Chapter 7: Controlling

1
 Learning Objectives
At the end of the chapter, you are all
expected to understand the following:

 Definition of Controlling
 The Nature of Controlling
 The Control Process
 Characteristics of Control
 Types of Control
 Control Methods and Systems
 Accounting Concepts and Techniques as
Control Devices
2
 What is Controlling?
The process of measuring and
correcting activities (plans,
organization, personnel etc.) of an
organization.

Controlling determines what is

being tackled by evaluating the
performance and if there is a
deviation, by applying corrective
measures so that the activities take
place according to plans.

 Can be considered as the activity

3
for knowing and correcting
 Nature of Controlling
 Where other fundamental functions of management are
performed perfectly, controlling is still inevitable , for it is
used to further effect some improvements.
 Controlling means big savings of money in operation
 Planning is related to controlling. The failure of planning
would mean failure in controlling and the success of
planning means success of controlling.
 Controlling alerts the manager to potentially critical
problems
• Top Management – when goals are not met
• Middle and Lower Management – when the objectives
are not met
 Managers can use the following:
• Prevent crises
• Standardized outputs
4 • Appraise employees performance
• Update plans
 The Control Process
Controlling involves the following:

1. Establishing Standards – standards are desired levels of

performance and constitute the foundation of the process.
These serve as the criteria against which the performance is
evaluated.
2. Measuring Performance Against the Established
Standards – should be both quantity and quality:
• Quality – Quality of output. What is produced compared to
what should be produced. Parallel to effectiveness
• Quantity - Finding out the amount or number of output.
Parallel to efficiency.
• Time – Formulating the timetable for achieving certain
goals at certain dates.
• Cost - Went over of the budget or not.
3. Comparison of Actual Performance – The core of the
controlling process. Checking the actual meets the
5 predetermined or planned performance.
4. Taking corrective action when and where deviation
 Characteristics of Control
The function of control is to keep work moving on schedule
as planned towards the established objectives and goals.
Control should meet the certain characteristics:

• Attuned to the activity – control should reflect needs of

people using them.
• Deviation must be identified quickly – what is the use
of checking the process or parts after they breakdown?
• Must be forward-looking – avoid historical, use of
forecast and other forward looking devices.
• Must be strategically oriented – selecting the crucial
points at which control is applied.
• Should be flexible – permits unexpected changes or
situations.
• Should be economical – cost of controlling should not
exceed the benefits of it.
6
•Should easy to be understood – people should
 Types of Control
There are many different types of control to be used for
different purpose:

1. Control used to standardize performance – helps to

increase efficiency and decrease costs
2. Control used to safeguard company assets – company
assets must be protected from theft, vandalism, wastage
and misuse.
3. Control used to standardize quality – for specific
quality level of the product.
4. Controls designed to set limits within which
delegated authority can be exercised without
further top management approval – manuals,
procedures etc.
5. Control used to measure job performance – special
reports, output data etc.
76. Control used for planning and programming
instructions – sales and production costs
 Control Methods and Systems
Two Kinds of Control Methods:
1. Behavior (or Personal) Control – based on direct and
personal surveillance.
2. Output (or Impersonal) Control – based on measurement
of output. Tracking production records and sales as example
of control output.

Flexible Budgets – are designed to vary with the volume of

sales or some other measure of output.
Zero-Based Budgeting – to justify an entire budget request in
detail, from scratch.
Direct Observation – daily tour of the facility, annual visit to all
branches
Written Reports – can be prepared on a periodic or “as
necessary” basis
• Analytical – interpret the facts
• Informational – presents the facts
8Audits – may be conducted by internal or external personnel
Time Related Charts and Techniques – though the use of
 Accounting Concepts and Techniques
as Control Devices
1. Tests of Liquidity – used to determine a firm’s
ability to meet short-term obligations and to
remain solvent in the event of adversities.
2. Tests of Debt Service – are employed to
present the project’s ability to meet long-term
obligations.
3. Tests of Probability – shows the operational
performance and efficiency of the project.
4. Test of Total Debt Coverage
5. Funds Flow Analysis – employed to
determine the major uses and sources of funds.
6. Tests of Operating Leverage – indicate how
the projects employ assets for which it pays a
fixed cost.
7. Test of Financial Leverage – present how a
project employs funds which pay a fixed return.
8.
9 Tests of Capital Investment – evaluate the
justification for investing in the project.
 Accounting Concepts and Techniques
as Control Devices
Quality Control - deals with setting up
of quality standards in advance in such
areas and comparing these with actual
standards.
Production Control – aim is to produce
the right product in the proper quantity
and quality, at the right time and by the
best and least cost methods.
Inventory Control – excess and not
maintaining adequate inventory should
be balanced.
Economic Order Quantity (EOQ) –
determines the most economic level of
10 inventory
Maintenance of Inventory –