Class 12

Business Studies
Chapter - 8

Controlling
 Controlling
Controlling is the process through which
management ensures that the actual performance
conforms to the planned performance

Actual Planned
 Controlling
Controlling is the process through which
management ensures that the actual performance
conforms to the planned performance

Actual Planned
 Controlling
Controlling discovers deviation from the results
expected

It also identifies the reasons for deviations and suggests

suitable action to avoid their recurrence in future
 Controlling
Controlling discovers deviation from the results
expected
 Controlling
Controlling discovers deviation from the results
expected
Importance
of
Controlling
 Importance of Controlling

1. Accomplishing organizational goals

It measures actual performance with standards and
making corrective actions on deviations, so that
the organization can achieve its goals smoothly
 Importance of Controlling

2. Judging accuracy of standards

Controlling helps to check the accuracy of
standards in changing environment, which helps to
revise the standards if needed
 Importance of Controlling

3. Efficient use of resources

Controlling seeks to reduce wastages of resources
 Importance of Controlling
4. Improving employee motivation
Controlling ensures employee awareness regarding
what is expected to do and what is the standards
fixed on him, so that he will be motivated to give
better performance
 Importance of Controlling
5. Ensures order and discipline
There is a close watch on the activities of all
employees
 Importance of Controlling
6. Coordination
To coordinate the activities of different persons and
departments, an effective system of control is
necessary
 Importance of Controlling
7. Decision making
The process of control is complete when corrective
actions are taken

It will lead to make better decisions in future

 Importance of Controlling
1. Accomplishing organizational goals
2. Judging accuracy of standards
3. Efficient use of resources
4. Improving employee motivation
5. Ensures order and discipline
6. Coordination
6. Decision making
Limitations
of
Controlling
 Limitations of Controlling
1. Difficulty in setting standards
Controlling will be effective only when standards
are fixed in quantitative terms

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Employee morale, job satisfaction, customer response

etc. cannot be expressed quantitatively, so that
controlling becomes less effective
 Limitations of Controlling
2. Little control on external factors
External factors such as Government policy,
technological changes, competition etc. cannot be
controlled by the organization
 Limitations of Controlling
3. Resistance from employees
Employees may oppose the control measures
taken by the firm, because they may feel that it will
reduce their freedom

E.g., CCTV, Punching System, Feedback calls to

customers etc.
 Limitations of Controlling
4. Costly affair
Small organizations cannot afford to install an
effective control system as it is very costly
 Limitations of Controlling

1. Difficulty in setting standards

2. Little control on external factors
3. Resistance from employees
4. Costly affair
Relationship
between
Planning &
Controlling
 Planning & Controlling

The entire planning process will turn to be waste

unless adequate control measures are
exercised
 Planning & Controlling
a. Interdependent and inseparable
Planning and control are interdependent and
inseparable functions of management.
Without a plan there is nothing to control

Thus planning is useless without control and

controlling is useless without plan
 Planning & Controlling
b. Interrelated and reinforce each other
i) Planning makes controlling easier and effective

ii) Controlling reveals the shortcomings of plans

and calls for improvement in future
 Planning & Controlling
c. Looking ahead and looking back
Planning is looking ahead while controlling is
looking back

Plans are prepared for future

Controlling is the post mortem of past activities
Relation between Planning & Controlling

a. Interdependent and inseparable

b. Interrelated and reinforce each other

c. Looking ahead and looking back

Controlling Process
(Steps in
Controlling)
 Controlling Process

5. Taking Corrective Actions 5

4. Analysing 4
Deviations

3. Comparison of Actual Performance 3

2. Measurement of Actual 2
Performance
1. Setting Standards 1
 Controlling Process

1. Setting performance Standards

To achieve the goals, standards of performance
have to be determined in planning itself
 Controlling Process

a) Quantitative Standards
Standards must be in concrete and tangible forms
which will make evaluation process easy

Eg: Cost of production for one unit is Rs.100 etc.

 Controlling Process

b) Qualitative Standards
Standards can also be in intangible forms

Eg: The results expected from a training programme,

loyalties of workers, Improving motivation level of
employees, etc.
 Controlling Process

2. Measurement of actual performance

Actual performance of each activity in terms of
quality and quantity should be measured
 Controlling Process

3. Comparison of actual performance with

standards
Comparison of actual performance with the
standards reveals the deviations between actual
and desired results
 Controlling Process

4. Analysing deviations
The extent of deviations and causes of such
deviations are to be found out

It is important to ascertain whether deviations are

within the expected range
Deviations in key areas of business require urgent
attention
Methods of Analysing Deviations in Key
areas
a) Critical Point Control
The control measures should be focused on
Key Result Areas (KRAs) which are critical in
the success of an organization
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La

These KRAs are the Critical Points, if anything goes wrong

at this critical point, the entire organization will suffer
Eg: 5% increase in labour cost is a serious matter than
20% increase in postal charges
Methods of Analysing Deviations in Key
areas
b) Management by Exception (MBE) /
Control by Exception
All deviations need not be brought to the
attention of top management

Only those deviations which seem exceptionally high and

which cannot be easily solved by lower level management
alone should be reported to top management
 Controlling Process

5. Taking corrective actions

As soon as deviations are reported, it is the duty of
the executives to take steps to correct the past
action so that deviations may not occur again and
the plans are properly executed

