Chapter 16—Controlling: Purpose, Process, and Techniques 1
Chapter 16
Controlling: Purpose, Process and Techniques
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the relationship between controlling and the other four functions of
management
2. List and describe the four steps in the control process
3. Describe the nature and importance of feedforward, concurrent, and feedback
controls
4. Describe the importance of a control system
5. Explain the characteristics of effective controls and the steps managers can take to
make controls more effective
6. Describe the content of the three primary financial statements and how managers use
them
7. Explain ratio analysis and four types of ratios used by managers
8. Describe the five types of financial responsibility centers and their relationships to
budgeting
9. Describe the four approaches to creating budgets
10. Explain the two major types of budgets used In businesses
11. Describe the five major marketing control techniques used In businesses
12. Describe the six major human resource control techniques used in businesses
KEY TERMS
audits
balance sheet
budget
concurrent controls
control process
control system
control technique
controlling
critical control point
feedback control
feedforward control
financial budget
financial ratio
financial responsibility center
human asset accounting
income statement
just in time (JIT)
marketing research
operating budget
risk manager
Six Sigma
sources and uses of funds statement
standard
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duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 16—Controlling: Purpose, Process, and Techniques 2
CHAPTER OUTLINE
I. INTRODUCTION
II. CONTROLLING AND THE OTHER MANAGEMENT FUNCTIONS
III. CONTROL PROCESS
A. Establishing Performance Standards
1. Productivity
2. Quality
B. Measuring Performance
C. Comparing Measured Performance to Established Standards
D. Taking Corrective Action
IV. TYPES OF CONTROLS AND CONTROL SYSTEMS
A. Feedforward Controls
B. Concurrent Controls
C. Feedback Controls
V. Control Systems
VI. CHARACTERISTICS OF EFFECTIVE CONTROLS
A. Focus on Critical Points
B. Integration
C. Acceptability
D. Timeliness
E. Economic Feasibility
F. Accuracy
G. Comprehensibility
H. CONTROL MONITORING
I. Monitoring Organizational Impacts
J. Updating Controls
K. SUBSYSTEM CONTROLS
L. Finance Controls
M. Marketing Controls
N. Human Resource Controls
VII. FINANCIAL CONTROLS
VIII. Financial Statements
A. Statements
1. Balance Sheet
2. Income Statement
3. Sources and Uses of Funds Statement
IX. Financial Ratio Analysis
A. Ratios
1. Liquidity Ratios
2. Profitability Ratios
3. Debt Ratios
4. Activity Ratios
X. Financial Responsibility Centers
A. Financial Audits
1. Internal Audits
2. External Audits
XI. Budget Development Process
A. Standardized Approaches
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Chapter 16—Controlling: Purpose, Process, and Techniques 3
1. Top-Down Budgeting
2. Bottom-Up Budgeting
3. Zero-Based Budgeting
4. Flexible Budgeting
XII. Operating Budgets
A. An Example
1. Revenue Budgets
2. Expense Budgets
3. Profit Budgets
B. Financial Budgets
1. Cash Budgets
2. Capital Expenditures Budgets
XIII. MARKETING CONTROLS
A. Marketing Research
XIV. Test Marketing
A. Marketing Ratios
B. Sales Quotas
C. Stockage
XV.HUMAN RESOURCE CONTROLS
A. Statistical Analysis
1. Turnover
2. Absenteeism
B. Human Asset Valuation
1. Training and Development
2. Performance Appraisals
3. Attitude Surveys
4. Management Audits
C. COMPUTERS AND CONTROL
Enrichment Vignette
Managers control things so as to achieve objectives. They tend to focus on controlling those
things that are most easily measured and especially those things that can be measured the
earliest. As a result, the controls related to a long-term objective may be focused on that which
is most easily measured in the short run. Those things that are not easily measured may be
very vital to the long-term objectives but they may get little or no attention. Instead managers
may zero in on such things as short-term profits—even if that involves using pushy salespeople
who get sales but lose customers, or even if it involves cutting costs by reducing research and
spending less on training people for future needs.
For a college, one of the objectives is to prepare students for a successful career and a
successful life. However, it takes years to determine whether a particular instructor has been
successful in a specific course during a given year in regards to that long-term objective.
However, it is possible to immediately measure the hours spent in a classroom, the student
evaluations of the instructor, the extent to which the average grades given by the instructor
deviate from the average of the college, and so on. The assumption is that if these things that
are measured meet the desired standards, then the long-term objective will be met—though it
may be very difficult to prove whether such is the case.
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Chapter 16—Controlling: Purpose, Process, and Techniques 4
LECTURE OUTLINE
The outline below (the lecture outline) is referenced to the above chapter outline and contains
supplementary material to enhance your discussion of the chapter, but it is organized somewhat
differently. As a result, you have a choice: by using what is in the outline below, (1) you may
present the above chapter outline material in a different sequence, or (2) you may use the
chapter outline references in the outline below to present the lecture outline material in the
same sequence as the chapter outline..
I.
INTRODUCTION (CHAPTER OUTLINE: SECTION I)
II.
CONTROLLING AND THE OTHER MANAGEMENT FUNCTIONS (CHAPTER OUTLINE:
SECTION II)
1.
2.
3.
4.
5.
6.
7.
Controlling is the management function of establishing performance standards,
measuring actual performance activities to see if the standards have been met,
and taking corrective action.
The purpose of controlling is to determine whether people and the various parts
of the organization are on target and achieving the progress toward the
objectives that they planned to achieve.
