Kerala Plus Two Business Studies Notes Chapter 8 Controlling
Meaning
Controlling is the process of ensuring that actual performance conform to planned performance. It also ensures that an organisation’s resources are being used effectively for the achievement of predetermined goals. So controlling is a goal oriented function. The controlling functions measure actual performance against standards, find out the deviations, analyse the causes of such deviations and take corrective actions.
Importance of Controlling
- Accomplishing organisational goals: The controlling function measures progress towards the organisational goals and brings to light the deviations, if any, and indicates corrective action.
- Judging accuracy of standards: A good control system enables management to verify whether the standards set are accurate.
- Making efficient use of resources: By exercising control, a manager seeks to reduce wastage of resources.
- Improving employee motivation: A good control system motivates the employees and helps them to give better performance.
- Ensuring order and discipline: Controlling creates an atmosphere of order and discipline in the organisation.
- Facilitating co-ordination: An efficient system of control helps to co-ordinate all the activities in the organisation.
Limitations of Controlling
- Difficulty in setting quantitative standards: Control system loses some of its effectiveness when standards cannot be defined in quantitative terms.
- Little control on external factors: Generally an enterprise cannot control external factors such as government policies, technological changes, competition, etc.
- Resistance from employees: Control is often resisted by employees. They see it as a restriction on their freedom.
- Costly affair: Control is a costly affair as it involves a lot of expenditure, time and effort.
Relationship between Planning and Controlling
- Planning and control are interdependent and inseparable functions of management.
- Planning is a prerequisite for controlling.
- Planning initiates the process of management and controlling complete the process.
- Planning is prescriptive where as controlling is evaluative.
- Planning and controlling are both backward looking as well as forward looking functions.
- Planning based on facts makes controlling easier and effective.
Controlling Process
Controlling is a systematic process involving the following steps.
- Setting performance standards
- Measurement of actual performance
- Comparison of actual performance with standards
- Analysing deviations
- Taking corrective action
1. Setting Performance Standards: Standards are the criteria against which actual performance would be measured. Standards can be set in both quantitative as well as qualitative terms.
2. Measurement of Actual Performance: After establishing standards, the next step is measurement of actual performance. Performance should be measured in an objective and reliable manner.
3. Comparing Actual Performance with Standards: This step involves comparison of actual performance with the standard. Such comparison will reveal the deviation between actual and desired results.
4. Analysing Deviations: The deviations from the standards are assessed and analysed to identify the causes of deviations.
5. Taking Corrective Action: The final step in the controlling process is taking corrective action. No corrective action is required when the deviations are within the acceptable limits.
Techniques of Managerial Control
1) Traditional Techniques:
i) Personal Observation: It creates a psychological pressure on the employees to perform well as they are aware that they are being observed personally on their job.
ii) Statistical Reports: Statistical analysis in the form of averages, percentages, ratios, correlation, etc., present useful information to the managers regarding performance of the organisation.
iii) Break Even Analysis: Break even analysis is a technique used by managers to study the relationship between costs, volume and profits. The sales volume at which there is no profit, no loss is known as break even point. It helps in estimating profits at different levels of activities.
B.E.P = \(\frac{F}{S-V}\)
F = Fixed cost
S = Selling price per unit
V = Variable cost per unit
iv) Budgetary Control: Budgetary control is a technique of managerial control in which all operations are planned in advance in the form of budgets and actual results are compared with budgetary standards.
2) Modern Techniques:
i) Return on Investment: Return on Investment (ROI) can be used to measure overall performance of an organisation. It helps to know the invested capital has been used effectively for generating reasonable amount of return.
Return on investment = \(\frac{\text { Net Income }}{\text { Total Investment }}\)
ii) Ratio Analysis: Ratio Analysis refers to analysis of financial statements through computation of ratios.
iii) Responsibility Accounting: Responsibility accounting is a system of accounting in which different sections, divisions and departments of an organisation are set up as ‘Responsibility Centres’. The head of the centre is responsible for achieving the target set for his centre. E.g. Cost centre, Revenue centre, Profit centre, Investment centre, etc.
iv) Management Audit: Management audit may be defined as evaluation of the functioning, performance and effectiveness of management of an organisation.
v) PERT and CPM: PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are important network techniques useful in planning and controlling.