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Management Principles and Application Unit 5 Control
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Control
MANAGEMENT PRINCIPLES AND APPLICATION
| VERY SHORT TYPES QUESTION & ANSWERS |
(A) Multiple Choice:
1. Which of the following is not done by controlling process
(a) Measurement performance.
(b) Correction activities.
(c) Compare actual and standard.
(d) Arranging activities.
Ans: (d) Arranging activities.
2. Which of the following is not a characteristic of controlling
(a) Continuous process.
(b) Curtailment of Right.
(c) Dynamic process.
(d) Pervasive function.
Ans: (b) Curtailment of Right
3. Which of the following is traditional control technique.
(a) Management Audit.
(b) Return on investment.
(c) Budgetary control.
(d) Responsibility accounting.
Ans: (c) Budgetary control.
4. Which of the following is not an variable of Break-Even-Analysis
(a) Purchase volume.
(b) Price.
(c) Sales volume
(d) Variable cost.
Ans: (a) Purchase volume.
5. In which of the following year, PERT was first formally applied to the planning and control.
(a) 1956
(b) 1957
(c) 1958
(d) 1959
Ans: (c) 1958
6. Controlling is closely related to the
(a) Fixing of authority.
(b) Fixing of responsibility.
(c) Setting of objectives.
Ans: (c) Setting of objectives.
7. Controlling is the function of–
(a) Line managers.
(b) Staff managers.
(c) None of the two.
Ans: (a) Line managers.
8. Control is exercised
(a) Whenever something goes wrong.
(b) When efficiency is to be improved.
(c) Regularly.
Ans: (c) Regularly.
9. Controls are-
(a) Forward looking.
(b) Static.
(c) Rigid.
Ans: (a) Forward looking.
10. Controls provide a basis for–
(a) Assessing past performance.
(b) Future action.
(c) Fixing responsibility.
Ans: (b) Future Action.
11. Budgeting is a technique of
(a) Control.
(b) Cost Reduction.
(c) Improving Efficiency.
Ans: (a) Control.
12. Budgetary control system involves.
(a) Estimation of costs.
(b) Setting of targets.
(c) Preparation of budget.
Ans: (c) Preparation of Budget.
(B) Fill up the blanks:
1. Budgetary control is a system of controlling ____________.
Ans: Cost.
2. A budget manual spells out ____________ of persons concerned with it.
Ans: Duties and Responsibilities.
3. A factor which influences other budgets is called ____________ factor.
Ans: Key.
4. Zero base budgeting was used as a technique of control first in America in the year ____________.
Ans: 1962.
5. Cost control is a control of all the costs of an enterprise in order to achieve cost ____________.
Ans: Effectiveness.
(C) Fill up the blanks:
1. Control is the measurement and ____________ of the performance of subordinates.
Ans: correction.
2. ____________ is the basis of control.
Ans: planning.
3. ____________ is the essence of control.
Ans: action.
4. ____________ is the key to control.
Ans: delegation.
5. ____________ is the guide to control.
Ans: information.
6. ____________ deviation indicates that the performance was better than expectation.
Ans: positive.
7. A widely used device for managerial control is the ____________.
Ans: budget.
8. Personal observation is a non ____________ control.
Ans: budgetary.
9. ____________ analysis is a managerial tool that emphasis the relationship among decision variables.
Ans: Break even.
10. Unit contribution = Sales Revenue- ____________ cost.
Ans: Variable.
(D) Say True or False:
1. Breakeven analysis is influenced by five variables.
Ans: True.
2. Breakeven analysis shows the effect of additional sales on profit.
Ans: True.
3. Cost and revenue should be taken into account to determine the breakeven point.
Ans: True.
4. Management audit is an overall review of financial performance of an organisation.
Ans: False.
5. Return on Investment is the rate of profitability on the capital employed.
Ans: True.
6. Under responsibility accounting system, the organisation is divided into various responsibility centres.
Ans: True.
7. PERT was originally developed in the military department.
Ans: False.
8. CPM follows the same principles as are used in PERT.
Ans: True.
9. Information technology has promoted the development of MIS.
Ans: True.
10. ZBB does not permit management any freedom and flexibility in the allocation of resources.
Ans: False.
| SHORT TYPE QUESTIONS & ANSWERS |
1. What is control?
Ans: Control can be defined as the process of evaluation of performance and the implementation of corrective actions to accomplish organizational objectives.
2. What is budgetary control?
Ans: Budgetary control is the process of determining various budgeted figures for the enterprise for the future period and comparing the budgeted figures with the actual performance for calculating variances, if any.
3. What is cost control?
Ans: Cost control is a control of all the costs of an enterprise in order to achieve cost effectiveness in business operations and thus boost the output of an organization.
4. What is management by exception?
Ans: It is an important principle of management control. According to this principle only significant deviations from the standards of performance should be brought to the management’s notice. It is a technique of separating important and unimportant information.
5. What is social audit?
Ans: Social audit is a systematic, study and evaluation of the organization’s social performance as distinguished from its economic performance.
6. What is management audit?
Ans: Management audit is a modern technique of controlling, in which the aim is to examine the efficiency of the management philosophies, policies, techniques etc. in successfully running an enterprise.
7. What is zero base budgeting?
Ans: Zero base budgeting is a non-business budgeting based on system where each function is justified in its entirely and each time a new budget is formulated.
8. When and where the zero-base budgeting was use at the first time?
Ans: In the year 1962 in America the zero-base budgeting was used for the first time.
9. Who was the person to use the zero-base budgeting for the first time?
Ans: The former president of America, Jimmy Carter used the zero-base budgeting for the first time when he was the Governor of Georgia for controlling state expenditure.
10. What is inventory control?
Ans: Inventory control implies controlling the kind, amount, location and timing of various commodities used in and produced by an enterprise.
11. What is break-even analysis?
Ans: Break-even analysis is a technique of determining that level of operation where total revenues equal to total expenses. It is the point of no profits no loss situation.
12. What is MIS?
Ans: Management Information System (MIS) is a formal method of making available to management the accurate and timely information necessary to facilitate the decision-making process and enable the organizational planning, control and operational functions to be carried out effectively.
13. What is responsibility accounting?
Ans: Responsibility accounting is a system of accounting under which each departmental head is made responsible for the performance of his department?
14. What is the full meaning of PERT?
Ans: Full meaning of PERT is “Programme Evaluation and Reviewing Technique.”
15. What is the full meaning of CPM?
Ans: Full meaning of CPM is “Critical Path Method.”
16. What is quality circle?
Ans. Quality circle is a group of employees that meets regularly to solve problems affecting its work area.
17. What is safety stock related to
Ans. Safety stock is related to inventory control.
18. Define budget.
Ans. It is a monetary expression of business plans and policies to be pursued in the future period of time.
According to Terry, “A budget is an estimate of future needs, arranged according to an orderly basis, covering some or all of the activities of an enterprise for a definite period of time.
19. What is profit and loss control?
Ans. Profit and loss control is a simple and commonly used device to find out the immediate revenue or cost factors responsible for either the success or failure of an enterprise.
20. Mention five characteristics of control?
Ans: Five characteristics of control are as follows:
(i) It is the last function of management.
(ii) It is backward looking.
(iii) It is a continuous process.
(iv) It is related to planning.
(v) Essence of control is Action.
21. Mention the steps of preparing steps of production budget?
Ans: Following four are the important steps of production budget:
(i) Production planning.
(ii) Consideration of plant capacity.
(iii) Stock quantity to be held.
(iv) Sales budget figures.
22. Write the five objectives of budgetary control?
Ans: Objectives of budgetary control are:
(i) To ensure planning for future by setting up various budgets.
(ii) To coordinate the activities of different departments.
(iii) To operate various cost centres.
(iv) Elimination of wastes and increase in profitability.
(v) To anticipate capital expenditure for future.
23. What are the assumptions of break-even analysis?
Ans: The break-even analysis is based on the following assumption:
(i) All elements of cost can be segregated into fixed and variable components.
(ii) Variable cost remains constant per unit of output and thus fluctuates directly in proportion to changes in the volume of output.
(iii) Fixed cost remains constant at all volumes of output.
(iv) Volume of productivity is the only factor that influences cost.
(v) There is synchronization between production and costs.
24. Mention five objectives of management audit.
Ans: Five objectives of management audit are mentioned below:
(i) To see whether the work at all level is undertaken efficiently or not.
(ii) If the management is not done effectively then suitable recommendations are made to tone it up.
(iii) Whether the plans and programmes are executed properly or not?
(iv) Suggesting ways and means of increasing managerial efficiency.
(v) It also aims to help management at all levels in the effective and efficient discharge of duties and responsibilities.
25. Write the various areas covered by management audit.
Ans: The various areas covered by management audit are:
(i) Appraisal of managers.
(ii) Economic functioning of the enterprise.
(iii) Fulfillment of major social responsibilities.
