CONTROLLING

What is Controlling?
Importance of Controlling
Steps in the Control Process
Types of Control
Components of Organizational Control Systems
Strategic Control Systems
Identifying Control Problems

Chapter 9

CONTROLLING
WHAT IS CONTROLLING?
Controlling refers to the process of ascertaining whether organizational objectives have been
achieved; if not, why not; and determining what activities should then be taken to achieve
objectives better in the future. Controlling completes the cycle of management functions.
Objectives and goals that are set at the planning stage are verified as to achievement or completion
at any given point in the organizing and implementing stages. When expectations are not met at
scheduled dates, corrective measures are usually undertaken.
IMPORTANCE OF CONTROLLING
When controlling is properly implemented, it will help the organization achieve its goal in
the most efficient and effective manner possible.
Deviations, mistakes, and shortcomings happen inevitably. When they occur in the daily
operations, they contribute to unnecessary expenditures which increase the cost of producing goods

and services. Proper control measures minimize the ill effects of such negative occurrences. An
effective inventory control system, for instance, minimizes, if not totally eliminates losses in
inventory.
The importance of controlling may be illustrated as it is applied in a typical factory, if the
required standard daily output for individual workers is 100 pieces, all workers who do not produce
the requirement are given sufficient time to improve; if no improvements are forthcoming, they are
asked to resign. This action will help the company keep its overhead and other costs at expected
levels. If no such control is made, the company will be faced escalating production costs, which will
place the viability of the firm in jeopardy,
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STEPS IN THE CONTROL PROCESS
The control process consists of four steps, namely:
1. Establishing performance objectives and standards
2. Measuring actual performance
3. Comparing actual performance to objectives and standards, and
4. Taking necessary action based on the results of the comparisons.
Establishing Performance Objectives and Standards
In controlling, what has to be achieved must first be determined. Examples of such
objectives and standards are as follows:
1. Sales targets which are expressed in quantity or monetary terms;
2. Production targets which are expressed in quantity or quality;
3. Worker attendance which are expressed in terms of rate of absences;
4. Safety record which is expressed in number of accidents for given periods;
5. Supplies used which are expressed in quantity or monetary terms for given periods;
Once objectives and standards are established, the measurement of performance will be
facilitated. Standards differ among various organizations. In construction firms, project completion
dates are useful standards. In chemical manufacturing firms, certain pollution measures form the
basis for standard requirements.
After the performance objectives and standards are established, the methods for measuring
performance must be designed. Every standard established must be provided with its own method
for measurement.
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Figure 9.1 Steps in the Control Process

ESTABLISHING
PERFORMANCE
OBJECTIVES AND
STANDARDS

MEASURE ACTUAL
PERFORMANCE

DOES
ACTUAL
PERFORMANCE
MATCH THE
STANDARDS?

Yes

No

TAKE
CORRECTVE
ACTION
Measuring Actual Performance
There is a need to measure actual performance so that when shortcomings occur,
adjustments could be made. The adjustments will depend on the actual findings.

The measuring tools will differ from organizations to organization, as each have their own
unique objectives. Some firms, for instance, will use annual growth rate as standard basis, while
other firms will use some other tools like the market share approach and position in the industry.
Comparing Actual Performance to Objectives and Standards
Once actual performance has been determined, this will be compared with that organization
seeks to achieve. Actual production output, for instance, will be compared with the target output,
this may be illustrated as follows:
A construction firm entered into a contact with the government to construct a 100 kilometer
road within ten months. It would be, then, reasonable for management to expect at least 10
kilometers to be constructed every month. As such,, this must be verified every month, or if
possible, every week.
Taking Necessary Action
The purpose of comparing actual performance with the desired result is to provide
management with the opportunity to take corrective action when necessary.
If in the illustration cited above, the management of the construction firm found out that
only 15 kilometers were finished after two months, then, any of the following actions may be
undertaken:
1. Hire additional personnel;
2. Use more equipment; or
3. Require overtime.

