Chapter 8

CONTROLLING
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 Premise
It is quite clear from the example that all managers need to
manage situations intelligently and take corrective action
before any damage is done to the business.

Controlling function of management comes to the

rescue of a manager here. It not only helps in
keeping a track on the progress of activities but
also ensures that activities conform to the
standards set in advance so that organisational
goals are achieved.

All About Controlling

Summary
1) In order to seek planned results from
the subordinates, a manager needs to
exercise effective control over the
activities of the subordinates.

2) In this very context, controlling means

ensuring that activities in an
organisation are performed as per the
plans.

3) Controlling also ensures that an

organisation’s resources are being used
effectively and efficiently for the
achievement of predetermined goals.
4) Controlling is, thus, a goal-oriented function.

5) Controlling should not be misunderstood as the last

function of management. It is a function that brings back the
management cycle back to the planning function.

6) The controlling function finds out how far actual

performance deviates from standards, analyses the causes
of such deviations and attempts to take corrective actions
based on the same

Importance of Controlling
A good control system helps an organisation in the following ways:

1) Accomplishing organisational goals:

✓ The controlling function measures progress towards the
organisational goals and brings to light the deviations, if any, and
indicates corrective action. It guides the organisation and keeps it
on the right track so that organisational goals might be achieved.

2) Judging accuracy of standards:

✓ it enables management to verify whether the standards set are

accurate and objective. An efficient control system keeps a
careful check on the changes taking place in the organisation and
in the environment and helps to review and revise the standards
3) Making efficient use of resources:
✓ By exercising control, a manager seeks to reduce wastage and
spoilage of resources. Each activity is performed in accordance
with predetermined standards and norms. This ensures that
resources are used in the most effective and efficient manner.

4) Improving employee motivation:

✓ A good control system ensures

that employees know well in
advance what they are expected
to do and what are the standards
of performance on the basis of
which they will be appraised.

5) Facilitating coordination in action:

✓ Controlling provides direction to all activities and efforts for

achieving organisational goals. Each department and employee is
governed by predetermined standards which are well coordinated
with one another

Limitations of Controlling

1) Difficulty in setting
quantitative standards:
Control system loses some of its
effectiveness when standards cannot
be defined in quantitative terms. This
makes measurement of performance
and their comparison with standards a
difficult task.
2) Little control on external factors:
Generally an enterprise cannot control external factors such as
arrival of covid, government policies, technological change,
competition status etc.

3) Resistance from employees:

Control is often resisted by employees. They see it as a restriction
on their freedom. For instance, employees might object when they
are kept under a strict watch with the help of Closed Circuit
Televisions (CCTVs).

4) Costly Affair:
Control is a costly affair as it involves a lot of expenditure, time and
effort. A small enterprise cannot afford to install an expensive
control system.
Fun fact
The box on Control System at
FedEx gives an overview of the
control system used by FedEx
and how it helped FedEx to
increase its profits.
Controlling Process

Controlling is a systematic process involving

the following steps.

1. Setting performance standards

2. Measurement of actual performance

3. Comparison of actual performance with

standards

4. Analysing deviations

5. Taking corrective action

Fixing the
Standards

Measuring the
Follow-up Actual
Control Performances

Process

Corrective
Comparison
Action
 Setting Performance Standards: The first
step in the controlling process is setting
Step 1 up of performance standards. Standards
are the criteria against which actual
performance would be measured.

Thus, standards act as a lighthouse that warns

& guides the ships at sea. Standards are the
benchmarks towards which efforts of entire
organisation are directed.

These standards can be expressed both in quantitative and

qualitative terms.

Examples of Quantitative Standards:

✓Revenue to be earned.
✓Units to be produced and sold.
✓Cost to be incurred.
✓Time to be spent in performing a task.
✓Amount of inventories to be maintained etc.

Examples of Qualitative Standards:

✓Improving motivation level of employees.
✓Improving labor relations.
✓Improving quality of products.
✓Improving goodwill etc.
It is important that standards should be flexible enough to be modified
whenever required. Due to changes taking place in the internal and
external business environment, standards may need some
modification to be realistic in the changed business environment
 Measurement of Actual Performance: Once
performance standards are set, the next step is
Step 2 measurement of actual performance.
Performance should be measured in an objective
and reliable manner. There are several techniques
for measurement of performance

Following are some of the ways for measuring

performance:

Superior prepares a report regarding the

performance of an employee.