(iv) Functioning of the Board of Directors.
(v) Soundness of organizational structure.
(vi) Intensity of sales promotional efforts.
(vii) Emphasis on research and development etc.
26. Mention four benefit of social audit.
Ans: Four benefit of social audit are:
(i) It supplies data for comparison with the organizations social policies and standards. The management can determine how well it is living up to its social objectives.
(ii) It develops a sense of social awareness among all employees. In the process of preparing report and responding to evaluations, employees become more aware of the social implication of their actions.
(iii) It provides data and information for comparing the effectiveness of various activities.
(iv) It provides data regarding cost of social programmes, so that management can create sufficient provision for the same.
27. Mention five benefits of Z.B.B.
Ans: Five benefits of Z.B.B. are:
(i) Effective allocation of resources.
(ii) Improvement in productivity and cost effectiveness.
(iii) Effective means to control cost.
(iv) Evaluation of unnecessary activities.
(v) Saving time of top management.
28. Give five features of MIS.
Ans: Five features of MIS are:
(i) Timeliness: Updated data and timely information is required by managers to make decisions. Online transaction has made it possible for managers to have access to latest information with respect to different functional areas.
(ii) Accuracy: Not only should information be provided on time, it must also be accurate. Wrong information will lead to wrong decisions.
(iii) Relevance: The MIS has access to huge data with respect to a given activity. The managers should pick up data pertinent to the decisions making process and the rest should be left out.
(iv) Concise: The data should be related only to the area or activity with respect to which decisions have to be made.
(v) Completeness: While picking up the data, managers should take care to collect all the necessary information that is relevant for solving the given problem.
29. Write four advantages of Critical Path Method.
Ans: Four advantages of Critical Path Method are:
(i) It provides due attention for timely completion of the whole work or even for reducing its time span by several means.
(ii) It permits to place special attention on each activity for securing its improvement by putting more resources, changing the technology or adopting other methods. Briefly, it results in optimum utilization of resources and facilities.
(iii) It helps managers to make plans for all activities, to identify strategic events, to detect potential bottlenecks to the flow of work and to avoid an unnecessary pressure on other paths.
(iv) Because of concentrated timing and attention on each activity of the project rather than on the whole of it, it improves the quality of planning, organizing and controlling in a number of ways.
30. Mention some conditions, which create condition for exercising self-control.
Ans: (i) Management by objectives (MBO): Under MBO, there is a great possibility that people will exercise self-control; because they have their own hand in setting objectives for themselves and are more likely to be committed to those objectives.
(ii) Delegation of Authority: Successful delegation of authority requires attitudes of mutual trust and confidence between the superior and the subordinate. A superior may not like to impose controls on a responsible and competent subordinate and may allow him to exercise self-control as a measure to motivate him.
(iii) Assignment of challenging work: When some challenging nature of work is assigned to an individual the job itself creates situation in which only self-control could be exercised by the individual on himself.
(iv) Highly dedicated employees: In case of highly dedicated employees, there are fewer requirements to impose controls over them as they could be assumed to be self-starters. They may be left to exercising self-control.
31. Write three advantages of Break-even Analysis.
Ans: Three advantages of Break-even Analysis are:
(i) This technique assumes the variable cost and selling price per unit to remain constant for varying levels of output. It does not always hold good.
(ii) Fixed costs also do not always remain constant. These costs may increase after a specified level of output.
(iii) Certain costs cannot be conveniently divided into fixed and variable costs and to that extent, do not form a part of break-even analysis.
32. Mention four limitations of Ratio analysis.
Ans: Four limitations of Ratio analysis are:
(i) Too much dependence on radios can confuse things more than making them clear to the managers. The use of different ratios does not indicate the optimum or sub-optimum use of capital resource.
(ii) Ratios help in intra-firm and inter-firm comparison but do not provide a standard against which actual performance can be measured.
(iii) Figures used in measuring certain ratios, for example, return on investment, do not reflect their true values.
(iv) Different firms may adopt different ways of valuing their depreciation or inventory. Inter-firm comparison in such cases through ratio analysis will not reflect the true picture of their performance.
33. Give six advantages of standard cost as controlling techniques.
Ans: Advantages of standard cost as controlling techniques are:
(i) As standard costs are developed from the study of past operations and existing conditions, they become a pointer to weaker aspects of the operations.
(ii) Standard costs are prepared from the set up physical standard in respect of materials, labour and overhead burden. Thus, standard costs provide both physical standards in quantitative terms and cost standards in financial terms.
(iii) Because of comprehensive character of standards, cost control exercises a permeating influence on all aspects of operations. Measurement and evaluation of current performance as well as of current expenses become much more effective in character.
(iv) Since the standard cost provides the desirable cost that should be achieved under satisfactory conditions and since most actual costs are higher than the standard cost, the performance can be measured quantitatively by expressing the gap as a percentage of the standard cost.
(v) As the standard cost is determined from the work-study as well as the time and motion study, it provides the basis for work simplification, piece rate wage fixation and methods standardization.
(vi) Standard costs give aid to budgetary control, particularly for introducing flexibility therein.
34. Give two limitations of standard cost as controlling techniques.
Ans: Two limitations of standard cost as controlling techniques are:
(i) Standard costs are expensive to set up and difficult to operate in many cases.
(ii) Standard costs may require frequent revisions of cost standards and physical standards along with changes in operating.
35. Mention three limitations of Break-even analysis.
Ans: Three limitations of Break-even analysis are:
(i) This technique assumes the variable cost and selling price par unit to remain constant for varying levels of output. It does not always hold good. The instead in variable cost may be more or less than the proportionate increase in selling price.
(ii) Fixed costs also do not always remain constant. These costs may increase after specified level of out put.
(iii) Certain costs cannot be conveniently divided in fixed and variable costs and to that extent, do not form a part of break-even analysis.
36. Give two limitations of critical path method?
Ans: Two limitations of critical path method are:
(i) In respective projects, it has limited use and applications. It is well applicable for non-routine projects.
(ii) As the time estimate for each activity is based on a single time without any consideration of future contingencies and impending difficulties time allotted for different activities may prove to be unrealistic.
37. Mention necessary steps of standard costing.
Ans: Necessary steps of standard costing are:
(i) Setting of cost standards for various components of cost such as raw materials, labour and overheads. The standards fix the limits within which the different types of expenses must be kept.
(ii) Measurement of actual performance.
(iii) Comparison of actual cost with the standard cost laid down.
(iv) Finding the variance of actual cost from the standard cost.
(v) Finding the causes of variance.
(vi) Taking necessary action to prevent the occurrence of variance in future.
38. Write some uses of PERT and CPM.
Ans: Some uses of PERT and CPM are:
(i) It ensures actual planning: In PERT, a manager is forced to plan. He is required to identify all key events and activities and their sequencing and inter-relationships. He is also required to probe all possibilities, uncertainties and pitfalls to compute the most likely time. Therefore, if he is incompetent or a non-planner, he cannot hide, his incompetence for long.
(ii) It makes every manager fully aware of his responsibilities: Every manager comes to know the precise start time for his work, its cost requirements and its relationship with other works.
(iii) It ensures improved management of resources: This is largely accomplished by transferring resources from the sub-critical paths to the critical path. It is termed trade off of resources.
(iv) It facilitates improved decision-making: Management can stimulate the effects of alternative decisions on paper or on a computer instead of tampering with expensive operations.
(v) If facilitates future-oriented control: The network needs are constantly reviewed and updated on the basis of feed back from the lower levels of management. This ensures advance action and management by exception at upper levels.
(vi) It ensures simultaneous performance of different parts of the work. This shortens the total time required for the project.
39. Define PERT. Mention three limitations of PERT.
Ans: The Program Evaluation Review Technique, or PERT, is a visual tool used in project planning. Using the technique helps project planners identify start and end dates, as well as interim required tasks and timelines.
Three limitations of PERT are:
(i) They are suitable mainly in cases where time is the essence of a programme or where cost and time are so related that by controlling time, cost is controlled.
(ii) Estimates of time, cost and events are seldom available with the precision required estimates of the numerous interlocking points of the chart may add up to situation to make the PERT chart erratic and unreliable as a control techniques.
(iii) PERT has a limited application to one-time non-repetitive projects. It does not help control in continuous processing and production.
40. What are the advantages of control?
Ans. The advantages of control are:
(i) It helps in facilitating decision making: Whenever there is deviation between standard and actual performance, the controls will help in deciding future course of action.
(ii) It serves as a basis for future action: Control provides basis for future action and helps in taking corrective actions.
(iii) Control helps in facilitating decentralisation and decentralisation helps in deciding the future course of action.
(iv) It facilitates coordination: Control helps in coordination of activities through unity of action.
(v) Control helps in improving efficiency: Control system helps in improving efficiency of the organisation.
