controlling in management sciences

7/30/2019 Controlling in Management Sciences

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Lecture 11

October 30, 2011

Controlling


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Chapter Objective

Explain different financial and non-financial systems Describe some of the important elements for

establishing financial controls

Explain balance sheets, income statements and

ratios Explain different control systems


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Advanced Organizer

Decision Making

Planning

Organizing

Leading

Controlling

Management Functions

Research

Design

Production

Quality

Marketing

Project Management

Managing Technology

Time Management

Ethics

Career

Personal Technology

Managing Engineering and Technology


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Controlling Definition

Compelling Events to Conform to Plans

Process of measuring performance and taking actionto ensure the desired results

It is a critical function as it ensures that all themanagement functions Planning, Organizing, Leadingare performed as planned


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Control Process

Establish Performance StandardsPlanning

Measure Actual Performance

Compare Performance with StandardsMeasurement of VarianceFeedback and Analysis

Corrective Action


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Control:Closed Loop vs. Open Loop

C losed LoopAutomatic or cybernetic (communication &control)

Monitors or manages process by internal,

self-regulating system Essential feature is strong feedback system

Home thermostat system

Open Loop Requires external monitoring or agent to

activate control

Cruise control on an automobile


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Timing of Control Feedback Control (Output)

Measures system output and variance withpredetermined standard

Adjusts system to maintain variance within aspecified range

Screening Control (Concurrent) Control applied concurrently with effort being

controlled - baseball coach guidance

Feed-forward Control (Steering or Preliminary)

Attempts to predict the impact of currentactions/events

Current decisions are refined to facilitate goalattainment

Eg: preventive maintenance


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Characteristics of Good Control Systems

Effective Efficient

Timely

Flexible Understandable

Tailored

Highlight deviations

Lead to corrective actions


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Three Types of Control

Financial

Human Resource

Social


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Financial Control: Budgets

Plans and resource allocation for future Budgeting process force managers to thnk

future operations in quantitative terms

Most common and universally used controlsystems -first stepin financial control

Financial Budgets: Identify sources of cashand intended uses

Cash Budgets estimates of future revenue andexpenditures

Capital Expenditure Budgets investment on plant,machinery etc.

Operating Budget expenses, revenue, profit budget


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Responsibility Centers

Cost Centers Managers primary concern is control of costs

Revenue Center

Managers primary concern is attainingrevenue target

Profit Center

Manager has more freedom to manipulate

costs to increase profit


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Budgeting Process

Top Management Estimates of future sales and production

Priorities used to meet new objectives

Middle Management Prepares proposed revenue and expense budgets

designed to attain estimated sales/production levels


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Audits of Financial Data

Third step in financial control

Investigations of an organizations activities

Verify accuracy of firms financial data

May be internal or external Internal audits also evaluate organizational

efficiency


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Financial Control --- Cost Accounting

Finding the cost of alternative methods

Historical accounting systems to determine theprofitability and hence tax liability

Product Units

Labour

Hour/Unit Rate Amount

A 4,000 1 10 40,000

B 1,000 1 10 10,000

50,000

Set up cost say $4000 for each product

Supervisory cost $1 for each labor hour

Higher profitability required for Product B


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Financial ControlThree Major Statements

Balance Sheet Shows the firms financial position at a particular

instant in time

Assets and liabilities

Income Statement Shows financial performance of a firm over a period

of time

Cash Flow Shows where cash comes from and what it is used

for


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Balance SheetSterling Chemicals Inc. , December 31, 2008

ASSETS

Current Assets

Cash 150,000

Securities (at cost) 100,000 250,000

Accounts Receivable 400,000

Inventories (at lower cost or market)Raw materials and supplies 200,000

Work in progress 180,000

Finished goods 300,000 680,000

Prepaid expenses 30,000

Total current assets 1,360,000

Property, plant and equipment 4,500,000

Less: Accumulated depreciation and depletion 2,400,000

Net property, plant and equipment 2,100,000

Total Assets 3,460,000


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LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities

Accounts Payable 100,000

Installments due within one year of debt 30,000

Federal income and other taxes 250,000

Other accrued liabilities 120,000

Total current liabilities 500,000

Long Term Debt 1,000,000

Total Liabilities 1,500,000

Stockholder's equity

Capital stock 500,000

Retained earnings 1,460,000

Total equity 1,960,000

Total Liabilities and Equity 3,460,000

Balance SheetSterling Chemicals Inc. , December 31, 2008


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Income StatementSterling Chemicals Inc. , January 1-December 31, 2008

Gross Sales 3,200,000

Less returns and allowances 150,000

Net Sales 3,050,000

Lesss expenses and cost of goods sold

Cost of goods sold 2,000,000

Depreciation and depletion 250,000

Selling expenses 100,000

General and administrative expenses 200,000 2,550,000Operating Profit 500,000

Plus interest and other income 60,000

Gross Income (EBIT) 560,000

Less interest expenses 20,000

Income before taxes (EBT) 540,000Provision for income taxes 260,000

Net Income 280,000

Retained earnings, January 1, 2008 1,500,000

1,780,000

Dividend paid 320,000

Retained earnings, December 31, 2008 1,460,000


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Ratio Analysis

Ratios of two financial numbers taken from financialstatements and compared to industry averages

Framework for 1) historical comparison within the firmand 2) external benchmarking relative to industry

Can also be used for target setting for a firm They must be used carefully especially considering the

firms business

There are major 4 types of ratios Liquidity: Measures ability to meet short term obligations

Leverage: Measures the level of debt in a firms financialstructure

Activity: Measures how effectively a firm uses its resources

Profitability: Measures profit producing performance of firm


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Ratio Analysis, cont.

Liquidity Ratio: Measures ability to meet short term obligations

Current ratio is most widely used measure of liquidity ratio.

A CR of around 2.0 is used a high CR shows that the assetsare not efficiently unemployed

Leverage:

Measures the level of debt in a firms financial structure Relative importance of stockholders and outside equity as a

source of capital

Activity: Measures how effectively a firm uses its resources or assets to

produce sales or how fast inventory is turned into sales

Profitability: Measures profit producing performance of firm

Net income as percentage of sales

Earning per share is also used widely


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Ratio Analysis, cont.Liquidity Ratio

Current Ratio Current Assts 1,360,000Current Liabilities 500,000

Acid Test Ratio Current Assts - Inventory 680,000

Current Liabilities 500,000

Leverage Ratio

Debt-to-Assets ratio Total Debt 1,500,000Total Assets 3,460,000

Activity Ratios

Inventory turnover ratio Cost of goods sold 2,000,000

Inventory 680,000

Assets Turnover Net sales 3,050,000

Total assets 3,460,000

Accounts receivable turnover Net sales 3,050,000

Accounts receivable 400,000

Profitability Ratio

Profit margin Net income 280,000

Net sales 3,050,000

=2.72

=1.36

=0.434

=2.94

=0.88

=7.63

=9.18%


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Non-financial Controls

Management Audits Evaluate efficiency

Check the policies and procedures

Human Resources Accounting Quantifies the value of human resources investment

Costs of recruiting

Costs of training

Costs of process improvement


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Non-financial Controls

Social Controls Standards the existence of standards (and

knowledge by general workers about it)

Comparison with outcomes (including feedback

of performance to the individual not just tomanager)

Corrective action individual have the tools, theautonomy, and the motivation to make self

corrections


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Other Non-financial Controls

Effectiveness of research activities Systems for drawing release and engineering

design

Inventory control Quality control

controlling in management sciences

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