UNIT V

CONTROLLING

System and process of controlling – budgetary and non-budgetary control techniques – use of computers
and IT in Management control – Productivity problems and management – control and performance –
direct and preventive control – reporting.

5.1 Controlling / System and process of controlling

Controlling consists of verifying whether everything occurs in conformities with the plans adopted,
instructions issued and principles established. Controlling ensures that there is effective and efficient
utilization of organizational resources so as to achieve the planned goals. Controlling measures the
deviation of actual performance from the standard performance, discovers the causes of such deviations
and helps in taking corrective actions According to Brech, ―Controlling is a systematic exercise which
is called as a process of checking actual performance against the standards or plans with a view to ensure
adequate progress and also recording such experience as is gained as a contribution to possible future
needs.‖ According to Donnell, ―Just as a navigator continually takes reading to ensure whether he is
relative to a planned action, so should a business manager continually take reading to assure himself that
his enterprise is on right course.‖ Controlling has got two basic purposes
1. It facilitates co-ordination

2. It helps in planning

5.1.1 Features of Controlling Function

Following are the characteristics of controlling function of management-
1. Controlling is an end function- A function which comes once the performances are made in
conformities with plans.

2. Controlling is a pervasive function- which means it is performed by managers at all levels and in all
type of concerns.

3. Controlling is forward looking- because effective control is not possible without past being
controlled. Controlling always looks to future so that follow-up can be made whenever required.

4. Controlling is a dynamic process- since controlling requires taking reviewal methods; changes have
to be made wherever possible.

5. Controlling is related with planning- Planning and Controlling are two inseparable functions of
management. Without planning, controlling is a meaningless exercise and without controlling, planning is
useless. Planning presupposes controlling and controlling succeeds planning.

5.1.2. Nature & Purpose of Control

• Control is an essential function of management

• Control is an ongoing process
• Control is forward – working because pas cannot be controlled
• Control involves measurement
• The essence of control is action
• Control is an integrated system

5.1.3. Controlling Process.

Controlling as a management function involves following steps:

1. Establishment of standards- Standards are the plans or the targets which have to be achieved in the
course of business function. They can also be called as the criterions for judging the performance.
Standards generally are classified into two-
a. Measurable or tangible – Those standards which can be measured and expressed are called as
measurable standards. They can be in form of cost, output, expenditure, time, profit, etc.

b. Non-measurable or intangible- There are standards which cannot be measured monetarily. For
example- performance of a manager, deviation of workers, their attitudes towards a concern. These are
called as intangible standards.

Controlling becomes easy through establishment of these standards because controlling is exercised on
the basis of these standards

2. Measurement of performance- The second major step in controlling is to measure the performance.
Finding out deviations becomes easy through measuring the actual performance. Performance levels are
sometimes easy to measure and sometimes difficult. Measurement of tangible standards is easy as it can
be expressed in units, cost, money terms, etc. Quantitative measurement becomes difficult when
performance of manager has to be measured. Performance of a manager cannot be measured in quantities.
It can be measured only by-
a. Attitude of the workers,

b. Their morale to work,

c. The development in the attitudes regarding the physical environment, and

d. Their communication with the superiors.

It is also sometimes done through various reports like weekly, monthly, quarterly, yearly reports.

3. Comparison of actual and standard performance- Comparison of actual performance with the
planned targets is very important. Deviation can be defined as the gap between actual performance and
the planned targets. The manager has to find out two things here- extent of deviation and cause of
deviation. Extent of deviation means that the manager has to find out whether the deviation is positive or
negative or whether the actual performance is in conformity with the planned performance. The managers
have to exercise control by exception. He has to find out those deviations which are critical and important
for business. Minor deviations have to be ignored.

Major deviations like replacement of machinery, appointment of workers, quality of raw material, rate of
profits, etc. should be looked upon consciously. Therefore it is said, ―If a manager controls everything,
he ends up controlling nothing.‖ For example, if stationery charges increase by a minor 5 to 10%, it can be
called as a minor deviation. On the other hand, if monthly production decreases continuously, it is called
as major deviation. Once the deviation is identified, a manager has to think about various cause which has
led to deviation. The causes can be-

a. Erroneous planning,

b. Co-ordination loosens,

c. Implementation of plans is defective, and

d. Supervision and communication is ineffective, etc.

4. Taking remedial actions- Once the causes and extent of deviations are known, the manager has to
detect those errors and take remedial measures for it. There are two alternatives here-

a. Taking corrective measures for deviations which have occurred; and

b. After taking the corrective measures, if the actual performance is not in conformity with plans, the
manager can revise the targets. It is here the controlling process comes to an end. Follow up is an
important step because it is only through taking corrective measures, a manager can exercise controlling.

5.1.4. BARRIERS FOR CONTROLLING

There are many barriers, among the most important of them:

• Control activities can create an undesirable overemphasis on short-term production as opposed to long-
X7\term production.
• Control activities can increase employees' frustration with their jobs and thereby reduce morale. This
reaction tends to occur primarily where management exerts too much control.
• Control activities can encourage the falsification of reports.
• Control activities can cause the perspectives of organization members to be too narrow for the good of
the organization.
• Control activities can be perceived as the goals of the control process rather than the means by which
corrective action is taken.

5.1.5 REQUIREMENTS FOR EFFECTIVE CONTROL

The requirements for effective control are

a) Control should be tailored to plans and positions
This means that, all control techniques and systems should reflect the plans they are designed to follow.
This is because every plan and every kind and phase of an operation has its unique characteristics.
b) Control must be tailored to individual managers and their responsibilities

This means that controls must be tailored to the personality of individual managers. This because control
systems and information are intended to help individual managers carry out their function of control. If
they are not of a type that a manager can or will understand, they will not be useful.
c) Control should point up exceptions as critical points
This is because by concentration on exceptions from planned performance, controls based on the time
honored exception principle allow managers to detect those places where their attention is required and
should be given. However, it is not enough to look at exceptions, because some deviations from standards
have little meaning and others have a great deal of significance.
d) Control should be objective
This is because when controls are subjective, a manager‘s personality may influence judgments of
performance inaccuracy. Objective standards can be quantitative such as costs or man hours per unit or
date of job completion. They can also be qualitative in the case of training programs that have specific
characteristics or are designed to accomplish a specific kind of upgrading of the quality of personnel.
e) Control should be flexible
This means that controls should remain workable in the case of changed plans, unforeseen circumstances,
or outsight failures.Much flexibility in control can be provided by having alternative plans for various
probable situations.
f) Control should be economical
This means that control must worth their cost. Although this requirement is simple, its practice is often
complex. This is because a manager may find it difficult to know what a particular system is worth, or to
know what it costs.
g) Control should lead to corrective actions
This is because a control system will be of little benefit if it does not lead to corrective action, control is
justified only if the indicated or experienced deviations from plans are corrected through appropriate
planning, organizing, directing, and leading.
5.1.6 TYPES OF CONTROL SYSTEMS
The control systems can be classified into three types namely feed forward, concurrent and feedback
control systems.

a) Feed forward controls: They are preventive controls that try to anticipate problems and take
corrective action before they occur. Example – a team leader checks the quality, completeness and
reliability of their tools prior to going to the site.
b) Concurrent controls: They (sometimes called screening controls) occur while an activity is
taking place. Example – the team leader checks the quality or performance of his members while
performing.
c) Feedback controls: They measure activities that have already been completed. Thus corrections can
take place after performance is over. Example – feedback from facilities engineers regarding the
completed job.
5.2 Budgetary and non-budgetary control techniques

5.2.1 BUDGETARY CONTROL

Definition: Budgetary Control is defined as "the establishment of budgets, relating the responsibilities of
executives to the requirements of a policy, and the continuous comparison of actual with budgeted results
either to secure by individual action the objective of that policy or to provide a base for its revision.

Salient features:

a. Objectives: Determining the objectives to be achieved, over the budget period, and the policy(ies) that
might be adopted for the achievement of these ends.

b. Activities: Determining the variety of activities that should be undertaken for achievement of the
objectives.

c. Plans: Drawing up a plan or a scheme of operation in respect of each class of activity, in physical a
well as monetary terms for the full budget period and its parts.

d. Performance Evaluation: Laying out a system of comparison of actual performance by each person
section or department with the relevant budget and determination of causes for the discrepancies, if any.

e. Control Action: Ensuring that when the plans are not achieved, corrective actions are taken; and when
corrective actions are not possible, ensuring that the plans are revised and objective achieved

5.2.2 CLASSIFICATION OF BUDGETS

Budgets may be classified on the following bases –

a) BASED ON TIME PERIOD:

(i) Long Term Budget
Budgets which are prepared for periods longer than a year are called LongTerm Budgets.
Such Budgets are helpful in business forecasting and forward planning. Eg: Capital
Expenditure Budget and R&D Budget.
 (ii) Short Term Budget
Budgets which are prepared for periods less than a year are known as ShortTerm Budgets.
Such Budgets are prepared in cases where a specific action has to be immediately taken to
bring any variation under control.

Eg: Cash Budget.

b) BASED ON CONDITION:
(i) Basic Budget
A Budget, which remains unaltered over a long period of time, is called Basic Budget.

