Republic of the Philippines

Don Honorio Ventura Technological State University

Bacolor, Pampanga

CHAPTER 9:
CONTROLLING

Group 9: BSCE-5D
Leader: Bondoc, Mariella
Members: Alipio, John Bernard
Bulanadi, Jerome
Caisip. Mark Renzo
De Vera, Julie Mae
Luceño, Aldrin

Engr. Rosemarie Tolentino

Instructor
CONTROLLING
The long-term existence of many companies, most often, is placed in jeopardy when some
aspects of their activities go out of control. Consider the following examples:
1. A news report indicated that the fire which destroyed the Php.800 million Superferry 7
luxury ship on March 26, 1997 was caused by illegal connection made on its electrical
system. If this is true, the losses could be attributed to inadequate management control.
2. The tragedy that happened at the Ozone Disco in March 18, 1996 clearly manifested
management’s lack of control over the day-to-day operations of the firm. Even the
failure to detect earlier the violations in the Building Code spells lack of effective
government control.
3. The management of a telephone company could not stop the unauthorized use of lines
assigned to many of its subscribers. Costumers become angry when they are billed for
calls they never made.
The examples presented constitute a very small percentage of unwanted occurrences that
happen everyday in the business world. Apart from the destruction of lives and property, normal
business operations are hampered causing discontinuities in employment and the provision of
products and services. These could not have happened if only adequate controls were instituted.
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 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 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 forth-coming, 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 with escalating production costs,
which will place the viability of the firm in jeopardy.
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 in the results of the comparisons

Establishing performance objectives and standards

In controlling, what has to be achieved must 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 and established, the measurement of performance will be
facilitated. Standards differ among various organization. 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 it’s own method
for measurement.
Figure 9.1 Steps in Control Process

ESTABLISH PERFORMANCE OBJECTIVES

AND STANDARDS

MEASURE ACTUAL
PERFORMANCE
Do nothing

DOES ACTUAL
PERFORMANCE
MATCH THE
Yes
STANDTARDS

No
TAKE CORRECTIVE
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 organization 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 what the
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 contract with the government to construct a 100 kilometer
road within ten months. It would be, the, 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 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 these distinct types,namely;

1.Feedforward control

2.Concurrent control

3.Feedback control
Figure9.2 Types of Control and Their Relation to Operations

PRE-OPERATIONS FEEDFORWARD
PHASE CONTROL

ACTUAL CONCURRENT
OPERATIONS PHASE
CONTROL

POST OPERATIONS FEEDBACK

PHASE
CONTROL

FEEDFORWARD CONTROL

When management anticipate problems and prevents their occurrence,the type of control
measure undertaken is called feedforward control. This type of control provides the assurance that
the required human and nonhuman resources are in place before operations begin. An example is
provided as follows:

The manager of a 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 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 that using concurrent controlare as follows:

The manager of a construction firm constantly monitors the progress of the company’s
project. 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 forimprovement are derived ,feedback control is undertaken. Corrective measures 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 lowers the quality of output ,. The feedback information
obtained leads to some adjustments in the time schedule.

COMPONENTS OF ORGANIZATIONAL CONTROL SYSTEM

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 (discussed in chapter 3) 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.

The Long-Ranged 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-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 headed, 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:

1. Labor efficiency rates

2. Quality control rejects

3. Accounts receivable

4. Accounts payable

5. Sales reports

6. Accident reports

7. Power consumption report

Figures 9.3 shows a sample statistical report

Policies and Procedures

Policies refer to “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 company’s 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 purchasing officer;

2. The purchasing officer forwards the request to top management for approval;

3. When approved, the purchasing officers makes a canvass of 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
By Department
(in KWH)
DEPARTMENT JANUARY FEBRUARY MARCH TOTAL
A 1000 1100 1200 3300
B 900 1400 1010 3310
C 1180 1650 1200 4030
D 500 1100 600 2200
E 600 455 632 1687
TOTAL 4180 5705 4642 14527

It is expected that policies and procedures laid down 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 SYSTEM

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 o its financial performance. It is just
fitting that certain measurement of financial performance be made so that whatever deviation from
standards are found out, corrective action may be introduced.

A review of the financial statement will reveal important detail about the company’s
performance. The balance sheet contain information about the company’s assets, liabilities, and
capital accounts. Comparing the current balance sheet with previous ones may reveal important
changes, which in turn, provides clues to performance.

The income statement contains information about the company’s gross income, expenses,
and profile. When also compared with the previous year’s income statement, changes in figures
will help management determine if it did well.

Figures 9.4 and 9.5 Show samples of financial statement

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 the 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
deviation occur, explanation are sought in preparation for whatever action is necessary.

