1. Essentials of Management Chapter 15
Essentials of Control
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2. 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.
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3. 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.
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4. 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.
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5. Steps in Control Process
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)
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6. Steps in Control Process, continued
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).
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7. 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.
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8. 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.
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9. Suggestions for Preparing a Budget
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.
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10. Budgets and Financial Ratios as Control Devices
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
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11. Financial Ratios, continued
Profit Margin = Net income
Sales
Return on Equity = Net income
Owner’s equity
Revenue per Employee =
Revenue Number or Employees
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12. 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.
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13. Managing Cash Flow
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.
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14. Investing in Positive Approaches to Cost Reduction
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.
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15. Potential Hazards of Cost Reduction
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.
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16. 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.
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17. 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.
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18. 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.
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19. 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.
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20. 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.)
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21. 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.
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22. 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.
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23. 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.
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24. Characteristics of Effective Controls
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.
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25. Characteristics of Effective Controls, continued
Not contradict itself (such as setting high quantity and quality standards)
Allows for random deviation from standard
Cost-effective (control system does not cost more than its savings)
Not limit innovation (such as too much emphasis on short-term profit vs. long-term investment)
© 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.