(ii) Current Budget

A Budget, which is established for use over a short period of time and is related to the current
conditions, is called Current Budget.

c) BASED ON CAPACITY:
(i) Fixed Budget
It is a Budget designed to remain unchanged irrespective of the level of activity actually
attained. It operates on one level of activity and less than one set of conditions. It assumes
that there will be no change in the prevailing conditions, which is unrealistic.

(ii) Flexible Budget

It is a Budget, which by recognizing the difference between fixed, semi variable and variable
costs is designed to change in relation to level of activity attained. It consists of various
budgets for different levels of activity

d) BASED ON COVERAGE:
(i) Functional Budget
Budgets, which relate to the individual functions in an organization, are known as Functional
Budgets, e.g. purchase Budget, Sales Budget, Production Budget, plant Utilization Budget
and Cash Budget.

(ii) Master Budget

It is a consolidated summary of the various functional budgets. It serves as the basis upon
which budgeted Profit & Loss Account and forecasted Balance Sheet are built up.

5.2.3. BUDGETARY CONTROL TECHNIQUES

The various types of budgets are as follows

i) Revenue and Expense Budgets:

The most common budgets spell out plans for revenues and operating expenses in rupee terms. The most
basic of revenue budget is the sales budget which is a formal and detailed expression of the sales forecast.
The revenue from sales of products or services furnishes the principal income to pay operating expenses
and yield profits. Expense budgets may deal with individual items of expense, such as travel, data
processing, entertainment, advertising, telephone, and insurance.
ii) Time, Space, Material, and Product Budgets:

Many budgets are better expressed in quantities rather than in monetary terms. e.g.

direct-labor-hours, machine-hours, units of materials, square feet allocated, and units produced.

The Rupee cost would not accurately measure the resources used or the results intended.

iii) Capital Expenditure Budgets:

Capital expenditure budgets outline specifically capital expenditures for plant, machinery,
equipment, inventories, and other items. These budgets require care because they give definite form to
plans for spending the funds of an enterprise. Since a business takes a long time to recover its investment
in plant and equipment, (Payback period or gestation period) capital expenditure budgets should usually
be tied in with fairly long-range planning.

iv) Cash Budgets:

The cash budget is simply a forecast of cash receipts and disbursements against which actual cash
"experience" is measured. The availability of cash to meet obligations as they fall due is the first
requirement of existence, and handsome business profits do little good when tied up in inventory,
machinery, or other noncash assets.

v) Variable Budget:

The variable budget is based on an analysis of expense items to determine how individual costs
should vary with volume of output.

Some costs do not vary with volume, particularly in so short a period as 1 month, 6 months, or a
year. Among these are depreciation, property taxes and insurance, maintenance of plant and equipment,
and costs of keeping a minimum staff of supervisory and other key personnel. Costs that vary with
volume of output range from those that are completely variable to those that are only slightly variable.

The task of variable budgeting involves selecting some unit of measure that reflects volume;
inspecting the various categories of costs (usually by reference to the chart of accounts); and, by statistical
studies, methods of engineering analyses, and other means, determining how these costs should vary with
volume of output.

vi) Zero Based Budget:

The idea behind this technique is to divide enterprise programs into "packages" composed of
goals, activities, and needed resources and then to calculate costs for each package from the ground up.
By starting the budget of each package from base zero, budgeters calculate costs afresh for each budget
period; thus they avoid the common tendency in budgeting of looking only at changes from a previous
period.

5.2.4 Advantages and Disadvantages of Budgeting

Organizations realize many benefits from budgeting including:

1. Budgets communicate management’s plans throughout the organization.

2. Budgets force managers to think about and plan for the future. In the absence of the necessity to
prepare a budget, many managers would spend all of their time dealing with daily emergencies.

3. The budgeting process provides a means of allocating resources to those parts of the organization
where they can be used most effectively.

4. The budgeting process can uncover potential bottlenecks before they occur.

5. Budgets coordinate the activities of the entire organization by integrating the plans of its various
parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction.

6. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent
performance.

Budgets offer some advantages. They have potential drawbacks as well. Both are summarized below;

Strengths Weaknesses

1. Budgets facilitate effective control. Budgets may be used too rigidly.

2. Budgets facilitate coordination and Budgets may be time-consuming.

communication.

3. Budgets facilitate record keeping. Budgets may limit innovation and change.

4. Budgets are a natural complement to However; Budgets hampers development,

planning. change, the flexibility of the plan.

As shown in the table above, budgets facilitate effective control. By placing financial values on
operations, managers can monitor operations effectively and pinpoint problem areas.

Second budgets facilitate communication and coordination between departments. Budgets also help
maintain records of organizational performance.

Finally, budgets are a natural complement to planning. As managers first plan and then develop control
systems, budgets are often a natural next step.

On the minus side, some managers apply budgets too rigidly. They fail to understand those budget
adjustments are necessary to meet the challenges of changing circumstances.
Also, the art of developing budgets can most often be time-consuming.

Moreover, budgets may limit innovation and change. When all available funds are allocated to specific
operating budgets, it may be impossible to get additional funds to take advantage of an unexpected
opportunity.

Budgets are an important element of an organization’s control system. It is difficult to imagine an

organization functioning without proper budgetary provisions.

Despite some drawbacks, budgets generally provide managers with an effective tool for executing the
control function.

Difference between Budget and Budgetary Control

Point of Budget Budgetary Control

Difference

Nature Budgeting is the formulation of the Budgetary control refers to the control of
plan of the organization. business activities.

Aims The budget sets the target to be Budgetary control aims at attaining that
achieved target.

Dependency Budget can be set without follow up But budgetary control is not possible
action i.e., without budgetary without a budget. However budget without
control. the budgetary control will not be of much

Assumption and The budget is forward-looking. It But budgetary control is concerned with
Actual charts out the course of action to be actual performance. Its objective is to make
followed in the future. the actual performance confirm

Continuity Budgeting is a one time job done Implementation of budgetary control

before the budget period. involves the measurement of actual
performance and comparison of the same
However, due to the changing with the target to analyze the variance.
situation, the budget may require
revision during the budget period. The process is continuous and carried out
throughout the budget period.
 5.2.5 Making Budgetary Control Effective

Budgetary control can be made effective if an organization can ensure the following:

1. Setting appropriate standard

This is key to successful budgeting. Many budgets fail for lack of such standards, and some upper-level
managers hesitate to allow subordinates to submit budget plans for fear that they may have no logical
basis for reviewing budget requests.

2. Ensuring top-management support

Budget making and administration must receive the whole-hearted support of top ‘management.

If top management supports budget making, requires departments and divisions to make and defend their
budgets, and participate in this review, then budgets encourage alert management throughout the
organization.

3. Participation by users in budget preparation

Besides the support of top management, the concerned managers at lower levels should also participate in
its preparation. Real participation in budget preparation is necessary to ensure success.

It may also prove worthwhile to give department managers a reasonable degree of latitude in changing
their budgets and in shifting funds, as long as they meet their total budgets.

4. Providing information to managers about performance under budget

If budgetary control is to work well, managers need ready information about actual and forecast
performance under budgets by their departments. Such information must be so designed as to show them
how well they are doing.

Conclusion

Budgeting is the formulation of plans for a given future period in numerical terms. Organizations may
establish budgets for units, departments, divisions, or the whole organization.

The usual period for a budget is one year and is generally expressed in financial terms. Budgets are the
foundation of most control systems.

They provide yardsticks for measuring performance and facilitate comparisons across divisions, between
levels in the organization, and from one period to another.

5.2.6 Problems in budgeting

• Whilst budgets may be an essential part of any marketing activity they do have a number of
disadvantages, particularly in perception terms.
• Budgets can be seen as pressure devices imposed by management, thus resulting in:
 a) bad labour relations
b) inaccurate record-keeping.
• Departmental conflict arises due to:
a) disputes over resource allocation
b) departments blaming each other if targets are not attained.
• It is difficult to reconcile personal/individual and corporate goals.
• Waste may arise as managers adopt the view, "we had better spend it or we will lose it". This is
often coupled with "empire building" in order to enhance the prestige of a department.
• Responsibility versus controlling, i.e. some costs are under the influence of more than one person,
e.g. power costs.
• Managers may overestimate costs so that they will not be blamed in the future should they
overspend.

5.2.7 NON-BUDGETARY CONTROL TECHNIQUES

There are, of course, many traditional control devices not connected with budgets, although some may be
related to, and used with, budgetary controls. Among the most important of these are: statistical data,
special reports and analysis, analysis of break- even points, the operational audit, and the personal
observation.

i) Statistical data:

Statistical analyses of innumerable aspects of a business operation and the clear presentation of statistical
data, whether of a historical or forecast nature are, of course, important to control. Some managers can
readily interpret tabular statistical data, but most managers prefer presentation of the data on charts.

ii) Break- even point analysis:

An interesting control device is the break even chart. This chart depicts the relationship of sales and
expenses in such a way as to show at what volume revenues exactly cover expenses.

iii) Operational audit:

Another effective tool of managerial control is the internal audit or, as it is now coming to be called, the
operational audit. Operational auditing, in its broadest sense, is the regular and independent appraisal, by
a staff of internal auditors, of the accounting, financial, and other operations of a business.

iv) Personal observation:

In any preoccupation with the devices of managerial control, one should never overlook the importance of
control through personal observation.

v) PERT:

The Program (or Project) Evaluation and Review Technique, commonly abbreviated PERT, is a is a
method to analyze the involved tasks in completing a given project, especially the time needed to
complete each task, and identifying the minimum time needed to complete the total project.

vi) GANTT CHART:

A Gantt chart is a type of bar chart that illustrates a project schedule. Gantt charts illustrate the start and
finish dates of the terminal elements and summary elements of a project. Terminal elements and summary
elements comprise the work breakdown structure of the project. Some Gantt charts also show the
dependency (i.e., precedence network) relationships between activities.

