31 Techniques of Controlling

Pooja Malhotra

1. Learning Outcome:

After completing this module the students will be able to:

• Understand various controlling techniques along with their implications.

2. Introduction

Controlling is the last and an important function of managerial process. The purpose of controlling is to bring the actual performance to predetermined standards. For this an organisation has to adopt an effective controlling technique. In present competitive scenario, it is important for an organisation to have such a system of control because of cut-throat competition from competitors. Hence, it is the need of an hour to adopt an effective system of controlling for enhancing the profitability by reducing the costs to the minimum.

There are a number of controlling techniques available for an organisation. The techniques can be classified under two major categories:

a. Traditional Techniques

b. Modern Techniques

Traditional techniques include;

i) Personal Observation

ii) Setting examples

iii) Plans and policies

iv) Organisation charts and manuals

v) Disciplinary system

vi) Statistical data

vii) Written instructions

viii) Special reports and records

ix) Operational audit

x) Financial statements

xi) Break-even analysis

xii) Cost Accounting and Cost Control

xiii) Budgets and budgetary control Modern Techniques include;

Modern Techniques include;

i) Return on investment

ii) Management audit

iii) Management information system

iv) Zero base budgeting

v) PERT/CPM

3. Traditional Techniques of Controlling

Following are the traditional techniques of controlling:

3.1  Personal Observation

Personal observation is the oldest and most important controlling techniques. Under this technique, managers or superiors personally visit the work place irregularly and observe the performance of employees. They check if the work is going as per plans or not. If any discrepancy is found, they give instructions on the spot immediately. Personal observation technique results into first hand evaluation of work. But control through this technique is time consuming and may not be applicable in all situations.

3.2  Setting Examples

Managers set their own examples of good performance before their employees and expect the same from them. For example if managers show their examples of punctuality before their employees, they will also follow the same easily. Hence, the exemplary behaviour of managers can control the behaviour and actions of their employees.

3.3  Plans and Policies

The organisational plans, policies, procedures, strategies, rules etc. govern and control all the activities of the organisation. They play an important role in controlling activities and prevent deviations and ensure the conformity of actions with plans and policies.

3.4  Organisation Charts and Manuals

Organisation charts and manuals sets out organisational relationships, responsibilities and duties of the employees of the organisation. These documents are also used to control the performance of employees and fixing responsibilities.

3.5  Disciplinary System

Disciplinary system comprising punishments, criticism, disciplinary actions etc. act as an important tool of control. It acts as a negative control tool. Where employees commit mistakes repeatedly and mistakes are crucial, strict disciplinary action is taken by the managers. This technique of control should be used by managers carefully as it results into fear in the minds of employees. It can cause reduced morale also.

3.6  Statistical Data

Statistical data is also used as an important controlling technique. Data is collected and presented in the form of tables, charts, figures, and graphs. Then it is analysed with the help of various statistical techniques like measures of central tendency, measures of dispersion, correlation, regression etc. to take certain decisions in the fields of production, quality, inventory, sales etc.

3.7  Written Instructions

Instructions in written form are issued by managers and superiors from time to time for the subordinates. Instructions are issued in the form of notices, letters, circulars, bulletins, etc. they provide information and instructions in the light of changing rules and situations. Written instructions act as supplementary control techniques.

3.8  Special Reports and Records

Special reports and records relating to different operations of the concern are also prepared in addition to normal reports and records. Experts prepare these reports. For example, in case of a serious problem in the organisation, expert committee may be appointed by the management to go into the depth of the problem and suggest the ways or means to solve the problem. The investigation reports relating to a specific problem or area are the examples of special reports and records.

3.9  Operational Audit

Audit is an effective controlling tool. Operational audit refers to audit of internal operations of the organisation. The organisation conduct internal audit with the help of some specialised internal staff or may also hire the services of external audit team. Internal audit gives a review of overall working of the organisation. It depicts whether organisational policies, plans, procedures etc. are being adopted by the employees in their day to day working or not. Thus internal audit provides an internal check over the operations of the employees and hence improve their efficiency.

