CHAPTER - 20

EFFECTIVE
CONTROL

The Meaning of Control

Control is the process of ensuring that actual

activities conform to planned activities.

Control helps manager monitor the effectiveness
of their planning, their organizing, & their leading
activities.
An essential part of the control process is taking
corrective actions as needed.

Steps in the Control Process

Robert J. Mocklers definition of control points out
the essential elements of the control process:

Management control is a systematic effort to

set performance standards with planning
objectives, to design information feedback
systems, to compare actual performance with
theses predetermined standards, to determine
whether there are any deviations & to
measure their significance, & to take any
action required to assure that all corporate
resources are being used in the most effective
& efficient way possible in achieving corporate

Mocklers definition divides control into 4 steps:

1) Establish standards & methods for measuring

performance
2) Measure the performance
3) Determine whether performance matches the
standard.
4) Take corrective action

Establish standards & methods

for measuring performance
Ideally, the goals & objectives established during
the planning process will already be stated in
clear, measurable terms that include specific
deadlines. This is important since:
Vaguely worded goals, such as to improve
employee skills are just empty slogans until
managers begin to specify what they mean by
improve & what they intend to do to reach
this goal - & when.
Precisely worded goals are easier to evaluate
for accuracy & usefulness than empty slogans.
Precisely worded, measurable objectives are
easy to communicate & to translate into

Measure the Performance

Like all aspects of control, measurement is an

ongoing, repetitive process.

Frequency of measurement depends on the type
of activity being measured.

Determine whether performance

matches the standard
This includes measuring results with the

established targets or standards previously set.

In the comparison stage, managers are
particularly concerned with the size & direction of
the variation.

Take corrective action

3 possible courses of action:
1) Doing nothing
2) Correcting actual performance Immediate
corrective action or basic corrective action
3) Revise the standard

Why Control is needed

1) To create better quality
2) To cope with change
3) To create faster cycles
4) To add value
5) To facilitate delegation & teamwork

Designing Control Systems

Control System: Multistep procedure applied to

various types of control activities.

Managers face a number of challenges in
designing control systems that provide accurate
feedback in a timely, economical fashion.
Most of these challenges can be traced back to
decisions about what needs to be controlled &
how often progress needs to be measured.
Trying to control too many elements of operations
can annoy & demoralize employees, frustrate
their managers , & waste valuable time, energy, &
money.

 Furthermore, managers may focus on easy-to-

measure factors & ignore harder-to-measure

factors.
Most of these problems can be avoided by an
analysis that identifies key performance areas &
strategic control points.

Identifying Key Performance

Areas
Key Performance areas or Key result areas

(KRAs): Aspects of a unit or organization that

must function effectively if the entire unit or
organization is to succeed.
These areas usually involve major organizational
activities or groups of related activities that occur
throughout the organization or unit.
These key performance areas, in turn, help define
the more detailed control systems & standards.

Identifying Strategic Control

Points
Strategic Control Points Critical points in a

system at which monitoring or collecting

information should occur.
Once such strategic control points can be
located, the amount of information that has to be
gathered & evaluated can be reduced
considerably.
The most important & useful method of selecting
strategic control points is to focus on the most
significant elements in a given operation.

The Balanced Scorecard

The balanced scorecard is an example of a

performance measurement system According to

proponents of this approach, business units
should be assigned goals & then measured from
the following 4 perspectives:
1) Financial (e.g. profit margins, return on
assets, cash flow).
2) Customer (e.g. market share, customer
satisfaction index).
3) Internal business (e.g. employee retention,
cycle time reduction).
4) Innovation & learning (e.g. percentage of

 The balanced scorecard fosters a balance among

strategic measures in an effort to achieve goal

congruence, thus encouraging employees to act
in the organizations best interests.
It is a tool that helps the company focus, improve
communication, set organizational objectives, &
provide feedback on strategy.
Every measure on a balanced scorecard
addresses an aspect of a companys strategy.
In creating a balanced scorecard, executives
must choose a mix of measurements that:
1) Accurately reflect the critical factors that will
determine the success of the companys
strategy;

2) Show the relationships among the individual

measures in a cause-&-effect manner,
indicating how nonfinancial measures affect
long-term financial results; &
3) Provide a broad-based view of the current
status of the company.

 Usually only a small percentage of the activities,

events, individuals, or objects in a given operation

will account for a high proportion of the expense
or problems that managers will have to face.
Another useful consideration is the identification
of places where change occurs in a production
process.

Budgetary Control Methods

Budget Formal quantitative statement of

resources allocated for planned activities over

stipulated periods of time.
They are widely used means for planning &
controlling activities at every level of the
organization.
The following are the reasons for their wide
usage:
Budgets are stated in monetary terms, which
are easily used as a common denominator for
a wide variety of organizational activities.
The monetary aspects of budgets means that
they can directly convey information on a key
organizational resource capital & on a key

 Budgets establish clear & unambiguous

standards of performance for a set time period

usually a year.
In addition to being a major control device,
budgets are one of the major means of
coordinating the activities of the organization.

