Management controls


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Management controls

  1. 1. MANAGEMENT CONTROL Prof. Purvish Shah
  2. 2. What Is Control?What Is Control?  ControlControl • The process of monitoring activities to ensureThe process of monitoring activities to ensure that they are being accomplished as plannedthat they are being accomplished as planned and of correcting any significant deviationsand of correcting any significant deviations • An effective control system ensures thatAn effective control system ensures that activities are completed in ways that lead toactivities are completed in ways that lead to the attainment of the organization’s goalsthe attainment of the organization’s goals
  3. 3. Characteristics of Three ApproachesCharacteristics of Three Approaches to Control Systemsto Control Systems  MarketMarket • Uses external market mechanisms, such as priceUses external market mechanisms, such as price competition and relative market share, tocompetition and relative market share, to establish standards used in system to gainestablish standards used in system to gain competitive advantage.competitive advantage.  BureaucraticBureaucratic • Emphasizes organizational authority ofEmphasizes organizational authority of administrative and hierarchical mechanisms toadministrative and hierarchical mechanisms to ensure appropriate employee behaviors and toensure appropriate employee behaviors and to meet performance performance standards.  ClanClan • Regulates employee behavior by the sharedRegulates employee behavior by the shared values, norms, traditions, rituals, beliefs, andvalues, norms, traditions, rituals, beliefs, and other aspects of the organization’s culture.other aspects of the organization’s culture.
  4. 4. The Control ProcessThe Control Process
  5. 5. Steps in the Control ProcessSteps in the Control Process  Measuring actual performanceMeasuring actual performance • Personal observation, statistical reports,Personal observation, statistical reports, oral reports, and written reportsoral reports, and written reports • Management by walking around (MBWA)Management by walking around (MBWA) • A phrase used to describe when aA phrase used to describe when a manager is out in the work areamanager is out in the work area interacting with employeesinteracting with employees
  6. 6. Steps in the Control Process (cont’d)Steps in the Control Process (cont’d)  Comparing actual performanceComparing actual performance against a standardagainst a standard • Comparison to objective measures:Comparison to objective measures: budgets, standards, goalsbudgets, standards, goals • Range of variationRange of variation  The acceptable parameters of varianceThe acceptable parameters of variance between actual performance and thebetween actual performance and the standardstandard
  7. 7. Defining an Acceptable Range of VariationDefining an Acceptable Range of Variation
  8. 8. Steps in the Control Process (cont’d)Steps in the Control Process (cont’d)  Taking managerial action to correct deviations orTaking managerial action to correct deviations or inadequate standardsinadequate standards • Immediate corrective actionImmediate corrective action  Correcting a problem at once to getCorrecting a problem at once to get performance back on trackperformance back on track • Basic corrective actionBasic corrective action  Determining how and why performance hasDetermining how and why performance has deviated and then correcting the source ofdeviated and then correcting the source of deviationdeviation • Revising the standardRevising the standard  Adjusting the performance standard toAdjusting the performance standard to reflect current and predicted futurereflect current and predicted future performance capabilitiesperformance capabilities
  9. 9. Types Of ControlTypes Of Control  Feedforward controlFeedforward control • Control that prevents anticipatedControl that prevents anticipated problemsproblems  Concurrent controlConcurrent control • Control that takes place while an activityControl that takes place while an activity is in progressis in progress  Feedback controlFeedback control • Control that takes place after an actionControl that takes place after an action  Provides evidence of planning effectivenessProvides evidence of planning effectiveness  Provides motivational information toProvides motivational information to employeesemployees
  10. 10. Importance of ControlImportance of Control  Adjustment in OperationsAdjustment in Operations  Policy VerificationPolicy Verification  Managerial ResponsibilityManagerial Responsibility  Coordination in ActionCoordination in Action  Organizational Efficiency &Organizational Efficiency & EffectivenessEffectiveness
  11. 11. Types of ControlTypes of Control
  12. 12. The Qualities Of An Effective ControlThe Qualities Of An Effective Control SystemSystem  AccuracyAccuracy  TimelinessTimeliness  EconomyEconomy  FlexibilityFlexibility  UnderstandabilityUnderstandability  Reasonable criteriaReasonable criteria  Emphasis on theEmphasis on the exceptionexception  Multiple criteriaMultiple criteria  Corrective actionCorrective action
  13. 13. What Contingency Factors Affect theWhat Contingency Factors Affect the Design of A Control System?Design of A Control System?  Size of the organizationSize of the organization  The job/function’s position in theThe job/function’s position in the organization’s hierarchyorganization’s hierarchy  Degree of organizational decentralizationDegree of organizational decentralization  Type of organizational cultureType of organizational culture  Importance of the activity to theImportance of the activity to the organization’s successorganization’s success
  14. 14. ContingencyContingency Factors inFactors in the Design ofthe Design of ControlControl SystemsSystems
  15. 15. The Dysfunctional Side Of ControlThe Dysfunctional Side Of Control  Problems with unfocused controlsProblems with unfocused controls • Failure to achieve desired or intended resultsFailure to achieve desired or intended results occur when control measures lack specificityoccur when control measures lack specificity  Problems with incomplete control measuresProblems with incomplete control measures • Individuals or organizational units attempt toIndividuals or organizational units attempt to look good exclusively on control measures.look good exclusively on control measures.  Problems with inflexible or unreasonable controlProblems with inflexible or unreasonable control standardsstandards • Controls and organizational goals will beControls and organizational goals will be ignored or manipulated.ignored or manipulated.