Financial ratios may be categorized into the following types:

1. Liquidity
2. Efficiency
3. Financial leverage
4. Profitability
5.

Liquidity ratio – these ratio assess the ability of company to meet its current obligation. The
following ratios are important indicators 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 follow;
Current ratio = current assets/current liabilities
2. Acid test – this is a measure of the firm’s ability to pay off short term obligations with the
use of current assets and without relying on the sale of inventories. The is as follows;

Acid test ratio = current test – inventories/current liabilities

Efficiency ratio – these ratios show how effectively certain assets or liabilities are being used in
the production of goods and services. Among the more common efficiency ratios are;

1. Inventory turnover ratio – this ratio measures the number of times an inventory is turned
over (or sold) each year. This is computed as follows;

Inventory turnover ratio = cost of goods sold/inventory

2. Fixed asset turnover – this ratio is used to measure utilization of the company’s investment
in its fixed assets, such as its plant and equipment. The formula used is as follows;

Fixed asset turnover = net sales/net fixed assets

Financial leverage ratios – this is a group of ratios designed to assess the balance of financing
obtained through debt and equity sources. Some of the more important leverage ratios are as
follows.

1. Debt to total assets ratio – this ratio shows how much of the firm’s assets are financed by
debt. It may be computed by using the following formula:

Debt to total assets ratio = total debt/total assets

 2. Times interest earned ratio – this ratio measures the number of times that earnings before
interest and taxes cover or exceed the company’s interest expense. It may be computed by
using the following formula:

Time interest earned ratio = profit before tax + interest expense

Interest expense

Profitability ratios – these ratios measure how much operating income a company is able to
generate in relation to its assets, owner’s equity and sales. Among the more notable profitability
ratios are as follows:

1. Profit margin ratio – This ratio compares the net profit to the level of sales. The formula
used is as follows:

Profit margin ratio = net profit/net sales

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 = ne t 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

Figure 9.4 Sample Balance Sheet Statement

MORNING STAR CHEMICAL CORPORATION

Balance Sheet Statement

As of December 31, 1997

Current assets

Cash Php. 415

Marketable securities 1,000

Account receivable 3,062

Inventory 1,980

Prepaid expenses ___123___

Total current Php. 6,580

Noncurrent assets

Gross plant and equipment Php. 11,500

 Accumulated depreciation (2,550)

Other assets and intangibles ___50____

Total assets Php. 15,580

Current liabilities

Account payable Php. 1,594

Notes payable 2,210

Accrued salaries and wages 63

Accrued taxed 174

Current portion of long-term dept ____220___

Total current Php. 4,261

Noncurrent liabilities

Bank term 500

Mortgage 1,355

Deferred income tax __1,783__

Total noncurrent 3,638

Stockholders equity

Common stock (per value is Php 1,00) 4,000

Pain –in surplus 1,513

Retained earnings 2,168

Total stockholders Php 7,681

Total liabilities and stockholders equity Php 15,580

Figure 9.5 A Sample Income Statement

MORNING STAR CHEMICAL CORPORATION

Incoming Statement

For the year Ending December 31, 1997

(Php000)

Net sales Php 12,250

Cost of good sold 8,820

Gross profit Php 3,340

Selling 673

Administrative 653

Depreciation and amortization 600

Operating profit 1,504

Interest expense 350

Profit before taxes 1,154

Taxes 462

Net profit Php 692

Common dividends Php 429

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 3 approaches.

1. Executive reality check

2. Comprehensive internal audit
3. General checklist of symptoms of inadequate control
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. This 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 non-academic 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 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 executives will experience in the classroom will make him more responsive in the
prep 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 never sees inside the confines of his air-
conditioned office. Because the said action exposes the engineer manager to certain realities, the
term reality check is very appropriate.

Comprehensive Internal Audit

 An internal audit is one undertaken to determine the efficiencyand effectivity of the activities of
an organization. Among the many aspects of operations w/in the organization, a small activity that
is not done right away continue to be unnoticed until it snowballs intoa full blown problem.

An example is the resignation of an employee after serving the company for 15 years. After 1
week, another employee with ten years of service also resigned. Both were from the same dept. if
another week a 3rd employee is resigning a full investigation is in order. Even if the source of the
problem is identified, it may have already caused considerable losses to the org. A comprehensive
internal audit aims to detect dysfunctions in the organization before they bring the bigger troubles
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 inadequate control may be used.

Kreitner listed some of the common symptoms as follows:

1. An unexplained decline in revenues and profits

2. A degradation of service (customer complaints)
3. Employee dissatisfaction (complaints, grievances, turnover)
4. Cash shortages caused by bloated inventories or delinquent accounts recievable.
5. Idle facilities or personnel
6. Disorganized operations (work flow bottlenecks, excessive paperwork)
7. Excessive cost
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 maybe derived. Nevertheless, problems are
easily recognized if adequate control measures are in place.