41. What are the limitations of control? What are the merits of cost control?
Ans. The limitation of control:
(i) Influence of external factors: These factors that have influence on control are -technological changes, government policy, change in fashion.
(ii) Expensive: The control system involves high expenditure.
(iii) Lack of satisfactory standards: It is difficult ot fix standards for the activities like public relations, research etc.
(iv) Opposition from subordinates: When due to control measures, there is pressure of work on subordinates, they may oppose superiors.
Merits of cost control are:
(i) It helps in discovering efficient and inefficient operations.
(ii) It records valuable information for submitting tenders or quoting prices of products or services.
(iii) It helps in pinpointing factors leading to losses.
(iv) The reasons for variations in profit can be ascertained.
(v) It helps in keeping a check on inventories.
(vi) Cost records become a basis for planning future production policies.
42. What are the objectives of operational control?
Ans. The objectives of operational control are:
(i) Products and services to be produced should be of good quality which is ensured through quality control.
(ii) Products and services are produced with minimum possible costs and in required quantities which is ensured through cost control and inventory control.
(iii) Products and services are to be produced at the required time.
43. What are the advantages of PERT?
Ans. Advantages of PERT are–
(i) It forces manager to plan because it is impossible to make a time – event analysis without planning and seeing how the pieces fit together. It forces planning at low levels too.
(ii) It focusses attention on critical activities because a delay in their performance will delay the whole project unless managers are able to make up the time.
(iii) It presses for right action, at right point and at right time in the organisation.
| LONG TYPE QUESTIONS & ANSWERS |
1. Define controlling? Describe the characteristics of controlling. Discuss the need for control.
Ans: Controlling can be defined as that function of management which helps to seek planned results from the subordinates, managers and at all levels of an organization. The controlling function helps in measuring the progress towards the organizational goals & brings any deviations, & indicates corrective action.
Following are the characteristics or nature of controlling:
(a) Managerial function: Control is a managerial function. It is the task of every line manager. A non-manager is not required to perform control functions.
(b) Pervasive function: Controlling is all pervasive function. Controlling exists at every management level. (Terry) Every manager has to exercise control over the activities and behavior of his subordinates. However, the scope of control varies by level of managers.
(c) Universal process: The elements and nature of control process are universal. The control process remains the same regardless of the activity involved or its location in the organization. (G. Dessler) Every control process involves four steps or elements-
(i) Fixing standards.
(ii) Measuring actual performance.
(iii) Comparing performance with standards and detecting deviation. and
(iv) Taking corrective action if required.
All these steps are involved in every control process.
(d) Continuous process: Control is a continuous and never ending process. As long as organization exists, managerial control continues to exist. It is a continuous process of setting standards, evaluating the actual performance and correcting the performance if it deviates from the standards.
(e) Dynamic process: Control is a dynamic process. It is not static. It involves continuous review of standards in the light of changing situations and ensuring performance in conformity with the standards. Thus, this process is subject to change with the change in the situations.
(f) Positive and constructive process: Controlling is a positive and constructive process. The purpose of controlling is positive because it aims at making things happen as desired. Terry and Franklin have rightly alarmed that, “controlling should never be viewed as negative in character. It is a managerial necessity and not an impediment or a hindrance.”
(g) Goal-oriented function: Control is a goal-oriented function. Objective of controlling is to assure that actions contribute to the goal accomplishment (Robert Abbanese). Thus, control is not an end in itself. It is a means to achieve desired results.
(i) Action oriented: Control is an action-oriented function. It implies taking some corrective action to achieve desired performance. Mere evaluation of actual performance is not control. Taking suitable action for correcting the deviation from desired performance is the essence of control. Thus it helps in determining whether the activity is a achieving the desired results (Haynes and Massie).
(j) It is forward looking: Control is forward looking. It aims at future. It not only aims at improving the current performance but also provides standards forfeiture performance.
(k) Controlling and planning are twins: Control is one function of management and its twin is planning. In other words, controlling and planning are closely related. They can be said as two sides of a coin. These functions cannot be separated. Without objectives and plans, control is not possible. (Weihrich and Koontz)
(l) Control not of men but of actions and behavior: Control relates to checking and regulating actions and behavior of human beings towards organizational goals. It does not aim at controlling human beings and their freedom.
(m) Control is not interference: Control is not meant for interfering with others. It does not aim at reducing authority of subordinates. It is simply a means of ensuring actions of subordinates are in line with the desired results.
(n) Wide scope: The scope of control is very wide. It covers all the aspects of performance leading to desired results. More specialty control includes the control of quantity, quality, time and cost. Any activity to control these four aspects of performance can be included in its scope.
The needs of control is described in the following sub heads:
(a) Smooth functioning of the enterprise: According Peter F. Drucker, Control maintains the equilibrium between ends and means, output and efforts”. When there is such equilibrium, enterprise functions smoothly. In other words sound control system ensure smooth functioning of the enterprise. It ensures achievement of long term and short term goals by maintaining equilibrium between ends and means and output and efforts.
(b) Managing large organization: Modern large organization use vast geographical market area and use complex distribution network. Thus their working is influenced by many factors simultaneously. In such a situation uniformity of action and behavior in entire organization can be ensured only through effective control system.
(c) Maintaining competitiveness: To become competitive is one thing. But to remain competitive over a long period of time is a big challenge. Maintaining comprehensiveness requires effective control. Through effective control, managers may use their available resources judiciously and remain competitive.
(d) Attainment of goals: Control is essential in order to attain organizational goals. An effective control system ensures that activities are completed in ways that lead to the attainment of organization goals. (Robbins and Coulter)
(e) Ensures success of planning: Control is the function intended to ensure that everything occur in conformity with plans. Thus, control is the essential to the success of planning.
(f) Facilitates decision-making: It has been rightly said that executive decisions are primarily control decisions. Control system finds deviations in actual performance from the standard. Managers have to decide how to correct the deviations. Thus, control system facilitates managers to decide about follow up actions.
(g) Delegation and decentralization: Control system is essential for the success of delegation and decentralization of authority. No delegation or decentralization of authority can produce desired results without proper control system.
(h) Effective direction: According to Peter F. Drucker, “The synonymous to control is direction”. It means, effective process management can ensure that actions are efficiently and effectively directed towards objectives of the organization.
(i) Promotes coordination: Effective control system ensures unity of direction. This, is turn, ensures unity and uniformity of actions and behaviour. These develop spirit of cooperation among the employees. This ultimately promotes coordination of efforts among all employees and departments.
(j) Enhances motivation and morale: An effective control system is vital to the employee motivation and morale. Controlling helps employees to do their work better to win respect. It serves as challenge and opportunity to improve performance.
Effective control system ensures judicious evaluation of the employees’ efforts and adequate rewards. It safeguards them against raw deal. Consequently it enhances employees’ motivation and morale.
(k) Ensures discipline and honesty: Effective control system causes every organization member to comply the norms, rules and other standards of behavior and action. Members are not under the temptation of greed of monetary and other gain for doing things violating the norms, rules etc. Thus, the disciple and honesty can be ensured to a reasonable extent.
(l) Timely Performance: Control system also contributes to timely performance of activities. Pre Decided work schedules, programmes, timetables etc. are the controlling techniques that ensure timely performance of the activities.
(m) Detection and correction of mistakes: Through control system every action and activity is evaluated against the set standards or rules or plans. Hence, mistakes or irregularities can be detected and corrected at early stages.
(n) Promotes Economy: A sound control system can ensure economy in operation. It can help in reducing and controlling overall and per unit cost of production. It is possible because control system ensure efficient and effective use and elimination of wastage of resources.
(o) Organizational Stability: Sound control system plays vital role in ensuring organizational stability. The techniques of control such as plans, policies, rules, budgets standards or norms of behavior can greatly contribute to the organizational stability. These can give sound foundation to the organization and create its own work, culture and build image and goodwill in the society.
(p) Adapting to changing environment: Modern business organizations work in an ever-changing environment. Products competition, technology, consumer likings, government policies, corporate and industrial laws, employee behavior, social and religious beliefs etc. are changing. Such a changing situation can be managed through adaptive controls.
2. Explain the process of Control. What are the principles of control?
Ans: Control is a continuous or ongoing dynamic process. It may involve many steps. Usually control process consists of the following steps–
(a) Establishment of Standards.
(b) Measurement of Performance.
(c) Comparison of Performance with Standards.
(d) Taking Corrective action.
(a) Establishment of Standards: The first step in the process of control is the establishment of standards of performance. It may be noted that standards are the objectives or plans against which actual performance can be measured.
Standards may be in several forms but they should be tangible, verifiable and measurable. More specifically standards should be qualitative as well as in quantitative terms. The performance standards are generally classified into four categories.
(i) Productivity Standards: These standards state the amount/number of product or service to be produced during a given time period.
(ii) Time Standards: These standards state the length of time to be allowed to make a certain product or perform a certain service.