3.10 Financial Statements

Financial statements comprise Profit and Loss account and Balance Sheet. These statements show the true picture of the organisation in the form of working and financial position of the
business. These statements also act as controlling technique. For example, the comparison and analysis of statements of different time periods reveal the trends in performance and depict the present position of the enterprise. This comparison and analysis can be used for controlling the financial position of the concern.

3.11 Break-Even Analysis

Break-Even analysis is a widely used technique of controlling. It is used to find out break-even point where the total cost is equal to total revenue, i.e. the point of no loss no profit. This point is used to identify the number of units of a product that must be sold to generate enough revenue so as to cover costs. Any production above this point will yield profits. This technique basically shows relationship between cost-volume-profit. With the help of this technique managers examine the impact of increase or decrease of units sold and increase or decrease in price or costs on the amounts of profits. Break Even analysis is done either mathematically or graphically. The formula to calculate beak even point is as follows:

Break-even point can also be presented graphically. The Break-even chart presents the profitability of an organisation at various levels of activity or output and indentifies the point where there is neither profit nor loss. In the following diagram units of output sold (or sales volume) are shown on x- axis and cost, revenue and profits (in Rupees) are shown on y-axis. The horizontal line represents fixed costs. TC is the total cost of sales which includes fixed cost, it moves upwards proportionately with output. The TR line represents total revenue which moves upward from the origin of axis. The point of interaction of total cost line and total revenue line is the break-even point.

Every management tries to reach the break-even point as soon as possible. Sales over and above this point depict the margin of safety or profit area. Hence, this chart is useful to know relationship between revenue, cost and profit as it shows probable level of profits at different levels of output.

The limitation of breakeven analysis is that it takes into consideration only fixed and variable costs. The impact of semi-variables costs is not taken into account. It also ignore impact of other variables like marketing aspects, capital invested, etc. It also assumes fixed cost to remain constant, but it doesn’t remain fixed in present scenario of changing technologies, size of the firm and other factors.

3.12 Cost Accounting and Cost Control

Cost accounting is a technique to determine the cost of a product, process, or a unit and cost control. Cost control includes control over costs by using various techniques. One such technique is standard costing. It includes determination of standard (or predetermined) costs. Standard costs are determined in respect of total cost as a whole as well as for each element of cost, i.e., material, labour and overheads. When actual costs are incurred, these are compared with standard costs and variations, if any, are found. The standard costing involves various steps which are explained as follows:

a) In first step of standard costing, standards or benchmarks for costs are fixed. Standards are fixed for each element of total cost on the basis of past records or through experiments and thorough analysis.

b) In second step, the actual cost is determined. The information is taken from cost accounting records.

c) A comparison between standard costs and actual costs is done to find out any deviations between the two. If there is no variation, or the variation is within prescribed and acceptable limits, no further action is required.

d) If the deviation is beyond the acceptable limits, it is further analysed. The causes for such variation are found and responsibility is fixed accordingly.

e) Future course of action is planned to avoid such deviation in future. It may also include review and revision of standards.

Hence, standard costing is an important tool of controlling of costs and wastages in the hands of managers.

3.13 Budgets and Budgetary Control

Budgets are used as a controlling technique by most of the organisations. A budget represents a statement of expected results expressed in numerical terms. It is formed in advance for the period to which it will apply. Budget serves as a benchmark against which the actual results will be compared and the performance of the organisation can be identified. Budgets make management by exception possible. Budget is used as a technique of planning as well as controlling. As a tool of planning, budget depicts the plans in numerical figures which are to be achieved. As a tool of controlling, budget serves as a standard for measurement and comparison of actual performance. It helps in delegation of authority and fixation of responsibilities.

Budgeting is the process of making budgets. Budgets are prepared for various operations of the organisation, like, sales budget, production budget, financial budget, overheads budget, personnel budget, etc.

Budgetary control is a technique to use budgets for controlling activities. Budgetary control is the process of establishing various budgets for different operations of the concern for the future period, and then actual results are recorded. The actual figures are compared with the budgeted one and discrepancies are found out and remedial actions are taken.

