BUSINESS STUDIES

CLASS XII
CHAPTER 8

CONTROLLING
 CONTROLLING - OVERVIEW
• CONCEPT
• IMPORTANCE OF CONTROLLING
• PROCESS OF CONTROLLING
 CONTROLLING - MEANING
• Controlling means ensuring that activities in an organisation are performed
as per the plans.
• Controlling also ensures that an organisation’s resources are being used
effectively and efficiently for the achievement of predetermined goals.
Controlling is, thus, a goal-oriented function.
• Controlling function of a manager is a pervasive function. It is a primary
function of every manager. Managers at all levels of management- top, middle
and lower-need to perform controlling functions to keep a control over activities
in their areas. Moreover, controlling is as much required in an educational
institution, military, hospital, and a club as in any business organisation.
• 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. 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. This process helps in formulation of future
plans in the light of the problems that were identified and, thus, helps in better
planning in the future periods. Thus, controlling only completes one cycle of
management process and improves planning in the next cycle.
 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
CONTROLLING - PROCESS
 CONTROLLING - PROCESS
Step 1: setting performance standards:
Standards are the criteria against which actual performance would be measured.
Standards can be set in both quantitative as well as qualitative terms.
. At the time of setting standards, a manager should try to set standards in precise
quantitative terms as this would make their comparison with actual
performance much easier. For instance, reduction of defects from 10 in every
1,000 pieces produced to 5 in every 1,000 pieces produced by the end of the
quarter.
whenever qualitative standards are set, an effort must be made to define them in a
manner that would make their measurement easier.
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.
 CONTROLLING - PROCESS
Step 1: setting performance standards:
 CONTROLLING - PROCESS
Step 1: setting performance standards:
QUANTITATIVE STANDARDS QUALITATIVE STANDARDS
• cost to be incurred, • Improving goodwill and
• revenue to be earned, motivation level of employees
product units to be produced • for improving customer
and sold, satisfaction in a fast food
chain having self-service,
• time to be spent in
standards can be set in terms
performing a task of time taken by a customer to
wait for a table, time taken by
him to place the order and
time taken to collect the order
 CONTROLLING - PROCESS
Step 2 - Measurement Of Actual Performance:
Once performance standards are set, the next step is measurement of
actual performance. Performance should be measured in an
objective and reliable manner.
There are several techniques for measurement of performance.
These include personal observation, sample checking,
performance reports, etc.
As far as possible, performance should be measured in the same
units in which standards are set as this would make their
comparison easier. It is generally believed that measurement
should be done after the task is completed. However, wherever
possible, measurement of work should be done during the
performance. For instance, in case of assembling task, each part
produced should be checked before assembling.
 CONTROLLING - PROCESS
Step 2 - Measurement Of Actual Performance:
Measurement of performance of an employee may require
preparation of performance report by his superior.
Measurement of a company’s performance may involve calculation
of certain ratios like gross profit ratio, net profit ratio, return on
investment, etc., at periodic intervals.
Progress of work in certain operating areas like marketing may be
measured by considering the number of units sold, increase in
market share etc., whereas, efficiency of production may be
measured by counting the number of pieces produced and number
of defective pieces in a batch
 CONTROLLING - PROCESS
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.
 CONTROLLING - PROCESS
Step 4: Analysing Deviations:
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.
 CONTROLLING - PROCESS
Step 4: Analysing Deviations:
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 labour cost may
be more troublesome than a 15 per cent increase in postal
charges.
 CONTROLLING - PROCESS
Step 4: Analysing Deviations:
 CONTROLLING - PROCESS
Step 4: Analysing Deviations:
• Key Result Areas Examples • KRA Examples for Human Resources
Managers
• KRAs are different for each • Improved advertisement of job vacancy
employee, department, • Effective screening of prospective employees
and company. However, common • Decrease in the cost of hiring
basic key result areas associated • Retention of current employees
with some designations are listed • Decreased employee turnover
below: • KRA Examples for Customer Service
• KRA Examples for Sales Representatives
Department • Effectively assisting customers with their queries
• Efficient handling of customers’ complaints
• Increase in number of sales as
• Improved customer retention
compared to the previous tenure
• KRA Examples for Marketing Managers
• Increase in profit margin as compared • Increased brand awareness and visibility
to the previous tenure • Promotional activities to improve the brand image
• Increase in the number of prospective • Decreased marketing costs per new customer
customers approached acquired
• Effective implementation of online
sales strategy
 CONTROLLING - PROCESS
Step 4: Analysing Deviations:
2. Management by Exception: Management by exception, which is
often referred to as control by exception, is an important principle
of management control based on the belief that an attempt to
control everything results in controlling nothing.
Thus, only significant deviations which go beyond the permissible
limit should be brought to the notice of management.
Thus, if the plans lay down 2 per cent increase in labour cost as an
acceptable range of deviation in a manufacturing organisation,
only increase in labour cost beyond 2 per cent should be brought
to the notice of the management. However, in case of major
deviation from the standard (say, 5 per cent), the matter has to
receive immediate action of management on a priority basis.
 CONTROLLING - PROCESS
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.
 Corrective action might involve training of employees if the production target
could not be met. Similarly, if an important project is running behind schedule,
corrective action might involve assigning of additional workers and equipment
to the project and permission for overtime work.
 In case the deviation cannot be corrected through managerial action, the
standards may have to be revised
 CONTROLLING - PROCESS
Relationship Between Planning And Controlling
 Planning is looking forward looking: Plans are prepared for
future and are based on forecasts about future conditions.
Therefore, planning involves looking ahead and is called a
forward looking function.
 Controlling is forward looking: corrective action initiated by
control function aims to improve future performance.
 Planning is backward looking: planning is guided by past
experiences.
 Controlling is backward looking: controlling is like a
postmortem of past activities to find out deviations from the
standards. In that sense, controlling is a backward-looking
function.
 Importance of Controlling
Accomplishing
organisational goals
Judging accuracy of
standards
Making efficient use
of resources
Improving employee
motivation
Ensuring order and
discipline
Facilitating
coordination in action
 Importance of Controlling
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, thus, guides the
organisation and keeps it on the right track so that organisational goals
might be achieved.
2. Judging accuracy of standards:A good control system 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 in light of such changes.
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.
 Importance of Controlling
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. It, thus, motivates them and helps them to give better
performance.
5. Ensuring order and discipline: Controlling creates an atmosphere of order
and discipline in the organisation. It helps to minimise dishonest
behaviour on the part of the employees by keeping a close check on their
activities. The box explains how an importexport company was able to
track dishonest employees by using computer monitoring as a part of
their control system.
6. 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. This ensures that overall organisational
objectives are accomplished.