(iii) Cost Standards: These standards state the cost associated with producing a product or service.
(iv) Quality Standards: These standards set the level of perfection desired.
(v) Behavioral Standards: These standards prescribe the desired type of behavior of employees in an organization.
Standards to be effective, should satisfy the following conditions–
(i) Standards should be fixed in all the key areas of business.
(ii) They should be consistent with the goals and policies of the organization.
(iii) They should be as far as possible, expressed in quantitative terms. Such standards can reduce subjectivity.
(iv) They should be precise and tangible so that everyone can understand them easily.
(v) They should focus on achievement of results and not on procedures.
(vi) They should be capable of achieving with reasonable effort, cost and time.
(vii) They should be flexible and capable of being adapted to changing circumstances.
(viii) They should be set in consultation with the employees.
(ix) They should be objective and based on facts.
(x) They should include the tolerance limits i.e. permitted limits of deviation.
(xi) They should be revised from time to time.
The Control Process
(b) Measurement of performance: The next step in the control process is the measurement of actual performance. Actual performance may be measured through personal observation, samples, report, accounting statements etc. But managers should carefully select the methods and time measurement. Measurement methods may be quantitative as well as qualitative or a combination of both.
(c) Comparison of performance against standards: The third step in the control process is the comparison of actual performance with the standards. At this step, manager finds out the degree of variation or deviation between actual performance and the standards. Where manager finds no deviation, no further action is required. Then the control process is deemed to have completed.
When deviation is found in the performance, manager has to find out the extent of deviation. If the deviation is within the tolerance limits, manager need not bother. However, if the deviation exceeds the tolerance limits, the manager’s attention is needed. In such a case manager has to take some corrective action.
(d) Taking corrective action: The fourth and final step in the control process is to take corrective action. At this point, manager should find out the cause of deviation. If the cause is beyond the control, manager can do nothing. If the cause is controllable, manager may either,
(a) correct actual performance. or
(b) revise the standards.
Manager may correct actual performance by
(i) providing training.
(ii) revising compensation plan.
(iii) redesigning job.
(iv) changing the strategy.
(v) changing the organizational structure and so on.
Where the deviation has been the result of faulty and under realistic standard, manager should revise the standard.
The above stated four steps constitute an effective control process. This control process is basic and universal. It essentially remains the same regardless of the activity involved at all the level of manager.
Late professors Koontz and O’bonnell and many other experts have laid down certain principles of control. Some of the basic principles of control are summarized as follows–
(a) Principle of standards: This principle requires that for ensuring effective control, accurate and objective standards should be specific and capable of being measured. The workers being measured will generally accept good standards as fair and reasonable.
(b) Principle of Objectives: This principle states that control must contribute to the achievement of objectives. In other words, control must facilitate the accomplishment of organizational objectives.
(c) Principle of strategic point of control: This principle states that for effective control manager’s focus should be on strategic or key points of performance. Effective and efficient control requires focus on those crucial activities or operations where variation from standards would cause greatest harm.
(d) Principle of efficiency of control: This principle states that control system should be able to detect deviations quickly and to take corrective action immediately with minimum of cost. The results of the control should be worth their cost, both in monetary and human term.
(e) Principle of control of responsibility: This principle holds that control should be exercised only by the manager responsible for the execution of the particular plan.
(f) Principle of future-directed control: This principle states that effective control system should aim at preventing present as well as future deviations from the standards.
(g) Principle of direct control: This principle states that control system should be designed to maintain direct contact between the controller and the controlled. Such a control system will ensure high quality of managerial actions and behavior.
(h) Principle of reflection of plans: This principle requires that control system must be so designed to reflect the character and structure of plans. It will help in implementing the plans effectively.
(i) Principle of Organization suitability: This principle states that controls should be tailored to fit the organization structure. Responsibility for execution of plans and for correction of deviations should clearly be pointed out in the organizational structure.
(j) Principle of individuality of controls: This principle states that controls must be designed to meet the needs of the individual manager. More specifically, control system should be tailored to suit the personality, quality and authority of the manager.
(k) Principle of control by exception: This principle holds that a manager should be concerned with and concentrate only on exceptional deviations i.e. significant deviations and ignore others.
(l) Principle of flexibility of controls: This principle prescribes that controls should be flexible enough to meet the needs of changing conditions.
(m) Principle of review: This principle holds that control system should be reviewed periodically.
(n) Principle of action: This principle states that control should be followed by appropriate action. Any control is justifiable if measures are undertaken to correct the potential or actual deviation from the standards or plans.
3. What are the essentials of an effective control system? Explain the limitations of control.
Ans: An effective control system should meet the following requirements:
(a) Goal-oriented: A control system is effective only when it is goal-oriented. Therefore, before formulating a control system, its goals should be and properly understood by all concerned. Moreover, everyone should be made known what is his role and what is expected of him to contribute to the system.
(b) Accurate: A control system should be accurate. It must generate accurate and reliable information. Inaccurate information from a control system may cause the managers to take inappropriate action or no action.
(c) Timeliness: Control system should be able to provide timely information. The best information has little value if it is delayed. Hence, control system should be able to receive and evaluate information quickly and timely for timely corrective action.
(d) Objective: An effective control system should be as objective as possible and not biased. It should therefore be reasonable to those about whom information is being received and evaluated.
(e) Understandable: A control system may fail if it cannot be understood by the users i.e. employees. The employees may ignore difficult system and very purpose of the system may be defeated. Hence, a control system should be easy to understand.
(f) Flexible and forward looking: The modern organization operates in a dynamic environment where change is inevitable. Hence, control system should be flexible and forward looking.
(g) Economical: A control system must be economical to operate. The cost of control system should not exceed the value of its benefits, but the economy need not be exercised at the cost of effectiveness of the system.
(h) Reasonable standards: A control system should use reasonable and attainable control standards. If they are too high or unrealistic they will not be achieved and hence will not motivate employees. Therefore, the control system should enforce the standards that challenge and induce people to reach higher performance levels.
(i) Strategic Point Control: Management cannot control everything that happens in an organization. Hence, managers should focus on those points or factors that are strategic or key to the organizations performance. They should operate where variation from standards would cause the greatest harm. (Robbins Coulter)
(j) Consistent to organization structure: A control system should be consistent with the organizational structure. It should be consistent with organization activity relationship as well as with the authority relationship. In other words, flow of information for control system should correspond with the organizational relationships.
(k) Emphasis on exception: A control system should be based on exception principle. This principle states that managers should concentrate on exception deviations from the standard. It is due to the fact that managers cannot control all the activities. Hence, managers should concentrate on the exceptional deviation or the significant deviations in performance from the standards.
(l) Multiple criteria: A control system should contain multiple criteria of control. It means that is should include qualitative as well as quantitative criteria of control. Such criteria are more logical and objective. They are more accurate evaluation of performance.
(m) Corrective action: An effective control system not only helps to detect deviation from the standard but also suggests the actions to be taken to correct the deviation. Thus, an effective control should be able to point out the defect and specify the corrective action.
(n) Participation: In order to formulate an effective control system, participation of all concerned should be ensured. In other words, control system should be a joint effort of the manager and his subordinates. Proper participation can greatly influence the success of control system.
(o) Suitability: It is a matter of fact that every organization is different in its size, operations and needs. Hence, the system and techniques of control will differ from organization to organization. Hence, control system should be designed and tailored to suit the needs of a particular organization.
(p) Self-Control by sub-systems: A control system should within it have a self-control system for each sub-system or department. It is a department, which can have its own control system, much of the detailed controls can be handled within the department. These departments with self-control can then be tied together by the overall control system. (Joseph L. Masie)
(q) Direct Control: A control system should be designed to maintain direct contact between the controller and the controlled. Even when there are number of control systems provided by staff specialists, the supervisor at the first level is still important because he had direct knowledge of performance (Joseph L. Massie)
(r) Human factor: Every control system involves human beings and hence affected by human factors. Hence, a technically well-designed control system may fail if human and psychological factors are ignored. Hence, the physiological and psychological factors of human beings (i.e. needs of human beings) should be considered while formulating a control system.
(s) It should consider and give allowance to the factors, which cannot be controlled.
(t) The control factor should be an effective feed back mechanism.
Though control is essential for better performance and maintenance of good standards, there are certain limitations also. Some of the limitations are discussed below–
(a) Difficulty in setting standards: There are many areas in the context of a business where measurable standards of performance just cannot be set. Important among such areas are employee morale, customer reaction, and research and development. In the absence of these control function becomes less effective.
(b) Difficulty in qualification: Sometimes standards cannot be fixed in terms of quantity. Hence, control becomes even more difficult.
(c) Influence of external factors: There may be an effective control system but external factors, which are not in the ambit of management, may have adverse effect on the working. These factors may be government policy, technological changes, change in fashion etc. The influence of these factors cannot be checked by the control system in the organization.