5.3 Use of computers and IT in Management control

5.3.1 Uses of computers in Management

In virtually every business, a computer is an essential tool for running the day-to-day operations,
enhancing productivity and communicating with customers, suppliers and the public. Managers use
computers for a variety of reasons, including keeping their teams on track, budgeting and planning
projects, monitoring inventory and preparing documents, proposals and presentations. Managers need
to understand not only the basic functions of the corporate software tools used in the office but also
the Internet and other external computing tools that can improve the way they manage their
departments.

Business Planning
Business planning can take up a lot of a manager's time, but computer programs make it easier. From
using email programs like Outlook or Google Mail to set appointments, tasks and deadlines to using
financial tools to develop budgets and project proposals, using computers to plan the day-to-day
activities of a business is essential. Managers also use the Internet to research their industries, the
competition and to look for ideas to help them create plans to engage customers, win more business and
succeed in the competitive world of business.
Record Keeping
Managers keep track of a lot of information that is vital to the company's success. From customer
records to financial records to employee records, the data a company has to store are seemingly endless.
Using computers to store and manage documents, files and records reduces the amount of physical
storage a company needs and also allows managers to have easy access to their files using simple
document search methods. Additionally, by keeping records, managers can easily share information
about an employee's history and job performance with other managers in the company.
Communication
One of the most common uses for computers in business is communication. Communication is essential
not only between employees but with customers as well. Many customer service departments use
computers to log service issues and make a record of their resolutions. Using email and instant
messaging programs allows employees to gather information from one another that they need to
complete their jobs. It also allows managers to delegate work tasks and follow up on projects.
Document Preparation
For creating spreadsheets, presentations, memos and other corporate documents, computers are
essential in business. Managers need to have a basic understanding of common workplace productivity
software such as Microsoft Office, but specialized industries such as advertising and marketing also
require managers to work with more advanced programs like Adobe Photoshop and Illustrator to create
visual materials for clients.
5.3.2 NEED AND LEVELS OF INFORMATION HANDLING
Management Information System (MIS) can be defined, according to Joel E. Ross, as a communication
process wherein information (input) is recorded, stored, processed and retrieved for decisions (output)
regarding the managerial process of planning, organising and controlling. If we now define decision-
making as the process of selecting from among alternatives a course of action to achieve an
objective, the link between information and decision becomes clear.

Computerised MIS cannot technically make a decision but it can yield processed data and follow
instructions to the extent of its capacity. For example, the computer can be properly instructed to
compare inventory levels with programmed decision-rules on re-order level and re-order quantity,
and generate purchase requisition, purchase enquiry and purchase order, etc. This can resemble an
automatic control of purchase documents.

The modern role of MIS for managerial decision-making in a complex organisation has been
compared to that of a military commander. Commanders often adopt a strategy built by direct
observation of partial situations. This is the style used by the managers who track operations by
periodic communications with remote sales depots, plant divisions and other offices. For instance,
the central marketing organisation of a travel agency has to keep track of all its booking offices
spread all over India for marketing related decision-making.

Levels of Information Handling

At the apex, the top level managers may need decision support system (DSS). This would be an
inter-active system that provides the user-manager with easy access to decision models and data
in order to support semi-structured and non-structured decision-making tasks. Inputs for DSS can
be some processed data, and mostly management-originated data along with some unique models.
The DSS would involve queries and responses, operations research models, and simulation. The
output from DSS would be special reports to resolve difficult questions and replies to
management queries.

At the middle management level (if there exists one), MIS would deal with an organised set of
procedures to provide information for middle managers to support their operations and decision-
making within the organisation. At this level, inputs for MIS would be both processed and raw-
data and some management-originated data, along with pre-programmed models. The MIS
process would involve report generation data management, simple models and statistical methods.
The outputs from MIS would be filtered and screened for semi-routine decisions and replies to
simple management queries.

At the shop-floor management level, transaction processing system (TPS) is a computer-based

system that would capture, classify, store, maintain, update and retrieve simple transaction data
for record keeping and for feeding MIS and DSS. The TPS would have transaction data as inputs.
The processing for TPS would involve classification, codification, sorting, merging, adding,
deleting and updating. Outputs for TPS would be detailed reports relating to routine decisions and
processed data.

At the clerical level, office and other automation control system can be in operation. Office
automation system (OAS) is simple in an automated office having multiple functions, where the
integrated and computer-aided system allows many office activities to be performed with
electronic equipment. The OAS would have inputs such as appointments, documents, addresses,
etc. The OAS processing would be scheduling word-processor, data storage and retrieval. Outputs
from OAS would be schedules, memoranda, bulk mail and administrative reports. Computer
Reservation Systems used in hotels and travel agencies are also operated at this level.

5.3.3. ADVANTAGES OF COMPUTERISATION

The advantages associated with computer-based managerial decision-making can be the

following :
 1) response time is greatly reduced;
2) very large data are stored for information and decision-making;
3) accuracy of information is considerably improved, thereby improving the quality of the
decision;
4) problems are handled more easily by using various operation research models;
5) the cost involved in the decision-making process is reduced;
6) more secrecy is observed as compared to manual file system;
7) ability to take quick decision improves considerably as the time for retrieval of information is
very fast;
8) paper work is reduced to the minimum as all the information is stored in the computer itself;
9) lots of information are stored for future reference;
10) chances of leakage of classified information are reduced;
11) accuracy in manipulation is increased very much; and
12) time spent in various decision-making activities is reduced to a minimum.

Emanating from the above, the following benefits for a commercial organisation can be attributed to
computerisation :

1) the availability of accurate forecasts within 1 per cent of net income;

2) the preparation of short-term profit plans and long-term projections;
3) the provision of pre-plan information in budget preparation;
4) the calculation of variances between budgeted and actual results;
5) the triggering of revised forecasts if not proceeding in accordance with plans;
6) the early warning system for monitoring activities and the signalling of necessary reactive
plans;
7) the indication of income and cash flow by following alternate investment strategies;
8) the assistance to the planning of new facilities and a host of special strides; and
9) the accomplishment of the preceding items at a great speed.

While TPS has been in use over several decades, OAS is coming into practice only now in a
number of organisations. The TPS has brought its own benefits for speedy execution, accurate
performance and quite often confidential handling. Such benefits will become evident if one
considers a couple of very common TPS applications.

Advantages of MIS can be manifold because of the aid to higher level decision-making. Once the
planning, monitoring, reviewing and control process are facilitated, the benefits can literally multiply
several times, over and above the mere shop-floor or clerical TPS applications.

5.3.4 APPROACH TO COMPUTERISATION

The first important stage of organising MIS at the corporate level is to build up comprehensive data-base
from TPS for the clerical systems. Valid data should be initially classified and codes attached to each
data-set. Thereafter data-base should be constantly updated. The analogy to a reference library system is
almost uncanny, where books have to be classified according to the subjects (e.g., reference, economics,
management, etc.) and then codes attached to each book (e.g., 001 for reference, 338 for economics, 658
for management, etc.). Thereafter the books need constant updating through cataloguing and indexing. A
library, however, is not as amenable to easy cross-reference among a vast number of books, as a
computerised data-base is. With classification, codification and updating, a computerised data-base can
help the user with almost instant retrieval of any amount of cross-classified and cross-revised data, thus
helping tremendously the decision-making process.

The second important stage to MIS at corporate level is to decide on the principles of evaluating the raw
data for decision-making. For this purpose, the four principles that can be unhesitatingly recommended
are: selection, pattern, linkage and overview. The first principle of selection looks at a screened segment
of data which can focus attention on variances from standards, deviations from norms, fluctuations from
targets and differences from budgets. It is presumed that whatever data are related to the initially fixed
standards, norms, targets and budgets they are, to that extent, not required to be looked at any further. But
whatever are not conforming to the steady state are worth looking at for decision-making purposes.

The second principle of pattern is to look at the collection of data and to derive insight by virtue of
management ratios, trends, correlations and forecasts. Essentially this is a principle of gaining insight into
the given mass of data. The third principle of linkage is a way of looking at a number of widely dispersed
data-sets and to formulate a coherent picture. The last principle of overview is to derive a total picture
which cuts across a number of control parameters and sums up the managerial position.

