A variety of tools and techniques have been used to help managerial control. Some of these techniques may be classified as traditional in the sense that they have been used for long by the managers. Some of the traditional techniques of control are: budget, statistical data, special reports and analyses, operational audit and personal observation. Other techniques like Programme Evaluation and Review Technique (PERT) etc. represent newer generation of planning and control tools.
A.) Budgetary Control:
A widely used device for managerial control is the budget. A budget is a plan showing how resources will be acquired and used over a specified time interval. The act of preparing budgets is called budgeting, and the use of budgets as a means for controlling activity is called budgetary control.
Benefits of Budgetary Control: Budgetary control leads to maximum utilization of resources with a view to ensure maximum returns because it provides aid to managerial planning and control. Following are some specific advantages of budgetary control.
1. Budgets are the result of planning function and as such they direct every action of the organisation towards goal achievements. Budgets also provide a basis for coordination and integration of various activities in the organisation.
2. Budgetary control involves measuring performance and comparing it against budgeted figures. Through this process, the variations are struck out and responsibilities fixed. In this light, reports are prepared and presented to management and suitable actions are taken. Thus, budgetary control is used as an effective and integrated control tool.
3. Budgetary control makes people in the organisation conscious about cost and performance. This leads to effective utilisation of organisational resources such as labour, machines, and materials.
4. It is somewhat a democratic way of managing and control. In the organisation where budgetary control is exercised, generally more authority for preparing budgets is delegated to subordinates. Thus, there is no undue centralisation of authority. The delegation of authority is a condition precedent to the success of budgetary programme. Moreover, there is a participation in management at all levels of the organisation in the preparation of budgets.
B.) Non-Budgetary Control
1. Statistical Data: Statistical analysis of the innumerable aspects of business operation is important to control. Analysis in terms of averages, percentages, ratios, correlation, etc. provides help for control. Such areas of control are production, planning and control, quality control, inventory control etc. Various tools indicate the deviations from the standard and suitable managerial actions in respect of these.
2. Special Report and Analysis: For control purposes reports and analysis help only in some particular problem areas. While routine accounting and statistical reports provide necessary information for control in general, there may be some areas where these may fall short of requirements, particularly in the case of specific problems of contingency. For this purpose, an investigating group may be assigned the job to go into details of the problem and to prepare a report for this purpose. The problem in this case is generally of non-routine type.
3. Internal Audit: Internal audit, now largely called operational audit is an effective tool of managerial control. Internal audit is carried out by mangers themselves or by special staff appointed for this purpose. In contrast to external audit which remains unconcerned with the operational aspects of the organisation, internal audit is much broader in scope and encompasses the whole range of activities of the organisation. Thus internal audit, in addition to ensuring that accounts properly reflect the facts, also appraises policies, procedures, use of authority, quality of management, effectiveness of methods, special problems, and other phases of operations; the latter aspects being more emphasised in present day internal audit. However, there are certain problems in broadening the scope of internal audit in these areas because of the limited ability of an organisation.
Internal audit provides managers with a perennial or everlasting supply of control information. By measuring performance and evaluating results in the light of the standard, internal audit makes suitable recommendations for managerial actions. It also scrutinizes the applicability and relevance of policy, procedure, and method which have a tendency to become obsolete. Such a scrutiny helps in choosing a suitable working procedure and methods. The introduction of internal audit tones up morale fibres and working efforts of all members in the organisation as it involves the risk of being exposed before the management and people try to avoid errors of omission and commission.
The internal audit is not free from its limitations. Its installation and operation require extra costs which may be too much for smaller organisations. Sometimes, the reports of internal audit team may not be acceptable to the manager because of some deficiency. The audit people have a tendency to look at every aspect of business operations from accounting point of view. This not only affects the scope of internal audit, but also leads to faulty conclusions. However, in recent years, the system of internal audit has been raised to new heights by organising a centralized audit unit for the purpose of supplying greater and wider control information to managers. In managing such a unit, accounting qualification alone are not adequate, but the greater emphasis is being given to managerial skill and experience. To avoid accounting bias, internal auditors in many organisations are selected from the rank of line managers.