Planning determines goals and maps out the necessary strategy and tactics.
Controlling attempts to prevent failure by providing the means to monitor the
performances of individuals, departments, divisions, and the entire organization.
Controlling is also critical because organization resources are limited. Their
acquisition and use are critical to the survival of the organization. No person or
organization should set resources in motion toward a goal and not monitor the
progress of those resources.
No company should operate without monitoring the performance of employees,
the expenditure of funds, or the production of goods.
Controlling affects and is affected by the other four functions.
Planning, organizing, staffing, and leading must be monitored to maintain their
effectiveness and efficiency.
Enrichment Vignette
The business of “quality” is something companies promote and consultants sell. Everyone is
concerned about quality to get an edge on competition and to stay competitive in the world’s
marketplace. The latest attempt at quality is Total Quality Management (TQM), which is one of
several names used to describe a philosophy of management that embraces the entire
company in a program of quality assurance. The key to the process is the establishment of
performance standards—control devices—throughout the entire organization.
III.
CONTROL PROCESS (CHAPTER OUTLINE: SECTION III)
A.
Establishing Performance Standards
1.
2.
The planning process determines objectives that eventually become the
foundations for controls.
From the purpose of the organization, its mission, and strategic objectives flow
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Chapter 16—Controlling: Purpose, Process, and Techniques 5
3.
4.
5.
6.
B.
Measuring Performance
1.
2.
C.
Managers must measure actual performance to determine any variations from
standard.
Computer-assisted equipment is used to achieve timely and accurate
measurements.
Comparing Measured Performance to Established Standards
1.
2.
D.
the coordinated goals to be achieved by succeedingly lower levels of
management in the organizational hierarchy.
As the plans and goals are developed, there must be controls established to
monitor the progress toward these goals.
The feedback in the control process is intended to provide management with
information on the progress of various levels of plans, sub plans, goals,
objectives, strategy, tactics, or individual performances.
A standard is a quantitative or qualitative measuring device designed to monitor
people, money, capital goods, or processes. The exact nature of a standard
depends on:
a. Who designs, works with, and receives the output from controls.
b. What is being monitored?
c. What is to be achieved through monitoring?
d. Where monitoring efforts will take place (location and functional area).
e. When controls will be used (before, during, or after operations).
f. What resources are available to expend on the controls.
Standards and controls usually deal with time, cost, quality, productivity, or
behavior. Once set, standards must be continually reevaluated to ensure that
they are still necessary and valid.
A third step asks the manager to compare the measurement against the
standard.
a. This is an application asking a comparison between the “what is” and the
“what should be.”
b. If the comparison results or measurements are acceptable, no action needs
to be taken. If results show a trend away from the acceptable or show the
unacceptable, action may be called for.
The difference between “what is” and “what should be” is known as the deviation.
Taking Corrective Action
1.
The last step, taking corrective action, depends on three things: the standard, the
accuracy of the measurements that determined a deviation exists, and the
diagnosis of the person or device investigating the cause for the deviation.
a. Corrective actions can be prescribed by management in advance through
policies, procedures, and practices.
b. Some corrective actions may be automatic.
c. Some corrective actions may have to take exception to established policy,
procedure, or practices.
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Chapter 16—Controlling: Purpose, Process, and Techniques 6
IV.
TYPES OF CONTROLS AND CONTROL SYSTEMS
(CHAPTER OUTLINE: SECTION IV)
A.
Feedforward Controls
1.
2.
B.
Concurrent Controls
1.
2.
C.
These post-performance controls focus upon the end results of the process.
The information obtained is used for corrective purposes.
Adjustments and/or corrections follow the feedback input.
Control Systems
1.
2.
V.
Sometimes known as “in-process” or “steering” controls, these controls apply to
processes as they happen.
Readouts and audible warnings mark this type of control.
Feedback Controls
1.
2.
3.
D.
Feedforward controls are future directed: they are designed to detect and
anticipate deviations from standards at various points.
Such preventative controls focus on establishing conditions that will make it
difficult or impossible for deviations from norms to occur. Examples include
locks, bars on windows, safety equipment, safety procedures, job descriptions,
job specifications, inductions, and orientation.
(CHAPTER OUTLINE: SECTION V)
The composite feedforward, concurrent, and feedback controls make up a
“package” or system. A system is a combination of any two or more controls.
Any combination of these controls is used to accommodate various management
control needs.
CHARACTERISTICS OF EFFECTIVE CONTROLS
(CHAPTER OUTLINE: SECTION VI)
A.
Focus on Critical Points
1.
2.
B.
The critical control points include all the areas of an organization’s operations
that directly affect the success of its key operations.
Such points focus specifically on those areas at which failures cannot be
tolerated and where time and costs are crucial.
Integration
1.
2.
3.
Controls must not be haphazardly placed.
They must function harmoniously within the established processes of the work.
In short, they should not bottleneck operations.
Trust, confidence, and acceptance of all controls must be a part of the culture.
Employees must have faith in these devices.
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Chapter 16—Controlling: Purpose, Process, and Techniques 7
C.
Acceptability
1.
2.
3.
D.
Timeliness
1.
2.
E.
Deadlines, time costs, and punctual needs are apparent in this criteria.
Costs are frequently attributed to time shortcomings or failures.
Economic Feasibility
1.
2.
3.
F.
As with integration, employees must accept these devices or methods.
The necessity, usage, and appropriateness of the controls must blend with the
personnel involved.