(d) Expensive: The control system involves huge expenditure on its exercise. The performance of each and every person in the organization will have to be measured and reported to higher authorities. This requires a number of persons to be employed for this purpose. If the performance cannot be quantitatively measured then the superiors will observe it. The exercise of control requires both time and effort.
(e) Opposition from subordinates: The effectiveness of control process will depend upon its acceptability by subordinates. Since control interferes with the individual actions and thinking of subordinates they will oppose it. It may also increase the pressure of work on subordinates because their performance is regularly monitored and evaluated. The factors are responsible for the opposition of controls by subordinates.
(f) Difficulty in pinpointing responsibility: Control process is concerned with damnifying the factors responsible for deviations. But, in modern times, it is difficult to do so, because number of persons are concerned with the performance of a single job.
(g) Time consuming: There are cases when control becomes time consuming exercise. It is due to the nature of techniques used and the work itself.
(h) Limits of corrective action: Sometimes deviations are found but no corrective action is possible. Sometimes, corrective action cannot be taken quickly and damages cannot be controlled.
4. Explain the traditional techniques of control? Discuss the various modern techniques of control.
Ans: The traditional techniques of control are discuss below:
(a) Personal Observation: Personal observation technique is the oldest and most important technique of control. Under this technique, managers occasionally visit personally the subordinates at work place and observe their performance. If they find any deviation, they give instructions on the spot.
(b) Setting examples: It is the old saying that “example is better than perceptions”. Some managers follow this saying and put good examples of performance before subordinates and expect the same from them. Examples set by managers become the norm of behavior for the subordinates.
(c) Plans and policies: Organizational plans include strategies, policies, procedures, methods, rules, programmes etc. These all are important tools that guide and control the actions of all the organization members. These prevent deviations in actions and behavior and ensure uniformity of actions and decisions. Thus, they play crucial role in controlling activities.
(d) Organization charts and manuals: Organizational charts and manuals are the document that provides a clear picture of relationship, duties and responsibilities of organization members. These can be used to compare performance of the members. Thus, these can serve as important control techniques.
(e) Disciplinary system: Disciplinary system provides for reprimand, ensures criticism, disciplinary action, punishment etc. Thus, it is a negative technique of control for minor but regular lapses on the part of an employee reprimand is issued. Where employee constantly makes mistakes or where mistakes are grave, strict disciplinary action is taken.
(f) Written instructions: Written instructions are issued from time to time to the organization members. These provide latest information and instructions in the light of changing rules and conditions. These may provide additional knowledge and even remove misconceptions of the members.
(g) Statistical data: Statistical data are important source of control statistical data are collected and presented in the form of tables, charts and graphs. They are analyzed in numerous ways such as mean, mode, standard deviations, regression and correlation. These data serve as an important role in the areas of production control, quality control, inventory control and so on.
(h) Special reports and records: Special operational reports and records are also prepared in addition to normal reports and records. These are non-routine reports prepared by experts. They contain much deeper information. They are actually investigated reports. They, therefore, indicate the depth of the problem and suggest the means of correcting/solving the problem.
(i) Financial Statements: Financial statements include the ‘profit and loss account’ and ‘balance sheet’. These show the working and financial position of a business. These are used as techniques of control. For this purpose, financial statements of different time periods are compared and analyzed. The conclusions drawn from such comparison and analysis are used for controlling financial performance of the firm.
(j) Operational audit: The audit is an effective tool of control. Operational audit relates to the internal operations of the firm. Statutory audit is more of a nature of financial operations. Some firms use internal audit with the help of special internal staff or external of working of the entire organization. It can reveal to what extent established policies, procedures, rules, work standards and methods have been followed in the day-to-day working of the organization. This information can be used to control the operation of organization.
(k) Break even analysis: It is a technique of finding out a point of break-even where total cost equals to the total revenue. Thus, this technique is useful in controlling production and sales volume in order to avoid loss.
(l) Standard Costing: Standard costing is a technique of cost control. Under this technique, standard costs of material, labor, overheads etc. are determined. Then, actual costs are recorded and compared with the standard costs and variances are found out. Then causes of variance are found out. Finally, measures are taken to prevent variances in future.
(m) Budgets/ budgetary control: When budgets (capital budget, expenditure budget, etc.) are used as a technique of control, it is called the budgetary control. It is a process of finding out what is being done and comparing the actual results with the related budget data and finding out the deviations and correcting the deviation. Thus, budgetary control helps manger to control the cost or use of resource as planned.
The modern techniques of control are as follows–
(a) Ratio analysis: Ratio Analysis is a technique for analyzing the financial statements of a business firm by computing different ratios.
The most commonly used ratios have been grouped under the following categories:
(i) Liquidity Ratios: Liquidity ratios are calculated to know the short-term financial position of the business and its ability to pay short-term liabilities. It includes the current ratio and quick ratio.
(a) Current Ratio = Current Assets/Current Liabilities.
(b) Quick Ratio = Cash + Bills Receivable/Current Liabilities.
(ii) Solvency Ratios: Solvency ratios are calculated to know long term solvency of the business and its ability to pay its long term debts. It includes debt equity ratio, proprietary ratio, interest coverage ratio etc.
(a) Debt Equity Ratio = Debt/Equity Share Holders Fund.
(b) Proprietary Ratio = Shareholders fund/Total Assets.
(iii) Profitability Ratios: Profitability ratios like gross profit ratio, net profit ratio, operating ratio, etc. help to analyze the profitability position of a business.
(a) Gross Profit Ratio = Gross Profit/Net Sales × 100
(b) Net Profit Ratio = Net Profit/Net Sales × 100
(iv) Turnover Ratios: The various turnover ratios like Inventory turnover ratio, debtors turnover ratio, fixed assets turnover ratio etc. help in knowing whether the resources are effectively used for increasing the efficiency of operations of the business or not. Higher turnover indicates better utilization of resources.
(a) Inventory Turnover Ratio = Cost of goods sold/Average Stock.
(b) Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivables.
The main advantages of Ratio Analysis are as follows:
(i) It is an useful tool for managerial control.
(ii) It helps in determining whether the financial responsibilities are accomplished effectively.
(iii) It helps in evaluating the liquidity and profitability of an organisation.
(iv) It determines the financial success or failure of any organisation.
(v) It measures the managerial efficiency and effectiveness of an enterprise.
(vi) It helps in establishing the relationship between the present financial performance and past performance.
Ratio Analysis has the following limitations:
(i) Different ratios are calculated on the basis of past information. Therefore, it cannot indicate the future condition.
(ii) Ratio analysis is considered to be an aid to judgement, but it cannot be treated as a substitute to judgement.
(iii) As a single ratio cannot give an indication of the nature of an organisation, many ratios are required to be calculated. As a result, this analysis is time-consuming and laborious.
(b) Return on investment or ROI: Return of investment (ROI) is a technique of control of overall performance. It measures the rate of return on investment i.e. capital employed. This technique is based on the assumption that goal of business is not to maximize profits but to optimize returns on capital employed. Therefore, in this technique profit of the organization is not takes to absolute terms but is considered in terms of capital employed.
As a control technique, ROI provides the following advantages:
(i) It places high values on the effective and efficient use of organisational resources.
(ii) It is a mirror which reflects the entire image of the operating activity. As such, suitable action can be taken for removing inefficiency.
(iii) It can be treated as a total control system in the sense that rate of return reflects the objectives of the organisation.
(iv) It indicates how effectively the resources are being used. It makes the managers alert to wastage and inefficiency.
There are some limitations of ROI as a control tool. These are as follows:
(i) It requires too many calculations and continuous recording — which is time-con-suming and expensive.
(ii) It gives excessive emphasis on financial factors ignoring other important factors like executive skills, good public relations, sound industrial relations, research and development etc.
(iii) Valuation of assets becomes difficult as prices change over time.
(iv) It is difficult to find out a standard rate of return.
(c) Budgetary Control: Budgetary control can be defined as such technique of managerial control in which all operations which are necessary to be performed are executed in such a manner so as to perform and plan in advance in the form of budgets & actual results are compared with budgetary standards.
Therefore, the budget can be defined as a quantitative statement prepared for a definite future period of time for the purpose of obtaining a given objective. It is also a statement which reflects the policy of that particular period. The common types of budgets used by an organization.
Some of the advantages of budgetary control are:
(i) An effective tool for performance measurement of departments, individual, and cost centers.
(ii) Identification of areas for reduction and efficiency improvement.
(iii) Increased efficiency and cost reduction results in profit maximization;
(iv) It also helps in introducing and incentive schemes based on performance.
(v) The reduction in cost is always the primary target.
(vi) Improves coordination between departments as the results and costs are interrelated.
(vii) It provides insight for in-depth analysis and any corrective action.
(viii) Helpful in achieving an organization’s long term goal.
Disadvantages:
(i) Budgeted numbers often need revision as future prediction is difficult.