The third stage of MIS at corporate level is to realise the above four principles in actual practice. The first
principle of selection can be implemented by generating exception-based reports. This requires the safe-
keeping of classified, codified and updated data on the computer and retrieving only specially meaningful
reports on the basis of exception. The second principle of pattern can be implemented by using
mathematical modelling and statistical analysis. Such analytical approach requires the data-sets to be
treated with mathematical models and statistical methods in order to derive meaningful indicators for
decision-making.

The third principle of linkage can be implemented by inter-relating different data-sets from disparate files
or data-bases. The inter-relationships would provide again available insight across the board. The fourth
principle of overview can be implemented by aggregating data. Such a process of aggregation can
connect together the classified and codified data for purposes of deriving a managerial insight into the
total span of operations

5.3.5 STRATEGIC ISSUES OF COMPUTER-AIDED DECISION-MAKING

Transaction processing systems using computers have played a relatively limited role as a management
tool. This has been so because decision-making has not been their central theme. Instead, they have been
speciality-oriented for on-going clerical needs in personnel (pay roll), book-keeping (accounting),
technical data (capital projects) or specific functional areas (materials). Alternatively, they have been
project-oriented, used to manage a specific programme of limited time and scope, such as, examination
result processing, or, they have been problem-oriented for emergency and random retrieval of information
to meet a crisis situation of limited duration and scope.

According to Robert Anderson, the corporate MIS should assist such material functions as:
• manufacturing, marketing and other real-time operations,
• futuristic improvement and problem-solving, instead of historical reports of the past actions,
• necessary corrective action rather than book-keeping, and
• monitoring of outside conditions affecting the organisational plans.

Joel E. Ross identifies the reasons for corporate MIS as the same for planning in general. It should offset
uncertainty, improve economy of operations, focus on the objectives and provide a device for control
operations. Such an approach is radically different from the patch-work approach of the transaction
processing system. (What follows is identification of some of the strategic issues identified by Ross and
others, and their suggested solutions in the Indian context).

1 Communication Gap

One of the reasons for the over-emphasis on the transaction processing system is the communication gap
between the computer professional and the user-manager of the system. In India, far too many
organisations have become used to separate EDP departments, now increasingly called computer services
departments. Because of the training interest and peer pressure, Ross suggests that there is a compulsive
tendency for the computer professional to generate massive data-bases, to install display devices and
glittering data-communications techniques, and to install newer and grander design. This only serves the
purpose of empire building and not improved management. There is a familiar situation where the
computer professional is engaged in developing the computer-aided decision-making but is not able to
communicate to the user-manager. The information that the user needs is called for, but the user cannot
adequately express them as he or she has not been accustomed to a rigorous self-analysis. Thereafter, the
computer professional works out a plan based on his or her own understanding of the user-needs, to
convert them into the flow-charts and programming. In the process, the information needs themselves get
altered. When the programmer codifies and implements the system, his or her own interpretation gets
incorporated, thus further changing the user-needs. All these end up by frustrating the user manager. This
can be called “ten-minute syndrome” where sufficient time has not been spent between the user-manager
and the computer professional to get all the needs clearly conveyed and understood.

A situation arose where during examination processing grace marks had to be allocated by way of
moderation. Computer professionals allocated grace marks to all students which resulted in glaring
anomalies where some top ranking students secured more than 100 per cent marks by virtue of additional
grace marks. Obviously, the Controller of examinations had not explained properly the mystique of grace
marks to the computer professionals!

2 Reliance on Service Bureaus or Computer Vendors

Quite often, Indian user-manager is approached by computer vendor who brain washes the management
into buying a system, indicating that the system has all the solutions to the managerial problems. The end-
result is that either the user gets a system which is too large for him or her with a lot of computer “fat” or
gets inadequate computing power for his or her needs.

Ross suggests that there should not be any technical romance with the computer vendor but a return on
investment (ROI) approach to expenditure. Further, the user-manager should operate with a master plan,
rather than react to the vendor’s suggestions. There have been cases where an organisation had appointed
a service bureau for a large sum of money to develop a corporate MIS. After spending a year as well as a
couple of lakhs of rupees, the user-organisation was thoroughly dissatisfied with the recommendations of
the service bureau and did not implement it.

3 Lack of Master Plan

The bulk of computer failures are due to the lack of master plans to which hardware acquisition, software
development and individual MIS design can be related. Without such a plan, “islands of mechanisation”
result with little integration between separate systems. We can cite two successful cases in this regard.
The TISCO studied the interface of various systems like production planning and control system,
financial control system, and sales invoicing and order processing system. It was observed that if
individual systems were developed without regard to their mutual interfaces, the result would be an
absence of communication between the systems and the incompatibility of the systems would prevail
throughout the company. This was prevented by building up sufficient linkages among these systems and
developing an integrated approach according to a master plan. A similar approach was also adopted by
TELCO with encouraging results.

4 Organisation of the MIS Function

Since clerical systems came first involving accounting, pay roll, inventory returns and similar financial
jobs, the transaction processing system developed around all of them. Following the normal principle of
assigning a service activity by “familiarity”, the historical trend in India has been to assign the computer
to the Controller of Finance or Chief Accountant. This has been the case in many sectors. Only now the
situation is being reversed, MIS function has been placed under the user-manager.

With more distributed processing becoming possible, the trend has been to place computer-aided
decision-making where it belongs, mainly under the user-manager with his or her own computing power.
Already, the personal computers (PCs) have made this trend possible in practice, with individual data-
bases available to the users. Similarly terminals are available to most important users to share central
computing power. In both cases, all PCs as well as terminals, the control of the computer-aided activity
has to remain with the user-manager.

5 Lack of Good Management System

It is imperative for successful corporate MIS on computer that there is good planning and control within
the framework of an efficient organisational structure. No degree of sophistication with computers can
cure the basic ill of chaotic data management. There have been many organisations where
computerisation has not brought any tangible improvements because there has been no systematic
handling of data or attention paid to the data management. In such cases, there would have been
considerable gain by first conducting a good Organisation and Method (O&M) study.

MIS has to be built on top by a management system which should include the organisational
arrangements, the structure and procedures for adequate planning and control, the clear establishment of
objective, and all other manifestations of good organisation in management. It is interesting to note that
good computer professionals know their craft but are simply not oriented to managerial jobs. In other
words, the road-based skills, which are necessary to function both in the computer room and in meeting
with user-manager for the MIS, are conspicuous by their absence. This phenomenon has been known
globally and that is why computer professionals are often called “machine-mesmerised”, where they are
more loyal to their profession than to their organisation!

6 Managerial Participation

The single most critical problem in effective computer utilisation is the need for understanding and
support from top management. Even after top management support is ensured, it is necessary that there is
user participation in the design phase on corporate MIS so as to avoid subsequent extensive and time-
consuming re-work. This can be called overnight syndrome where users spell out their needs and expect
the computer professionals to deliver the outputs immediately thereafter. Converting jobs eventually for
computerisation needs a stabilisation period, which is all too easily forgotten. It makes good sense, when
the user-manager picks up minimum familiarity with the MIS at the beginning. From the point of view of
the organisation, corporate MIS is as much a vital part of the operation as marketing operations and
finance are today. Indian Airlines, too, discovered that managers had to be involved in order to get better
and more effective information systems by virtue of their participation. A similar approach is being
followed in many other organisations.

7 Failure to Identify Information Needs

A clear identification of information needs is fundamental and necessary to go for design of a corporate
MIS. Recently, a Central Government department spent lavish sums on hardware and software to
perpetuate the existing 53 MIS reports and to build a sophisticated data-bank without first determining the
real information needs of management. It is often forgotten that only that information should go into the
corporate MIS which can increase the perception of managers in critical areas such as problems,
alternatives, opportunities and plans. It is the user-manager who is to provide the specification for what he
or she wants out of his or her corporate MIS. If the manager fails to do so, the computer professional by
default would provide his or her own objectives and own information needs. These would seldom meet
the needs of the user-manager.

8 Poor Systems Prior to Computerisation

It has been observed that computerisation of a poor system will merely increase inefficiency at an
accelerating rate. The user-manager gets irrelevant or bad information faster and the bad decisions are
made sooner! Hindustan Zinc Ltd., for instance, planned to upgrade and improve their transaction-
processing system in a methodical manner. Such clerical systems as ledger accounting were to be
upgraded to financial planning; invoicing to sales analysis; inventory accounting to inventory
management; and production reports to production planning and control. Well established procedures
helped them to make a smooth transition.

9 Overlooking Human Acceptance

A new MIS quite often meets resistance from the user-organisation because people do not accept what
they do not understand. Such reasons for resistance have to be analysed and a new attitude brought in to
overcome it. Ross identified the reasons as threat to the status of the salesmen; threat to the ego of the
managers; economic threat to the clerical persons (fear of job loss), insecurity for the managers having
personal powers and political base; loss of autonomy and control for the production managers and
engineers; and frayed and inter-personal relations for all others. A number of public and private sector
organisations such as BHEL, Indian Airlines, ITDC, NTPC, etc. have started a process of systematic
programme of training and user-education. It is imperative that such education begins at the top level for
computer appreciation, at the middle management for specific computer applications in their own
domains, and at the working level for direct involvement in input and output quality control. It is good to
see the bulk of Indian organisations going through such an elaborate process of computer initiation as
there is no short-cut to it.