The acceptability of controls is important to effectiveness and efficiency.
How much does it cost? What will it save? What are the returns on the
investment?
The above questions need to be answered and the accompanying expenses to
any control or system of controls must be analyzed.
In short, compare the costs to the benefits.
Accuracy
1.
2.
The information for the control must be useful and accurate.
Reliability and validity of diagnosed deviations from standards must be accurate.
Are they consistent? Do they measure what is intended?
G. Comprehensibility
1.
2.
3.
VI.
Complexity can cause confusion. Managers should favor simplicity.
How simple or complex should the system become?
Ease of understanding and application is often associated with simplicity.
CONTROL MONITORING
A.
Monitoring Organizational Impacts
1.
2.
3.
4.
5.
Controls need to be monitored to determine the degree of organizational impact
that they have, both on people and on systems.
When controls are developed, employees may resent them as unnecessary,
strict, or demeaning. Employee involvement in the design and implementation of
the control is critical to reduce or eliminate anxiety and resentment.
Controls also need to be monitored to limit the potential impact on organizational
patterns and systems because controls can have side effects.
One potential answer for management is to use program evaluation techniques
to monitor the system. One technique, before-and-after comparison, looks at the
environment before and after the system is installed to note any differences and
why they occurred.
Other potential options include time trend data comparisons, comparisons
between affected and unaffected parts of the organization, and controlled
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Chapter 16—Controlling: Purpose, Process, and Techniques 8
6.
B.
experimentation.
In determining the impact of controls on various parts of the organization,
questions need to be asked in the following areas: goals, structure, decisionmaking, and human relations.
Updating Controls
1.
Controls are effective as long as they (a) do what they are intended (prevent
deviation, diagnose deviations, treat deviations, or provide information for future
planning), and (b) do not create organizational problems that result in costs
greater than the benefits of the control devices.
2. Controls need to be updated if the circumstances and expectations under which
they were designed change.
3. The instant changes are planned or occur in operations, managers should begin
to examine how adequate the present controls will be for these changes.
4. Controls need to be current.
VII. SUBSYSTEM CONTROLS
A.
B.
C.
Finance Controls
Marketing Controls
Human Resource Controls
VIII. FINANCIAL CONTROLS (CHAPTER OUTLINE: SECTION VII)
A.
Financial Statements (CHAPTER OUTLINE: SECTION VIII)
1.
2.
3.
B.
Financial control is at the heart of organizational survival.
The balance sheet focuses on the assets of an organization and who owns them.
a. It shows assets, liabilities, and stockholders’ equity.
b. It is a photograph of the business debt and equity positions with regard to its
assets as of a specific date.
c. The value of a balance sheet rests in comparison from year to year and in
trends that appear.
The income statement focuses on the income and expenses of an organization
and calculates the difference between them to arrive at a profit or loss.
a. The income statement provides the manager with a tool to review the
expenses and revenue of the business on an ongoing basis.
b. The major purpose of the income statement is to measure the progression of
costs and income, noting trends in the growth or decline of each item being
monitored.
c. A major financial statement is the one that shows the sources and uses of
funds.
Financial Ratio Analysis (CHAPTER OUTLINE: SECTION IX)
1.
2.
A ratio is an expression of the relationship between numbers.
It involves selecting two critical figures from a financial statement and expressing
the relationship in terms of a percentage or ratio.
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Chapter 16—Controlling: Purpose, Process, and Techniques 9
3.
4.
5.
C.
Financial Responsibility Centers
1.
2.
3.
4.
5.
D.
Ratios help accountants and others measure progress toward goals and assess
the financial health of their company’s operations.
Ratios are compared in two ways: to past performances of the company and to
performances of other companies in the same industry.
Four of the most common types of ratios are liquidity ratios, profitability ratios,
debt ratios, and activity ratios.
(CHAPTER OUTLINE: SECTION X)
Financial responsibility centers are based on the concept of responsibility
accounting.
The basic idea is that each manager in a company has responsibility for a part of
that vital activity assigned to that manager.
The accounting system should be designed so that it yields a measurement of t
he financial effects of the activities for which a manager is responsible.
The measurement can be stated in the form of a financial objective for each
manager.
The principal types of financial responsibility centers include standard cost
centers, revenue centers, discretionary expense centers, profit centers, and
investment centers.
Financial Audits
1.
2.
3.
Audits are formal investigations conducted to determine if the records, reports,
statements, and data they are based on are correct and in line with the
organization’s rules and procedures. Audits may be conducted by insiders or
outsiders to check on financial and managerial practices.
Most companies establish regular routines to determine if people in all positions
are doing what they should be doing accurately, effectively, and efficiently.
a. Most government agencies have internal investigative agencies to check on
various operations.
b. Internal audits have the advantage of keeping problems in-house and are
conducted by persons who know the operations under scrutiny well.
When outsiders are employed to conduct investigations, objectivity is practically
guaranteed. The main purpose of choosing an outside auditor is to guarantee to
insiders and interested outsiders that the financial data presented in financial
documents give an accurate representation of events and that the examination is
conducted in keeping with standard accounting practices and principles.
Enrichment Vignette
In a recent ruling by the U.S. District Court of Appeals for the Northern District of Illinois,
accountants, in the performance of their auditing functions, were judged not to be fraud
investigators. Ernst and Young, a national accounting firm, had been brought to task by
shareholders of Continental Illinois Corporation for allegedly violating securities laws by
certifying fraudulent financial statements and failing to report Continental’s troubled financial
status.
