Management Control - Meaning, Nature and Process | Tools and Techniques of controlling in management | Traditional and Modern

Management Principles and Application Notes
B.Com Notes (CBCS Pattern)
Unit 5: Controlling in Management

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In this post I have given a brief explanation of Controlling in Management. These notes are useful B.Com 3rd Semester Students under CBCS Pattern. Some of the topics are not yet included in these notes which will be added very soon.

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Table of Contents

1. Meaning of Management Control

2. Nature or Characteristics of Management Control

3. Advantages (Importance) of Controlling

4. Steps in Controlling Process

5. Essentials of an Effective control system

6. Relationship between Planning and Controlling

7. Tools and Techniques of controlling in management - Traditional and Modern

Introduction to Management Control

Control is one of the managerial functions. These functions start with planning and end at controlling. The other functions like organising, staffing, directing act as the connecting like between planning and controlling. Planning will be successful only if the progress planning and controlled, Planning involves setting up of goals and objectives while controlling seeks to ensure.

In the words of Koontz and O'Donnel, “The measurement and correction of the performance of activities of subordinates in order to make sure that enterprise objectives and plan devised to attain them are being accomplished." The accomplishment of organisational goals is the main aim of every management. The performance of subordinates should be constantly watched to ensure proper implementation of plans. Co-ordination is the channel through which goals can be achieved and necessary.

According to Henry Fayol, “In an undertaking, control consists in verifying whether everything occurs in conformity with the plan adopted, the instructions issued and principles established. It has to point out weakness and errors in order to rectify them and prevent recurrence”.

Thus, controlling implies determining and stating specifically what is to be accomplished, then checking performance against such standards prescribed with a view to supplying the corrective action required to achieve the planned objectives. The end objective of controlling is, therefore, to ensure that the people’s   effort   in   the   organisation   is   continuously   directed   towards   the attainment of the predetermined objectives.

Nature or Characteristics of Control

1)      Control is a function of management: It is, in fact, a follow-up action to the other functions of management. All the managers in the organisation to control the activities assigned to them perform this function.

2)      Control is a dynamic process: It involves continuous review of standards of performance and results in corrective action, which may lead to changes in other functions of management.

3)      Control is a continuous activity: It does not stop anywhere. According to : Koontz and O’Donnell, “Just as the navigator continually takes reading to a planned action, so should so should be the business s manager continually take reading to assure himself that his enterprise or : department is on course”.

4)      Control is forward looking: It is related to future, as past cannot be controlled. It is usually preventive as the presence of control systems leads to minimize wastages, losses, and deviations from standards. It should be noted that control does not curtail the rights of the individuals. It simply keeps a check on the performance of individuals.

5)      Planning and Controlling are closely related with each other: Managerial planning seeks consistent and integrated while managerial control seeks to compel events to conform to plans. As a matter of fact, planning is based on control and control is based on planning. The process of control uses certain standards for measuring performance, which are laid down by planning. The control process, in turn, may reveal the deficiency of planning and may lead to the revision of planning. It may also lead to setting of new goals, changing the organisational structure, improving staffing and making major changes in the techniques of directing.

Advantages (Importance) of Controlling:

(i) Accomplishing organisational goals: The controlling function measures progress towards the organisational goals and brings to light the deviations, if any, and indicates corrective action.

(ii) Judging accuracy of standards: A good control system enables management to verify whether the standards set are accurate or not. An efficient control system keeps a careful check on the changes taking place in the organisation and in the environment and helps to review and revise the standards in light of such changes.

(iii) Making efficient use of resources: By exercising control, a manager seeks to reduce wastage and spoilage of resources. This ensures that resources are used in the most effective and efficient manner.

(iv) Improving employee motivation: A good control system ensures that employees know well in advance what they are expected to do and what are the standards of performance on the basis of which they will be appreciated.

(v) Ensuring order and discipline: Controlling creates an atmosphere of order and discipline in the organisation. It helps to minimize dishonest behaviors on the part of the employees by keeping a close check on their activities.

(vi) Facilitating coordination in action: Controlling provides direction to all activities and efforts for achieving organisational goals.

Limitations of Controlling:

(i) Difficulty in setting quantitative standards: Control system loses some of its effectiveness when standards cannot be defined in quantitative terms. Employee morale, job satisfaction and human behaviors are such areas where this problem might arise.

(ii) Little control on external factors: Generally an enterprise cannot control external factors such as government policies, technological changes, competition etc.

(iii) Resistance from employees: Control is often resisted by employees. They see it as restriction on their freedom.

(iv) Costly affairs: Control is a costly affair as it involves a lot of expenditure, time and efforts.

