CONTROLLING

Credits to:

NEU ES 311
Engineering
Students

WHAT IS CONTROLLING
Controlling refers to the process of
ascertaining whether organizational objectives
have been achieved; if no, why not; and
determining what activities should then be taken
to achieve objectives better in the future.
Controlling completes the cycle of management
functions.

CONTROLLING
The long- term existence of many companies, most often, is placed in jeopardy
when some aspects of their activities go out of control. Consider the following
examples:
1. A news report indicated that the fire which destroyed the P800 million
Superferry 7 luxury ship on March 26, 1997 was caused by illegal connections
made on its electrical system. If this is true, the losses could be attributed to
inadequate management control.
2. The tragedy that happened at the Ozone Disco in March 18, 1996 clearly
manifested managements lack of control over the day-to-day operations of the
firm. Even the failure to detect earlier the violations in the Building Codespells lack
of effective government control.

3. The management of a telephone company could not stop the unauthorized use
of lines assigned to many of its subscribers. Customers become angry when they
are billed for call they never made.

IMPORTANCE OF CONTROLLING
When controlling is properly implemented it will
help the organization achieve its goal in the most
efficient and effective manner possible.
Deviations, mistakes, and shortcoming happen
inevitable. When they occur in the daily operations,
they contribute to unnecessary expenditures which
increase the cost of producing goods and services.

STEPS IN CONTROL PROCESS

The control process consists of four steps, namely:

1. establishing performance objectives and standards

2. measuring actual performance

3. comparing actual performance to objectives and standards, and

4. taking necessary action based on the results of the comparisons

ESTABLISHING PERFORMANCE
OJECTVIES AND STANDARDS

1. Sales targets which are expressed in quantity or monetary terms;

2. Production targets which are expressed in quantity or quality;

3. Worker attendance which are expressed in terms of rate of absences;

4. Safety record which is expressed in number of accidents for given

periods;

5. Supplies used which are expressed in quantity or monetary terms for

given periods

ESTABLISH
PERFORMANCE
OBJECTIVES AND
STANDARDS
ESTABLISH
PERFORMANCE
OBJECTIVES AND
STANDARDS

Do nothing
DOES ACTUAL
PERFORMANCE
MATCH THE
SATANDARDS

YES
NO

TAKE
CORRECTIVE
ACTION

Steps in the Control

Process

Measuring Actual Performance

The measuring tools will differ from organization
to organization, as each have their own unique
objectives. Some firms, for instance, will use
annual growth rate as standard basis, while other
firms will use some other tools like the market share
approach and position in the industry.

Comparing Actual Performance to

Objectives and Standards
A construction firm entered into a contract
with the government to construct a 100 km road
within then months. It would be, then reasonable
for management to expect at least 10kilometers
to be constructed every month. As such, this must
be verified every month, or if possible, every
week

Taking Necessary Action

The management of the construction firm found
out that only 15km were finished after two months,
then, any of the following actions may be
undertaken:
1.

hire additional personnel;

2.

use more equipment; or

3.

require overtime

TYPES OF CONTROL
Control consists of three distinct types, namely:
1.

feed forward control

2.concurrent
3.

control, and

feedback control.

Feedforward Control
This type of control provides the
assurance that the required human and
nonhuman resources are in place
before operations begin.

Concurrent Control
When operations are already on going and
activities to detect variances are made,
concurrent control is said to be undertaken. It is
always possible that deviations from standards will
happen in the production process, When such
deviations occur, adjustments are made to ensure
compliance with requirements. Information on the
adjustments are also necessary inputs in the preoperation phase.

Feedback Control
When information is gathered about a completed
activity and in order that evaluation and steps from
improvement are derived, feedback control is undertaken.
Corrective actions aimed at improving future activities are
features of feedback control.

Feedback control validates objectives and standards. If

accomplishment consist only of a percentage of standard
requirements, the standard may be too high or
inappropriate.

COMPONENTS OF ORGANIZATIONAL
CONTROL SYSTEMS
Organizational control systems consists of the
following:

1. strategic plan

2. the long-range financial plan

3. the operating budget

4. performance appraisal

5. statistical reports

6. policies and procedures

Strategic Plans
A strategic plan provides the basic control
mechanism for the organization. When there are
indications that activities do not facilitate the
accomplishment of strategic goals, theses activities
are either set aside, modified or expanded. These
corrective measures are made possible with the
adoption of strategic plans.

The Long-Range Financial Plan

The planning horizon differs from company to
company. Most firms will be satisfied with one year.
Engineering firms, however, will require longer term
financial plans. This is because of the long lead
times needed for capital projects.

The Operating Budget

An operating budget indicates the expenditures,
revenues, or profits planned for some future period
regarding operations. The figures appearing in the
budget are used as standard measurements for
performances

Performance Appraisals
Performance appraisal measures employee
performance. As such, it provides employees with
a guide on how to do their jobs better in the future.
Performance appraisals also function as effective
checks on new policies and programs.

