LESSON 1

Definition and Nature of Management Control

Controlling- a management function that involves ensuring that the work performance of the organization’s
members are aligned with the organization’s values and standards through monitoring, comparing, and
correcting their actions.

Importance of Management Control

Management control make sure:

 That the firm’s operating cash flow is sufficient, efficient, and if possible, profitable when invested
 That the decision to seek funds should be appropriate, so as not to incur expenses as well since
borrowing would be subjected to payment of interest.
 That there is a continuous monitoring of the organization’s activities, followed by corrective actions
based on previously planned programs of action.
 That tasks are completed with less errors by comparing these with previously set standards or with
competitor’s standards or standards prevailing in their particular industry setting.

The Control Process

Control techniques used for controlling financial resources, office management, quality assurance, and
others are essentially the same. The typical control process involves establishing standards, measuring and
reporting actual performance, and comparing it with standards, and taking action.

Establishing Standards means setting criteria for performance. Managers must be able to identify
priority activities that have to be controlled, followed by determining how these activities must be properly
sequenced.

Measuring and reporting actual performance and comparing it with set standards is essentially the
monitoring of performance. To be able to do this, managers must be able to develop appropriate information
systems which will help them identify, collect, organize, and disseminate information.

Taking Action involves the correction of deviations from set standards. This activity clearly shows the
control function of management. Managers may rectify deviations by modifying their plans or goals, by
improving the training of employees, by firing inefficient subordinates, or by practicing more effective
leadership techniques.

Lesson 2

The Link between Planning and Controlling

Double Entry Accounting- accounting strategy of some firms which requires the preparation of two
different accounting reports, one for internal use and another for external use.

Dual entry- process of journalizing with debit and credit entries.

Liquidity- the organization’s ability to meet short-term obligations.

The relationship between planning and controlling could be easily established. Control is integrated planning.
Planning involves a thorough process which is essential to the creation and refinement of a blue print or its
integration with other plans that may combine forecasting of developments in preparation for future
scenarios in order to eventually react to them.

As one plans, the elements of control immediately take place to consider how ever turnout of the plan
may be evaluated and rectified. On a periodic basis, is useful to create a pro forma financial statement which
serves as a forecast of the balance sheet, income statement , and cash flow statement in order to make
projections.

As Smart (2013) cited, “by making projections of sales volume, profits, fixed asset requirements,
working capital needs, and sources of financing, the firm can predict any liquidity problems with enough lead
time to have additional financing sources available when needed.

Shim, et al. (2012), emphasized that “ any CFO (chief financial officer) must prepare short-term,
company-wide, or division-wide planning reports. These reports may relate to product distribution by
territory and market, product line mix analysis, warehouse handling, salesperson performance, and logistics.
The Balance Sheet

Balance sheet is a financial statement which is defined by most accounting books as the “snapshot” of any
entity’s financial condition because it presents the financial balances of a particular period. It follows a pro
forma accounting entry: A= L + C, or that the total assets (A) must be equivalent to the aggregate summation
of liabilities (L) and capital (C) of owner’s equity.

The Income Statement

The income statement is also known as the profit and loss statement, revenue and expenses statement,
statement of financial performance, or earnings statement. It displays the cost and expenses charged to
recognize revenues in a specific period. Basically, it shows whether the company made money or lost money.

The Cash Flow Statement

Without adequate cash for the timely payment of obligations, funding operations and growth, and for
compensating owners, the firm will fail. The statement of cash flow summarizes the inflow and outflow of
cash during a given period.

Summarizes of Significant Accounting Policies and Assumptions

The management’s intent of preparing the prospective financial statements should be stated and it must be
mentioned that prospective results may not materialize. It should be clearly stated that the assumptions used
by management are based on information and circumstances that exited at the time the financial statements
were prepared.

Organizational Performance Control

All managers must know which measures will give them data and information about overall organizational
performance and control. The usual measures are organizational productivity, organizational effectiveness,
and ranking in industry.

Organizational productivity is the amount of goods or services produced (output) divided by the
inputs needed in order to produce the said output. In general, all organizations and their work units aim to
be productive. In other words, they want to produce the biggest amount of outputs, using the least input.

Output may be measured by the sales income which an organization gains when goods are sold.
Inputs on the other hand, may be measured by the amount spent on acquiring and transforming resources
into outputs. Decreasing inputs by being more efficient in work performance will decrease the organization’s
expenses, thus, increasing the ratio of output to input and achieving what management wants.

Organizational effectiveness is a measure of the organizational goal’s suitability to organizational

Rankings in industry is a way of commonly used by manager to measure organizational performance.

Other Performance Controls in Organizations

Computer based control systems are common in many companied today. Managers have easy access to their
firm’s databases which could provide meaningful information for performance evaluation . Performance may
be controlled by quantifiable measures such as: the number of customer transactions handled, the frequency
of errors committed by their human resources, or the length of time taken to deliver goods to customers.

Bureaucratic Control makes use of strict rules, regulations, policies, procedures, and orders from
formal authority. Negative performance evaluation is given to human resources who do not comply the said
control measures.

Clan Control is based on compliance with norms, values, expected behavior related to the firm’s
organizational culture, and other cultural variables of the country where the company is located. Positive
performance evaluation ratings are given to employees or teams who quickly adapt to possible changes of
norms and values in the firm’s internal and external environment.
 Lesson 3

Control Methods and Systems

Control Methods are techniques used for measuring an organization’s financial stability, efficiency,
effectiveness, production output, and organization’s members attitudes and morale.

Methods of Control

A firm may apply control techniques or methods which are either quantitative or nonquantitative.

Quantitative Methods

Quantitative methods make use of data and different quantitative tools for monitoring and controlling
production output. Budgets and audits are among the most common quantitative tools.