5.3.6 Information Technology in Controlling

Management Information system (MIS) provides the communication link that makes controlling possible
MIS is defined as a formal system of gathering, integrating, comparing, analyzing and dispersing
information internally and externally to the enterprise in a timely effectively and efficient manner
Electronic equipment permits fast and economical processing of large data without confusions and make
them readily available for decision making
The applications of computer are found in material requirement planning, computer aided manufacturing,
project costing, inventory control and purchasing
5.3.7 Role of Management Information System
 Helps in Decision Making: MIS plays a significant role in decision making process of any
organization. Because in any organization decision is made on the basis of relevant information
and relevant information can only be retrieving from the MIS
  Helps in coordination among the Department: MIS is also helping in establishing a sound
relationship among the people between department to department through proper exchanging of
informations
 Helps in finding our problems: MIS provides relevant information about the every aspect of
activities. Hence, if any mistake is made by the management then MIS helps in finding out the
solution of that problem
 Helps in comparison of Business Performance : MIS stores all Past data and information in its
database. That is why MIS is very useful to compare business organization performance. With the
help on MIS organization can analyze their performance whatever they did last year or previous
years and whatever performance in this year and also measures organization development and
growth.

5.3.8 Types of Technology Used in Modern Day Business

In this digital era, organizations have access to advanced customer management, commercial,
communication and mobile software designed to streamline their day-to-day operations.
Cloud technology, for example, has eliminated the need for CDs, DVDs and other types of media
storage. It is estimated that more than 2.3 billion people will be using the cloud by 2020. This market is
expected to reach $92.488 billion over the next four years.
Other types of technology that are shaping the business world include electronic commerce, augmented
reality, the Internet of Things, 3D printing and customer self-service. Online conferencing systems,
which are one of the best examples of communication technology, allow business owners and
employers to hold meetings on the go, regardless of their location. Expensive business trips are no
longer necessary.
Information Technology
Organizations worldwide rely on information technology to create, store, exchange and process data.
This industry includes thousands of services and software programs that streamline communication,
improve customer retention and increase security.
Artificial intelligence, for instance, has made possible the development of autonomous systems,
predictive analysis, robotics and other processes. Companies can use AI software to predict customer
behavior, automate credit decisions and turn data into valuable insights.
For example, chatbots can talk to customers and address their concerns in real time. More and more
clinics and hospitals are using AI to diagnose cancer and other disorders. The automobile industry
employs this technology for activity recognition.
Communication Technology
From social media to email, smartphones, messenger apps and team collaboration tools, there are
endless examples of communication technology. Programs like Slack and Trello allow employees and
teams to collaborate more efficiently. Users can exchange files, provide feedback and give other team
members access to documents - all on one platform.
Social Intranet, for example, can improve internal communication and productivity in your
organization. Employees can use this type of software to brainstorm ideas, share internal information
and even access social networks like Twitter and Facebook.
Unified communication systems integrate messaging, video conferencing, live chat and other features
to allow businesses to communicate effortlessly and reduce infrastructure costs. Voice over Internet
Protocol (VoIP), one of the most widely used forms of technology in business, makes communication
over the Internet possible. Users can call directly from their computers, hold conferences remotely and
multi-task without interruption.
Management Technology
Modern technology enables business executives and managers to work more efficiently and make better
decisions. Database management systems, for instance, provide users with a systematic way to retrieve,
manage, update and create data. This helps ensure that the information is consistently organized and
can be accessed whenever it's necessary. The latest systems incorporate advanced features, such as
activity auditing, data recovery and automated rollbacks.
Customer Relationship Management (CRM) software has emerged as one of the most popular types of
technology for business. CRM systems facilitate the processes that invoke customer interactions with
the sales and marketing teams within an organization. Project management software allows you to track
the status of all projects in one place, identify risks and share updates in real time.
These are just a few of the many forms of technology available today. Whether you're running a startup
or a corporation, you can use the latest software to reduce costs and increase profitability. Your team
will work more efficiently and get better results in less time.
5.4 Productivity problems and management

Productivity refers to the ratio between the output from production processes to its input.
Productivity may be conceived of as a measure of the technical or engineering efficiency of production.
As such quantitative measures of input, and sometimes output, are emphasized.

5.4.1 Typical Productivity Calculations

Measures of size and resources may be combined in many different ways. The three common approaches
to defining productivity based on the model of Figure 2 are referred to as physical, functional, and
economic productivity. Regardless of the approach selected, adjustments may be needed for the factors of
diseconomy of scale, reuse, requirements churn, and quality at delivery.

a) Physical Productivity

This is a ratio of the amount of product to the resources consumed (usually effort). Product may
be measured in lines of code, classes, screens, or any other unit of product. Typically, effort is measured
in terms of staff hours, days, or months. The physical size also may be used to estimate software
performance factors (e.g., memory utilization as a function of lines of code).

b) Functional Productivity

This is a ratio of the amount of the functionality delivered to the resources consumed (usually
effort). Functionality may be measured in terms of use cases, requirements, features, or function points
(as appropriate to the nature of the software and the development method). Typically, effort is measured
in terms of staff hours, days, or months. Traditional measures of Function Points work best with
information processing systems. The effort involved in embedded and scientific software is likely to be
underestimated with these measures, although several variations of Function Points have been developed
that attempt to deal with this issue.

c) Economic Productivity
 This is a ratio of the value of the product produced to the cost of the resources used to produce it.
Economic productivity helps to evaluate the economic efficiency of an organization. Economic
productivity usually is not used to predict project cost because the outcome can be affected by many
factors outside the control of the project, such as sales volume, inflation, interest rates, and substitutions
in resources or materials, as well as all the other factors that affect physical and functional measures of
productivity. However, understanding economic productivity is essential to making good decisions about
outsourcing and subcontracting. The basic calculation of economic productivity is as follows:

Economic Productivity = Value/Cost

5.4.2 Factors affecting productivity

1. National Productivity

Human Resources ( basic education, training, good working condition, pay scale, etc)

Technology and capital investment (R&D, attractive tax reduction and ease of policy to attract
investment)

Government regulation

2. Manufacturing Industry
Product design
Equipment and Machinery
Skill and effectiveness of workers
Energy
Type of production

5.4.3 Productivity Improvement Tools

1. JIT (Just-In-Time)

Reduce lead times

Minimize inventory

Reduce the defect rate to zero and

Accomplish all of the above at minimum cost

3. KANBAN
Kanban is a visual process and project management tool first developed in Japan by Toyota
Kanban is a way to visualize your work and limit the amount of work in progress at any one time
Kanban is a Japanese word that simply translates to “signal”
Kanban card work system allows teams to communicate and collaborate on what work needs to
be done and when
Kanban has three core principles:
 Start with what you know – Don’t try to reinvent the wheel right away. Visulaize what
you have now.
  Pursue incremental, evolutionary change - Once you can see the current state of your
work, visualize how to improve it
 Respect the current process, roles, responsibilities and titles - Don’t make drastic,
sweeping changes without getting buy-in from the rest of your team. Kanban is a
collaborative process.
3.5 S
The five S’s stand for five Japanese words

Seiri ( Proper arrangement)

Seiton (Orderliness)
Seiso (Cleanliness)
Seiketsu (Standardising)
Shitsuke (Discipline)
4. KAIZEN
Kaizen defines the area for improvement
Analyse and select the appropriate problem.
Identify its causes
Plan counter measures
Confirm the result
Standardize

5.3.4 PROBLEMS IN MEASUREMENT OF PRODUCTIVITY OF KNOWLEDGE WORKERS

Productivity implies measurement, which in turn, is an essential step in the control process.
Although there is a general agreement about the need for improving productivity, there

is little consensus about the fundamental causes of the problem and what to do about them. The blame has
been assigned to various factors. Some people place it on the greater proportion of less skilled workers
with respect to the total labor force, but others disagree. There are those who see cutback in research and
the emphasis on immediate results as the main culprit. Another reason given for the productivity dilemma
is the growing affluence of people, which makes them less ambitious. Still others cite the breakdown in
family structure, the workers’ attitudes, and government policies and regulations. Another problem is that
the measurement of skills work is relatively easy, but it becomes more difficult for knowledge work. The
difference between the two kinds is the relative use of knowledge and skills.

COST CONTROL

Cost control is the measure taken by management to assure that the cost objectives set down in
the planning stage are attained and to assure that all segments of the organization function in a manner
consistent with its policies.

Steps involved in designing process of cost control system:

• Establishing norms: To exercise cost control it is essential to establish norms, targets or parameters
which may serve as yardsticks to achieve the ultimate objective. These standards, norms or targets
may be set on the basis of research, study or past actual.
• Appraisal: The actual results are compared with the set norms to ascertain the degree of utilization of
men, machines and materials. The deviations are analyzed so as to arrive at the causes which are
controllable and uncontrollable.
• Corrective measures: The variances are reviewed and remedial measures or revision of targets,
norms, standards etc., as required are taken.