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Steps in Controlling Process

In order to perform his control functions, a manager follows three basic steps. First of all, he establishes the standards of performance to ensure that performance is in accordance with me plan. After this, the manager will appraise the performance and compare it with predetermined standards. This step will lead the manager to know whether the performance has come up to the expected standard or if there is any deviation. If the standards are not being met, the manager will take corrective actions, which is the final step in controlling.


1)      Establishing standards: A standard acts as a reference line or basic of comparison of actual performance. Standards should be set precisely and preferably in quantitative terms. It should be noted that setting standards is also closely linked with and is an integral part of the planning process. Different standards of performance are set up for various operations at the planning stage, which serve as the basis of any control system. Establishment of standards in terms of quantity, quality or time is necessary for effective control. Standards should be accurate, precise, acceptable and workable. Standards should be flexible, i.e., capable of being changed when the circumstances require so.

2)      Measurement of performance: This step involves measuring of actual performance of various individuals, groups or units and then comparing it with the standards, which have already been set up at the planning stage. The quantitative measurement should be done in cases where standards have been set in quantitative terms. In other cases, performance should be measured in terms of quantitative factors as in case of performance of industrial relations manager. Comparison of performance with standards is comparatively easier when the standards are expressed in quantitative terms.

3)      Comparison: This is the core of the control process. This phase of control process involves checking to determine whether the actual performance meets the predetermined or planned performance. Manager must constantly seek to answer, “How well are we doing?” When a production supervisor checks the actual output or performance of his department with the production schedule, he is performing comparison aspect of control. When-an executive calculates the performance of his subordinates once in six months or   annuity, he is performing comparison aspect of control. Checking return on in investment is a comparison phase of control.

4)      Taking corrective action: The final step in the control process is taking corrective actions so that deviations may not occur again and the objectives of the organisation are achieved. This will involve taking certain decision by the management like re-planning or redrawing of goals or standards, assignment of clarification of duties. It may also necessitate reforming the process of selection and the training of workers. Thus, control function may require change in all other managerial functions. If the standards are found to be defective, they will be modified in the light of the observations.

Essentials of an Effective control system:

The following are the essentials or basic requirements of an effectively control system:

1)      Suitable: The control system must be suitable for the kind of activity intended to serve. Apart from differences in the systems of control in different business, they also vary from department to department and from one level in the organisation to the other. The manager must be sure that he is using the technique appropriate for control of the specific activity involved.

2)      Understandable: The system must be understandable, i.e., the control information supplied should be capable of being understood by those who use it. A control system that a manager cannot understand is bound to remain ineffective. The control information supplied should be such as will be used by the managers concerned. It is, therefore, the duty of the manager concerned to make sure that the control information supplied to him is of a nature that will serve his purpose.

3)      Economical: The system must be economical in operation, i.e., the cost of a control system should not exceed the possible savings from its use. The extent of control necessary should be decided by the standard of accuracy or quality required. A very high degree or standard of accuracy or quality may not really be-necessary.

4)      Flexible: The system of control must be flexible, i.e. workable even if the plans have to be changed. In case the control systems can work only on the basis of one specific plan, it becomes useless if the plan breaks down and another has to be substituted. A good control system would be sufficiently flexible to permit the changes so necessitated.

5)      Expeditious: Nothing can be done to correct deviations, which have already occurred. It is, therefore, important that the control system should report deviations from plans expeditious. The objective of the control system should be to correct deviations in the immediate future.

6)      Forward Looking: The control system must be forward looking, as the manager cannot control the past. In fact, the control system should be so designed so as to anticipate possible deviations, or problems. Thus deviations can be forecast so that corrections can be incorporated even before the problem occurs.

7)      Organisational Conformity: Since people carry on activities, and events must be controlled through people, it is necessary that the control data and system must conform to the organisational pattern. The control data must be so prepared that it is possible to fix responsibility for the deviations within the areas of accountability.

8)      Indicative of Exceptions at Critical Points: The management principle of exception should be used to show up not only deviations but the critical areas must also be fixed for most effective control.

9)      Objectivity: As far as possible the measurements used must have objectivity, particularly while appraising a subordinate's performance, the subjective element cannot be entirely removed.

10)   Suggestive Of Corrective Action: Finally, an adequate control system should not only detect failures must also disclose where they are occurring, who is responsible for them and what should be done to correct them. Overall summary information can cover up certain fault areas.

Barriers in Effective Controlling

(i) Difficulty in setting quantitative standards: Control system loses some of its effectiveness when standards cannot be defined in quantitative terms. Employee morale, job satisfaction and human behaviors are such areas where this problem might arise.

(ii) Little control on external factors: Generally an enterprise cannot control external factors such as government policies, technological changes, competition etc.

(iii) Resistance from employees: Control is often resisted by employees. They see it as restriction on their freedom.

