Unit 5

Concept, Types of control, Techniques of controlling

Budgetary and non-budgetary control techniques

Factors affecting Controlling;

Managing Productivity- Cost control, Purchase control, Maintenance control

Developing a Quality Control System – Total Quality Control

Concept, Types of control, Techniques of controlling

• According to Peter Drucker:

• Control relates to direction.
• Control deals with expectations, that is, with future.

• According to Reeves and Woodward:

• Control refers to the task of ensuring that activities are producing the
desired results. Control in this sense is limited to monitoring the
outcome of activities, reviewing feedback information about this
outcome, and if necessary, taking corrective action.
Features:
• Control is forward looking because one can control future happenings
and not the past.
• Control is an executive process because each manager has to perform
control function in the organization.
• It is a continuous process.
Types of control
• Control may be of different types and these can be classified on the
basis of elements to be controlled and stages at which control can be
exercised in controlling the work outcome.
• Based on elements- Strategic and operational control
• Based on stages- feedback control, feedforward control and
concurrent control.
Strategic and operational control
• Strategic control looks at the strategy of a process, from
implementation to completion, and analyzes how effective the
strategy is and where changes can be made to improve it. Where as,
Operational control focuses on day-to-day operations.
• Feedforward control- taking corrective action before a particular sequence
of operation is completed. Thus, it attempts to remove the limitations in
taking a corrective action.

• Concurrent control- taking the corrective action or making adjustment while

the programme is still in operation and before any major damage is done.

• Feedback control- based on the measurement of the results of an action.

Based on this measurement, if any deviation is found between performance
standards and actual performance, rhe corrective action is undertaken.
Techniques of controlling
• Techniques of controlling is divided into 3 major parts:
1. financial control-
a) budgetary control
b) Control through costing
c) Break even analysis
d) Responsibility accounting
e) Internal audit
• 2. operating control – quality control
• 3. Inventory control-
a) ABC analysis
b) Economic order quantity
c) Time event network analysis
d) PERT/ CPM
FINANCIAL CONTROL
• Financial control is relevant for those aspects of business operations
whose outcomes are expressed in monetary terms.
1. Budgetary control- derived and use of budgets.
• According to Terry- it is a process of comparing the actual results with
the corresponding budget data on order to approve accomplishments
or to remedy differences by either adjusting the budget estimates or
correcting the cause of the difference.
• 2. control through costing- it involves the control over costs in the
light of certain pre-determined costs usually known as standard costs.

• Standard costs are pre-determined operation cists computed to

reflect quantities, prices, and level of operations.

• Such standards have various components- material, labour and

overheads.
• 3. Break even analysis- is concerned with the cost-volume- profit
relationships.
• It magnifies a set of relationships of fixed costs, variable costs, price
level of o/p, and sales mix to the profitability of the organization.
• Break even point= fixed costs/ contribution per unit.
• 4. Responsibility accounting- in this, each person is responsible for his
area of operation, and for effective control, he must know what his
costs should be and what his costs were.
• In responsibility accounting, costs are assigned to responsibility
centres rather than to products, and a clear distinction is made
between costs that are controllable by the head of the responsibility
centre and the costs which are not controlled by him.
• 5. Internal audit- is carried out by managers themselves or by special
staff appointed for this purpose.
• Internal audit ensuring that accounts properly reflect the facts, also
appraises policies, procedures, use of authority, quality of
management, effectiveness of methods, special problems, and other
phases of operations, the latter aspects being more emphasised in
present day internal audit.
Operating control
• Operating control tries to ensure that :
• 1) products and services are produced of good quality which is
ensured through quality control,
• 2) products and services are produced with minimum possible costs
and in required quantity which is ensured through cost control and
inventory control,
• 3) products and services are produced at the required time which is
ensured through time-event network analysis.
Quality control
• Quality control means focusing on the production of increasingly better
products and services at progressively more competitive prices.
• Techniques- divided into 2 parts. One is statistical quality control and
second is, inspection control.
• Statistical quality control- is a method of measuring and continuously
improving work process before the final inspection of the product.
Therefore, it’s a prevention as well as remedial.
• Inspection control- is applied at the stage of raw materials as well as at the
stage of finished products or in between. In this, the quality control
incharge, may be quality control manager or inspector, seeks to determine
the acceptability of parts, products or services. This may be used for raw
material or for final product.
Quality control through quality circle
• Group of employees that meets regularly to solve problems affecting its
work area.

• This group carries on continuously as a part pf organization wide

control activities, self development and mutual development, and
control and improvement within the workplace utilising quality control
techniques with all the members participating.

• Generally, 6 to 12 volunteers from the same work area make up the

circle.
Inventory control
• Inventory consists of raw materials, work-in-progress, and finished
products.
• Inventory is kept at a particular level to meet future needs of the
organization.

