are compared. The department becomes a cost
centre. The in charge of the department is responsible for its performance. Even historical comparison is
done to assess the performance. In case there are deviations in performance than immediate steps are
taken to rectify them.

VI. Statistical Data Analysis:

It is an important control technique. This analysis is possible by means of comparison of ratios,
percentages, averages, trends etc., of different periods with a view to find out deviations and causes.
This method is applicable in case of inventory control, production control and quality control. The
minimum and maximum control limits are fixed and deviations with in these limits are allowed.
It variations go beyond limitations then immediate steps are taken to correct them. Statistical control
charts are prepared with the help of collected data and permissible limits are plotted. This chart will give
an idea whether everything is going as per the plans or not. Hence, analysis of data is important device
of control.

2. Modern Techniques:
Besides the traditional techniques which were discussed above, there are many other techniques which
have been evolved in modern times. These techniques are also called non-budgetary techniques.
I. Return on Investment Control (ROI):
One of the most successfully used control technique of measuring both the absolute and the relative
success of a company is by the ratio of net earnings to investment the company has made. This
approach often referred to a ROI. If the rate of return on investment is satisfactory, it will be considered
as good performance. The return on investment can be compared over a period of time as well as with
that of other similar concerns.
The return on investment can be computed with the following formula:

II. Programme Evaluation and Review Techniques (PERT):

The success of organization depends on its activities for the accomplishment of an objective within
stipulated time and cost. Management should determine activities to be performed and their inter-
relationships so that estimated resources and time needed to complete these activities as per schedule
and to monitor and control the time and cost of the project.
Through network analysis technique the time can be minimized to complete the project and also overall
project cost can be minimized. For this purpose PERT and CPM are the two important types of network
analysis used in modern management.
It is a technique of project which is used in the following managerial functions:
i. Planning:
The planning of project includes the listing of different jobs that has to be performed to complete the
venture. Here, requirements of men, material and equipment are determined along with the costs and
duration for the various jobs, in the process of planning.
ii. Scheduling:
It is the arrangement of the actual jobs of the project according to sequence of the time in which they
have to be performed. At this stage calculation of manpower and materials required are calculated
along with the expected time of completion of each job.
iii. Control:
The process of control starts with comparison of the difference between schedules and actual results.
They analyse of difference and the corrective action taken is the essence of control process.
The most important condition for implementing PERT is the breaking up of the project into activities and
determining the order of occurrence of these activities i.e., deciding activities which are to be completed
before. The next step is to draw graph, which explains the activities outlining the predecessor and
successor relations among them. A thorough understanding of the steps associated with the
construction of the graph is important for understanding of PERT.
Advantages:
The following are the important advantages of PERT are:
(1) It forces managers to chalk-out a plan to integrate all the activities as a whole.
(2) It is instrumental for concentrating attention on critical elements that may need modifications.
(3) It is helpful in solving problems of scheduling the activities of one-time projects i.e., the projects
which are not taken on routine basis.
(4) It helps in completing a project on schedule by coordinating different jobs involved in its completion.
Limitations:
(1) The expected time for each activity of any programme cannot be determined with certainty.
(2) It is suitable for programmes where time is essential consideration.

III. Critical Path Method (CPM):

The technique is helpful in finding out the more strategic elements of a plan for the purpose of better
designing, planning, coordinating and controlling the entire project. It was developed by walker of
Dupont Company in 1950s, 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 diagram known as network diagram. The network diagram
may be used for optimizing the use of resources and time. This 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 times and the project completion time can be varied.
Objectives of CPM Analysis:
The following are the main objectives of critical path analysis in a network:
(1) To estimate a route or path between two or more activities which maximizes some measures of
performance.
(2) To locate the points of hurdles and difficulties in the implementation of any project.
(3) To determine starting and ending times for each activity.
(4) To determine the slack associated with each non-critical activity.
Advantages:
The application of CPM leads to the following advantages:
(1) It determines most critical elements and pays more attention to these activities.
(2) It results in the maximum utilization of resources and facilities.
(3) It provides standard method for communicating project plans, schedules and costs.
(4) It concentrates on the timely completion of the whole project.
(5) It improves the quality of planning and controlling.
(6) It eliminates waste of time, energy and money on unimportant activities.
Limitations:
CPM is having two major limitations:
(1) It has limited use and application in routine activities for recurring projects.
(2) Time given for different activities may prove to unrealistic.