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Chapter 16—Controlling: Purpose, Process, and Techniques 10
The court in its ruling stated that “although accountants must exercise care in giving opinions on
firms’ financial statements, they owe no broader duty to search and sing.” In addition, the court
claimed that the accountants must have demonstrated deliberate or reckless misconduct or
must have had specific knowledge that the information they relied on was false to be guilty of
the charge.
IX.
BUDGET CONTROLS (CHAPTER OUTLINE: SECTION XI)
A.
Budget Development Process
1.
2.
B.
Operating Budgets
1.
2.
3.
4.
C.
(CHAPTER OUTLINE: SECTION XII)
Operating budgets are financial plans as well as controls.
The budgets for financial responsibility centers focus upon revenues, expenses,
and profits.
Financial budgets specifically involve forecasts and control of fiscal issues.
Included in this area are cash budgets and capital expenditures budgets.
Financial Budgets
1.
2.
X.
Budgeting requires (a) setting goals; (b) planning and scheduling to reach the
goals; (c) identifying and pricing resources; (d) locating needed funds; and (e)
adjusting goals, plans, and resources to match actual fund availability.
Budget preparers can follow one or more of four standardized approaches: topdown, bottom-up, zero-based, or flexible budgeting. Following a standardized
approach helps ensure consistency in the process.
Cash budgets
Capital expenditures budgets
MARKETING CONTROLS (CHAPTER OUTLINE: SECTION XIII)
A.
Marketing Research
1.
2.
B.
Test Marketing
1.
2.
C.
Market research is a form of feedforward control.
The primary components of this area are the gathering and analyzing of
geographic, demographic, and psychographic data.
Potential and new products or services must be piloted as prototypes.
Limiting risk is key to this strategy since only a portion of the total market is
sampled during this introductory stage.
Marketing Ratios
1.
2.
Ratios are used to monitor ongoing operations and to determine needs for
improvement.
Typical ratios include profit to sales, costs of selling to gross profit, sales calls to
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duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 16—Controlling: Purpose, Process, and Techniques 11
3.
D.
Sales Quotas
1.
2.
E.
Amount and time are the consistent variables of quotas.
Commission-only earnings are frequently paired with the expectations of sales
quotas.
Stockage
1.
2.
XI.
orders, and sales volume to sales price changes.
Profitability is the name of the game of many marketing ratios.
Stockage is the level of inventory for any item.
Contemporary inventory strategies and techniques must improve for most
American businesses. The vast array of overt and covert costs affiliated with
ineffective and inefficient inventory management is expensive.
HUMAN RESOURCE CONTROLS (CHAPTER OUTLINE: SECTION XV)
A.
Statistical Analysis
1.
2.
3.
B.
Human Asset Valuation
1.
2.
3.
C.
Human resource statistics provide information on turnover and absenteeism.
Turnover is the percentage of the work force that leaves and must be replaced.
a. It serves as a control device to measure the organization’s internal
environment.
b. It is normally measured over a one-year period of time.
Absenteeism is the percentage of an organization’s work force that is absent
from work on a given day. In order for this device to be effective, the
organization must have a realistic standard for absenteeism.
Human asset valuation involves monitoring devices to assess the value of a
person to a company. One approach focuses on accounting while the second
projects the long-range promotability of a person.
Human asset accounting treats the money spent on and for employees as
investment expenditures.
This accounting method takes two general
approaches:
a. The first records the money spent in recruiting, hiring, training, and
developing employees and enters this amount as an asset on the company’s
periodic balance sheets. Periodically, this asset value is reduced by the
value assigned to personnel lost through any permanent separation from the
company.
b. The second approach attempts to assign a dollar value to each employee’s
contribution to the company’s profit.
A variation of human asset accounting is the use of staffing charts or staffing
boards which value the human assets of the organization by assessing the longterm worth of the employees in terms of present and future contributions.
Training and Development
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Chapter 16—Controlling: Purpose, Process, and Techniques 12
1.
2.
3.
D.
Performance Appraisals
1.
2.
E.
Human resources management controls are composed of a number of devices
that monitor the human resources of the organization. The purpose of the
controls is to provide a range of information from the productivity of the work
force to the value of individual contributions.
Performance appraisal is one of the primary ways an organization provides
control for the members of the work force.
a. The focus of performance appraisal is on the actual performance of an
employee as compared to job standards.
b. It provides a means to monitor the performance of the employee, compare
the performance to the designed standards, and provide feedback to modify
any deficiencies.
Attitude Surveys
1.
2.
3.
F.
These control techniques focus upon problem prevention. This is a “beforehand”
application of control.
Employees are prepared to face novelty and change prior to the occurrence.
Work force complexity and diversity cause the need for constant training and
development.
Surveys provide valuable feedback regarding employee feelings toward
management policy and practice.
Outside firms are often contracted to conduct and perform these valuable
services. The outsiders are third party, disinterested investigators.
Change and action, if required, must follow the information obtained from
surveys. Often, the survey results provide opportunity to change.
Management Audits
1.
2.
3.
4.
The Occupational Safety and Health Administration (OSHA) and the Equal
Employment Opportunity Commission (EEOC) require regular recording,
reporting, and disclosure of statistics about employment.
To ensure that regulations are being followed, managers should conduct
regularly scheduled management audits, or compliance audits.
Frequently, regulations regarding employment are governed by both federal and
state authorities and violations are punishable by significant sanctions.