3.13.1 Objectives of Budgetary Control

Budgetary control is an important tool of planning as well as of controlling. The main objectives of budgetary control are as follow:

a. To determine business policies for the achievement of desired objectives during a particular period of time. It sets out definite targets of performance and also act as a guide to the actions of others.

b. To help in co-ordination of activities and efforts of different departments.

c. To control the activities of the people to ensure the conformity of actual results with budgeted results.

d. To operate various cost centres and departments efficiently.

e. To correct the deviations from the predetermined standards and also provide a basis for revision of policies and plans.

Budgetary control helps organisations to enhance efficiency by controlling costs and wastages. It increases efficiency of the organisation. Hence, budgetary control is an important technique in the hands of management.

4. Modern Techniques of Controlling

The modern techniques of controlling are as follows:

4.1  Return on Investment (ROI)

Return on Investment (ROI) is a controlling technique to control the overall performance of an organisation. ROI measures the rate of return on investment. Under this technique, profit is considered in terms of capital employed. Following is the formula to calculate ROI:

ROI = Net Profit / Total Investment

ROI is used to evaluate the efficiency of an investment. The managers can compare ROI between two or more periods of the organisation or of the two or more other organisations to draw certain conclusions regarding the efficiency. Higher ROI reflects higher performance as compared to concerns with lower ROI. However, while doing comparisons over period, it should be considered that value of money differs in different periods. Hence, time value of money can be incorporated. Secondly, while comparing with other organisations, the terms used in ROI i.e. what components are included in profits and investments and in which units. On the basis of such calculations, mangers control the activities of their own organisation.

4.2  Management Audit

Management audit evaluates the performance of various management functions and processes. This audit intends to examine and review the management policies and actions on the basis of certain objective standards. It is a comprehensive audit which reviews all the aspects of management. Management audit is a systematic and independent review activity within an organisation which appraises the operations of all the departments. The objective of management audit is to help all managerial levels to perform their responsibilities effectively by providing them objective analyses, appraisals, recommendations regarding the activities reviewed. Management audit usually contains the following steps:

a. The first step of management audit is to identify the objectives of the organisation. Objectives of organisation should be clearly defined.

b. The overall objectives of the organisation are divided into various targets and plans for various segments.

c. The organisational structure is also evaluated to check whether it can achieve the overall objectives and targets effectively. The managers also identify each functional area as a responsibility centre.

d. The performance of each responsibility centre is examined. It is compared with the objectives and targets.

e. Pragmatic course of action is suggested on the basis of above examination. Motivation system is also devised to provide incentives to various personnel as per the results of management audit.

Management audit is result oriented. Management audit helps to assess the performance or progress of various mangers and accordingly, a suitable incentive system can also be linked to it. The performance is evaluated by relating inputs like man-hours, materials, wages etc. with outputs like quantity, return etc. Hence, the thrust of management audit is on results. The management audit acts as an important tool of management control if undertaken properly. Following techniques can be used for conducting management audit:

a. Inquiry: Management auditor prepares a questionnaire containing relevant questions for obtaining relevant evidences. Relevant questions may be asked in such a way as to provide answers to a hidden problem.

b. Examination: in many situations, the management auditor examines records and documents. The need may arise to cross check the documents along with information obtained from inquiry.

c. Confirmation: Management auditor may get written or oral information from various persons to confirm the information acquired by him.

d. Personal Observation: in many cases, management auditor may have to go for personal observation of various activities and situations in the organisation.

e. Correlation of Information: the information collected from various techniques has to be correlated so as to draw conclusions.

4.3  Management Information System (MIS)

In present age of information technology, Management Information System or MIS is an important technique for providing quick information to the management. MIS provides all necessary information to the managers and superiors at different levels to help them to discharge their functions like planning, organising, decision making and controlling properly. MIS is a scientific way of collecting, organising, processing, and storing and communicating information to various levels of management so that decisions can be taken by the managers in time. MIS helps in increasing efficiency of the organisation by providing timely, accurate and relevant information for doing various operations of the organisation.