(iv) Costly affairs: Control is a costly affair as it involves a lot of expenditure, time and efforts.

Relationship between Planning and Controlling

The relationship between planning and controlling can be divided into the following two parts.

(i) Interdependence between Planning and Controlling.

(ii) Difference between Planning and Controlling.

(i) Interdependence between Planning and Controlling. Planning is meaningless without controlling and controlling is blind without Planning. Both the aspects of the interdependence of planning and control have been discussed below:

(a) Planning is meaningless without Controlling: if the process of controlling is taken away from management no person working in the enterprise will take it seriously to work according to the plans and consequently, the plans will fail.

(b) Controlling is blind without Planning: Under the system of controlling actual work performance is compared with the standards. Hence, if the standards are not determined there is no justification left for control and the standards are determined under planning.

(ii) Difference between Planning and Controlling: Yes, planning and controlling are incomplete and ineffective without each other but it doesn’t mean that both are not independent. Reasons are:

(a) Planning is looking Ahead whereas Controlling is Looking Back: Plans are always formulated for future and determined the future course of action for the achievement of objectives laid down. On the contrary, controlling is looking back because under it a manager tries to find out, after the work is completed, whether it has been done according to the standards or not.

(b) Planning is the first function and Controlling is the last function of Managerial Process: the managerial process moves in a definite sequence- like planning, organising, staffing, directing and controlling happens to be the last step.

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Tools and Techniques of controlling in management

A number of techniques or tools are used for the purpose of managerial control. Some of the techniques are used for the control of the overall performance of the organisation, and some are used for controlling specific areas or aspects like costs, sales, etc. The various techniques of control can be classified into categories, viz.,

(1) Traditional or Conventional techniques and

(2) Modern or Contemporary techniques.

Traditional Techniques

1. Budgetary Control: A budget is a planning and controlling device. Budgetary control is a technique of managerial control through budgets. It is the essence of financial control. Budgetary control is done for all aspects of a business such as income, expenditure, production, capital and revenue. Budgetary control is done by the budget committee.

According to J.A. Scott, “Budgetary control is the system of management control and accounting in which all operations are forecasted and so far as possible planned ahead, and the actual results compared with the forecasted and planned ones”.

Advantages of Budgetary Control

(i) Helpful in Attaining Organizational Objectives: Budgets are based on plans and all the departmental managers are informed about the expectations each one of them. The departmental managers put in their best efforts to achieve their target and consequently it helps in attaining the organizational objectives.

(ii) Source of Motivation for Employees: this technique prescribes the objectives for the employees. Their performance is matched with the standards. If the results are positive, they are appreciated. This motivates them.

(iii) Optimum utilization of Resources: Budgetary Control divides the resources among all the departments in an appropriate manner. This makes it possible the Optimum utilization of available Resources in the organization.

(iv) Achieving Coordination: By implementing this system, the activities of all the departments are directed towards a single goal. In this way, all the departments work for the attainment of the common goal. Consequently, coordination is established among them.

2. Standard Costing: Standard Costing is defined by I.C.M.A. Terminology as, “The preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points of incidence”. The technique of standard cost study comprises of:

Ø  Pre-determination of standard costs;

Ø  Use of standard costs;

Ø  Comparison of actual cost with the standard costs;

Ø  Find out and analyse reasons for variances;

Ø  Reporting to management for proper action to maximize efficiency.

3. Break-even Analysis or Cost-Volume-Profit Analysis: Cost-Volume-Profit Analysis or Break-even Analysis is the study of the interrelationship between the cost (i.e., cost of production), volume (i.e., the volume of production and sales), the prices and the sales value, and the profits. In other words, it is the study of the inter-relationship between the cost (i.e., cost of production), volume (i.e., volume of production and sales), prices (i.e., selling prices) and profits.

4. Inventory Control: Inventory is the stock of raw materials, work-in-progress, finished goods, consumable stores and spare parts and components at any given point to time. So, inventory control means control over different items of inventory or stock. “It is defined as physical control of stock items and implementing the principles and policies relating thereto”.

5. Internal Audit: Internal audit is a continuous and systematic review of the accounting, financial and other operations of a concern by the staff specially appointed by the management for the purpose. In other words, it is the auditing for the management conducted by the staff specially appointed for the purpose to ensure that the work of the concern is going on smoothly, efficiently and economically.

6. Statistical Data Analysis: It is a technique under which statistical data of the past and the present relating to the important aspects of the business are used for managerial control. The statistical data are collected from books and registers of the concern and presented to the management in a systematic manner in the form of tables, charts, graphs, etc.,

7. Direct Supervision and Observation: 'Direct Supervision and Observation' is the oldest technique of controlling. The supervisor himself observes the employees and their work. This brings him in direct contact with the workers. So, many problems are solved during supervision. The supervisor gets first hand information, and he has better understanding with the workers. Production Planning and Control: According to S. Elon, “Production planning and control may be defined as the direction and co-ordination of the firm’s material and physical facilities towards the attainment of pre-specified production goals in the most efficient and valuable way”.