EEOC guidelines require employers with 15 or more employees to maintain a
work force representative of the mix of women and protected groups found in
their community. Minimum employee numbers will vary depending upon various
EEOC guidelines.
XII. COMPUTERS AND CONTROL
1.
2.
Two out of three employees in the U.S. work with computers on a daily basis.
Computers “touch” nearly every employee in America’s work force, directly or
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duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 16—Controlling: Purpose, Process, and Techniques 13
3.
4.
5.
6.
7.
indirectly.
Computers are aids to processing data into output with high degrees of speed
and accuracy.
Four basic processing operations of computers include sequencing, merging,
calculating, and summarizing.
Computers are tools to aid management in decision-making.
Computers can help managers in the execution of all their functions by facilitating
the various information systems that exist throughout their organizations.
Despite what a computer can do to assist in the control process, there are some
potential problems that management must face. The following decisions and/or
problems need to be addressed:
a. Benefits versus the cost of the system.
b. Technological environment.
c. Impact of the computer on personnel.
d. Centralized or decentralized computer system.
SUGGESTED RESPONSES TO REVIEW QUESTIONS
1.
How is planning related to controlling? In what ways is controlling part of the other
management functions?
Controlling affects and is affected by the other four functions. Each function must be
monitored to maintain its effectiveness and efficiency. In essence, when a plan is
created, a control is established to monitor it. In turn, when organizing, staffing, and
leading take place, controls are established, performance is measured, and corrective
action is taken if needed.
2.
What happens first in the control process? How are its Steps 1 and 3 related? What
will happen in the process if no deviations from established standards are
discovered?
a.
b.
c.
d.
3.
First, establish standards to use in measuring progress, or lack of progress. The
exact nature of the standards depends on what is being monitored. Standards
can apply to personnel, marketing, production, financial operations, etc.
Actual performance must be measured to determine the level of performance
and possible variation from established standard(s).
Comparing the measured performance against standards and noting deviations
from the standards is next. If this comparison yields results that are acceptable,
no action needs to be taken. If the results show a trend away from the
acceptable or show the unacceptable, action may be called for.
Take actions necessary to correct deviations from standards. The appropriate
actions may be automatic or developed based on the situation.
Can organizations function without controls? Explain.
Controls act as safeguards or checks to ensure that plans are accomplished. Without
this form of follow-up or monitoring the individual(s) and/or organization will merely
drift or be headed in a potentially dangerous direction.
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duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 16—Controlling: Purpose, Process, and Techniques 14
4.
Why must controls be integrated into a coherent system to work most effectively?
Any combination of feedforward, feedback, and/or concurrent controls serves the
complex needs of many managers. This combination is an overall system that
enables managers to control integrated systems and various processes, and to
ensure that all resources are used effectively and efficiently.
5.
To be effective, what characteristics should feedforward, concurrent, and feedback
controls have?
a.
b.
c.
6.
Feedforward controls are future directed.
They are designed to detect and
anticipate deviations from standard at various points throughout the process.
Feedback controls are post-performance controls and focus on the end results of
the process. The purpose is to help prevent mistakes in the future. The
information derived is not used for corrective action on a project because it has
been completed. The feedback control provides information for a manager to
examine and apply to future activities that are similar to the present one.
Concurrent controls apply to the immediacy of operations. They happen “now”
as the process is happening. Quick change or adaptation is possible because of
the currency of these in-process controls.
What can managers do on a regular basis to increase the effectiveness of the
controls they are using?
Managers need to know the impacts of controls. Controls can generate support or
antagonism. Involving employees in the design of controls can help ensure support.
Controls that employees believe are equitable seldom encounter resistance. When
ensuring the effectiveness of controls, managers can use the following techniques:
a.
b.
c.
d.
Conduct before-and-after comparisons.
Survey the employees affected by the controls.
Perform controlled experiments.
Update the controls when necessary or as required.
Controls are effective only as long as they do what they are intended to do. When the
control devices were designed, it was with a certain set of expectations and under
specific circumstances. If these circumstances and expectations change within the
organization, the control devices need to be reviewed and possibly updated or
replaced. The instant changes are planned or occur in operations, managers should
begin to examine how adequate the present controls will be for these changes.
Controls need to be current.
Again, controls need to be monitored for the degree of impact they have on people
and organizational patterns and systems. It should be expected that control systems
will affect employees and organizational operations, but extreme changes should be
avoided. If employees resent control, they will limit the effectiveness of the control. If
a control device has side effects on the organizational patterns and systems, it can
impact morale, timeliness of decisions, and the decision-making environment.
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Chapter 16—Controlling: Purpose, Process, and Techniques 15
7.
What does a balance sheet tell managers? An income statement? A sources and
uses of funds statement?
A balance sheet focuses on the assets of the organization and who owns them—the
organization or its creditors. It provides a photograph of the business debt and equity
positions with regard to its assets as of a specific date. The balance sheet provides a
measure of feedback control over financial and other activities. It is used as a basis
for budgeting, planning, and control.
An income statement focuses on the income and expenses of an organization and
calculates the difference between them to arrive at a profit or a loss. The income
statement provides the manager with a tool to review the expenses and revenue of
the business on an ongoing basis, while noting trends in the growth or decline of each
item being monitored.
A sources and uses of funds statement tracks the flow of cash, i.e., the company
receipts to the company payments.
8.
What do the four primary financial ratios measure? Why is ratio analysis used by
managers?
a.
b.
c.
d.
e.
9.