PERT and CPM Compared:

PERT and CPM as techniques of planning and control have certain similarities as well as differences.
The two techniques are similar in the following respects:
(1) Both CPM and PERT use the project network as their basis.
(2) The concept of critical paths and activity slack are common to both.
(3) Both the techniques are basically time-oriented. They are now used for cost control as well.

The differences between the two techniques are the following:

(1) PERT is used for new industries with rapidly changing technology having more uncertainties, while
CPM is used for construction projects where uncertainties are limited.
(2) CPM is activity-oriented while PERT is event-oriented.
(3) CPM lays stress on the element of costs whereas PERT is concerned essentially with the time factor.

IV. Management Information System (MIS):

This system emphasizes on providing timely, adequate and accurate information to the right person in
the organization which in turn helps in making right decisions. It is a planned technique for transferring
of intelligence within an organization for better management. Under this method data from all possible
sources are collected and properly processed for using in future. So this system should be designed in
such a way that helps management in exercising effective control over all aspects of the organization.
MIS is of two types:
(1) Management operating system and
(2) Management reporting system.
The first one meant for meeting the information needs of the lower and middle level managements and
second one is to supply information to top level management for decision-making.

V. Break Even Analysis:

A significant and popularly used control technique among the business enterprises and industries is the
analysis of break-even point which explains the relationship between sales and expenses in such a way
as to show at what volume revenue exactly covers expenses. This technique measures profit
corresponding to the different levels of output. Hence, the study of cost- volume-profit relationship is
frequently referred to as break even analysis.
In the words of Matz and Curry “Break-even analysis indicates at which level costs and revenue are in
equilibrium”. Thus, break-even analysis is associated with the calculation of break-even point. It is also
known as no profit, no loss point. This point can be calculated mathematically and charted on graph
paper also.
The method of calculating break-even point is as follows:

Assumption:
The break even analysis is based on the following assumptions:
(i) All elements of cost i.e., production, administration and selling and distribution can be segregated
into fixed and variable components.
(ii) Variable cost remains constant per unit of output and thus fluctuates directly in proportion to
changes in the volume of output.
(iii) Fixed cost remains constant at all volumes of output.
(iv) Volume of production is the only factor that influences.
(v) There is a synchronization between production and sales.
Advantages:
The break even analysis renders many advantages for managerial guidance.
(i) It helps in calculating of profit for different sales volumes.
(ii) Calculation of sales volume to produce desired profit can be possible.
(iii) It emphasizes on calculation of selling price per unit for a particular break-even point.
(iv) It helps in determination of margin of safety.
(v) It helps in calculating of sales required to offset price reduction.
(vi) It helps in choosing the most profitable alternatives.
(vii) It helps in determining the optimum sales mix.
(viii) It helps in calculation of sales volume required to meet proposed expenditures.
Limitations:
The break even analysis is based on number of assumptions which are rarely found in real life. Hence, its
managerial utility becomes limited.
Its main limitations are as follows:
(i) This analysis overlooks the time lag between production and sale.
(ii) The assumption of keeping factors like plant-size, technology and methodology of production
constant in order to get an effective break-even chart is unrealistic in actual life.
(iii) The sales-mix is also not a constant variable.
(iv) The valuation and allocation of costs in an organization is usually arbitrary and hence it reduces the
usefulness of this analysis.
(v) This analysis does not take into account the capital invested in the production and its costs which is
very important factor in profitability decisions.

