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1 Control
2 Concept
Process of evaluating actual performance and, if necessary, taking corrective actions so that
the performance is in accordance with planned performance
Both backward looking and forward looking. Corrective actions suggested for future period
Nature, scope and limit of controlling function different at different management levels
Continuous process
Action-oriented
3 Process of Control
Establishment of Control Standards – Specify standards and standards of work performance
Measurement of Actual Performance
Comparing Actual and Standard Performance – extent of deviation and causes of such
deviations
Corrective Actions – eliminating negative factors and reviewing performance standards
4 Types of Control
Strategic and Operational Control
5 Principles of Effective Controlling
Integrating Strategic Planning and Control System – strategic objectives and performance
measures must be consistent
Identifying Strategic Control Points – Control what is significant and affects objective
realisation, don’t try to control everything
Organizational Communication – Effective communicate expectations and actual performance
up and down the command chain
Motivational Dynamics – Design control system in tune with the needs of the people and
keeps them motivated
6 Essentials of Effective Control System
Reflecting Organizational Needs
Forward Looking
Promptness in Reporting Deviations
Pointing out Exceptions at Critical Points
Objective
Flexible
Economical
Simple
Motivating
Reflecting Organizational Pattern
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7 Control Techniques
Traditional techniques – there is a long history of companies using these. For example,
budgetary control.
Modern techniques – companies have been using them relatively recently. For example,
PERT/CPM.
8 Operations Level and Overall Organization Level
Operations is concerned with converting inputs into outputs
Control techniques can be used both during (quality control) and after (budgetary control)
completion of an operation
Overall control techniques apply to the whole organization level, as operational control
techniques which are usually partial
Overall control techniques can be both financial and nonfinancial, as can operational control
techniques
9 Budgetary Control
Process of comparing the actual results with the corresponding budget data in order to
identify whether both match or differ and rectify factors causing mismatch
Not just cost control
Establish a plan or target of performance (in quantified terms) which becomes the basis of
measuring progression of activities
Master and Functional Budgets, Capital and Revenue Budgets, Long-term and short- term
budgets, fixed and flexible budgets
10 Benefits of Budgetary Control
Tool for Planning
- Forces managers to plan their activities with concrete numerical goals with proper use of
resources and effective delegation
Tool for Control
- Allows managers to evaluate performance vs. goals, pinpoints deviation including possible
reasons for improvement
Aid to Coordination
- Helps in coordinating divisional plans with overall goals, exchange of information among units,
evaluating how performance deviations at individual/unit level affect organizational objectives
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evaluating how performance deviations at individual/unit level affect organizational objectives
and coordinating improvement actions which are synergistic
11 Problems in Budgetary Control
Planning Problems
- Uncertainty of future, lack of reliability of assumptions, changing situations, inflexibility
leading to loss of efficiency and effectiveness
Operational Problems
- guesswork, motivation of employees, organizational morale, excessive paperwork
12 Control Through Costing
Costing is concerned with cost determination and indicates the approximate cost of a process
or a product under existing conditions.
Standard costs are predetermined operation costs computed to reflect quantities, prices, and
level of operations.
Includes material, labour and overheads.
Set standards, determine actual costs, measure deviation, determine reason for deviation if
beyond specific limit, take corrective action if needed
13 Benefits of Control Through Costing
Provide basis for measuring operating performance
Easy comparability
Helps in cost reduction
Basis for budgeting
Incentive wage system and bonus plan
14 Limitations of Control Through Costing
Standard costs are expensive to set up and difficult to operate
Standard costs require frequent revisions if the conditions change
Some type of resistance can be expected from people, due to implementation issues,
motivation issues, issues related to incentive management
15 Break-even Analysis
Break-even point = Fixed costs / Contribution per unit
Contribution = Sale price per unit – Variable costs per unit
Margin of safety = Total sales proceeds – Sales at B.E.P.
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Profit = Sales – Total costs (fixed + variable)
16 Benefits of Break-even Analysis
Determining profit at different levels of production capacity utilization
Determination of break-even point
Determination of level of sales to earn pre-determined profit
Comparison performance of different product lines and services
Pricing decisions
Product mix optimization
Capacity expansion decisions
17 Limitations of Break-even Analysis
Fixed costs themselves may vary at different times and variable costs per unit of production
may change.
Impact of learning curve on production costs is not taken into account
Selling all units at a predetermined price is often not a realistic assumption
For multiple products with shared production, it is difficult to calculate fixed and variable costs
of each product
18 Inventory Control
Inventory consists of raw materials, work-in-progress (semi-finished goods) and finished
goods
Optimum level of inventory depends on organization, demand for the product, length of
processing cycle, availability of raw materials etc
Just-in-time (JIT) inventory system, invented in Japan with limited applicability in Indian
context
ABC analysis and economic order quantity
19 ABC Analysis
Group A – high value items but low in number
Group C – low value items but high in number
Group B – fall in between with average value and number
Usually, group A gets more focus because of high value but criticality to production process is
also an important factor, which can be A, B or C
20 Economic Order Quantity
Size of order that will result in the lowest total of order cost and inventory carrying cost
EOQ = 2SO
C
Where S = total quantity of materials required
O = ordering cost per order
C = carrying cost per unit
Limitations: time taken by supplier is assumed to be constant, consumption of raw material
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Limitations: time taken by supplier is assumed to be constant, consumption of raw material
assumed to be uniform through the year, lead time assumed to be negligible – these may not be
the case in the real world
21 Safety Stock
Stock of inventory maintained by an organization to continue operations without interruptions
Seasonal variation in the demand of safety stocks
Criticality of raw materials in the production process
Delivery schedule of suppliers and lead time variability
Alternative sources of supply in case of disruptions in regular supply
Effect of seasonal variation on the supply of raw materials
22 Financial Ratio Analysis
Liquidity ratios – organization’s ability to pay its short-term debts
Activity ratios – how funds of the organization are being used
Leverage ratios – relative amounts of funds in the business supplied by creditors/financiers
and shareholders/owners
Profitability ratios – ability of an organization to earn profit in relation to its sales and/or
investment
23 Liquidity Ratios
Current Ratio = Current Assets / Current Liabilities
Quick Ratio = Quick Assets / Current Liabilities
where Quick Assets = Cash and Cash Equivalents + Marketable Securities + Accounts Receivable
Limitations: High A/R may cause the QR to be high but depending on due dates, there may still
be a cash runout risk
24 Activity Ratios
Inventory turnover ratio
Receivable turnover ratio
Payable turnover ratio
Working capital turnover ratio
Assets turnover ratio
25 Leverage Ratios
Debt-equity ratio
Debt-total capital ratio
Interest coverage ratio
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26 Profitability Ratios
Net profit margin
Gross profit margin
Return on investment
Return on equity = Net Income/ Average Shareholders’ Equity
27 Responsibility Accounting
Performance of responsibility centers
Costs assigned to responsibility centers rather than to products
Cost centers, profit centers and investment centers
Controllable vs. uncontrollable costs
28 Internal Audit
Encompasses whole range of activities of the organization
Ensuring accounts properly reflect the facts, appraises policies and procedures, use of
authority, quality of management
Serves the purpose of control
May lead to faulty conclusions, partly due to accounting bias