Various ratios like gross profit ratio, debtor turnover

ratio, return on investment, current ratio etc. are
calculated at periodic intervals to measure company’s
performance.

Progress made in areas like marketing can be measured

by considering the number of units, increase in market
share etc.

In small organisations, each unit produced can be

checked personally to ensure the quality standards.

In large organisation, the technique of sample

checking is used. Under this technique, some pieces
are checked at random for quality specifications.
 Step 3

Comparing Actual Performance with Standards:

This step involves comparison of actual

performance with the standard.

Such comparison will reveal the deviation between actual

and desired results. Comparison becomes easier when
standards are set in quantitative terms.
For instance, performance of a worker in terms of units
produced in a week can be easily measured against the
standard output for the week

Step 4

Analysing Deviations: This basically means, why a particular

deviation arose?
Some deviation in performance can be expected
in all activities. It is, therefore, important to
determine the acceptable range of deviations.
Also, deviations in key areas of business need to be
attended more urgently as compared to deviations in
certain insignificant areas.

Critical point control and management by exception should be

used by a manager in this regard.
 Critical Point Control:

It is neither economical nor easy to keep a check on

each and every activity in an organisation.

Control should, therefore, focus on key result areas

(KRAs) which are critical to the success of an
organisation.

These KRAs are set as the critical points. If anything

goes wrong at the critical points, the entire
organisation suffers.

For instance, in a manufacturing organisation, an

increase of 5 per cent in the labor cost may be more
troublesome than a 15 per cent increase in postal
charges.

Management by Exception:
Management by exception, which is often referred to as control by
exception, is based on the belief that an attempt to control everything
results in controlling nothing.
significant deviations which go beyond the permissible limit should be
brought to the notice of management.

For e.g. if the plans lay down 2 percent increase in labor cost as an
acceptable range of deviation in a manufacturing organisation, only
increase in labor cost beyond 2 percent should be brought to the
notice of the management. However, in case of major deviation from
the standard (say, 5 percent), the matter has to receive immediate
action of management on a priority basis.
Conclusion: Deviations may have multiple causes for their
origin. These include unrealistic standards, defective
process, inadequacy of resources, structural drawbacks,
organisational constraints and environmental factors beyond
the control of the organisation.

It is necessary to identify the exact cause(s) of deviations, failing

which, an appropriate corrective action might not be possible.

Step 5 Taking Corrective Action:

The final step in the controlling process

is taking corrective action.
No corrective action is required when the deviations
are within acceptable limits.
However, when the deviations go beyond the acceptable
range, especially in the important areas, it demands
immediate managerial attention so that deviations do not
occur again and standards are accomplished.

Some examples of Corrective Action

Causes of Deviation Corrective action to b e 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 up gradation of
machinery.
4. Defective process Modify the existing process.
5. Defective physical Improve the physical conditions of work.
conditions of work
 Techniques of Manegerial Control
The various techniques of managerial control may be
classified into two broad categories: Traditional techniques,
and modern techniques

Traditional techniques are those which have been used by

the companies for a long time now. However, these
techniques have not become obsolete and are still being
used by companies. These include:

Personal Statistical Breakeven Budgetary

Observation Reports Analysis Control

Modern techniques of controlling are those which are of

recent origin and are comparatively new in management
literature. These techniques provide a refreshingly new
thinking on the ways in which various aspects of an
organisation can be controlled. These include:

1. Return on investment
2. Ratio analysis
3. Responsibility accounting
4. Management audit
5. PERT and CPM
6. Management information system (MIS)
 Traditional Techniques
1) 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.

2) Statistical Reports:

Statistical analysis
in the form of
averages,
Such information It allows a
percentages,
when presented in comparison to be
ratios, correlation,
the form of charts, made with
etc., present
graphs, tables, performance in
useful information
etc., enables the previous periods
to the managers
managers to read and also with the
regarding
them more easily. benchmarks.
performance of
the organisation in
various areas.
3) Breakeven Analysis :
✓ Breakeven analysis is a technique used by managers to study the
relationship between costs, volume and profits.
✓ It determines the probable profit and losses at different levels of
activity.
✓ The sales volume at which there is no profit, no loss is known as
breakeven point.
Breakeven point is determined by the intersection of Total Revenue
and Total Cost curves. The figure shows that the firm will break even
at 50,000 units of output. At this point, there is no profit no loss.