(ii) Time-consuming and costly process, need people and resources Budgetary control processes.
(iii) This process sometimes requires coordination between various departments is a difficult task.
(iv) This process requires approval and support from top senior management.
(v) Always comparing the actual with a budget is detrimental to employees motivation.
(d) EVA: EVA is simply the operating profit after tax less a charge for the capital, equity as well as debt, used in the business. Economic value added (EVA) is a measure of a company’s financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA can also be referred to as economic profit, as it attempts to capture the true economic profit of a company. The idea behind EVA is that shareholders must earn a return that compensates for the risk taken. If EVA is zero; it is treated as a sufficient achievement on the ground that shareholders earned a return that compensated the risk.
EVA has the following merits:
(i) It maximises the return of company over and above its cost of capital. The focus is, thus, on stakeholders (management or employees) and not owners (shareholders) only.
(ii) It attempts to optimise the capital structure by minimising its cost of capital.
(iii) It is an incentive tool for employees to improve organisational performance as they share surplus profits of the company.
(iv) It optimises the use of capital by investing it in investment outlets that provide maximum returns. The aim is to maximise the difference between return on capital and cost of capital.
(e) PERT/CPM: PERT and CPM are network techniques that are also used in controlling the actions and performance. PERT stands for ‘Programme Evaluation and Review Technique” and CPM stands for “Critical Path Method”. Though these techniques differ slightly, they are based on the same principle.
This technique not only helps in planning the schedule of a project but also helps managers to monitor and control progress of the project, but also identify possible obstacles, and shift resources as necessary to keep the project on schedule. Thus, with a PERT/CPM a manager can ensure control of complex projects.
The specific advantages of the PERT/CPM are as follows:
(i) It forces the managers to analyse all possibilities, uncertainties and defects. This eliminates wastage. All the factors affecting the successful completion of the project are analysed in advance.
(ii) It focuses attention on critical activities because delay in their performance will delay the whole project, unless the managers are able to make up the time by shortening some future activities.
(iii) It provides a tool for predicting the impact of schedule changes.
(iv) It requires to be continuously reviewed and updated on the basis of feedback from the lower levels. This ensures attention to all levels.
The PERT/CPM has the following limitations:
(i) It is not possible to estimate accurately the time and cost involved in various activities of a project. Errors in estimation make the network analysis unreliable as a control technique.
(ii) It is not useful for simple, routine and repetitive projects.
(iii) It is mainly suitable in the projects where time is essential.
(f) Management audit: Management audit is yet another new technique of control. Management audit is a systematic technique of evaluation the working and effectiveness of management of an organization. It is designed to make an assessment for the effectiveness of entire management process. An independent team of expert from relevant areas conducts this audit. This audit is a periodic event.
(g) Management information system of MIS: Management information system (MIS) is a system of collecting, processing and transmitting information needed by managers. More specifically, this system is a centre of facilities and personnel for collecting, processing, storing, transmitting information needed for managing an organization. Managers use these information for planning, decision-making as well as for controlling the activities of the organization. In this way MIS is a technique of control.
(h) Zero base budgeting or ZBB: Zero-base budgeting is a new approach to budgeting and used as control technique. It is a budgeting technique, which does not consider figures of previous period or year while preparing a budget. It prepares budget afresh without considering the futures of earlier year or period. It takes into account the needs of the activity.
5. “Control is the process of bringing about conformity of performance with planned action.” Discuss.
Ans: The controlling function compares the actual performance with predetermined standards, finds out deviation and attempts to take corrective measures. Eventually, this process helps in formulation of future plans too. Thus, controlling function helps in bringing the management cycle back to planning.Controlling is a primary goal-oriented function of management in an organization. It is a process of comparing the actual performance with the set standards of the company to ensure that activities are performed according to the plans and if not then taking corrective action.Every organization aims at achieving some goals from its business activities and it is essential to ensure whether or not the firm is performing activities according to the predetermined goals. The controlling function of management helps an organization in ensuring the same. Hence, Controlling means comparing the actual performance of an organization with the planned performance and taking corrective actions if the actual performance does not match the planned performance.
6. Explain the various types of Budgets?
Ans: Budgets are classified according to their nature and purpose. Some of their types are given as follows–
(i) Sales Budget: Sales budget is an estimate of expected sales during a budget period. A sales budget is known as a nerve centre or backbone of the enterprise. The degree of accuracy with which sales are estimated will determine the practicability of operating budgets. A sales budget is the starting point on which other budgets are so based.
The following factors are taken into accounts while preparing sales budget:
(a) Past sales figures.
(b) Assessment and report by sales men.
(c) Availability of raw materials.
(d) Seasonal fluctuation.
(e) Availability of finances.
(f) Plant capacity.
(ii) Selling and distribution cost budget: Selling and distribution cost budget forecasts the cost of selling and distributing the products. This budget depends upon the sales budget. These expenses will vary with the expected sales figure during the period. These expenses may be estimates per unit of sales or some percentage on sales etc. The person in charge of sales and distribution should sit together to prepare this budget.
(iii) Production Budget: The production budget is prepared in relation to the sales budget. Whatever is to be sold should be produced in time so that it is delivered to the customers. It is a forecast of the production for the budget period. Production budget is prepared for the numbers of units to be produced and also for the cost to be incurred on materials, labor and factory overheads. Two important considerations involved in the preparation of production budget are–
(a) What is to be produced?
(b) When is it to be produced?
The preparation of production budget involves the following stages:
(a) Production planning.
(b) Consideration of plant capacity.
(c) Stock quantity to be held.
(d) Sales budget figures.
(iv) Cost of production Budget: The production budget determines the number of units to be produced. When these units are converted into monetary terms, it becomes a cost of production budget. The cost of production budget is the total amount to be spent on producing the units, stipulated in the production budget.
(v) Materials Budget: The materials budget is considered with determining the quantity of raw materials required for production. The programme for purchasing raw materials is adjusted according to the production budget. The materials are purchased as per the requirements of production department. The requirement of materials is determined product wise. The rate of consumption of raw materials is also determined. The number of units to be produced multiplied by the rate of consumption will give the figure of materials required. The stocks of materials required in hand at any time are added to the materials required for production. The opening stock of materials is deducted from the figures determined above. In this way, the requirements of materials in units will be determined. The units of materials required multiplied by the rate per unit of raw materials will give us a figure of material cost.
The raw materials budget will serve the following purpose:
(a) The purchase department will be able to plan the purchase of raw materials at different times.
(b) It will enable the fixation of minimum stock level, maximum stock level and re-ordering level.
(c) The raw materials purchase budget will be determined.
(d) The budgeted cost of raw materials will be determined.
(vi) Direct Labor Budget: The labor required for production may be classified into direct and indirect labor. The labor required for manufacturing the product is known as direct labor. The labor, which cannot be specific with production, is called indirect labor. Though two budgets may be prepared for direct and indirect labor but from costing point of view only direct labor budget is prepared because indirect labor is made a part of manufacturing overheads.
Labor budget is useful for anticipating labor time required for production. It also helps in determining the finances required for labor. The personnel department is also able to make arrangements for recruitment of workers etc.
(vii) Manufacturing overhead cost budget: The manufacturing overheads cost is that part of works cost which arises from indirect labors, indirect materials, overheads and other factory expenses. Manufacturing cost is excluded from direct materials and direct labor. A manufacturing overheads cost may be classified into fixed cost, variable cost and semi-variable cost.
The fixed works overheads cost remains constant irrespective of output and it is estimated on the basis of past experience. The variable works overheads cost is determined per unit of cost and it is calculated by multiplying the rate per unit by the budgeted output. The semi-variable cost increases with the increase in out put. But the rate per unit decreases with increase in input. While budgeting manufacturing overheads cost, management must consider the level of activity to be attained in future so that the expenses are estimated accurately.
(viii) Cash Budget: A cash Budget is an estimate of cash receipts and disbursements during a future period of time. It precedes various other budgets like materials budget, labor budget, overheads cost budget, capital expenditure budget and research and development budget. It is an analysis of flow of cash in a business over a future short on long period of time. It is a forecast of expected cash intake and outlay.
The cash budget should be coordinated with other activities of the business. The functional budgets may be adjusted according to the cash budget. The available funds should be fruitfully used and the concern should not suffer for want of funds.
7. Discuss the various advantages of budgetary control. Explain the limitations of budgetary control.
Ans: The budgetary control system helps in fixing the goals for the organization as a whole and concerted efforts are made for its achievements. It enables economies in the enterprise. Some of the advantages of budgetary control are–
(a) Maximization of profits: The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and coordination of different functions are undertaken. There is a proper control over various capital and revenue expenditures. The resources are put to the best possible use.
(b) Coordination: The working of different departments and sectors is properly coordinated. The budgets of different department have a bearing on one another. The co-ordination of various executives and subordinates is necessary for achieving budgeted targets.
