Essentials of Control
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Controlling and Other Management
Functions
 Controlling is known as terminal management
function because it takes place after other
management functions are completed.
 Controls help evaluate whether other functions have
been carried out properly.
 Control function can also be used to measure the
effectiveness of the control system.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
The Time Element of Controls
 Preventive controls take place prior to the
performance of an activity, as when quality
standards are applied.
 Concurrent controls monitor activities while they are
being carried out, such as a computerized
supervisory system.
 Feedback controls evaluate an activity after it is
carried out, as with financial statement.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
External vs. Internal Controls
 Traditional controls are external, and assume that
people must be controlled by external forces.
 External controls may discourage employee
commitment.
 Internal controls require employee participation and
a problem-solving attitude about performance
deviations.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Steps in Control Process
1.
2.
3.
Setting appropriate performance standards
(should be realistic and acceptable to people
involved)
Measuring actual performance (managers should
agree on aspects of performance to be measured)
Comparing actual performance to standards
(deviation indicates size of discrepancy)
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Steps in Control Process, continued
4.
a.
b.
c.
Taking corrective action
Do nothing if things are proceeding according to
plan.
Solve the problem (the big payoff from controls).
Revise the standard (important if standard was
unrealistically difficult or easy).
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Nonbudgetary Control Techniques
 Qualitative control techniques are based on human




judgment about performance.
Result in verbal, not numerical evaluation.
Quantitative control techniques based on numerical
measures of performance.
Controls widely used to keep costs at an acceptable
level (focus on variable costs).
Audits should be made independently.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Types of Budgets
 Budgets can be fixed or variable.
 Fixed budget allows for expenditures based on one-
time allocation of resources.
 Flexible budget allows for variation in use of
resources based on activity.
 Budget types include (1) master, (2) cash, (3) cash
flow, (4) revenue-and-expense, (5) materials
purchase, (6) human-resource, and (7) capital
expenditure.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Suggestions for Preparing a Budget

1.
2.
3.
4.
Judgment and political tactics enter into budget
preparation.
Leave wiggle room.
Research the competition.
Embrace reality (such as studying facts, and
taking historical perspective).
Do not neglect intuition.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Budgets and Financial Ratios as Control
Devices
1.
2.
a.
Budgets and control process (planned
expenditures compared to actual expenditures,
corrective action possible)
Financial ratios and the control process (an
advanced method of using budgets for control)
Gross profit margin =
Sales – Cost of goods sold
Sales
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Financial Ratios, continued
b.
c.
d.
Profit Margin = Net income
Sales
Return on Equity = Net income
Owner’s equity
Revenue per Employee =
Revenue
Number or Employees
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Other Measures of Financial Health
 Economic value added (EVA) refers to earnings in
comparison to minimum amount investors expect to
earn.
 EBITDA is earnings before interest, taxes,
depreciation, and amortization.
 Pro-forma is financial statement excluding one-time
charges not affecting future.
 Net debt is debt minus cash on hand.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Managing Cash Flow

1.
2.
3.


Sections of cash flow statement reflect cash from
or used by the following:
Operating activities
Financing activities
Investing activities
Accounting firms may not agree with managers on
definition of cash.
Free cash flow deducts capital expenses.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Investing in Positive Approaches to
Cost Reduction

a.
b.
Investing money in right process or equipment
often leads to useful cost reductions.
Video conferencing equipment can help reduce
travel expenses.
Automation in general is a positive investment that
reduces costs, such as self-service counters in
supermarket.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Potential Hazards of Cost Reduction

a.
b.
Can lead to low morale, lower quality goods and
services, and foster image of being a cheap
company.
Some of Toyota’s recall problems were attributed
to heavy cost cutting.
Fatal blowout of Deepwater Horizon oil rig in Gulf
of Mexico (2010) was attributed in part to cost
cutting.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
The Balanced Scorecard
 Alternative to exclusive reliance on financial
measures of health of company.
 Enables organizations to clarify vision and strategy
and translate into action.
 Sets goals and measures performance from the
perspectives of (1) learning and growth, (2) business
processes, (3) customer satisfaction, (4) financial
health.
 Widens horizons about success.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Activity-Based Costing (ABC)
 Allocates cost of production to all the activities
performed and resources used.
 Leads to understanding of true costs involved in
production and getting product or service off to
market.
 Some ABC systems rank activities by degree to
which they add value to organization or its outputs.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Measurement of Intellectual Capital
 Employee brainpower is major contributor to wealth
of an organization.
 Intellectual capital is value of useful ideas and the
people who generate them.
 Investing in intangible assets like research and
development and training might yield a return eight
times greater than equal investment in new plants
and equipment.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Relative Standing Against the
Competition
 Comparing company’s performance against the
competition can be more meaningful than
comparison with own previous performance.
 Measuring performance in terms of anticipated
market share is valuable performance metric.
 Asking customers can yields this metric.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Information Systems and Control
 Provides management with information useful or
necessary for making decisions.
 Information from information system (IS) or
management information system (MIS) well suited
for control purposes.
 Control information generated by information system
is virtually unlimited. (Convenience store example
would be tracking sales by time of day or weather.)
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Computer-Aided Monitoring of Work
 Uses computer-based system to monitor work habits




and productivity of workers.
Can also uncover leaks of sensitive information
including trade secrets.
Provides constant worker surveillance.
Helps monitor work of remote workers.
Electronic evidence may be important in any lawsuits
against workers.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Workers Most Likely to Be Monitored
 Office workers, including those in frequent telephone
contact with customers
 Workers who could be involved in information leaks,
such as in healthcare, law, product development,
and marketing
 Monitoring works best with workers who performed
discrete, measurable tasks during prescribed hours,
such as call center employees.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Concerns about Electronic
Monitoring Systems
 Critics say that system invades employee privacy and




violates their dignity.
Executives are not monitored.
Results of monitoring systems often used to take
harsh action against rule violators.
Advance notice of system may lead to more positive
attitude about monitoring.
Good to have policy about acceptable use of
company resources before monitoring.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Characteristics of Effective Controls
1.
2.
3.
4.
5.
6.
Accepted by employees.
Appropriate and meaningful.
Provides diagnostic information.
Allows for self-feedback and self-control.
Provides timely information.
Allows employees control over results measured.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.
Characteristics of Effective Controls,
continued
Not contradict itself (such as setting high quantity
and quality standards)
8. Allows for random deviation from standard
9. Cost-effective (control system does not cost more
than its savings)
10. Not limit innovation (such as too much emphasis
on short-term profit vs. long-term investment)
7.
© 2012 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole
or in part.