If there is no deviation or if the deviation is within the

permissible limit, let the situation remains as it is
 Controlling Process

Cause of deviation Corrective action to be taken

Defective material Change the supplier or quality

Defective machinery Repair or replace

Obsolete machinery Undertake technological up gradation

Increase in labour Improve working conditions and

turnover provide better incentives

Defective process Modify the existing process

 Controlling Process
1. Setting performance Standards
2. Measurement of actual performance

3.Comparison of actual performance

with standards
4. Analysing deviations
5. Taking corrective actions
Techniques of
Managerial
Control
 Controlling Techniques

Traditional Modern
Technique
Technique s
s
 Traditional Techniques
1. Personal observation
Personal observation on the employee may create
a psychological pressure to perform well
 Traditional Techniques
2. Statistical reports
Statistical information regarding performance of
employees in the form of charts, graphs, tables etc.
enable the managers to interpret them and to
make comparison
 Traditional Techniques
3. Break-even analysis
The level of operation where total revenue or sales
are equal to total cost is called the break-even point

At this point (sales volume) the firm makes no profit no loss

 Traditional Techniques
4. Budgetary control
Controlling the activities of an organization with the
help of budgets
It involves the comparison of actual performance
with the budgetary standards

E.g. Sales budget, production budget, Materials budget etc.

1. Budget is a guidance management
for planning and policy in
formulation.
2. Gives a direction to the organisation by fixing the
goals and targets.
3. Minimises wastages and losses.

4.Actual performance can compared with

be budgetary standards.

5. It motivates the executives to attain targets.

 Traditional Techniques
1. Personal observation
2. Statistical reports
3. Break-even analysis
4. Budgetary control
 Modern Techniques
1. Return on Investment (ROI)
This technique is used to ensure the capital
investment is properly utilised or not in order to get
a reasonable amount of return (profit)
 Modern Techniques
2. Ratio Analysis
This is a simple technique used for analysing and
interpreting data contained in financial statements

This is done through calculating accounting ratios

A ratio is an arithmetic relationship between two figures
 Accounting Ratios
a. Liquidity ratio
It is used to ascertain short term solvency of
business
It shows the ability of a business to meet its short-
term obligations in time

Eg: Current ratio, liquid ratio etc.

 Accounting Ratios
b. Solvency ratio
Solvency here means long term solvency which
refers to the ability to meet all liabilities in the event
of liquidation

Eg: Debt – equity ratio, capital gearing ratio,

proprietary ratio etc.
 Accounting Ratios
c. Profitability ratio
It is calculated to know the profitability in relation to
sales or capital in the business

E.g. Gross profit ratio, Net profit ratio, Return on total

sales ratio, Return on capital employed ratio, Return on
equity capital ratio etc.
 Accounting Ratios
d. Turnover ratio
It reflects the speed at which resources are utilised in
effecting sales
A higher turnover ratio means efficient use of
resources

E.g. Inventory turnover ratio, Debtors’ turnover ratio,

Creditors’ turnover ratio, working capital turnover ratio etc.
 Modern Techniques
3. Responsibility accounting
It is a system of accounting in which different
sections or departments in an organisation are
taken as “Responsibility Centres”

The person in charge of a centre is responsible for

achieving the target fixed
a. Cost centre
It is a location, a person, a department or an item of
equipment for which the cost is ascertained and
used for cost control

Eg: In a manufacturing unit production department is

treated as a cost centre and the production manager is
responsible for controlling costs in his department
b. Revenue centre
A segment of an organization which is primarily
responsible for earning revenue is called a revenue
centre

E.g. Marketing department is a revenue centre

c. Profit centre
It is a segment of activity of an organization which
is responsible for making profit
it is a centre responsible for both revenue and
costs and thereby profit for a particular activity

Repair and maintenance department may be treated as a

profit centre provided it bills other departments for their
services
d. Investment centre
Here the investment is separately calculated and
return on investment is taken as the basis for
evaluating the performance of that centre

1 2 3

Eg: Investment in Fixed Assets

 Modern Techniques
4. Management Audit
It is necessary to evaluate the efficiency of
management to ascertain whether the performance
of management is according to expected lines

Management audit reveals the achievements of

management against the expected performance and also
the weaknesses are pointed out
 Modern Techniques
5. PERT and CPM
Program Evaluation and Review Technique and Critical Path
Method

A network analysis technique to determine the time to

complete a complex process
 Steps in PERT and CPM

1. The project is divided into a number of activities

2. Develop a network diagram incorporating all activities with

a starting point and finishing point

3. Three time estimates – optimistic, most likely and

pessimistic are made

4. The longest path in the network is identified as a critical

path

5. Plan may be modified for prompt execution and timely

completion of the project
 Modern Techniques
6. Management Information System (MIS)

Computer based information system which provides data

and information on a real time basis supports the
management for decision making and to take corrective
actions on deviations
 Advantages of MIS

1. Collection, processing and dissemination of information.

2. Support Planning, decision making and controlling.

3. Quality of information is improved.

4. Cost effectiveness.

5. Managers are not overloaded with too many information.

 Modern Techniques
1. Return on Investment (ROI)

2. Ratio Analysis

3. Responsibility accounting

4. Management Audit

5. PERT and CPM

6. Management Information System