(c) Specific Aims: The top management decides the plans, policies and goals. All efforts are put together to reach the common goal of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving some specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.
(d) Tool for measuring performance: By providing targets to various departments, budgetary control provides a tool for measuring managerial performance. The budgeted targets are compared to actual results and deviations are determined. The performance of each department is reported to the top management. This system enables the introduction of management by exception.
(e) Economy: The planning of expenditure will be systematic and there will be economy on spending. The finances will be put to optimum use. The benefits derived for the concern will ultimately extend to industry and then to national economy. The national resources will be used economically and wastage will be eliminated.
(f) Determining weakness: The deviations in budgeted and actual performance will enable the determination of weak points. Efforts are concentrated on those aspects where performance is less than the stipulated.
(g) Corrective Action: The management will be able to take corrective measures wherever there is a discrepancy in performance. The deviations will be regularly reported so than necessary action is taken at the earliest. In the absence of a budgetary control system the deviations can be determined only at the end of the financial period.
(h) Consciousness: It creates budget consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work uninterrupted.
(i) Reduces costs: In the present day competitive world budgetary control has a significant role to play. Every businessman tries to reduce the cost of production for increasing sales. He tries to have those combinations of products where profitability is more.
(j) Introduction of Incentive schemes: Budgetary control system also enables the introduction of incentive schemes of remuneration. The comparison of budgeted and actual performance will enable the use of such schemes.
Despite of many good points of budgetary control there are some limitations of this system. Some of the limitations are discussed as follows:
(a) Uncertain Future: The budgets are prepared for the future period. Despite best estimates made for the future, the predictions may not always come true. The future is always uncertain and the situation, which is presumed to prevail in future, may change. The change in future conditions upsets the budgets assumption. The future uncertainties reduce the utility of budgetary control system.
(b) Budgetary Revision Required: Budgets are prepared on the assumptions the certain conditions will prevail. Because of future uncertainties, assumed conditions may not prevail necessitating the revision of budgetary targets. The frequent revision of targets will reduce the value of budgets and revisions involve huge expenditures too.
(c) Discourage efficient persons: Under budgetary control system the targets are given to every person in the organization. The common tendency of people is to achieve the targets only. There may be some efficient persons who can exceed the targets but they will also feel contented by reaching the targets. So budgets may serve as constraints on managerial initiatives.
(d) Problem of Coordination: The success of budgetary control depends upon the coordination among different departments. The performance of one department affects the results of other departments. To overcome the problem of coordination Budgetary officer is needed. Every concern cannot afford to appoint a budget officer. The Lack of coordination among different departments results in poor performance.
(e) Conflict Among Different Departments: Budgetary control may lead to conflicts head functional departments. Every departmental head worries for his departmental goals without thinking of business goals. Every department tries to get maximum allocation of funds and this raise a conflict among different departments.
(f) Depends upon support of Top Management: Budgetary control system depends upon the support of top management. The management should be enthusiastic for the success of this system and should give full support for it. If at any time there is a lack of support from top management then this system will collapse.
8. Discuss in details the Emerging Issues and Challenges in Management.
Ans: (a) Globalization: Globalization phenomenon is getting popular these days. Globalization of business refers to the free flow of goods service, technology, labor, capital information, across the national boundary; it is closer economic integration among different countries in terms of flow of good service, capital labor and technology. Globalization is the tendency of expanding business in different countries. Managers have to work in boundary less world. There is no territory or barrier in export and import business. Globalization invites global competition. Organizations which were competing locally with local competitors now they have to compete with global competitors. It is very difficult to organization to survive and develop in such situation. Organizations should increase quality of product and reduce cost which is a challenge for manager. Many organizations are becoming global these days. They are running their business in different countries with different culture, climate, and geography, political and economic system. It is a challenging work for managers to prepare executives officers who can run business in such countries.
(b) Ethics and Social responsibility: The decision made by managers in organizations have a broad reach both inside and outside the organizations. Thus, managers must be concerned with ethics, and social responsibility. Many organizations today are taking step to enhance the ethical standards of their managers and to avoid legal or public sentiment problems.
(c) Workforce diversity: Modern organizations are characterized by workforce diversity. Diversified workforce is the reality of business these days. Organizations are becoming heterogeneous in terms of ethnicity, gender, nationality, age group, etc. People having different religions, different nationality works together under one roof. Different people have different nature and they show different behavior because they come from different background. How to manage such diversified workforce is a great challenge for managers. If such diversified workforce is managed properly, organization will be highly benefited because they also bring diversified skill and knowledge. But, if they are not managed properly, they create serious problem.
(d) Empowerment: Decision making is pushed down to the operating level. Workers are now being given the freedom to make choice about the schedule, procedures, and solving work-related problems. Earlier managers were encouraged to get their employees to participate in the work-related decision. Now managers allow employees full control of their work. Thus managers engaged in empowering employees. Similarly, the manager provides more information to employees to make them aware of the problem and the prospects of their organization.
(e) Information Technology: Today’s managers must manage information technology (IT) and in e-business world. IT must be selected and implemented with the end user and work to be accomplished firmly in mined to be effective. The IT choices available to modern managers far exceed those that were available just a few years ago.
(f) Building a Competitive Advantage: Increasing Efficiency in Reducing the number of resources used to produce goods and services. Also, increasing Quality Introducing Total Quality Management (TQM) to improve quality. Similarly, to increasing Speed, Flexibility, and Innovation Adapting to bring new products to market faster. Increasing Responsiveness to Customers Empowering employees to deal with customers.
(g) Technological advancement: -How to utilize advanced and sophisticated technology has become another challenge for management.
Technology has developed beyond the expectation of anybody in the world over last 100 years. Tremendous advancement has been made in production, distribution and information technology. Managers must manage all this technology with the development of computer, the face of information technology has absolutely changed. Introduction of internet, email and other electronic media, have benefitted organizations in the field of productions, distribution and other areas of business. Decision making have been facilitated by information technology. Technological advancement has changed the nature of job. Most of the jobs which were performed by unskilled and semi-skilled labors previously, now they are performed by skilled labors. Number of white collar job is increasing and blue collar jobs are decreasing. Organization must train their employees about new technology. Only with new technology, Organization can compete with other competitors.
(h) Quality and productivity: Another area of interest to emerge in recent years has been quality, productivity and their interrelationships. As Japanese manufacturers began beating out U.S. competitors in quality comparisons, Western managers soon began taking a more serious look at Total Quality Management(TQM). Hence, managers have become more cautions to increase the productivity of their employees.
(i) Innovation and change: The innovation of new knowledge and change of expectation of stakeholders are emerging challenges to the present manager or management. Where facing the change is a critical challenge to the manager. It or change may occur in the attitude and behavior of stakeholders like competitors, customers, employees, suppliers, and lenders. Thus, it is an important responsibility of managers to handle such a change in a scientific and practical way.
(j) Employee Development: It is critical to make sure that employees keep a vested interest in the work. Employee burnout and a lack of enthusiasm about the work can often lead to slowed production and lower output. This is a recipe for disaster for managers that are trying to keep up production and quality. To make sure that your employees continue the same level of enthusiasm, be certain to give them plenty of opportunities for training. This will make them feel appreciated and valued as a part of the team. By investing in employees, you are investing with the company for its growth and development.
(k) Customer Satisfaction: Managers must always be aware of their level of customer satisfaction with their product or service. You must be certain to always keep your ear to the ground and stay connected with your customers. If you are a restaurant owner, for instance, you must speak directly to the customers and get their feedback. Managers often become very busy with work and often neglect to get up close to what is going on. Be certain to do frequent employee performance reviews to ensure quality control and customer satisfaction.
(l) Knowledge management: Employees are the primary source of knowledge. And as far as possible their ideas should be accumulated to prepare plans and policies. It is due to the expectation of society such as new ideas, new things and creativity in the product or service from any organization. And, on the basis of requirement, it is essential to hire new knowledge from outside.
(m) Multicultural effects: An innovation of modern communication and transportation system has tied the multi-cultured people together. They work together to meet their common and professional goals or objectives. In the present context, the involvement of cross-cultural professions in the organization is continuously increasing. Therefore, the involvement of multicultural people having different traditions, values, social attitudes, religious beliefs, and living approaches creates a new challenge to the manager.
