CONTROLLING

What is Controlling?
Importance of Controlling
Steps in the Control Process
Types of Control
Components of Organizational Control Systems
Strategic Control Systems
Identifying Control Problems
CHAPTER 12 | CONTROLLING
Objectives

At the end of this chapter, the students are expected to:

1. define the meaning of controlling;

2. describe the purpose and importance of controlling;
3. identify the steps in the control process;
4. differentiate the various types of control;
5. examine the components of organizational control systems;
6. evaluate various strategic control systems; and
7. identify various ways to control problems.

INTRODUCTION
The long-term existence of many companies is placed in jeopardy because of difficulties caused
by problems, which could have been avoided in the first place. Examples of such problems are as
follows:

1. The Transmission of Confidential Information to Competitors. For instance, if the introduction of

a new product by the company is known in advance by the competitor, much of the advantage
of such introduction is negated. The Hiring of Personnel Way above the Required Number.
Unnecessary additions to the
2. existing workforce mean waste of manpower and scarce resources. Unethical Conduct of an
Employee. For instance, the loan officer of a bank, for consideration, connives with a borrower
for loan approval in spite of defective collaterals. The bank suffers in the end when it forecloses
on the mortgage.
3. The above-cited examples are typical errors, which happen every now and then. If left
unchecked, they may be enough to get some businesses bankrupt. When this happens,
unemployment occurs and there will be some disruptions in the provision of products and
services to the public. These will not happen, however, if adequate controls are instituted.

WHAT IS CONTROLLING?
Controlling refers to the process of ascertaining whether organizational objectives, have been
achieved; if not, to determine why not; and determining what activities should be taken to achieve
objectives better in the future. Controlling completes the cycle of management functions. Objectives
and goals at any given point in the organizing and implementing stage are verified as to achievement or
completion. When expectations are not met at scheduled dates, corrective measures are usually
undertaken.
IMPORTANCE OF CONTROLLING
When controlling is properly implemented, it will help the organization achieve its goal in the
most efficient and effective manner possible.

In any organization, deviations, mistakes, and shortcomings happen once in a while. When they
occur, they contribute to unnecessary expenditures, which add up to the cost of producing goods and
services. The introduction of effective control measures minimizes the ill effects of such negative
occurrences. An effective inventory control system, for instance, minimizes, if not totally eliminates
losses in inventory.

The importance of controlling may be illustrated as it is applied in a typical factory. If the

required standard daily output for individual workers is 100 pieces, all workers who do not produce the
requirement are given sufficient time to improve; if no improvements are forthcoming, they are asked
to resign. This action will help the company keep its overhead and other costs at expected levels. If no
such control measure is applied, the company will be saddled with escalating production costs, which
will place the viability of the firm in jeopardy.

STEPS IN THE CONTROL PROCESS

The control process consists of four steps, namely (Figure 56):

Figure 56

Steps in the Control Process

1. Establishing Performance Objectives and Standards. For effective controlling, what has to be
achieved must first be determined. Typical examples of objectives and standards are as follows:
a. Sales Targets are expressed in quantity or monetary terms;
 b. Production Targets - are expressed in quantity and quality;
c. Worker Attendance - is expressed in terms of rate of absences;
d. Safety Records - are expressed in number of accidents for given periods; and
e. Supplies Used - are expressed in quantity or monetary terms for given periods.

Once objectives and standards are established, the measurement of performance will be
facilitated. Standards differ among various organizations. In construction firms, project
completion dates are useful standards. In chemical manufacturing firms, certain pollution
measures form the basis for standard requirements.

After the performance objectives and standards are established, the methods for
measuring performance must be designed. Every standard established must be provided with its
own method of measurement.

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

The measuring tools will differ from organization to organization, as each have has its
own unique objectives. Some firms, for instance, will use annual growth rate as standard basis,
while other firms will use some other tools like the market share approach and position in the
industry.