TYPES OF CONTROL
Control consists of three distinct types, namely:
1. Feedforward control
2. Concurrent control, and
3. Feedback control
Figure 9.2 Types of Control and Their Relation to Operations

PREOPERATIOS
PHASE

Feedforward
Control

ACTUAL
OPERATION
S PHASE

Concurrent
Control

POST
OPERATION
S PHASE

Feedback
Control

Feedforward Control
When management anticipates problems and prevents their occurrence, the type of control
measure undertaken is called feedforward control. This type of control provides assurance that the
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required human and non human resources are in place before operations begin. An example is
provided as follows:
The management of chemical manufacturing firm makes sure that the best people are
selected and hired to fill jobs. Materials required in the production process are carefully checked to
detect defects. The foregoing control measures are designed to prevent wasting valuable resources.
If these measures are not undertaken, the likelihood that problems will occur is always present.
Concurrent Control
When operations are already ongoing and activities to detect variances are made, concurrent
control is said to be undertaken. It is always possible that deviations from standards will happen in
the production process. When such deviations occur, adjustments are made to ensure compliance
with requirements. Information on the adjustments are also necessary inputs in the pre-operation
phase.
Examples of activities using concurrent control are as follows:
The manager of a construction firm constantly monitors the progress of the companys
projects. When construction is behind schedule, corrective measures like the hiring of additional
manpower are made.
In a firm engaged in the production and distribution of water, the chemical composition of
the water procured from various sources is checked thoroughly before they are distributed to the
consumers.
The production manager of an electronics manufacturing firm inspects regularly the outputs
consisting of various electronics products coming out of the production line.

Feedback Control
When information is gathered about a completed activity, and in order that evaluation and
steps for improvement are derived, feedback control is undertaken. Corrective actions aimed at
improving future activities are features of feedback control.
Feedback control validates objectives and standards. If accomplishments consist only of a
percentage of standard requirements, the standard may be too high or inappropriate.
An example of feedback control is the supervisor who discovers that continuous overtime
work for factory workers lower the quality of output. The feedback information obtained leads to
some adjustments in the overtime schedule.
COMPONENTS OF ORGANIZATIONAL CONTROL SYSTEMS
Organizational control systems consists of the following:
1. Strategic plan
2. The long-range financial plan
3. The operating budget
4. Performance appraisals
5. Statistical reports
6. Policies and procedures
Strategic Plans
A strategic plan provides the basic control mechanism for the organization. When there are
indications that activities do not facilitate the accomplishment of strategic goals, these activities are
either set aside, modified or expanded. These corrective measures are made possible with the
adoption of strategic plans.
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The Long-Range Financial Plan

The planning horizon differs from company to company. Most firms will be satisfied with
one year. Engineering firms, however, will require longer term financial plans. This is because of
the long lead times needed for capital projects. An example is the engineering firm assigned to
construct the Light Rail Transit (LRT) within three years. As such, the three-year financial plan will
be very useful.
As presented in Chapter 3, the financial plan recommends a direction for financial activities.
If the goal does not appear to be where the firm is beaded, the control mechanism should be made
to work.
The Operating Budget
An operating budget indicates the expenditures, revenues, or profits planned for some future
period regarding operations. The figures appearing in the budget are used as standard measurements
for performance.
Performance Appraisals
Performance appraisal measures employee performance. As such, it provides employees
with a guide on how to do their jobs better in the future. Performance appraisals also function as
effective checks on new policies and programs. For example, if a new equipment has been acquired
for the use of an employee, it would be useful to find out if it had a positive effect on his
performance.
Statistical Reports
Statistical reports pertain to those that contain data on various developments within the firm.
Among the information which may be found in a statistical report pertains to the following:
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1. Labor efficiency rates

