principles of management-controlling
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LOGO
Principles of ManagementControlling
Management Functions
Planning
Organizing Staffing Directing Controlling
What Is Control?
Control The process of monitoring activities to ensure that they
are being accomplished as planned and of correcting any significant deviations.
Need for control To measure progress
To uncover deviations
To indicate corrective actions
Need for Control
Adapt to environmental change
Limit the accumulation of error
Control helps the organization
Cope with organizational
complexity Minimize costs
Steps in the Control Process
Establishstandards
Measureperformance
Compareperformanceagainst standards
Maintain thestatus quo
Correct thedeviation
Changestandards
Determine needfor correctiveaction
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Steps in the Control Process Establish Standards
Control standard: A target against which subsequent performance will be compared.Control standards should be expressed in
measurable terms.Control standards should be consistent with
organizational goals.Control standards should be identifiable indicators
of performance.
Measure Performance Performance measurement is an ongoing process. Performance measures must be valid indicators (e.g.,
sales, costs, units produced) of performance.
Steps in the Control Process
Compare the Performance against Standards Define what is a permissible deviation from the
performance standard.
Utilize the appropriate timetable for measurement.
Determine the need for Corrective action Maintain the status quo (do nothing).
Correct the deviation to bring operations into compliance with the standard.
Change the standard if it was set too high or too low.
Types of Control Methods
Past oriented controls Post action controls
Measure results after the process
Can be used to plan future behavior in the light of past errors or successes
Accounting records, inspection of goods and services, etc.,
Future oriented controls Steering controls or feed- forward controls
Measure results during the process
They serve as warning post principally to direct attention rather then to evaluate.
Cash and fund flow analysis, on-time delivery, etc.,
Comparison of Control Methods
Inputs Process Outputs
Future oriented control
Past oriented control
-------------- Feedback __________ Feed forward
Control Techniques
Traditional Techniques
Budgeting Break Even Analysis Personal Observation Statistical Quality Control Internal and External Audits Balanced Scorecard Responsibility Accounting Financial Statements and Ratio Analysis
Modern Control Techniques
Linear Programming
Program Evaluation & Review Techniques (PERT)
Critical Path Method (CPM)
Benchmarking
Budgeting
Budgets are statements of anticipated results during a designed time period expressed in financial and non-financial terms.
The preparation of budgets is the step of establishing standards.
The budgeting process involves the use of cost standards. Purpose of budgeting:
Enable the actual financial operation of the business to be measured against the forecast.
Establish the cost constraint for a project, program, or operation.
Organization Budgeting
Boards of Directors
|
Top level managers
|
Middle level managers
|
Lower level managers
Budget department
or committee
Budgeting
Process of Budgeting
The various steps included in the preparation of budget are:
Top managers send down to the operating managers their views on the organizational goals, policies , resource position and its relationship with various environmental factors.
The lower-level or the operating managers prepare their budget proposals based on the guidelines.
The budget so prepared is sent to the top managers for their review , appraisal and approval.
Budgeting
If approved, the top managers coordinate these budgets with the overall budgets framed by them and prepare the master budget.
The master budget is then sent to the board of directors for their approval. Once approved, it is sent down the hierarchy again for its effective implementation.
Types of Budgets Operating budget: It relates to the operating
activities of an enterprise, which involve both revenue and expenses.
Financial budget: It predict various sources and uses of finance. It facilitates the working of operating budget.
Break Even Analysis
It involves the a chart which represents the overall volume of sales necessary to cover costs.
Break even analysis can be used both as an aid in decision making and as a control device.
The break-even point (BEP) is the point at which cost or expenses and revenue are equal.
BEP = TFC / (P-V)
Where,
TFC= Total fixed cost
P= Unit selling price
V= Unit variable cost
Personal Observation
Mangers can do close observation of subordinates while they are working.
Face-face interaction
It helps to know the worker’s attitude towards work.
It helps in correcting their work and methods, if necessary.
This technique is time consuming and costly.
Statistical Quality Control
It is statistical technique used to monitor quality of the products.
It is based on statistical theories and methods of probability to control the incoming materials, processes during production and final products.
It can be done in the following ways: Acceptance sampling
Process sampling
Control charts – X-Bar chart, R chart
Management Audit
Audit means periodic inspection of financial statements and verifying that the statement and are honestly and fairly prepared according to accounting principles. Audit thus provides the basis for control.
Two types of audit can be conducted by firm: External Audit
Internal Audit
Management Audit
External Audit: It refers to verification of financial statement. Company’s
assets, liabilities and capital accounts are checked and deviations are reported to managers for action.