3. Comparing Actual Performance to Objectives and Standards. Once actual performance has been
determined, this will be compared with what the organization seeks to achieve. Actual
production output, for instance, will be compared with the target output. This may be illustrated
as follows:

A construction firm entered into a contract with the government to construct a 100-
kilometer road within ten months. It would be, then, reasonable for management to expect at least
10 kilometers to be constructed every month. As such, this must be verified every month, or if
possible, every week. Taking Necessary Action. The purpose of comparing actual performance with
the desired result is to provide management with the opportunity to take corrective

4. action when necessary. If in the illustration cited above, the management of the construction
firm found out that only 15 kilometers were constructed after two months, then, any of the
following actions may be undertaken:
a. hire additional personnel;
b. use more equipment; or
c. require overtime work

TYPES OF CONTROL
Control consists of three distinct types, namely (Figure 57):
 Figure 57

Types of Control and Their Relation to Operations

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

The manager of a chemical manufacturing firm makes sure that the best people are
selected and hired to fill jobs. Materials required in the production process are carefully checked
to detect defects. The foregoing control measures are designed to prevent wasting valuable
resources. If those measures are not undertaken, the likelihood that problems will occur is
always present.

2. Concurrent Control. When operations are already ongoing and measures to detect variances are
made, concurrent control is said to be undertaken. It is always possible that deviations from
standards will happen in the production process. When such deviations occur, adjustments are
made to ensure compliance with requirements. Information on the adjustments is also
necessary inputs in the pre-operation phase.

Examples of activities using concurrent control are the following:

The manager of a construction firm constantly monitors the progress of the company's
activities. When construction is behind schedule, corrective measures like the hiring of
additional manpower are made.

In a firm engaged in the production and distribution of water, the chemical composition
of the water procured from various sources is checked thoroughly before they are distributed to
the consumers.

The production manager of an electronics-manufacturing firm inspects regularly the

outputs consisting of various electronic products coming out of the production lines.
 3. Feedback Control. When information is gathered about a completed activity for purposes of
evaluating and deriving required steps for improving the activity, feedback control is
undertaken. Corrective actions aimed at improving future activities are features of feedback
control.

Feedback control validates objectives and standards. If accomplishments consist only of

a percentage of standard requirements, the standard may be too high or inappropriate. An
example of feedback control is the supervisor who discovers that continuous overtime work for
factory workers lowers the quality of output. The feedback information obtained leads to some
adjustments in the overtime schedule.

COMPONENTS OF ORGANIZATIONAL CONTROL SYSTEMS

To effectively control activities, organizations adapt control systems consisting of the following
components:

1. Strategic Plan. The strategic plan (discussed in chapter 6) provides the basic control mechanism
for the organization. When there are indications that activities undertaken do not facilitate the
accomplishments of strategic goals, these activities are set aside, modified, or expanded. These
corrective measures are made possible with the adoption of strategic plans.
2. Long-Range Financial Plan. The planning horizon differs from company to company. Most firms
will be satisfied with a one-year plan. Engineering firms, however, will require longer-term
financial plans. This is because of the long lead times needed for capital projects. An engineering
firm assigned to construct a modern airport within three years is a good example. In such case,
the three-year financial plan will be very useful.

As presented in Chapter 6, the financial plan recommends a direction for financial

activities. If the goal does not appear to be where the firm is headed, the control mechanism
should be made to work. The Operating Budget. This indicates the expenditures, revenues, or
profits planned for some future period regarding operations. The figures appearing in the
budget are used as standard requirements for performance.

3. Performance Appraisal. This measures employee performance. As such, it provides employees

with a guide on how they could do their jobs better in the future.
4. Performance appraisals also function as effective checks on new policies and programs. For
example, if new equipment has been acquired for the use of an employee, it would be useful to
find out if it had a positive effect on performance.
5. Statistical Reports. These are those that contain data on various developments within the firm.
Among the information which may be found in a statistical report are the following:
a. quality control rejects;
b. accounts receivable;
c. labor efficiency rates;
d. accounts payable;
e. sales reports;
f. accident reports; and
g. power consumption reports.
 Figure 58

A Sample Statistical Report

6. Policies and Procedures. Policies refer to the framework within which the objectives of the
organization must be pursued. An example of policy is, whenever two or more activities
compete for the company’s attention, the client takes priority.
 Procedure is a plan that describes the exact series of actions or steps to be taken in a
given situation. Following is an example of a procedure in the purchase of equipment:

a. The concerned manager forwards a request for purchase to the purchasing

officer.
b. The purchasing officer forwards the request to top management for approval.
c. If approved, the purchasing officer makes a canvass of the requested item's
price; if disapproved, the purchasing officer returns the request form to the
requesting manager.
d. For approved requests, the purchasing officer negotiates with the lowest
complying bidder.