Advantages of cost control

• Better utilization of resources

• To prepare for meeting a future competitive position.
• Reasonable price for the customers
• Firm standing in domestic and export markets.
• Improved methods of production and use of latest manufacturing techniques which have the
effect of rising productivity and minimizing cost.
• By a continuous search for improvement creates proper climate for the increase efficiency.
• Improves the image of company for long-term benefits.
• Improve the rate of return on investment.

PURCHASE CONTROL

Purchase control is an element of material control. Material procurement is known as the

purchase function. The functional responsibility of purchasing is that of the purchase manager or the
purchaser. Purchasing is an important function of materials management because in purchase of materials,
a substantial portion of the company's finance is committed which affects cash flow position of the
company. Success of a business is to a large extent influenced by the efficiency of its purchase
organization. The advantages derived from a good and adequate system of the purchase control are as
follows:

a) Continuous availability of materials: It ensures the continuous flow of materials. so production

work may not be held up for want of materials. A manufacturer can complete schedule of production in
time.

b) Purchasing of right quantity: Purchase of right quantity of materials avoids locking up of working
capital. It minimizes risk of surplus and obsolete stores. It means there should not be possibility of
overstocking and understocking.

c) Purchasing of right quality: Purchase of materials of proper quality and specification avoids waste of
materials and loss in production. Effective purchase control prevents wastes and losses of materials right
from the purchase till their consumptions. It enables the management to reduce cost of production.

d) Economy in purchasing: The purchasing of materials is a highly specialized function. By purchasing

materials at reasonable prices, the efficient purchaser is able to make a valuable contribution to the
success of a business.
e) Works as information centre: It serves as a function centre on the materials knowledge relating to
prices, sources of supply, specifications, mode of delivery, etc. By providing continuous information to
the management it is possible to prepare planning for production.
f) Development of business relationship: Purchasing of materials from the best market and from
reliable suppliers develops business relationships. The result is that there may be smooth supply of
materials in time and so it avoid disputes and financial losses.

g) Finding of alternative source of supply: If a particular supplier fails to supply the materials in time,
it is possible to develop alternate sources of supply. the effect of this is that the production work is not
disturbed.

h) Fixing responsibilities: Effective purchase control fix the responsibilities of operating units and
individuals connected with the purchase, storage and handling of materials.

In short, the basic objective of the effective purchase control is to ensure continuity of supply of requisite
quantity of material, to avoid held up of production and loss in production and at the same time reduces
the ultimate cost of the finished products.

MAINTENANCE CONTROL

Maintenance department has to excercise effective cost control, to carry out the maintenance
functions in a pre-specified budget, which is possible only through the following measures:

First line supervisors must be apprised of the cost information of the various materials so that the
objective of the management can be met without extra expenditure on maintenance functions

A monthly review of the budget provisions and expenditures actually incurred in respect of each
center/shop will provide guidlines to the departmental head to exercise better cost control.

The total expenditure to be incurred can be uniformly spread over the year for better budgetary control.
however, the same may not be true in all cases particularly where overhauling of equipment has to be
carried out due to unforseen breakdowns. some budgetary provisions must be set aside, to meet out
unforeseen exigencies.

The controllable elements of cost such as manpower cost and material cost can be discussed with the
concerned personnel, which may help in reducing the total cost of maintenance. Emphasis should be
given to reduce the overhead expenditures, as other expenditures cannot be compromised.

It is observed through studies that the manpower cost is normally fixed, but the same way increase due to
overtime cost. however, the material cost, which is the prime factor in maintenance cost, can be reduced
by timely inspections designed, to detect failures. If the inspection is carried out as per schedule, the total
failure of parts may be avoided, which otherwise would increase the maintenance cost. the proper
handling of the equipment by the operators also reduces the frequency of repair and material
requirements. Operators, who check their equipment regularly and use it within the operating limits, can
help avoid many unwanted repairs. In the same way a good record of equipment failures/ maintenance
would indicate the nature of failures, which can then be corrected even permanently.
QUALITY CONTROL

Quality control refers to the technical process that gathers, examines, analyze & report the
progress of the project & conformance with the performance requirements

The steps involved in quality control process are

1) Determine what parameter is to be controlled.

2) Establish its criticality and whether you need to control before, during or after results are
produced.
3) Establish a specification for the parameter to be controlled which provides limits of acceptability
and units of measure.
4) Produce plans for control which specify the means by which the characteristics will be achieved
and variation detected and removed.
5) Organize resources to implement the plans for quality control.
6) Install a sensor at an appropriate point in the process to sense variance from specification.
7) Collect and transmit data to a place for analysis.
8) Verify the results and diagnose the cause of variance.
9) Propose remedies and decide on the action needed to restore the status quo.
10) Take the agreed action and check that the variance has been corrected.

Quality control tools

Fish Bone Diagram – cause and effect diagram

Pareto Chart - Left Y axis numbers, right cumulative percentage X axis various reasons

Histograms – Frequency of occurrence of samples

Control Charts - deviation about mean

Check sheets – defects over a period (may be in a week)

Scatter plot – relationship between 2 variable

Advantages and disadvantages

¬ Advantages include better products and services ultimately establishing a good reputation for a
company and higher revenue from having more satisfied customers.

¬ Disadvantages include needing more man power/operations to maintain quality control and
adding more time to the initial process.

5.4.6 Productivity problem for practice

Key relationship: productivity = output/resources used = output/input

1. FastCo has generated productivity data for the first two quarters of the year (Table 1). Using dollar
measures of input and output, compare the total profit and productivity achieved for the first two
quarters. How does Q2 productivity compare with Q1 productivity? Use partial factor productivity to
identify what might be done to improve productivity and profitability during Q3.

Table 1: FastCo Quarterly Productivity Data

Q1 Q2
Unit selling price $20 $21
Total units sold 10,000 8,500
Labor hours 9,000 7,750
Labor cost/hr $10 $10
Material usage (lb) 5,000 4,500
Material cost/lb $15.00 $15.50
Other costs $20,000 $18,000

Solution:

Q1 Q2

Output $20*10,000=$200,000 $178,000

Input $10*9000+$15*5000+$20,000=$185,000 $165,250

Profit $200,000-$185,000=$15,000 $13,250

Productivity 200,000/185,000=1.081 1.080 (-0.1%)

Note: Are these partial-, multi-, or total factor productivities?

Profit decreased $1750 but productivity remained about the same (-0.1% year over year).

Looking at partial factor productivity for labor and materials:

Q1 Q2

Labor productivity 200,000/90,000=2.22 2.30 (+3.6%)

Material productivity 200,000/75,000=2.67 2.56 (-4.1%)

Labor productivity appears to have increased (+3.6%); material productivity appears to have decreased (-
4.1%).
2. XYZ Manufacturing uses two measures of productivity: a) total sales/total inputs, b) total sales/total
labor inputs. Given data for the last three years (Table 2), calculate the productivity ratios. How would
you interpret the results.

Table 2: XYZ Productivity Data (in millions of dollars)

Y1 Y2 Y3
Sales 110 129 124
Materials 62 73 71
Labor 28 33 28
Overhead 8 12 10

Solution:

Y1 Y2 Y3

Total sales/total inputs 1.12 1.09 (-2.7%) 1.13

(+3.7%)

Total sales/total labor input 3.93 3.91 (-0.5%) 4.42

(+13.0%)

Total factor productivity and partial factor productivity with respect to labor, after decreasing in Y2,
appears to have increased in Y3.

Note: Which of the above is total factor productivity? Why?

3. A hamburger factory produces 50,000 burgers each week. The equipment costs $5,000 and will remain
productive for three years. The annual labor cost is $8,000.

a) What is the productivity as measured in units of output per dollar of input over a 3 year period?

b) Management has the option of $10,000 equipment, with an operating life of five years. It would
reduce labor costs to $4,000 per year. Should management purchase this equipment (using productivity
arguments alone)?

Solution:

a) In this case, define

productivity = (total burgers produced)/($labor+$equipment)=(50,000*52*3)/(8000*3+5000)

= 269 burgers/$input
b) for new machine project:

productivity=(50,000*52*5)/(4000*5+10,000)

=433 burgers/$input

This is a good project from a productivity perspective. Although the proposed equipment is expensive, 5
year life and lower labor costs make new machine attractive.

5.5 Management Control system and performance

5.5.1 Definition
Horngreen, Datar and Foster define management control system “as a means of gathering and using
information to aid and coordinate the process of making planning and control decisions through- out the
organisation and to guide the behaviour of its managers and employees. The goal of management control
system is to improve the collective decisions within an organisation in an economically feasible way.”

5.5.2 Nature of Management control system

Different managers perform different responsibilities in an organisation and therefore different kinds of
information are needed by them to manage the activities in their respective areas. Management control
system should be able to develop, gather and communicate information to management at different levels
in the organisation. Also, management control system should aim to provide financial as well as non-
financial information as needed by different managers.
Some examples of financial information are material costs, labour costs, net profit, investments made etc.
Non-financial data are those which are not in monetary terms such as production units per worker, labour
hours, machine hours, time taken to comply with the customer’s orders, absenteeism. Some information
gathered under management control system may emerge from internal data maintained within the firm.
Some other information required by managers may be gathered from external sources such as information
about competitors’ product. As stated earlier, different types of information are needed by persons
working at different levels in the organisation. For example, top managers may require internal as well as
external financial and non-financial data as their responsibilities relate to total organisation. However, a
production manager would be more interested in internally generated financial and non-financial data.
5.5.3 Management Control Systems:

Broadly, management control system (MCS) refers to the design, installation and operation of
management planning and control systems.