Liquidity ratios are used to measure the firm’s ability to raise cash to meet shortterm financial obligations.
Profitability ratios allow managers to study a company’s profit status.
A debt ratio expresses an organization’s capacity to meet its debts.
Activity ratios focus upon the firm’s key internal areas to reveal performance.
All of these ratios are used to compare relative status of financial amounts.
What is a standard cost center? A revenue center? A discretionary expense center?
A profit center? An investment center? How do all five centers enter into the budget
process?
a.
b.
c.
d.
e.
A standard cost center attempts to measure, access, and minimize the variance
between actual costs and standard costs.
A revenue center attempts to maximize sales revenue while operating within and
holding to budget limitations.
A discretionary expense center allows managers to use experience, knowledge,
and judgment to correlate budgets to operations.
A profit center attempts to achieve the optimum combination of costs and
revenue.
An investment center is responsible for the magnitude of assets employed within
the firm’s financial portfolio.
10. How does top-down budgeting work? Bottom-up budgeting? Zero-based budgeting?
Flexible budgeting?
a.
b.
Top-down budgeting is created by upper levels of authority and distributed to
lower levels, with or without input from below.
Bottom-up budgeting is the inverse of top-down budgeting since the personnel
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Chapter 16—Controlling: Purpose, Process, and Techniques 16
c.
d.
closest to the budgeted activities initiate or propose the budget.
Zero-based budgeting starts “fresh” each fiscal period by requiring those involved
to justify all expenditures for each upcoming fiscal period.
Flexible budgeting sets “meet or beat” standards to which expenditures
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duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 16—Controlling: Purpose, Process, and Techniques 17
11.
a.
b.
c.
d.
e.
What are the five major marketing control techniques? How does each serve the
needs of marketing managers?
Market research attempts to gather and analyze geographic, demographic, and
psychographic data.
Test marketing is used to limit the risks associated with introducing prototype
products and services in a scaled down and select portion of the total potential
market.
Ratios for marketing purposes are used to monitor ongoing operations and to
determine needs for improvement.
Sales quotas are a form of encouragement and motivation for sales personnel.
Stockages attempt to streamline the effectiveness and efficiency of inventory
management.
12. What are the six major human resource control techniques? How does each serve
the needs of human resource managers?
Human resource managers employ diverse control techniques. Among the most
frequently used are statistical analysis, human asset valuation, training and
development, performance appraisals, attitude surveys, and management audits.
Each is intended to provide information about the productivity of the work force and
the quality and quantity of individual and group performance.
INSTRUCTIONAL EXPLANATION: DISCUSSION QUESTIONS FOR CRITICAL THINKING
These thought-provoking questions are provided by the authors for each chapter as primers for
student discussion. This method of questioning ensures that the students have read the
assigned materials or content. These questions are presented to generate thinking and
discussion. They can be used as supplemental homework assignments and/or class
discussions that center on specific critical thinking issues and applications.
It is important that students are able to respond from their experiences and through their
perceptions as well as incorporate the specific course content into their reasoning, explanations,
descriptions, and individualized contributions. Most of these questions cannot be answered in a
right/wrong fashion.
Instead, student responses and/or group discussions should be
encouraged by the instructor to bring out individualized critical thinking as opposed to absolute
correct answers.
WEB 2.0 EXERCISES
Social Bookmarking
Social bookmarking is a method for Internet users to organize, store, manage and search for bookmarks
of resources online. Unlike file sharing the resources themselves aren't shared, merely bookmarks that
reference them. Descriptions may be added to these bookmarks in the form of metadata, so users may
understand the content of the resource without first needing to download it for themselves.
Delicious is a social bookmarking service that lets you save your favorite Websites
online and add tags to categorize them.
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duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 16—Controlling: Purpose, Process, and Techniques 18
Explore Delicious by clicking on “Learn More,” searching for bookmarks and tags, and clicking
on bookmarks and tags. How could a Delicious account help managers? Prepare a list of ten
bookmarks with tags that could help a manager.
SUGGESTED RESPONSES TO EXPERIENTIAL LEARNING CASE: Toshiba Adopts Six
Sigma
The general nature of these questions will allow the instructor to encourage students to think
freely and openly. It is important that the instructor ensure that students identify specific content
related to the chapter and directly relate this subject matter to their comments and contributions.
ADDITIONAL CASE PROBLEMS WITH SUGGESTED RESPONSES
New Broom Sweeps Clean
In 1995, after years of chronic financial deficits, mismanagement, unethical conduct, and waste,
the Illinois legislature passed a reform act designed to root out systemic problems in Chicago’s
public schools. The city’s mayor, Richard M. Daley, received sweeping new powers to gain
control. He oversaw the selection of a management team, the Chicago School Reform Board of
Trustees, to replace the previous school board and “restore confidence in school leadership.”
Among the many problems the new board was created to deal with were a general lack of
control over spending of all kinds and either a lack of policies or incoherent ones governing the
conduct of the majority of school personnel. For example, there was no policy on the use of
school phones, which led to hundreds of thousands of dollars being spent to pay for personal
phone calls, many to 900 numbers. Waste proliferated in travel expenses for board and
administrative staff and lavish decorating allowances for administrators. Much-needed school
equipment, worth hundreds of thousands of dollars and purchased over several years, was
found decaying in storage. The departing school board president had used her position to enrich
her and the companies she owned and was indicted for failure to pay nearly $350,000 in
personal income taxes.