It is expected that policies and procedures laid down by management are followed.
When they are breached once in a while, management must have some means to directly
inquire on the deviations. Occasional breaches notwithstanding, policies and procedures provide
a good way of controlling activities.

STRATEGIC CONTROL SYSTEMS

To be able to assure the accomplishment of the strategic objectives of the company, strategic
control systems become necessary. These systems consist of:

1. Financial Analysis. The success of most organizations depends heavily on its financial
performance. It is necessary that certain measurements of financial performance be made so
that whenever deviations from standards are found out, corrective actions may be introduced.

A review of financial statements reveals important facts about the company's

performance. One statement, the balance sheet, contains information about the company's
assets, liabilities, and capital accounts. Comparing the current balance sheet accounts with
previous ones may reveal important changes which may provide clues to performance.

The income statement contains information about the company's gross income,
expenses, and profits. When compared with previous year's income statement, any change in
the figure provided will help management determine if the company did. well on the current
year. Figures 59 and 60 show samples of financial statements.
 Figure 59

A Sample Balance Sheet Statement

 Figure 60

Sample Income Statement

2. Financial Ratio Analysis. This is a more elaborate approach used in controlling business activities.
Under this method, one account appearing in the financial statement is paired with another to
constitute a ratio. The result is compared with a required norm, which is usually related to what
other companies in the industry have achieved, or what the company has achieved in the past.
When deviations occur, explanations are sought in preparation for whatever action is deemed
necessary.
Financial ratios may be categorized into the following types:

a. Liquidity Ratios. These ratios are used to assess the ability of a company to meet its
current obligations. The following ratios are important indicators of liquidity:
i. Current Ratio - shows the extent at which current assets of the company can cover
its current liabilities. The formula for computing current ratio is as follows:

Current ratio = current assets / current liabilities

ii. Acid-Test Ratio - is a measure of the firm's ability to pay off short-term obligations
with the use of current assets and without relying on the sales of inventories. The
formula used is as follows:

Acid-test ratio = current assets - inventories / current liabilities

b. Efficiency Ratios. These ratios show how certain assets or liabilities are used efficiently in
the production of goods and services. Among the more common efficiency ratios are:
i. Inventory Turnover Ratio - measures the number of times an inventory is turned
over (or sold) each year. This is computed with the use of the following formula:

Inventory turnover ratio = costs of goods sold / inventory

ii. Fixed Assets Turnover is used to measure utilization of the company's investment on
its fixed assets, such as plant and equipment. The formula used is as follows:

Fixed assets turnover = net sales / net fixed assets

c. Financial Leverage Ratios. This is a grouping of ratios designed to assess the balance of
financing obtained through debt and equity sources. Some of the more important
leverage ratios are the following:
i. Debt to Total Assets Ratio - shows how much of the firm's assets are
financed debt. It may be computed by using the following formula:

Debt to total assets ratio = total debt/ total asset

ii. Times Interest Earned Ratio - measures the number of times that earnings
before interest and taxes cover or exceed the company's interest expense. It
may be computed by using the following formula:
profits before tax+interest expense
¿ interest earned ratio=
Interest Expenses
d. Profitability Ratios. These ratios measure how much operating income or net income a
company is able to generate in relation to its assets, owner's equity and sales. Among
the more notable profitability ratios are the following:
i. Profit Margin Ratio - compares the net profits with the level of sales. The
formula used is as follows:

Profit margin ratio = net profit/net sales

 ii. Return on Assets Ratio - shows how much income the company produces
for every peso invested in assets. The formula used is as follows:
Return on assets ratio = net income/assets
iii. Return on Equity Ratio-measures the returns on the owner's investments.