Statistical Reports
1.

labor efficiency rates

2.

quality control rejects

3.

accounts receivable

4.

accounts payable

5.

sales reports

6.

accident reports

7.

power consumption report

Policies and Procedures

Policies refer to the framework within which
the objectives must be pursued. A procedure is
a plan that describes the exact series of
actions to be taken in a given situation.

MORNING STAR CHEMICAL CORPORATION

Power Consumption Report
For the First Quarter 1997
By Department
(in KWH)
Department

January

February

March

Total

1,000

1,100

1,200

3,300

900

1,400

1,010

3,310

1,180

1,650

1,200

4,030

500

1,100

600

2,200

600

455

632

1,687

Total

4,180

5,705

4,642

14,527

STRATEGIC CONTROL SYSTEMS

1. financial analysis
2. financial ratio analysis

Financial Analysis
A review of the financial statements will reveal important
details about the companys performance. The balance
sheet contains information about the companys assets,
liabilities, and capital accounts. Comparing the current
balance sheet with previous ones may reveal important
changes, which, in turn, provide clues to performance.

Financial Ratio Analysis

Financial ratio analysis is a more elaborate approach
used in controlling activities. Under this method, one
account appearing in the financial statement is paired
with another to constitute a ratio. The result will be
compared with a required norm which is usually related to
what other companies in the industry have achieved, or
what the company has achieved in the past. When
deviations occur, explanations are sought in preparation
for whatever action is necessary.

Financial ratios may be categorized into the following

types:

1. liquidity
2. efficiency
3. financial leverage
4. profitability

Liquidity Ratios
These ratios assess the ability of a company to meet its current obligations.
The following ratios are important indicators of liquidity:
1. Current ratio This shows the extent to which current assets of the
company can cover its current liabilities. The formula for computing current
ratio is as follows:
Current ratio = current assets/current liabilities
2. Acid-test ratio- This is a measure of the firms ability to pay off short-term
obligations with the use of current assets and without relying on the sale of
inventories. The formula is as follows:
Acid-test ratio = current assets inventories/current liabilities

Efficiency Ratios
These ratios show how effectively certain assets or liabilities are being
used in the production of goods and services. Among the more
common efficiency ratios are:
1. Inventory turnover ratio This ratio measures the number of times
an inventory is turned over (or sold) each year. This is computed as
follows:

Inventory turnover ratio = cost of goods sold/inventory

2. Fixed asset turnover This ratio is used to measure utilization of the
companys investment in its fixed assets, such as its plant and
equipment. The formula used is as follows:
Fixed asset turnover = net sales/net fixed assets

Financial Leverage Ratios

This is a group of ratios designed to assess the balance of financing obtained
through debt and equity sources. Some of the more important leverage
ratios are as follows:
1. Debt to total assets ratio This ratio shows how much of the firms assets
are financed by debt. It may be computed by using the following formula:
Debt to total assets ratio = total debt/total assets
2. Times interest earned ratio This is ratio measures the number of times
that earning before interest and taxes cover or exceed the companys
interest expense. It may be computed by using the following formula:
Times interest earned ratio = profit before tax + interest expense
interest expense

Profitability Ratios
These ratios measure how much operating income or net income a
company is able to generate in relation to its assets, owners equity , and
sales. Among the more notable profitability ratios are as follows:
1. Profit margin ratio This ratio compares the net profit to the level of
sales. The formula used is as follows:

Profit margin ratio = net profit/net sales

2. Return on assets ratio = This ratio shows how much income the
company produces for every peso invested in assets. The formula used is
as follows :
Return on assets ratio = net income/assets
3. Return on equity ratio This ratio measures the returns on the owners
investment. It may be arrived at by using the following formula
Return on equity ratio = net income/equity

IDENTIFYING CONTROL PROBLEMS

1. executive reality check
2. comprehensive internal audit
3. general checklist of symptoms of
inadequate control

Executive Reality Check

Employees at the frontline often complain that
management imposes certain requirement that are
not realistic. In a certain state college, for instance,
requests for purchase of classroom materials and
supplies take last priority. This is irregular because
requests of such kind must be of the highest priority
considering that the organization is an educational
institution.

Comprehensive Internal Audit

An internal audit is one undertaken to
determine the efficiency and effectivity of the
activities of an organization. Among the many
aspects of operations within the organization, a
small activity that is not done right may continue
to be unnoticed until it snowballs into a full blown
problem.

Symptoms of Inadequate Control

1. An unexplained decline in revenues and profits.
2. A degradation of service (customer complaints)
3. Employee dissatisfaction (complaints, grievances,

turnover).
4. Cash shortages caused by bloated inventories or
delinquent accounts receivable.

5. Idle facilities or personnel.

6. Disorganized operations (work flow
bottlenecks, excessive paperwork)

7. Excessive costs.
8. Evidence of waste and inefficiency
(scrap, rework)/