The term ‘management control systems’ emphasises on two distinct, but highly interrelated and
sometimes indistinguishable, subdivisions of controls systems:

(i) Structure or organisation structure or relationships among the units in the organisation, more
specifically the responsibility centres, the relationship among responsibility centres, performance
measures and the information that flows among these responsibility centres.
(ii) Process or set of activities, or steps or decisions that are taken by an organisation or managers to
establish purposes, allocate resources and achieve organisational purposes.

The process consists of interrelated phases of programming (programme selection), budgeting, execution,
measurement and evaluation of actual performance.

The structure of a management control system indicates what the system “is” and process of a
management control system indicates what the system “does.” The management control systems knits the
organisation together so that each part, by exercising the autonomy given to it, fulfills a purpose that is
consistent with and contributes to the fulfillment of the overall purpose of the organisation.

The control system should be designed to achieve unity of purpose through the use of the diverse talents
of individuals in the organisation. The constant requirement of management control is the achievement of
unity in diversity through coordination, in pursuit of short-term objectives and long-term goals.

Management Control System — Formal and Informal:

Management control system includes both formal control system and informal control system. A formal
control system requires that an organisation should have clear-cut rules, procedures, guidelines, plans
relating to different managerial aspects. Such things are needed to guide, direct, motivate the managers
and other employees and coordinate their behaviour to achieve organisational goals.

In an organisation, many formal control systems may exist such as cost accounting system, management
accounting system, production engineering systems, human resource system, quality maintenance system
etc. Informal management control systems are always unwritten and implicit.

However, they contribute greatly in the implementation of business goals and strategies and help the
organisation to attain high degree of motivation and goal congruence. Examples of informal management
control systems are unwritten norms about good behaviour of managers and employees, loyalties, shared
values, organisational culture and ethics, mutual commitments among managers and employees.

A major objective of management control is to encourage goal congruence, which means that as people
work to achieve their own goals, they also work to achieve the goals of the company. People must have
incentives to work toward the company’s goals. To accomplish that objective, managers must assign
responsibilities and develop performance evaluation criteria that motivate employees to work toward the
company’s goals.

A management control system is most effective when it establishes evaluation criteria that encourage
goal-congruent behaviour and is implemented through a responsibility accounting system that employees
trust to report their performance.

5.5.4 Characteristics of Management Control Systems:

Management control systems designed in an organisation should fulfill the following characteristics:

(i) Management control systems should be closely aligned to an organisation’s strategies and goals.
(ii) Management control systems should be designed to fit the organisation’s structure and the decision-
making responsibility of individual managers.

(iii) Effective management control systems should motivate managers and employees to exert efforts
toward attaining organisation goals through a variety of rewards tied to the achievement of those goals.

5.5.5 Factors Influencing Management Control Systems:

Factors influencing the design of Management Control Systems are as follows:

(i) Size and Spread of the Enterprise:

The size and spread of a large firm is bound to be different compared with that of a small firm. This
would certainly determine the content and nature of the control system for each organisation.

(ii) Organisational Structure, Delegation and Decentralisation:

Statutes and conventions govern organisational structure, and the extent of decentralisation and delegation
in all enterprises. For example, the management philosophy of the State Bank of India is bound to be
different from that of the State Trading Corporation. Also, within an enterprise, the degree of
decentralisation and delegation changes from one point of time to another to meet changed environmental
challenges and the opportunities that these may present. All these influence management control systems
practiced in organisations.

(iii) Nature of Operations and Divisibility:

Nature of operations and their divisibility affect management control systems. For example, in the oil
industry, for instance, sub-units can not be formed on the basis of products. In many large trading
companies, however, divisions can be created on the basis of products. Again, in the paper industry, the
different stages in pulp making can not be subdivided for the purposes of management control, though
pulp making as a whole can be regarded as a division.

(iv) Types of Responsibility Centres:

Different control systems are needed for the various responsibility centres or sub-systems within an
organisation. Whether the performance of a responsibility centre should be measured in terms of expenses
or profitability or return on investment depends on the type of responsibility centre. For example, a bank
may apply different performance measures to measure performance of its different branches.

There are transactional differences between branches; some are deposit heavy or advance heavy, some are
with or without safe deposit facilities or foreign exchange transaction. It is, therefore, not possible to have
profit as the sole criteria for performance evaluation of all branches. Hence, control systems with different
criteria of performance should be used for different sub-units.

(v) People and their Perceptions:

Perceptions of people in the organisation about the likely effects of the control system on their work life,
job satisfaction, job security, promotion and general well-being could differ across organisations. These
considerations will significantly influence the nature and content of the management control system
needed in the organisation and must be duly considered while designing management control systems.

5.5.6. THE BENEFITS OF MANAGEMENT CONTROL SYSTEMS

First, implementation of an MCS can reduce risks. The organization will remove non-conformity by
ensuring the actual performance and results relate to the main objectives of the organization. The
organization doesn’t just set goals and then pursue them blindly, but has systems in place to ensure the
processes are moving the organization towards the objectives.

Since you are aware of the effectiveness of your systems, you can notice problems quicker. You reduce
risk as you notice problems before they turn into a disaster. Consider you are aiming to boost sales to
increase the organization’s bottom line. Due to having an Management Control System in place, you’ll be
alerted if the cost of production goes up and the targets become harder to obtain.

In even simpler turns, imagine you are driving down the road. Now if your car just stops suddenly
because it ran out of fuel, you are in trouble and you didn’t have a warning system in place. On the other
hand, if you have a system in place monitoring your fuel levels, you can have an alarm notify you when
you are running low on fuel. This allows you to take corrective action (find a gas station), before you are
stuck on the side of the road.

The framework also improves your organization’s ability to plan future actions. The information flows
faster under the MCS system, as each part of the organization’s process is being monitored and analyzed.
The enhanced information flow makes it easier to plan and organize future processes and ensure
objectives are set properly.

Without the kind of information MSC provides, you would find long-term planning difficult, as you
wouldn’t have the right facts or the control to guarantee you are aware of the current situation and on top
of future predictions. In the car example, knowing how much fuel you have in each moment and the
distance you need to travel, will make it easier to plan when you need to stop to refuel.

Organizational efficiency also improves in the form of better facilitation of co-ordination. For any
business to succeed, a good communication between the management and other parts of the business is
the key. With MSC in place, the workers, their tasks and objectives are aligned with the management’s
tasks and objectives.

The control systems in place create a middleman between the management and the employees and feeds
information to both directions. As you, the manager, become more aware that sales numbers are
increasing due to a specific result, you can use the information to tweak and perfect the system further.
On the other hand, this also improves employee motivation and gives them feedback on the things they
are doing right.

MSC naturally provides benefits in a pure managerial point of view. The first is how managerial
problems are much easier to notice. Each organization will face problems related to the other managerial
functions of planning, staffing and organizing, but with a proper control system in place, the impact of
these can be limited. You gain more information, you receive early notifications when the management is
not working to its standard, and you are able to remedy the situation before it gets worse.

Furthermore, supervision becomes much easier under the systematic control system, since the deviations
are easier to spot. The data and information you receive as a manager will make it easier to notice the
issues, instead of having to monitor each employee constantly. Supervision is smoother and more focused
on spotting the actual problems and deviations in the system.

Finally, MCS supports organizational decentralization, without the loss of control. The system creates
an environment of knowledge and understanding of the objectives. A key part of the framework is the
proper communication of the goals and policies in place to subordinates. Since the subordinates and lower
level managers are on top of the current situation and are fully aware of the expectations, they can have
more confidence in doing the right things.

Since the framework doesn’t require constant monitoring by the manager, the subordinates are able to
make decisions and solve problems on their own. The motivation and the belief to know you can do it is
much deeper under the system, since you know the MSC will pick up any key deviations and help you
correct them

5.6 Direct and preventive control

Causes of negative deviations in the process of controlling

• Uncertainty
• Lack of knowledge, experience, or judgment
Two general approaches to negative deviations
• Direct control: the procedure that traces the causes of an unsatisfactory result back to the persons
responsible for it and get them to correct their practices.
• Preventive control: the procedure that traces the causes of an unsatisfactory result back to
managers’ management skill and knowledge.
Assumptions underlying direct control
• All performance can be measured
• Personal responsibility exists
• Time expenditure is warranted
• Mistakes can be discovered in time
• Person responsible will take corrective steps

Popular Techniques of direct control

1. Budget summaries and report
Budget summary is a resume of all individual budgets. It reflects company in terms of profit, cost,
sales volume, etc.
2. Profit and loss control
Income expenditure statement, at times may be for each and every division
3. Return on Investment (ROI)
Ratio of earning to investment of capital of a company

Preventive Control

The basic philosophy of preventive control system is that the best way to correct deviations is not to let
these take place at all.
The basic tool of the system is to develop better managers, who can manage problems from a wider and
intelligent perspective. Highly qualified managers will make fewer mistakes, thus reducing the need for
direct control.