It may be determined by using the following formula:

Return on equity ratio = net income/equity

IDENTIFYING CONTROL PROBLEMS

Recognizing the need for control is one thing; actually implementing it is another. When
operations become complicated, the managers must consider useful steps in controlling. The following
approaches may be useful:

1. Executive Reality Check. Employees manning the frontlines often complain about management's
imposition of certain requirements that are not realistic. This happens because, most often, the
manager is inaccessible to his subordinates and he has no way of knowing what is really
happening inside the workplaces. In a certain state university, for instance, without the
knowledge of the president, requests for purchase of classroom materials and supplies take last
priority. This is irregular because requests of such kind must be of the highest priority
considering that the organization is an educational institution. Ironically, because certain officers
of the non-academic staff have direct access to the president, their purchase requests, no
matter how trivial, almost always get top priority. Later on, when the president made an
inspirational speech on quality teaching, many members of the faculty just shrugged their
shoulders and listened passively.

One school, the Central Luzon State University, provides a good example. of how the
executive reality check may be exercised. It requires its executives to handle at least one subject
each. Even the president is required to teach. What these executives will experience in the
classrooms will make them more responsive in the preparation, execution, and controlling of
academic plans.

The manager of a construction firm could, once in a while, perform the work of one of
his laborers. In doing so, he will be able to see things he could not see

2. inside the confines of his air-conditioned office. Because the said action exposes manager to
certain realities, the term "executive check" is very appropriate. the Comprehensive Internal
Audit. An internal audit is undertaken to determine the efficiency and effectiveness of the
activities of an organization. Among the many aspects of operations within the organization, a
small activity that is not done right may be done continuously and without anybody noticing it
until it snowballs into a full-blown problem.

An example is the resignation of an employee after serving the company for 15 years.
After one week, another employee with ten years of service also resigned. Both were from the
same department. When after another week, a third employee was resigning, a full investigation
was in order. Even if the source of the problem is identified, it may already have caused
considerable losses to the organization.
 To minimize the occurrence of such problems, it is necessary to use the comprehensive
internal audit, which aims to detect dysfunctions in the organization before they bring bigger
troubles to management.

3. Symptoms of Inadequate Control. If a comprehensive internal audit cannot be availed of for

some reason, the checklist for symptoms of inadequate control may be used.

Some of the more common symptoms of inadequate control are the following:

a. an unexplained decline in income and profits;

b. customers complaining about poor service they get from the company;
c. employee dissatisfaction characterized by complaints, grievances and resignations;
d. cash shortage caused by overstocking of inventories or delinquent accounts receivables;
e. idle facilities or personnel;
f. disorganized operations characterized by work flow bottlenecks, excessive paperwork,
etc.;
g. excessive costs;
h. evidence of waste and inefficiency such as scrap rework.

It must be noted that behind every symptom is a problem waiting to be solved. Unless the
problem is clearly identified, no effective solution can be derived. Nevertheless, problems are easily
recognized if adequate control measures are in place.

SUMMARY
Controlling is one of the main functions of management. It comes after planning, organizing, and
directing. Controlling is aimed at determining if objectives were realized and by providing means for
achieving unrealized goals.

Controlling is important because it complements the other management functions.

Controlling is a process consisting of various steps, namely: establishing performance objectives

and standards, measuring actual performance, comparing actual performance to objectives and
standards, and taking the necessary action based on the results of the comparison. Control may be
classified either as feed forward, concurrent, or feedback.

Organizational control systems consist of the strategic plan, the long-range financial plan, the
operating budget, performance appraisals, statistical reports, policies and procedures.

Strategic control systems consist of financial analysis and financial ratio analysis. There are
means to identify control problems. They consist of the executive reality check, the comprehensive
internal audit, and the general checklist of symptoms of inadequate control.

CHAPTER EXERCISES
1. Explain how controlling ensures achievement of organizational plans and objectives.
2. Contrast the basic types of control.
3. How would you integrate control in setting organizational objectives?
4. Choose one control system and briefly explain.
 5. Briefly discuss how analyses of financial performance and ratio as examples of control are useful
in the achieving organizational targets.