8. Self-Control: Self-Control means self-directed control. A person is given freedom to set his own targets, evaluate his own performance and take corrective measures as and when required. Self-control is especially required for top level managers because they do not like external control. The subordinates must be encouraged to use self-control because it is not good for the superior to control each and everything. However, self-control does not mean no control by the superiors. The superiors must control the important activities of the subordinates.

Some of the Modern techniques are discussed below

1. Financial Statements Analysis: All business organisations prepare Profit and Loss Account. It gives a summary of the income and expenses for a specified period. They also prepare Balance Sheet, which shows the financial position of the organisation at the end of the specified period. They can be used by the management for measuring and controlling the profitability, liquidity and the financial position of the business. By comparing the financial statement of the current year with those of the previous years and also by comparing the financial statement of their concern with those of other concerns engaged in the same industry.

2. Return on Investment (ROI): Investment consists of fixed assets and working capital used in business. Profit on the investment is a reward for risk taking. If the ROI is high then the financial performance of a business is good and vice-versa. ROI is a tool to improve financial performance. It helps the business to compare its present performance with that of previous years' performance.                                   

3. Management by Objectives (MBO): MBO facilitates planning and control. It must fulfill following requirements:

Ø  Objectives for individuals are jointly fixed by the superior and the subordinate.

Ø  Periodic evaluation and regular feedback to evaluate individual performance.

Ø  Achievement of objectives brings rewards to individuals.

4. Management Audit: Management Audit is an evaluation of the management as a whole. It critically examines the full management process, i.e. planning, organising, directing, and controlling. It finds out the efficiency of the management. Management auditing is conducted by a team of experts. They collect data from past records, members of management, clients and employees. The data is analysed and conclusions are drawn about managerial performance and efficiency.

5. Management Information System (MIS): In order to control the organisation properly the management needs accurate information. They need information about the internal working of the organisation and also about the external environment. Information is collected continuously to identify problems and find out solutions. MIS collects data, processes it and provides it to the managers. MIS may be manual or computerised. With MIS, managers can delegate authority to subordinates without losing control.

Advantages of MIS are:                                                

a) It provides accurate information to all the managers working at different levels.

b) It helps in planning, controlling and decision-making.

c) It provides cost effective management information.

d) It improves quality of information with which a manager works.

e) It reduces information overload i.e., only relevant information is provided to them.

6. PERT and CPM Techniques: Programme Evaluation and Review Technique (PERT) and Critical Path Method (CPM) techniques were developed in USA in the late 50's. Any programme consists of various activities and sub-activities. Successful completion of any activity depends upon doing the work in a given sequence and in a given time. CPM / PERT can be used to minimise the total time or the total cost required to perform the total operations. In these techniques, the job is divided into various activities / sub-activities. From these activities, the critical activities are identified. More importance is given to completion of these critical activities. So, by controlling the time of the critical activities, the total time and cost of the job are minimised.

Steps involved in using PERT/CPM are given below:

a) The project is divided into a number of clearly identified activities.

b) These clearly identified activities are arranged in logical sequence.

c) A network diagram is prepared to show the sequence of activities.

d) Time estimates are prepared for each activity.

e) In CPM cost required to complete the project is also calculated.

f) The longest path is identified as critical path where no delay can be permitted.

7. Responsibility accounting: Under this technique of controlling organisation is divided into various responsibility centres and head of each centre is responsible for the achievement of their centres. Common types of responsibility centres are profit centre, cost centre, revenue centre, investment centre etc. These centres are generally various sections or departments of the organisation.

8. Ratio analysis: It refers to analysis of financial statements by calculating various types of ratios. Some of the important ratios are current ratio, liquid ratio, debt-equity ratio, proprietary ratio, profitability ratios. These ratios help in knowing the operating efficiency and financial position of the company.              

9. Zero-Base Budgeting (ZBB): In the words of Peter A Pyher, “Zero-base budgeting is a planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch and shifts the burden of proof to each manager to justify why he should spend money at all. The approach requires that all activities be analysed in ‘decision packages’ which are evaluated by systematic analysis and ranked in order of importance”. From his definition, it is clear that Zero-base budgeting is a technique of preparing the budget in which the previous year is not taken as the base, and every year is taken as a new year for preparing the current year’s budget.

10. Human Resources Accounting: The American Accounting Association has defined human resources accounting as “the process of identifying and measuring data about human resources and communicating this information to interested parties”.

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