It is beyond this point that the firm will start earning profits.
Breakeven point can be calculated with the help of the
following formula:

Fixed Costs
Breakeven Point=
Selling price per unit−Variable cost per unit
4) Budgetary Control:
Let’s understand first, what is
a budget:

A budget is a quantitative statement for a definite future

period of time for the purpose of obtaining a given objective.
It will contain figures of forecasts both in terms of time and
quantities. E.g.

1) Sales Budget: A statement of what an organization

expects to sell in terms of quantity as well as value
2) Production Budget: A statement of what an organization
plans to produce in the budgeted period
3) Material Budget: A statement of estimated quantity and cost
of materials required for production
4) Cash Budget: Anticipated cash inflows and outflows for the
budgeted period

Budgetary control is a technique of

managerial control in which all
operations are planned in advance
in the form of budgets and actual
results are compared with
budgetary standards. This
comparison reveals the necessary
actions to be taken so that
organisational objectives are
accomplished.
 Modern Techniques
1) Return on Investment:
Return on Investment (known as 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.

It can be calculated as under.

Net income before interest and tax

ROL=
Capital Employed

Explanation about the formulae:

➢ 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
2) Ratio Analysis:
Examples of Commonly used Ratios

Type of Ratio Examples

Liquidity Current Ratio
Quick Ratio
Solvency Debt-Equity Ratio
Proprietary Ratio
Interest Coverage Ratio
Profitability Gross Profit Ratio
Net Profit Ratio
Return on Capital Employed
Turnover Inventory Turnover Ratio
Stock Turnover Ratio
Debtors Turnover Ratio

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:

a)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.

b)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.

c)Profitability Ratios: These ratios are calculated to analyze the

profitability position of a business. Such ratios involve analysis of
profits in relation to sales or funds or capital employed.

d)Turnover Ratios: Turnover ratios are calculated to determine the

3) 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’ eg. Cost Centre, Revenue Centre,
Profit Centre, Investment Centre

a) 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.
b) 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
c) 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
d) Investment Centre:
✓An investment centre is responsible not only for profits
but also for investments made in the centre in the form of
assets
4) 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.

✓Management audit may be defined as evaluation of the

functioning, performance and effectiveness of
management of an organization
It helps to locate present and potential
deficiencies in the performance of
management functions.

It helps to improve the control system of

an organisation by continuously
monitoring the performance of
It is quite helpful: management.

It improves coordination in the

functioning of various departments so
that they work together effectively
towards the achievement of
organisational objectives.
5) PERT and CPM
1) PERT (Programme Evaluation and Review Technique)
and CPM (Critical Path Method) are important network
techniques useful in planning and controlling.

2) These techniques deals with time scheduling and

resource allocation for these activities and aims at
effective execution of projects within given time
schedule and structure of costs.

3) The steps involved in using PERT/ CPM are as follows:

The project is divided into a number of clearly identifiable activities

which are then arranged in a logical sequence.

A network diagram is prepared to show the sequence of activities,

the starting point and the termination point of the project

Time estimates are prepared for each activity. PERT requires the
preparation of three time estimates – optimistic (or shortest time),
pessimistic (or longest time) and most likely time. In CPM only one
time estimate is prepared. In addition, CPM also requires making
cost estimates for completion of project.

The longest path in the network is identified as the critical path. It

represents the sequence of those activities which are important for
timely completion of the project and where no delays can be
allowed without delaying the entire project.

If required, the plan is modified so that execution and timely

completion of project is under control.
6) Management Information System (MIS)
Management Information System (MIS) is a
computer-based information system that provides
information and support for effective managerial
decision-making. MIS also serves as an important
control technique. It provides data and information
to the managers at the right time so that
appropriate corrective action may be taken in case
of deviations from standards.

MIS offers the following advantages to the

managers:

It facilitates collection, management and

dissemination of information at different levels of
management and across different departments of
the organisation.

It supports planning, decision making and

controlling at all levels

It improves the quality of information with which a

manager works.

It ensures cost effectiveness in managing

information.

It reduces information overload on the managers

as only relevant information is provided to them
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