SUGGESTED ITEM FOR RESEARCH

List down the control activities that may be useful to any of the following:

a. The construction of a bridge

b. The manufacture of microchips
c. The installation of a power plant
d. Operating on a cancer patient in a hospital
CASE 12. THIRST FIRST BOTTLING COMPANY: S.O.S
Competition in the soft drinks industry is very intense that every means to improve a company's
sales position are explored. Advertising and promotional efforts are heavily relied upon at the Thirst First
Bottling Company to drum up customer's interest in the company's products.

The company is engaged in the production and marketing of soft drinks. It operates plants,
warehouses, and sales offices throughout the Philippines. The company has been serving the Philippine
market for more than 50 years.

The manager in charge of advertising and promotion is Mr. Rolando Calanday, a graduate of a
marketing course in the College of the Immaculate Conception in Cabanatuan City. The advertising and
promotion unit coordinates with advertising firms in the design and production of advertising materials
like billboards, posters, and streamers. The unit often produces t-shirts printed with advertising
messages, which are used as promotional items. The company spends more than P20 million annually
for the purpose.

Periodically, advertising and promotion unit sends the advertising and promotional materials to
managers of the various sales offices of the company. The managers, in turn, hand over the materials to
their respective sales teams for proper disposal. The drivers of the delivery trucks, with the assistance of
helpers are directed to install the billboards and streamers on appropriate places and paste the posters
in conspicuous corners of retail establishments.

At the beginning, the drivers appropriate for themselves a small portion of the advertising and
promotion materials. Some of the billboards are used as partitions in the houses of the drivers. The
posters are used to reinforce the walls. The t-shirts are not handed over to customers but to family
members and friends. The materials are clearly not used as intended but nobody in the sales offices
questions the practice or even cares to know.

One day, the general manager of the company, Mr. Marcelino de Vega, received a letter from a
concerned employee reporting about the unethical practice. Immediately, the general manager called
Mr. Calanday and inquired on how he was getting about his responsibility of promoting the company's
products. Mr. Calanday's reply did not satisfy the general manager.

On the same day, Mr. Calanday received an order from the general manager to clear up the
problem regarding the unethical practice or he will be replaced as head of his unit.

Learning Assessment
1. Propose an applicable strategic control to combat the intense effect of the competition.

2. Lay down possible approach that can be used to control the pressing problem.
Chapter Test 12
Name: Score:

Section: Professor:

I. Fill in the blanks

1. ____________ refers to the process of ascertaining whether organizational objectives have been
achieved, etc.

2. The types of control are feed forward control, concurrent control, and ____________.

3. ____________ is that type of control installed when operations are already ongoing and measures to
detect variations are made.

4. ____________ is that type of control which validates objectives and standards.

5. ____________ is a plan that provides the basic control mechanism for the organization.

6. ____________ indicates the expenditures, revenues, or profits planned for

some future period regarding operations.

7. ____________ refer to the framework within which the objectives of the organization must be
pursued. 8. ____________ contains information about the company's gross income, expenses, and
profits.

9. ____________ are ratios that show how certain assets or liabilities are used efficiently in the
production of goods and services.

10. ____________ is an approach in identifying control problems which is undertaken to determine the
efficiency and effectiveness of the activities of an organization.

II. Match column A with column B

______ 1. measuring actual performance

______ 2. purpose of comparing actual performance with the desired result

______ 3. feedback control

______ 4. statistical reports

______ 5. performance appraisals

______ 6. power consumption report

______ 7. policies
______ 8. current ratio

______ 9. return on assets ratio

______ 10. internal audit

A. to provide management with the opportunity to take corrective action when necessary

B. a component of organizational control systems

C. function as effective checks on new policies and programs

D. information which may be found in a statistical report

E. a kind of liquidity ratio

F. a kind of profitability ratio

G. undertaken to determine the efficiency and effectiveness of the activities of an organization

H. a type of control

I. a step in the control process

J. the framework within which the objectives of the organization must be pursued