2. Quality control rejects
3. Accounts receivable
4. Accounts payable
5. Sales reports
6. Accident reports
7. Power consumption report
Policies and Procedures
Policies refer the framework within which the objectives must be pursued. A procedure is
a plan that describes the exact series of actions to be taken in a given situation.
An example of policy is as follows:
Whenever two or more activities compete for the companys attention, the client takes
priority.
An example of a procedure is as follows:
Procedure in the purchase of equipment:
1. The concerned manager forwards a request for purchase to the purchasing officer;
2. The purchasing officer forwards the request to top management for approval;
3. When approved, the purchasing officer makes a canvass if the requested item; if
disapproved, the purchasing officer returns the form to the requesting manager;
4. The purchasing officer negotiates with the lowest complying bidder.
Figure 9.3 A Sample Statistical Report
MORNING STAR CHEMICAL CORPORATION
Power Consumption Report
For the First Quarter 1997

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By Department

(in KWH)
Department
January
A
1000
B
900
C
1180
D
500
E
600
Total
4180
Prepared by:
CECILIA AGPALASIN
Chief
Accounting Division

February
1100
1400
1650
1100
455
5705

March
1200
1010
1200
600
632
4642

Total
3300
3310
4030
2200
1687
14527

It is expected that policies and procedures laid shown by management will be followed.
When they are breached once in a while, management is provided with a way to directly inquire on
the deviations. As such, policies and procedures provide a better means of controlling activities.
STRATEGIC CONTROL SYSTEMS
To be able to assure the accomplishment of the strategic objectives of the company, strategic
control systems become necessary. These systems consist of the following:
1. Financial analysis
2. Financial ratio analysis
Financial Analysis
The success of most organization depends heavily on its financial performance. It is just
fitting that certain measurements of financial performance be made so that whatever deviations
from standards are found out, corrective actions may be introduced.
A review of the financial statements will reveal important details about the companys
performance. The balance sheet contains information about the companys assets, liabilities, and

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capital accounts. Comparing the current balance sheet with previous ones may reveal important
changes, which, in turn, provide clues to performance.
The income statement contains information about the companys gross income, expenses
and profits. When also compared with previous years income statements, changes in figures will
help management determine if it did well.
Figures 9.4 and 9.5 show samples of financial statements.

Financial Ratio Analysis

Financial ratio analysis is a more elaborate approach used in controlling activities. Under
this method, one account appearing in the financial statement is paired with another to constitute a
ratio. The result will be compared with a required norm which is usually related to what other
companies in the industry have achieved, or what the company has achieved in the past. When
deviations occur, explanations are sought in preparation for whatever action is necessary.
Financial ratios may be categorized into the following types:
Figure 9.4 A Sample Balance Sheet Statement
MORNING STAR CHEMICAL CORPORATION
Balance Sheet Statement
As of December 31, 1997
(P000)
Current assets
Cash
Marketable securities
Accounts receivable
Inventory
Prepaid expenses
Total Current

P
415
1,000
3,062
1,980
123
P 6,580
12

Noncurrent assets
Gross plant and equipment

P 11,500

Accumulated depreciation
Other assets and intangibles
Total assets

(2,2250)
50
P 15,580

Current liabilities
Accounts payable
Notes payable
Accrued salaries and wages
Accrued taxes
Current portion of long-term debt
Total current

P 1,594
2,210
63
174
220
P 4,261

Noncurrent liabilities
Bank term loan
Mortgage
Deferred income tax
Total noncurrent
Stockholders equity
Common stock (par value is 1.00 Php)
Pain-in surplus
Retained earnings
Total stockholders
Total liabilities and stockholders equity

500
1,355
1,783
P 3,638
4,000
1,513
2,168
P 7,681
P 15,580

Figure 9.5 A Sample Income Statement

MORNING STAR CHEMICAL CORPORATION
Income Statement
For the Year Ending December 31,1997
(P000)
Net sales
Cost of good sold
Gross profit
Operating Expenses
Selling
Administrative
Depreciation and amortization
Operating profit
Interest expense
Profit before taxes
Taxes
Net profit
Common dividends