Until April 1995, only high-level administrators were required to report any possible
conflicts of interest and their sources of outside income. In April these requirements were
extended to members of the local school councils, which oversee the operations of
neighborhood schools and vote on a variety of local schools’ purchasing contracts. Clearly,
these controls were not enough, given the scale and depth of corruption found in the public
school system.
From the very beginning of the new board’s operations, control was gained over spending
with various freezes on accounts and a requirement that all spending be approved through
board oversight. A policy was immediately instituted to control phone usage. A new ethics
policy, required by the Illinois reform act, was created to cover all school employees, trustees,
and contractors doing business with the school system. The new policy goes far beyond its
predecessor, forbidding “city employees from accepting gifts for services or using their position
to win personal favors. It also discourages employees from hiring or conducting city business
with relatives.” A new travel policy was formulated to prevent staff from receiving reimbursement
for travel without prior authorization from the new board.
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duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 16—Controlling: Purpose, Process, and Techniques 19
Source: Haynes, V. Dion. “Ethics Will Be Subject of First Meeting of New School Board,”
Chicago Tribune, July 26, 1995, sec. 2, p. 3.
QUESTIONS
1.
2.
3.
What caused the general lack of control found by the reform board, and who do you
think was primarily responsible for it?
What type of controls did the new board propose or institute?
What characteristics of effective controls do the policies created by the new board
have? Which do they seem to lack?
The general nature of these questions will allow the instructor to encourage students
to think freely and open. It is important that the instructor ensure that students identify
specific content related to the chapter and directly relate this subject matter to their
comments and contributions.
GETTING CONTROL
Wallace Struthers, the president of Glen Aire Bank and Trust, is discussing with the members of
his executive committee the statistics from his comptroller’s report on the problems with the
bank’s automated teller machines. “The figures are getting worse. According to a study by the
American Banker Association, about 18,000 crimes were committed at or with automated teller
machines nationwide. Our bank’s experience with losses from our ATMs parallels losses
nationwide. About 90 percent of our losses come from people using stolen or lost ATM cards,
about 5 percent from vandalism and break-ins to the ATMs, and the remaining 5 percent from
robberies and muggings of customers at our remote ATM locations. Last year, the bank lost
$12,954 because of these ATM-related crimes. This year, the comptroller estimates that our
losses will exceed $15,000. Ladies and gentlemen, we have to tighten our controls.”
The bank’s three automated teller machines are located as follows: One is at the bank,
next to the drive-through lanes; the second is at the train station about fifty feet from the
passenger depot in a telephone-booth-like structure; the third is outside the local supermarket in
a similar structure. All three machines are sheltered from the wind and rain and are well lighted
except for the occasional vandalism that breaks glass and destroys the lighting fixtures. All
three have entrances that face a street and use folding doors. The booth at the train station has
been the source of nearly 75 percent of the bank’s losses to theft, vandalism, and fraud.
The bank has only had automated teller machines for two years and has not installed any
type of surveillance equipment. It has relied on visual observation by bank personnel during
banking hours for the machine at the bank and on public locations with high visibility from the
street at the other locations. Obviously, this has not been adequate. Local police drive by all the
machine locations at least once every hour. The ATMs do not have any alarm devices.
The problem with the stolen or lost cards is a tough one to deal with. Customers are
issued a card when they sign up for the ATM service. Each cardholder has a six-number code
that must be entered before the machines will accept the card. Once the numbers are entered,
the card is inserted in a slot and transaction buttons are pressed to withdraw cash from the
cardholder’s bank account. When the transaction is completed, the card is returned to a drop
slot. Most cards that are lost have been left at the machine by customers. Obviously, the bank
cannot do anything about stolen or lost cards until the customer notifies the bank. Then the
bank programs its computer to reject any transaction using that card and its cardholder code.
So far, more than 280 cards have been reported lost or stolen by customers.
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duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 16—Controlling: Purpose, Process, and Techniques 20
QUESTIONS
1.
As a member of the bank’s executive committee, what security measures do you
recommend to deal with the unauthorized use of ATM cards?
Since the bank can do nothing about stolen or lost ATM cards until it is notified, it
must take action to prevent the primary reason for lost cards—customers leaving
them in the machines after making a transaction. Most lost cards have been left at
the ATMs by customers.
The ATMs may be redesigned or altered to draw the user’s attention to the fact that a
card remains in the machine. Currently, the machines drop the card into a return slot
after the transaction is completed. Perhaps the machines could demand that the user
retrieve the card before a transaction is completed, making the removal of the card
essential and a required step in the user’s procedure. Clear instructions could be
issued and available at the ATM locations spelling out this new step. A warning
buzzer or bell (such as those in automobiles that warn the driver that the lights have
been left on or that the key is in the ignition) could draw a user’s attention to the fact
that the card awaits retrieval.
2.
What kinds of controls would you recommend to deal with vandalism problems?
The bank currently relies upon visual observations by bank personnel, or police, or
members of the public to prevent vandalism. None of the three ATMs have
surveillance equipment or alarm devices. These may have to be installed, especially
at the one location that has 75 percent of the problems—the train station ATM. The
bank needs to know the times when vandalism most frequently occurs. It could then
ask the police to increase their surveillance efforts during those times to aid in the
apprehension of vandals. It may be possible to use a stronger material in the booths
and surrounding lights to make it more difficult to break the see-through portions of
the booth and to damage its lighting fixtures. Alarms, surveillance equipment,
increased patrols, and less vulnerable booths are examples of prevention and
feedforward types of controls.