Responsibility Centers
Any organizational function or unit whose

manager is responsible for all of its activities.

All responsibility centers use resources (inputs or
costs) to produce something (outputs or
revenues).
Typically, responsibility is assigned to a revenue,
expense, profit &/or investment center.

 Revenue Centers organizational unit in which

outputs are measured in monetary terms but are

not directly compared to input costs.
Expense Center or Cost Center
Organizational units, such as administrative,
service, & research departments, where inputs
are measured in monetary terms, but outputs are
not.
Profit Center Organizational unit where
performance is measured by numerical
differences between revenues & expenditures.
Investment Center Organizational unit that not
only measures the monetary value of inputs &
outputs, but also compares outputs with assets

The Budgeting Process

Budgeting process usually begins when

managers receive top managements economic

forecasts & sales & profit objectives for the
coming year along with a timetable stating when
budgets must be completed.
The forecasts & objectives provided by top
management represent guidelines within which
other managers budgets will be developed.
In few organizations, the preference is for topdown budgeting. Budgets are imposed by top
managers with little or no consultation with lowerlevel managers.
Most companies, however, prefer the process of
bottom-up budgeting: Budgets are prepared, at

Bottom-up budgeting has a number of

advantages:
Supervisors & lower-level department heads have
a more intimate view of their needs than do
managers at the top, & they can provide more
realistic details to support their proposals.
They are also less likely to overlook some vital
ingredient or hidden flaw that might subsequently
impede implementation.
Managers are also more strongly motivated to
accept & meet budgets they have had a hand in
shaping.

The Role of Budget Personnel

The Budget Department, which generally

reports to the Corporate Controller, provides

budget information & assistance to organizational
units, designs budget systems & forms, integrates
the various departmental proposals into a master
budget for the organization as a whole, & reports
on actual performance relative to the budget.
The Budget Committee, made up for senior
executives from all functional areas, reviews the
individual budgets, reconciles the divergent
views, alerts or approves the budget proposals, &
then refers the integrated package to the board of
directors. Later, when the plans have been put
into practice, the committee reviews the control

Some Problems in Budget

Development
When organizations limited resources are

allocated, managers could fear that they will not

be given their fair share.
Tension can grow as competition with other
managers increases. Anxieties might also arise
because managers know they will be judged by
their ability to meet or beat budgeted standards.
Hence, they are concerned about what those
standards will be & may overstate their needs to
create some slack.
Conversely, their seniors managers are
concerned with establishing aggressive budget
objectives.

 As a result, the senior managers will often try to

trim their managers expenditure requests or raise

their revenue targets.
The result can be an ever-widening web of
distrust & anxiety, especially if employees begin
to suspect the budgets will not meet their needs.
Organization-wide participation in the budgeting
process often minimizes these types of anxiety
reactions.
When all managers are involved in budget
development, they are more likely to be satisfied
with their resource allocations.

Types of Budgets
Operating Budget Budget indicating the goods

& services the organization expects to consume

in a budget period. They usually list both physical
quantities & cost figures.
Financial Budget Budget detailing the money

expected to be spent during the budget period &

indicating its sources.

Operating Budgets
1) Expense Budgets Budget explaining where

money was applied.

Engineered Cost Budget Type of
expense budget that describes material &
labor costs of each item produced, including
estimated overhead cost. These are typically
used in manufacturing plants but can be
used by any organizational unit in which
output can be accurately measured.
Discretionary Cost Budget Type of
expense budget that is used for departments
in which output cannot be accurately
measured.

2) Revenue Budget Budget for projected sales

revenue, used to measure marketing & sales
effectiveness.
They consist of the expected quantity of sales
multiplied by the expected unit selling price of
each product.
3) Profit Budget or Master Budget Budget
combining expense & revenue budgets in one
unit.

Variable Versus Fixed Budgets

One difficulty with budgets is that they are often

inflexible.
To deal with this difficulty, many managers resort
to a variable budget. (flexible budget, slidingscale budget, & step budget).
Whereas fixed budgets express what individual
costs should be at one specified volume, variable
budgets are cost schedules that show how each
cost should vary as the level of activity or output
varies.
Variable budgets are therefore useful in
identifying in a fair & realistic manner how costs
are affected by the amount of work being done.

3 types of costs must be considered when

developing variable budgets:
Fixed Costs Those expenses unaffected by the
amount of work accumulated in the responsibility
center.
Variable Costs Expenses that vary directly with
the amount of work being performed.
Semivariable Costs Those expenses, such as
short-term labor costs, that vary with the amount
of work performed but not in a proportional way.

Auditing
Auditing is the process of appraisal.

External Audit Verification process involving

the independent appraisal of financial accounts &

statements.
Internal Audit Audit performed by the
organization to ensure that its assets are properly
safeguarded & its financial records reliably kept.