9. Justify the Relationship between Planning and Controlling. Also distinguish between Planning and Controlling.
Ans: Planning and Controlling are inter-related within any organization. Planning sets the goals for the organization and controlling ensures its accomplishment. Planning decides the control process and controlling provides a sound basis for planning. In simple words, planning and controlling are basically dependent on each other. Controlling is impossible without planning. Planning without controlling is meaningless because, in the absence of controlling, it is impossible to monitor the progress and keep a check on the proper implementation of plans. Thus, without controlling, planning will fail to achieve objectives. Planning is a thinking process while controlling is an executive function. While planning involves creative thinking, imagination and sound judgment, controlling ensures that such decisions are converted into desired actions. Planning is required for day-to-day processes, like scheduling, dispatch inspection, quality assessment, inventory control, supply and equipment management. Control ensures that the execution of those items is done optimally, both in terms of cost savings and efficiency.
| Basis | Planning | Controlling |
| (i) Objective | To set goals and choosing the means to achieve these goals. | To ensure that the objectives are achieved according to the plan. |
| (ii) Meaning | Planning is deciding in advance what to do how to do it, when to do it and who is to do it. | Controlling is the process of taking steps to bring actual results and desired results closer together. |
| (iii) Functions | Planning is a function that decides when, how, where and who will perform the function. | Controlling including measurement of employees performance and feedback. |
| (iv) Importance | Planning function is important because other functions of management are only performed in a better way if proper planning is done. | Controlling plays an important role as without feedback managers cannot judge the performance of employees. |
| (v) Goals | The primary motive of planning is to set goals. | The primary objective of controlling is to ensure that the target is achieved or not. |
10. Explain the Recent Trends in Management in details.
Ans: Recent trends in management refer to the latest managerial practices that managers use to effectively manage their employees. As the market situation evolves, the managerial trends also evolve and change. These changes are subject to the market conditions of that time period. The most popular recent trends in management are Total Quality Management, Risk Management, Crisis Management etc. Let’s understand in detail the following topics:
(i) Total Quality Management: Quality is one of the most important factors determining the success of a business. Customers always consider the quality of a business’s goods and services while purchasing them. In fact, in some cases, quality gets prominence over price as well.
Good quality of products always gives every organization a strong edge over its competitors. It also rewards the business with customer patronage, word of mouth and goodwill. It is because of these benefits that total quality management has become so important. Reasons like these have lead to quality certification standards becoming so important these days. Companies often flaunt their ISO certification rankings in advertisements to earn goodwill and gain customers.
With the emergence of newer ways of doing business, the importance of quality management has only increased. Its principles have seen tremendous change over time under modern service-oriented economies.
Previously, only business entities took quality management seriously. These days, however, even governments and NGOs focus on quality management. This shows that apart from consumers, even common citizens can be the focus of quality management.
Another thing one needs to understand is that quality management does not relate to just production-related functions. Other managerial activities like planning, organizing, controlling, etc. also require quality standards.
(ii) Crisis Management: One can never predict when a tragedy may strike. We can plan and try to prevent mishaps but they can still happen. Crisis management in such conditions is one of the most important functions of managers. They must always be able to rebuild their organization after a crisis occurs.
A crisis is basically any mishap, tragedy or ill event that carries negative effects. It causes damage to an organization, its members, its business or customers. It can even affect an organization’s reputation and legal or financial position.
As the expression suggests, crisis management is simply the act of handling a crisis effectively. It refers to the response of an organization to an incident that can affect it negatively.
A business can anticipate crisis situations that may strike it but it can never completely prevent them. It is practically impossible to prohibit tragedies from occurring. Each kind of tragedy carries unique effects. Not all crisis situations have common features. Hence, managers have to understand each possible crisis and deal with it differently.
(iii) Risk Management: The concept of risk management originates from the business of insurance. It has assumed significance over the years as an important function of management. It basically consists of five processes that aim to mitigate business losses. No organization can completely eliminate risks but it is certainly possible to prepare for them.
Risk management basically means the identification and mitigation of losses. It is a systematic process by which an organization identifies, analyzes, prepares and reduces losses.
Apart from that, it also focuses on helping a business find profitable opportunities. Every business organization faces an unavoidable influence from its external and internal environments.
Management of risks reduces the chances of such factors affecting an organization negatively. Managers can either avoid or reduce risk or even transfer it to another entity.
(iv) Resistance to Change: One of the most important tasks of managers is to facilitate changes smoothly. Change is always inevitable but so is resistance to change. It is basic human nature of people to try and keep their methods and customs constant. This is where change management comes into play. An organization always must strive to adapt to change if it wants to be successful.
Change is basically a variation in pre-existing methods, customs, and conventions. Since all organizations function in dynamic environments, they constantly have to change themselves to succeed.
Change management contains several strategies that help in facilitating the smooth adoption of such changes.
One of the most important facets of change management is resistance to change. It is simply human nature to counteract any changes and maintain the status quo.
But since change is inevitable, instead of resisting changes the organization must try to implement them with minimum hassle.
(v) Change Through Management Hierarchy: It is usually the top level of a management hierarchy that makes the most important changes in any organization. The lower level only implements these changes. Such a hierarchy often misses out small and minute details of planning. Managers must, hence, understand how to plan for changes under such conditions.
The term management hierarchy basically refers to a structure of superior and subordinate rankings. Almost every small and large organization follows this structure. Under this hierarchy, members of an organization follow a fixed chain of command.
(vi) Concept of Change Management: Change is often said to be the only constant in one’s life. This statement holds true for business organizations as well. External and internal factors almost always lead to changes in the way things happen. One of the most important tasks of managers is to implement these changes smoothly. We refer to this process as change management.
Changes in its external and internal environment constantly affect every business’s activities. These changes can happen either at individual levels or at the organizational level. Furthermore, it affects employees as well as managers. It is also basic human nature to resist changes, especially drastic ones. Since an organization’s success depends on how well it adapts to change, management of these situations is crucial. This is where change management comes into play.
(vii) Role of International Managers: There are some basic functions that every business manager has to perform routinely. These functions apply to international managers as well. Due to the peculiar nature of international business, however, international managers have to perform them a little differently.
International business basically refers to commercial transactions that involve more than one country. Globalization has made it possible for business organizations and nations to carry out such transactions.
Business managers have to perform several important roles to earn profits and minimize losses. Since cross-border transactions require large-scale operations, management becomes very difficult. Due to this reason, international management has gained immense significance over the years.
(viii) International Business and Global Practices: With the advent of globalization, global business practices and international business have become common phenomena. Large companies and MNCs often operate in more than one country. Managing such cross-border operations requires a thorough understanding of local cultures, practices, laws and business environments. International managers, thus, have to play several important roles in their businesses.
International business basically means commercial transactions that involve two or more countries. These transactions can occur between private entities as well as government agencies. The only prerequisite of such transactions is that they should involve multiple nations.
International management refers to the practice of managing these kinds of international businesses and global practices. This field of management has gained a lot of prominence after globalization. Even small and medium-sized companies these days transact with foreign entities.
11. Write short notes on:
(i) Management Audit.
Ans: A management audit evaluates whether the management team is working in the interests of shareholders, employees, and the company’s reputation. A management audit does not evaluate individual managers but rather the overall management of the company in its ability to achieve its goals.
Objectives Of Management Audit:
(i) Verify Efficiency: It aims at increasing productivity at all the levels of management and execution of policies.
(ii) Give the Recommendation to Increase Efficiency: The management audit marks the incapabilities in various levels of management and provides suggestions to enhance the efficiencies.
(iii) Evaluates the Potential of Policies and Planning: It audits and evaluates the policies and plannings structured by the management and judge if its appropriately implemented.
(iv) Increase Profit: It helps to increase the profit margin by providing solutions to maximize the company’s resources in a valuable way.
(ii) Emerging challenges in management.
Ans: Management is an ever developing concept because the development of technology, social expectations, innovations, creativity emerges new concepts in management.
Challenges of manager are as follow:
(i) Globalization of business: Companies that experience saturation in local markets find new ways to promote and sell their products in other territories of the globe where the laws, culture, and customer needs differ. Businesses need to tackle globalization when they expand their operations to other regions, dive into the markets and compete with companies of that region. It helps them build new revenue sources.
(ii) Decreased performance levels: In a fiercely competitive business environment, companies expect their employees to perform their best and meet their productivity goals. While it is common for employees to go through periods of time where they are less productive and motivated, there are ways to help them feel motivated again.
(iii) Hiring skilled employees: Making the right hiring decisions is crucial for the long-term success of a business. Apart from the right skills and experience, managers look for people who can fit in with the company culture. The team can benefit from new employees who can settle in quickly and do not require extensive guidance. A wrong hiring decision can negatively impact your team’s morale.
(iv) Workforce diversity: One of the main aspects businesses need to focus on to improve organizational culture and productivity is handling diversity in the workplace. Organizations should facilitate inclusive work environments for employees with varying individual characteristics, values, preferences, behaviors, beliefs, experiences, and backgrounds.
(v) Empowering the workforce: Businesses are adopting a participative management approach by empowering assembly line workers in making decisions as they have awareness and knowledge of the actual problems and can contribute more. Best management practices emphasize making decisions at the place where work is performed concerning schedules and processes and solving work-related problems. Educating and encouraging assembly line workers to make the best decisions gives them authority, increasing their value and morale.