The importance of having an effective MIS also lies in the presence of changing economic, political, social and technological conditions. Timely information helps the organisations to take advantages of various opportunities available outside and to overcome threats by taking proper actions in time. MIS also provides internal information relating to various activities and also shows the manner of utilisation of resources in the organisation. It shows the performance of various resources. The information relating to idle time, labour turnover, wastages etc. can also help the managers to control various costs. In present information scenario, it is very important to have an effective management information system in the organisation. It will be very difficult to manage and control the operations without an effective MIS.

4.4  Zero Base Budgeting (ZBB)

Zero base budgeting or ZBB is a new approach of budgeting. It is used as a control technique. Under ZBB, in determination of budgets, information or figures of previous periods is not taken into account. Budgets are prepared afresh without considering the information from previous years or periods. Budgets are prepared in the light of current situations.

ZBB starts with a base taken as zero. In this technique, all activities are analysed in terms of their needs and costs. In the budget, every expense has to be justified in the presence of prevailing conditions. Unlike conventional budgeting, where previous year inefficiencies can enter, zero base budget starts from scratch and is prepared every time. Following are the steps involved in the process of zero base budgeting:

a. Determination of the objective of budgeting: the first step of ZBB is to determine the objective of budgeting very clearly. Objective may be to reduce cost, it may be accomplished by cutting down salaries, or by dropping an unprofitable product or project. Hence, objective of budgeting should be clearly defined at the first instance.

b. Determination of Scope of application: scope of application of ZBB is decided. ZBB can be applied to whole organisation or to some specific areas.

c. Development of Decision Units and Decision Packages: in next step, decision units are developed and for each decision unit, decision packages are determined. A decision unit is that for which cost benefit analysis can be done so as to arrive at a decision regarding continuing or discontinuing any particular unit. A decision package involves ranking of all activities in order of their importance based on cost benefit analysis.

d. Allocation of resources: finally, resources are allocated according to ranking of decision packages to have optimum results.

Ranking of projects on the basis of cost benefit analysis help the management to eliminate the unnecessary expenditures. Hence, management uses ZBB as a controlling technique to achieve organisational objectives in an efficient manner.

4.5  PERT/CPM

The project management techniques, PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are useful for managerial functions like planning, scheduling and controlling. These techniques help the mangers in completing the projects on schedule. Presently, organisations are involved in various projects which are very large in size and take more time. Companies make use of these networking techniques to schedule the complex projects which involve many activities. Though the two techniques differ slightly, but both are based on same principles.

PERT/CPM is a tool used to plan, schedule and control large projects consisting of a number of independent activities and with uncertain completion time. In this technique, a network diagram is prepared that shows the sequence of activities needed to complete a project and time and cost associated with each activity. Hence the purpose is to identify critical activities which are essential to perform and complete the project and to identify the time (least possible) and cost associated with each activity. Thus, these techniques not only help in planning but also help managers to monitor and control the progress of the project, find out any obstacles and provide proper resources to complete the project as per schedule. The major limitation of PERT and CPM technique is that they can not be effectively applied in manufacturing operations as the main focus of these techniques is on time and not on quality which is a key factor in manufacturing.

5. Summary

Every organisation needs to have an effective controlling system for its efficient working. For this purpose, an organisation has a number of controlling techniques. Controlling techniques are mainly of two types: traditional techniques and modern techniques. The traditional techniques include, Personal Observation, Setting examples, Plans and policies, Organisation charts and manuals, Disciplinary system, Statistical data, Written instructions, Special reports and records, Operational audit, Financial statements, Break-even analysis, Cost Accounting and Cost Control, Budgets and budgetary control. While the modern techniques include Return on investment, Management audit, Management information system, Zero base budgeting and PERT/CPM. A combination of these techniques can also be applied by the organisations to have a proper control over the activities of the organisation.

References:

• Nolakha, R. L. (2008), Principles of Management, 2nd Edition, Ramesh Book Depot, Jaipur.
• Robbins, S., Bergman, R., Stagg, I. and Coulter, M. (2014), Management, 7th Edition, Pearson Education.