Assumptions of preventive control

• Qualified managers make a minimum of errors
 • The management fundamentals can be used to measure performance
• Application of management fundamentals can be evaluated
Advantages of preventive control
• Greater accuracy is achieved in assigning personal responsibility.
• Preventive control encourages self-control and make corrective action more effective.
• Preventive control may lighten the managerial burden caused by direct controls.
• Employees may be motivated to improve themselves continuously.

5.7 Reporting.

Management reporting is that part of Management Control System which provides adequate business
information to various levels of Management in the form of Reports and statements at regular Intervals. It
is a formal system designed to ensure timely supply of pertinent information to Management.

5.7.1 DEFINITION OF MANAGEMENT REPORTING:

According to Kohler, Management Reporting refers to:

"A body of information organized for presentation or transmission to others. It often includes
interpretations, recommendations and findings with supporting evidence in the form of other reports."

5.7.2. ESSENTIALS OF GOOD REPORTING SYSTEM:

• The following are the essentials of a good management reporting system :

(1) Proper Form:

A good report should have a comprehensive form with suggestive title, heading, sub heading and number
of paragraphs as and where necessary for easy and quick reference.

(2) Contents:

Simplicity is one of the requisites of reporting in relation to the contents of a report. Further the contents
should follow a logical sequence. Wherever necessary the contents should be represented in the form of
visual aids such as charts and diagrams etc.

(3) Promptness:

It means that the system should ensure the preparation and submission of report at the proper time. It
facilitates business executives to make suitable decisions based on quick reports without delay.

(4) Accuracy:

Information conveyed should be accurate. This means that the person responsible for reporting should
have sufficient care in preparing the report as correctly as possible within the parameters of possible
accuracy in this regard.

(5) Comparability:
In order to ensure that the furnished information is useful, it is essential that reports are also meant for
comparison. The report should provide information about both the actual and the budgeted performance
of the budget period.

(6) Consistency:

In order to make a meaningful and useful comparison, uniform accounting principles and procedures
should be followed on consistent basis over a period of time for collection, classification and presentation
of accounting information.

(7) Relevancy:

The report should be presented with relevant data to disclose the fact in unambiguous terms. Because,
inclusion of both the relevant and the irrelevant data in the management reports may result in faulty
decisions.

(8) Simplicity:

The report should be as far as possible in simple form. In other words, the report should avoid technical
jargons, duplication of work and presented in a simple style.

(9) Flexibility:

The system should be capable of being adjusted according to the requirement of the users.

5.7.3 Objectives or purpose of reporting to management

A Management Accountant has to prepare the report for the following purposes.

1. Means of Communication: A report is used as a means of upward communication. A report is

prepared and submitted to someone who needs that information for carrying out functions of
management.

2. Satisfy Interested Parties: The interested parties of management report are top management
executives, government agencies, shareholders, creditors, customers and general public. Different types
of management reports are prepared to satisfy above mentioned interested parties.

3. Legal Requirements: Some reports are prepared to satisfy the legal requirements. The annual reports
of company accounts is prepared to furnished the same to the shareholders of the company under
Companies Act 1946. Likewise, audit report of the company accounts is submitted before the income tax
authorities under Income Tax Act 1961.

4. Develop Public Relations: Reports of general progress of business and utilization of national
resources are prepared and presented before the public. It is useful for increasing the goodwill of the
company and developing public relations.

5. Basis to Measure Performance: The performance of each employee is prepared in a report form. In
some cases, group or department performance is prepared in a report form. The individual performance
report is used for promotion and incentives. The group performance report is used for giving bonus.
6. Control: Reports are the basis of control process. On the basis of reports, actions are initiated and
instructions are given to improve the performance.

5.7.4 Advantages of reporting to management

1. It helps the management to understand functional areas of an organization.

2. It is used as a tool to identify the areas of weaknesses and any untoward or unusual occurrences.

3. The performance of employees is regulated and controlled.

4. The management can devote more time on policy formulation and future development.

5. The future course of action is taken with great care.

6. Responsibility is fixed on an individual and in total very clearly.

7. It helps the management to prepare the budget according to the ground reality of the business
conditions.

8. Report provides a basis for deciding operating policy, volume of sales or production, stock policy,
quality production, product design etc.

9. It helps the management to maintain the operational efficiency of all the employees and the business in
general.

10. The management can find the reasons for poor performance and takes corrective actions for avoiding
such happenings in the future.

5.7.5. Types of reporting

External Reports:

These reports are meant for external parties such as government, shareholders, bankers, financial
institutions, etc., for example, published financial statements of companies. Copies of such reports are
also to be filed with the Registrar of Joint Stock companies and with the stock exchange. In the interest of
general understanding, these reports are expected to conform to certain minimum standards of disclosure
and disclose certain basic details under the Companies Act, 2013.

Internal Reports:

These reports are meant for internal uses of different levels of management such as top level, middle
level, and junior level of managements. Hence, the approach to the reporting problem would vary
according to the reporting level. These reports do not have to conform to any statutory standards. While
the reports meant for top management have to be comprehensive and concise, the reports to operating
supervisors should be specific and detailed.

Routine Reports:
These reports cover routine matters and are submitted at periodical intervals on regular basis. Example,
variance analysis, financial statements, budgetary control statements are routine reports. They are
submitted to different levels of management as per a fixed time schedule. Routine reports are usually
printed or cyclostyled forms with blank spaces to be filled in. most of the internal reports are of the nature
of the routine reports.

Special Reports:

Reports, which are submitted on particular occasions on specific requests or instructions, are special
reports. When problems arise in a business, they are to be investigative. The results of investigations and
the recommendations are submitted by way of special reports.

Examples of some of the special reports are:

1. Reports of information about competitive products,

2. Reports by the Cost Accountants on the implication of price changes on the cost of products,

3. Reports regarding choice of products or selection of a production method, etc.

Operating Reports: These reports may be classified into Control report and Information Report.

Control Report: is an important ingredient of control process and helps in controlling different activities
of an enterprise. It provides information properly collected and analyzed to different levels of
management. The framework of this report is determined by the needs of the undertaking.

Information Report:

These reports provide information, which are very much useful for future planning and policy
formulation. They may take the form of trend reports or analytical reports. Trend reports provide
information in a comparative form over a period of time. On the other hand, analytical reports provide
information n a classified manner.

Financial Reports:

These reports contain information about the financial position of the business. They may be classified into
Static Reports and Dynamic Reports. Static report reveals the financial position on a particular date e.g.,
balance sheet of a company. On the other hand, the dynamic report reveals the movement of funds during
a specified period, e.g., funds flow statement, cash flow statement.

5.7.6 Reporting Needs at Different Managerial Levels

Generally the reporting levels in the internal management fall into three broad categories. They are top
level, middle level, and junior level managements. They need different kinds of reports depending upon
the nature of functions they do.

Top Management Level:

The top management is primarily concerned with the policy formulation, planning and organizing. Hence,
their function is to evolve proper plans, to carry out proper delegation of authority to subordinates with a
view to obtain an effective and efficient utilization of resources and to promote appropriate development
schemes.

Board of Directors: Quarterly statements on production costs, machine and labour utilization, quarterly
cash flow statements, and quarterly income statement and balance sheet

Finance Director: Monthly abstract of receipts and payments and monthly cash flow statements.

Production Director: Production cost statement, department-wise machine and labour utilization
statements, and material scrap statements, overhead cost and production statements. All these statements
are to be presented to him on a monthly basis.

Sales Director: He is to receive the following reports on monthly basis: Reports on orders received,
orders executed, and orders kept pending – division-wise;

Reports on selling and distribution cost – division wise;

Reports on credit collections, balances, and bad debts – division wise.”

Middle Management Level:

The departmental managers such as production, sales etc., are concerned with the execution of plans
formulated by top management. They act mainly as coordinating executives to administer policies, direct
operating supervisors, and evaluate their performance. Hence the reports submitted to them should enable
to exercise these functions more effectively.

They may require reports at shorter intervals, say weekly, fortnightly basis. For example, the works
manager requires weekly reports on idle time, idle capacity, scrap production costs, quantity produced,
etc. The sales manager needs fortnightly reports on budgeted and actual sales, credit collection, orders
booked, executed and pending, and stock position-product-wise and area-wise.

Junior Management:

Foremen, Supervisors, etc., constitute this level of management. They are interested in reports, which will
apprise them of progress of jobs under their control. Some of these reports are almost in the form of scrap
of paper having no proper format. They may need reports on daily or weekly basis.

For Example- the shop foreman requires daily report of idle time and machine utilization, daily scrap
reports and daily report of production – actual and budgeted. Sales area supervisor needs weekly reports
on sales – salesman wise, orders booked, executed and outstanding, credit collections and outstanding,
etc.

5.7.7 BENEFITS OF EFFECTIVE MANAGEMENT REPORTING

• Improved decision making

• Improved management effectiveness

• More efficient use of resources in the delivery of organization services

• Increased confidence in the quality of management decisions by agency staff, and

• Improved responsiveness to issues as they arise.