VI. Management Audit:

This audit reveals irregularities and defects in the working of management. It also suggests the ways to
improve the efficiency of the management. It examines and the reviews various policies and functions of
the management on the bases of certain standards. It emphasis to evaluate the performance of various
management processes of an organization.
According to Taylor and Perry, “Management audit is the comprehensive examination of an enterprise
to appraise its organizational structure, policies and procedures in order to determine whether sound
management exists at all levels, ensuring effective relationships with the outside world”.
According to the Institute of Internal Auditors, Management audit is a “future oriented, independent
and systematic evaluation of the activities of all levels of management for the purpose of improving
organizational profitability and increasing the attainment of the other organizational objectives”.
Hence, from the above two definitions it can be concluded that management audit concentrates on the
examination of policies and functions of the management on the basis of certain standards and norms.
Objectives:
The following are the main objectives of management audit:
(i) It assists management in achieving co-ordination among various departments of the organization.
(ii) It detects any irregularity in the process of management and also it suggests improvement to achieve
best results.
(iii) It assists all levels of management through constant watch of all activities of the organization.
(iv) It suggests changes in the policies and procedures for a better future.
(v) It ensures most effective relationship with the outsiders and the most efficient internal organization.
(vi) It concentrates on performance of the management through close observation of inputs and
outputs.
(vii) It ensures the establishing good relations with the employees and to elaborate duties, rights and
liabilities of the entire staff.
(viii) It recommends better human relation approach, new management development and overall
organizational plans and objectives.
Importance:
Management audit is very important for its usefulness and is outlined as follows:
(i) It assesses the soundness of plans adopted and the adequacy of control system for making plans
successful.
(ii) It is useful in giving advices to the prospective investors.
(iii) It is very much useful in reviewing plans and policies.
(iv) It gives proper advice to the management to perform their functions well.
(v) Financial institutions may get management audit conducted to ensure that their investment in the
company would be safe and secured in the hands of the management.
Advantages of Management Audit:
It provides us following advantages:
(i) It helps the management in preparing plans, objectives and policies and suggests the ways and means
to implement those plans and policies.
(ii) Proper management audit techniques help the business to stop capital erosion.
(iii) Management audit increases the overall profitability of a business through constant review of
solvency, profitability and efficiency position of the concern.
(iv) Management audit eradicates the inefficiencies and ineffectiveness on the part of the management.
(v) The techniques of management audit are not only applicable to all factors of production but also to
all elements of cost.
(vi) It helps the top management to take effective decisions in time.
(vii) It helps the management in strengthening its communication system within and outside the
business.
(viii) It helps management in preparation of budgets and resources management policies.
(ix) It helps management in training of personnel and marketing policies.
Disadvantages:
The disadvantages of management audit can briefly be stated as follows:
(i) The installation of this audit technique involves heavy expenditure.
(ii) Due to ineffectiveness and inefficiency of the management auditor, management audit cannot
provide result oriented service.
(iii) Management auditors may be engaged in some activities detrimental to social objects of auditing for
example evasion of tax.

Advantages of controlling
 Saves time and energy
 Allows managers to concentrate on important tasks. This allows better utilization of the managerial
resource.
 Helps in timely corrective action to be taken by the manager.
 Managers can delegate tasks so routinely chores can be completed by subordinates.
On the contrary, controlling suffers from the constraint that the organization has no control over
external factors. It can turn out to be a costly affair, especially for small companies.

Limitations of Controlling:
The defects or limitations of controlling are as following:
1. Difficulty in Setting Quantitative Standards:
It becomes very difficult to compare the actual performance with the predetermined standards, if these
standards are not expressed in quantitative terms. This is especially so in areas of job satisfaction,
human behaviour and employee morale.
2. No Control on External Factors:
An organization fails to have control on external factors like technological changes, competition,
government policies, changes in taste of consumers etc.
3. Resistance from Employees:
Often employees resist the control systems since they consider them as curbs on their freedom. For
example, surveillance through closed circuit television (CCTV).
4. Costly Affair:
Controlling involves a lot of expenditure, time and effort, thus it is a costly affair. Managers are required
to ensure that the cost involved in installing and operating a control system should not be more than the
benefits expected from it.