• In 1970s, Japanese introduced the concept of just-in-time inventory

system, known as Kanban in Japanese language.
1. ABC analysis
It is a widely used technique for classifying different items.
Distribution of ABC class
ABC class Number of items Total amount required
A 20 ％ 60 ％
B 20 ％ 20 ％
C 60 ％ 20 ％
Total 100 ％ 100 ％
2. Economic order quantity
The economic order quantity (EOQ) model is used in inventory
management by calculating the number of units a company should add
to its inventory with each batch order to reduce the total costs of its
inventory.
• 3. Time event network analysis
It helps to know how the parts of a programme fit together during the passage
of time and events.
To ensure that the programme or project is completed within the stipulated
time.

There are three major techniques for this analysis:

Gantt chart,
Milestone budgeting,
PERT/CPM
4. PERT/ CPM

• Programme evaluation and review technique was developed by the special

project office of the US navy in 1958.
• Almost at the same time, engineers at Du Pont Company, USA, also developed
CPM (Critical path method).
• Though there is some basic difference between 2, but both utilise the same
principles.
• In PERT, uncertainty in the duration of activities is allowed and is measured by 3
parameters- most optimistic duration, most likely duration, and most
pessimistic duration.
• PERT/CPM is used either to minimise total time, total cost and minimise cost for
a given total time, minimise time for a given cost, or minimise idle resources.
Factors affecting controlling
• 1. does not reflect organizational needs
• 2. does not look forward.
• 3. does not identify the critical points of the controlling process.
• 4. lack in objectivity.
• 5. lack in flexibility.
• 6. lack in economical and lack in worth of its costs.
• 7. lack in motivating the employees.
• 8. lack in reflecting organizational pattern.
Budgetary and non-budgetary control techniques

• According to Brown and Howard, “Budgetary control is a system of

controlling costs which includes the preparation of budgets,
coordinating the departments and establishing responsibilities,
comparing actual performance with the budgeted and acting upon
results to achieve maximum profitability.”
Techniques of budget control
Types of budgetary controlling techniques are classified into 3 parts.
1. Financial Budgets.
2. Operating Budget.
3. Non-Monetary Budgets.
1. Financial Budgets

• Such budgets detail- where the organization expects to get its cash
for the coming time period and how it plans to spend it.

• sources of cash include- sales revenue, the sales of assets, the

issuance of stock, and loans.

• the common uses of cash are to purchase new assets, pay expenses,
repay debts, or pay dividends to shareholders.
Types of Financial budgets :
A. Cash budget- This is simply a forecast of cash receipts and
disbursements against which actual cash “experience” is measured.
• Cash budget shows the availability of excess cash, thereby making it
possible to plan for profit-making investment of surpluses.
• B. Capital expenditure budget- This type of financial budget
concentrates on major assets such as a new plant, land or machinery.
• All organizations, large or small, business or non-business, pay close
attention to such budget because of the large investment usually
associated with capital expenditure.
• C. The balance sheet budget- It forecasts what the organization’s
balance sheet will look like if all other budgets are met.
• Hence it serves the purpose of an overall control.
2. Operating Budgets
• This type of budget is an expression of the organization’s planned operations for a
particular period. They are usually of the following types:

a. The sales or revenue budget

• It focuses on income the organization expects to receive from normal operations. It
is important since it helps the manager understand what the future financial position
of the organization will be.
b. The expense budget
• It outlines the anticipated expenses of the organization in a specified time period. It
also points out upcoming expenses so that the manager can better prepare for them.
c. The project budget
• It focuses on anticipated differences between sales or revenues and expenses i.e.
profit. If the anticipated profit figure is too small, steps may be needed to increase
the sales budget or cut the expense budget.
3. Non-monetary budgets
• Budgets of this type are expressed in non-financial sales or revenues and expenses, i.e. profit.
• If the anticipated profit figure is too small steps may be needed to increase the sales budget or cut the expense
budget.

• Fixed and variable budgets

• Regardless of their purpose, most budgets must account for the three following kinds of costs:

• Fixed costs
• They are the expenses which the organization incurs whether it is in operation or not. Salaries of managers may
be an example of such a cost.
• Variable costs
• Such costs vary according to the scope of operations. The best example may be the raw materials used in
production. If Tk.5 worth of material is used per unit. 10 units would cost Tk.50, 20 units would cost Tk.100 and so
on.
• Semi-variable costs
• They also vary, but in less direct fashion. Costs for advertising, repairs, and maintenance, etc. may fall under this
category.
• All these categories of cost must be accurately accounted for in
developing a budget.
• Fixed costs are usually the easiest to deal with.
• Variable costs can also be forecast, although with less precision from
projected operations.
• Semi-variable costs are the most difficult to predict because they are
likely to vary, but not in direct relation to operations.
• For these costs, the manager must often rely on experience and
judgment.
Non-budgetary control techniques
1. Statistical data
2. Break- even point analysis
3. Operational audit
4. Personal observation
5. PERT
6. GANTT CHART
TOTAL QUALITY CONTROL