Access to the money inside the machine must be made more difficult. It might be
possible to encase the machine with stronger, more break-in resistant material. An
alarm hookup with the police department should be studied. Such a feedforward
device could alert police that a break-in was in progress. Some ATMs have a video
camera present to tape-record every user’s face. This type of surveillance device
serves double duty—it helps prevent trouble and records the troublemakers in the act.
3.
What kind of controls would you recommend to deal with the problems of robbery and
muggings at the ATM machines?
Losses by customers through robbery and muggings occur in several ways. Users of
ATMs have been held up and forced to use their ATM cards to withdraw money for
the thief. Others have been held up after using the ATMs, out of sight of the
surveillance provided. Still others have been robbed, thus losing their wallets, ATM
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duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 16—Controlling: Purpose, Process, and Techniques 21
cards, and their six-number codes that they foolishly left written down in their wallets.
The efforts listed above may help to prevent robberies and muggings at or near the
ATMs. Increased police surveillance and video cameras recording the station’s
activities cannot do it all. Users must be cautioned that using these machines at odd
hours and in darkness can be risky. The design and positioning of the ATMs must
provide easy access by car with a parking spot for users set aside immediately in
front of or next to the machine. Users can get in and out quickly with minimum
exposure to robbers. In addition, ATMs should stand alone, well away from other
structures or plants that can offer cover for a thief waiting for a victim. Separate,
detached lighting for the areas surrounding the ATMs make the robber wary and the
area less inviting. The best controls rest with the ATM user. He or she should use
such facilities in daylight, with another person, or when crowds of friendly people are
near, and with good, common sense.
ON THE JOB VIDEO CASE SOLUTIONS: PRESERVE BY RECYCLINE: QUALITY AND
PERFORMANCE
DISCUSSION QUESTIONS AND SUGGESTED ANSWERS:
1. What types of feedforward controls might Peapod use in the next few years?
Student answers will vary but the key thing is for students to demonstrate their
knowledge of feedforward controls by applying them specifically to Peapod.
2.
Using the feedback control model, identify at least two standards that Peapod might
establish.
Answers may vary, and students should support their selections with facts and
demonstrate their awareness that the essence of controlling involves comparison of
actual to standard and thus the importance of establishing the appropriate standards.
3.
Do you think decentralized control would be effective at Peapod? Why or why not?
Although the question is somewhat based on opinion, the important thing is for
students to demonstrate their knowledge of decentralized control through their
discussion of Peapod.
TEAM ACTIVITY
Managers must weigh the costs of controlling (the supervisor’s time, chemical analysis, etc,)
with the costs of not controlling lost sales, lost customers, laws and lawsuits). There are
numerous cases of companies that have gone bankrupt or have been damaged by corporate
scandals because of inadequate controls. However, within various groups, discuss how
managerial insecurity and paranoia can result in extreme controls that produce paralysis.
BIZ FLIX VIDEO CASE
VIDEO CASE: BABY MAMA
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Chapter 16—Controlling: Purpose, Process, and Techniques 22
VIDEO CASE SYNOPSIS
Meet Kate Holbrook (Tina Fey), single, late thirties, successful in her career, but childless. She
loves children and wants a child but does not want to take chances with a pregnancy at her age.
Kate enlists the help of Angie Ostrowiski (Amy Poehler) from South Philadelphia to act as her
surrogate mother. Former attorney, now Super Fruity Fruit Smoothies owner Rob Ackerman
(Greg Kinnear) enters the scene and begins dating Kate. Angie becomes pregnant but it is not
clear whether the child is Kate’s or Angie’s. The complex, intertwined relationships and social
interactions create an enjoyable comedy experience.
These scenes start with a shot of Kate and Rob seated at a table in a vegan restaurant.
The Vegan Waiter (Jon Glaser) approaches the table and introduces himself. Soon, Kate and
Ray establish that neither of them are vegans, so they move to a different fast-food restaurant.
VIDEO CASE DISCUSSION QUESTIONS AND SUGGESTED ANSWERS
What type or types of control did you witness in this scene? Give examples from the video clip.
Naturally, Rob wants the date to be a success, so he is carefully monitoring Kate’s enjoyment of
the meal at the vegan restaurant. Likewise, the waiter is monitoring the couple’s experience at
his restaurant. These are both examples of concurrent control. Later, the couple is seen
ordering sandwiches at a fast-food restaurant. Kate gives very specific instructions about her
expectations for her order, which is a form of feedforward control.
How did Rob apply the steps in the control process to evaluate his date with Kate? Give
examples from the film clip to support your answer.
Rob started by establishing performance standards regarding his plan to take Kate out to
dinner. He decided that he wanted to impress and please her with the meal, over and above
simply providing a meal for her. Rob used concurrent controls (watching her body language,
engaging her in conversation about the meal) to determine that she was not enjoying the food.
When compared with his established standard, Rob realized he was failing to meet his
objective. He immediately took corrective action by suggesting they move to a different
restaurant.
Using what you’ve learned in this chapter, analyze what Rob could have done differently to
prevent the initial failure at the vegan restaurant.
Rob made an incorrect assumption that Kate was vegan. If he had asked her to confirm this
information before organizing and planning their date, he could have developed an alternate
plan that they would have enjoyed more. Some students may even mention that he had to pay
for two meals—one at the vegan restaurant and one at the fast-food restaurant—so it would
have been more cost-effective to have gathered accurate data in advance.
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duplicated, or posted to a publicly accessible website, in whole or in part.