4. Personal Observation: Though various devices of managerial control such as budgets, standard cost, statistical tools, audit reports and recommendations are quite helpful in managerial control, managers should not forget the importance of control through personal observation. Managers need to hold discussion with the persons whose work is being controlled and they should visit the actual operations. There are certain kinds of impressions and information that can be conveyed only through face-to-face contact, personal observation and conversation. When a man is new to the job, a supervisor will like to watch his work more closely than that of an experienced operator. Managers, after all, have responsibility of achieving organisational objectives, whatever control devices they may use. This largely involves measuring of human performance. Thus, the success of personal observation as a control method depends upon how much information a manger can collect through this process.
5. Break-even analysis: It is mainly concerned with the effect which changes in fixed costs, changes in variable costs, changes in sales volume, changes in the sales prices and changes in sales mix will have on profits. Therefore, it establishes a relationship between cost of production, sales at which total cost is fully covered and beyond which profits will be earned and below which there will be a loss. The volume of sales at which sales revenue exactly equals total cost or there is no profit or loss is known as ‘break-even point’. This break-even analysis can be shown graphically also. (shown below)
In the above graph, suppose fixed cost is Rs. 1.5 lakhs and variable costs and sales price are Rs. 7 and Rs. 10 per unit respectively. Here break even point is 50,000 units of sales because at this point the total cost is equal to the total revenue. At this point the total cost is Rs. 5 lakhs represented by fixed cost of Rs. 1.5 lakh and variable cost—Rs. 3.5 lakhs and the total revenue is also Rs. 5 lakhs (i.e., 50,000 X 10). The spread to the right of this point represents the profit potential and the spread to the left shows the loss potential.
Break even analysis presents information regarding total cost, revenues, profit/loss at various levels of production in such a manner that it is easily understandable. It is based on the division of total costs into fixed and variable. Some examples of fixed cost are represented by depreciation, insurance charges, property taxes, cost of maintaining office, etc. Variable costs may include direct material costs, labour costs and commission rates on sales. The management can’t have control over the fixed costs, but it can exercise control over the variable costs. The assumption of this analysis is that it is possible to identify fixed and variable components of cost but this is not very true in actual practice. Moreover, fixed costs remain fixed only upto a certain level of production after which they will rise considerably. Another difficulty with this analysis is that the break-even point is not fixed. It changes with every management decision that is when selling price changes, while operating efficiency changes, when product-mix changes and so on.
Modern Control or Network Techniques
Network analysis is a means of planning and controlling the project activities. Under this, a project is broken down to small activities or operations which are arranged in a logical sequence. After this, the order in which the various operations should be performed is decided. A network diagram may be drawn to show the relationship between all the operations involved. So it will reveal the gaps in the flow plan.
The net work drawn thus shows the interdependence of various activities of a project and also points out the activities to be completed before the others are started.
The object of network analysis is to help in planning, organizing and controlling the operations to enable the management in accomplishing the project economically and efficiently. The most popular network techniques are:
A.) PERT (Programme Evaluation and Review Technique)
It is an important technique in the field of project management. It involves planning, monitoring and controlling of projects. It specifies the techniques and procedures to assist project managers in:
- Planning schedules and costs.
- Determining time and cost status.
- Forecasting man power skill requirements.
- Predicting schedule slippages and cost plans.
- Developing alternate time cost plans.
- Allocating resources among tasks.
PERT uses probability and linear programming for planning and controlling the activities. Probability helps in estimating the timings of various activities in the project and linear programming is used to maximize the achievement of the project objectives. PERT is employed in the construction of ships, buildings and highways, in the planning and launching of new projects, in the publication of books, in the installation of computer system, etc.
B.) C.P.M (Critical Path Method)
It is most widely used as a planning and control technique in business. Unlike PERT, it is applied in those projects where timing are relatively well known. It is used for planning and controlling the most logical sequences of activities for accomplishing a project.
Under CPM, the project is analysed into different operations or activities and their relationships are determined and shown on the network diagram. The network is then used for optimizing the use of resources and time. CPM marks critical activities in a project and concentrates on them. Here assumption is that expected time is actually the time taken to complete the project. CPM requires a greater planning than required otherwise. Thus, it increases the planning cost, but this increase in cost is justified by concentrating on critical path only and avoiding expenses on the strict supervision and control of the whole project. Besides ascertaining time schedule, CPM provides a standard method of communicating project plans, schedules and costs.