  16. 16. Contemporary Issues In ControlContemporary Issues In Control  The right to personal privacy in the workplaceThe right to personal privacy in the workplace versus:versus: • Employer’s monitoring of employee activities inEmployer’s monitoring of employee activities in the workplacethe workplace • Employer’s liability for employees creating aEmployer’s liability for employees creating a hostile environmenthostile environment • Employer’s need to protect intellectualEmployer’s need to protect intellectual propertyproperty
  17. 17. Suggestions for Achieving a SupportiveSuggestions for Achieving a Supportive Growth-Oriented CultureGrowth-Oriented Culture Keep the lines of communication open—inform employees about major issues. Establish trust by being honest, open, and forthright about the challenges and rewards of being a growing organization. Be a good listener—find out what employees are thinking and facing. Be willing to delegate duties. Be flexible—be willing to change your plans if necessary.
  18. 18. Suggestions for Achieving a Supportive Growth-Suggestions for Achieving a Supportive Growth- Oriented Culture (cont’d)Oriented Culture (cont’d) Provide consistent and regular feedback by letting employees know the outcomes—good and bad. Reinforce the contributions of each person by recognizing employees’ efforts. Continually train employees to enhance their capabilities and skills. Maintain the focus on the venture’s mission even as it grows. Establish and reinforce a “we” spirit since a successful growing venture takes the coordinated efforts of all the employees.
  19. 19. Controlling Financial ResourcesControlling Financial Resources 1. Budgeting: • Budgeting is a control process that involves expressing the future activities of an organization or sub unit in rupees or any other quantitative terms • Typically drawn up for one year and are foundation of most control systems • Controlling future expenditures that are designed to implement the organization’s strategy • Cash Flow Budget; Capital Expenditure Budget; Balance Sheet Budgets • Sales or Revenue Budgets; Expense Budget; Profit & Loss Budget • Bottom Up Budgeting; Top Down Budgeting
  20. 20. Controlling Financial ResourcesControlling Financial Resources 2. Ratio Analysis: •Monitor & Adjustment of Financial Resources •Liquidity Ratios:Indicator’s of firm’s ability to short term obligations •Leverage Ratios:Identify a firm’s source of capital •Activity Ratios:How effectively firm is using its resources •Profitability Ratios: How effectively a firm as a whole is being managed •Standards for Comparison: •Current time period with ratios of past times •Firms comparison or Industry Comparison
  21. 21. Controlling Financial ResourcesControlling Financial Resources 3. Financial Audits: •Mechanism used to control Financial Resources •Two Major Types: •External Audits & Internal Audits •Mechanism for Post Action Control •Seek to document the authenticity of every item on a firm’s Financial Statements
  22. 22. Controlling Human ResourcesControlling Human Resources 1. Selection : • Important mechanism for ensuring the effective use of human resources • Selecting the right person for a task or activity increases the probability that the task will be performed well • Feed Forward Control 2. Performance Appraisal: • It identifies standards to be achieved, monitors & compares to those standards the performance of individuals & work groups • Concurrent Control & Feedback Control
  23. 23. Quality ControlQuality Control  Two ways to implement itTwo ways to implement it • Control of an operational Process, i.e.Control of an operational Process, i.e. Statistical QCStatistical QC • Control over RM/semi-finished goods,Control over RM/semi-finished goods, i.e. Inspection controli.e. Inspection control
  24. 24. Inventory ControlInventory Control  ABC analysisABC analysis  EOQEOQ  Order CostOrder Cost  Inventory Carrying CostInventory Carrying Cost  Safety StockSafety Stock