P 12,250
8.820
P 3,430
673
653
600
1,504
350
1,154
462
P 692
P 429

1. Liquidity
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2. Efficiency

3. Financial leverage
4. Profitability
Liquidity Ratios. These ratios asses the ability of a company to meet its current obligations.
The following ratios are important indicator of liquidity:
1. Current ratio This shows the extent to which current assets of the company can cover its
current liabilities. The formula for computing current ratio is as follows:
Current ratio = current assets/current liabilities
2. Return on assets ratio This ratio shows how much income the company produces for every
peso invested in assets. The formula used is as follows:
Return on assets ratio = net income/assets
3. Return on equity ratio This ratio measures the returns on the owners investment. It may
be arrived at by using the following formula:
Return on equity ratio = net income equity
IDENTIFYING CONTROL PROBLEMS\
Recognizing the need for control is one thing, actually implementing it is another. When
operations become complex, the engineer manager must consider useful steps in controlling.
Kreitner mentions three approaches:
1. Executive reality check
2. Comprehensive internal audit
3. General checklist of symptoms of inadequate control

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EXECUTIVE REALITY CHECK

Employees at the frontline often complain that management imposes certain requirements
that are not realistic. In a certain state college, for instance, requests for purchase of classroom
materials and supplies take last priority. Thus is irregular because requests of such kind must be of
the highest priority considering that the organization is an educational institution. Ironically,
because certain officers of the nonacademic staff have direct access to the president, their purchase
requests almost always get top priority. Later on, when the president made an inspirational speech
on quality teaching, many members of the faculty just shrugged their shoulders and listened
passively.
One school, the Central Luzon State University, provides a good example on how the
executive reality check may be exercised. It requires its executives to handle at least one subject
load each. What the executives will experience in the classroom will make him more responsive in
the preparation of plans and control tools.
The engineer manager of a construction firm could, once in a while, perform the work of
one of his laborers. In doing so, he will be able to see things that he never sees inside the confines
of his air-conditioned office. Because the said action exposes the engineer manager to certain
realities, the term executive reality check is very appropriate.
Comprehensive Internal Audit
An internal audit s one undertaken to determine the efficiency and effectivity of the activites
of an organization. Among the many aspects of operations within the organization, a small activity
that is not done right may continue to be unnoticed until it snowballs into a full blown problem.

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An example is the resignation of an employee after serving the company for 15 years. After
one week, another employee with ten years of service also resigned. Both were from the same
department. If after another week, a third employee is resigning, a full investigation is in order.
Even if the source of the problem is identified, it may already have caused considerable losses to
the organization. A comprehensive internal audit aims to detect dysfunctions in the organization
before they bring bigger to management.
Symptoms of Inadequate Control
If a comprehensive internal audit cannot be availed of for some reason, the use of a checklist
for symptoms of a inadequate control may be used.
Kreitner has listed some of the common symptoms as follows:
1. An unexplained decline in revenues and profits.
2. A degradation of service (costumer complaints).
3. Employee dissatisfaction (complaints, grievances, turnover).
4. Cash shortages caused by bloated inventories or delinquent accounts receivable.
5. Idle facilities or personnel.
6. Disorganized operations (work flow bottlenecks, excessive paperwork).
7. Excessive costs.
8. Evidence of waste and inefficiency (scrap, rework)
It must be noted that behind every symptom is a problem waiting to be solved. Unless this
problem is clearly identified, no effective solution may be derived. Nevertheless, problems are
easily recognized if adequate control measures are in place.

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SUMMARY
Controlling is one of the main functions of management. It comes after planning,
organizing, and directing. Controlling is aimed at determining whether objectives were realized or
not, and if not, by providing means for achievement.
Controlling is important because it complements the other management functions.
Controlling is a process consisting of various steps, namely: establishing performance
objectives and standards. Measuring actual performance, comparing actual performance with
objectives and standards, and taking necessary action based on the results of the comparison.
Control may be classified either as feedforward, concurrent, or feedback.
Organizational control systems consist of the strategic plan, the long-range financial plan,
the operating budget, performance appraisals, statistical reports, policies and procedures.
Strategic control systems consist of financial analysis, and financial ratio analysis.
There are means to identify control problems. They are the executive reality check, the
comprehensive internal audit, and the general checklist of symptoms of inadequate control.