Control is thus facilitated through verification of accounts against the standard principle. This is known as financial audit.
External audit checks fraudlent practices in preparing financial accounts.
Outside parties like, investors, bankers and financial institutions can enter into fair and honest dealing with the firm if its accounts are audited.
Management Audit
Internal Audit: It refers to verification of various statistical data and reports so
that correct and fair presentation of financial statements is made. It evaluates the firm's internal operations, determines where things have gone wrong and where corrective action is needed.
Objectives To appraise managerial efficiency with respect to objectives,
policies and procedures of the organization.
To asses whether organizational policies are being followed or not.
To evaluate management's performance with respect to standard performance.
Management Audit
If actual performance deviates from standard performance, to find out causes for the same.
To suggest remedial measures to remove deviation and improve managerial performance.
Balanced Scorecard
A performance measurement tool that looks at four areas- financial, customer, internal processes and people/innovation/ growth assets that contributes to a companies performance.
The four general perspective which have been proposed by balanced scorecard are as under: Financial perspective
Customer perspective
Internal processes perspective
Innovation and learning perspective
Balanced Scorecard
Limitations: Scores are not based on any proven economic or
financial theory. Balanced scorecard does not provide a bottom-line
score.
Responsibility Accounting
It divides the organization into small units where manager of each unit is responsible for achieving the targets of his unit.
These units are called responsibility centers and head of each responsibility centre is responsible for controlling the activities of his centre.
Performance of responsibility centre is judged by the extent to which targets of the centre are achieved .
There are four main types of Responsibility Centre are Control centre, Revenue Centre, Profit Centre and Investment Centre
Financial Statement
Financial statement depict the financial position of
the firm over a period of time, generally one year.
These statements are normally prepared along with
the last year’s statement so that the firm can
compare its present performance with the last year’s
performance and take necessary action to improve its
future performance.
As these statements are prepared at the end of the
financial year, as a measure of control, they provide
tips to managers to improve their future
performance.
Financial Statement
These statement offer information on the following aspects
Liquidity: The firm can know its cash position Financial Strength: Its assets and liabilities and its
equity position Profitability: The excess of revenue over cost
Two commonly used financial statement Balance Sheet: It is a statement of the company’s
financial position at a point of time, usually 31st of March. A balance sheet describes a company’s assets, liabilities and owner’s equity.
Financial Statement
Income Statement: An income statement depicts the company’s financial performance over a period of time(financial year : from April to march). It is a statement of company’s revenues and expenses.
Revenues are the inflows arising out of the company’s sale of goods and services.
Expenses are the outflows incurred to earn the revenues
Financial Ratio Analysis
Ratio: It means comparison of one figure with another relevant figure or figures. It may also be termed as number expressed in terms of another number.
No analysis is possible on the basis of absolute figures. Hence various ratios are calculated for financial analysis and control.
Some of such important ratios are as follows:-
Financial Ratios
Financial Ratios
Linear Programming
“linear programming is a planning technique that permits some objective function to be minimized or maximized within the framework of given situational restrictions.”
AX1 + BX2 ≤ Z
Requirements: Objective function. Constraints. Linearity. Non-Negativity. Finiteness.
PROGRAM EVALUATION AND REVIEW TECHNIQUE(PERT)
PERT: A time event network analysis system in which the various events in a project or program are identified with a planned time established for each.
Methodology: Preparation of the network Network analysis Scheduling Resource allocation Project control
Critical Path Method(CPM)
It is used for optimizing resource allocation and minimizing overall cost for a given project.
Procedure: Break down the project into various activities
systematically. Number all the events and activities. Calculate the earliest start time, earlier finish time,
latest start time and latest finish time. Determine total float time. Identify the critical activities and connect them with
double line arrow. Calculate total duration of project.
Benchmarking
Benchmarking: The search for best practices among the competitors or non-competitors that lead to their superior performance.
Benchmark: The standard of excellence against which to measure and compare.
The methodology adopted is as under: Identify the problem areas. Identify other industries. Identify organizations that are leaders in these areas.
Benchmarking
Survey companies for measure and practices. Visit the “best practice” companies to identify leading
edge practices. Implement new and improved business practices.
Gantt Chart
This chart system was developed by Henry L. Gantt. Gantt chart:
A bar chart that shows the time relationships between the “events” of a production program.
Milestone budgeting or milepost: Advanced technique of Gantt chart milestone breaks a
project down into controllable pieces.