Class 12-commerce NCERT Solutions Business Studies Chapter 8: Controlling

Management by Exception is the principle of management that a manager should consider while dealing with deviations effectively. According to this technique ‘an effort to control everything may end up in controlling nothing’. Thus, only significant deviations which are beyond the permissible limit should be acknowledged. For example, Management may decide that an increase in production cost by Rs 2 per unit can be checked at the supervisory level and any further increase is to be tackled by management.

The control system of an organisation loses its effectiveness when standards cannot be defined in quantitative terms. For example, it is difficult to set standards for accessing 'Employee Morale' in employees as every individual is motivated by different motives and drives.

Control system loses some of its effectiveness when standards cannot be defined in quantitative terms. This makes it difficult to measure the deviation between actual performance and standard performance. For example, setting standards for 'Job satisfaction' is difficult as each individual employee is motivated by different motives and drives. Thus, effective control system is difficult to set as the standards cannot be quantitatively provided.

A company can use the following standards to evaluate the performance of its Finance & Accounting department:

1. Inventories
2. Liquidity
3. Capital expenditures
4. Flow of capital

Deviation is the term is used to indicate the difference between standard performance and actual performance. 

Management by Exception is the principle of management control that MsVasundhara should consider while taking her decision. According to this technique ‘an effort to control everything may end up in controlling nothing’. Thus, only significant deviations which are beyond the permissible limit should be acknowledged. In this case, Mr. Bhanu had fallen short of only 10 units, he should not be terminated for such a small deviation.

In simple terms, controlling refers to the process of evaluation and assessment of the work done. Under the process of controlling, standards are set for various tasks and activities. Accordingly, the various tasks and activities are evaluated against the set standards. Deviations from the set targets are identified, and corrective actions to be taken are decided. Thus, controlling refers to the process of ensuring that the various activities and tasks in the organisation are carried out according to the pre-defined goals and objectives.

Controlling helps in utilising resources to the fullest and in an efficient manner. With controlling, the future course of action and plans is formulated.

The statement that planning is looking ahead and controlling is looking back is only partially true.

Planning is a process wherein it is decided what is to be done, and accordingly deciding the required course of action. In other words, planning involves deciding the goals and objectives which are to be achieved and deciding the actions through which they are to be achieved. In this way, planning helps in predicting future actions and thus can be said to be looking ahead.

As against planning, the controlling function involves assessing and evaluating past performance against the pre-defined standards. As controlling assesses past performance, it can be said to be backward looking.

However, it must be remembered that planning decides the goals and actions for the future, but these decisions are taken on the basis of experiences. Thus, planning involves looking back as well.

In a similar manner, controlling not just involves assessing past performance but also decides the corrective actions to be taken (in the future). Thus, the controlling function looks forward as well.

One of the important steps in the process of controlling is to identify the deviations from the predefined standards. The activities in an organisation are evaluated according to the pre-determined standards as defined by the plans. Because of certain factors, there may be deviations from these standards. These deviations must be identified so that corrective actions can be taken such that the goals and objectives of the organisation are achieved. However, it must be remembered that everything in a business cannot be controlled every time. Deviations in areas of importance must be attended to with priority.

According to the principle of management by exception, control must be by exception. An attempt must not be made to control everything. It is based on the belief that controlling everything would result in controlling nothing. Accordingly, only those deviations must be acted upon which are significant (which are beyond a limit according to the standards). An acceptable range of deviation must be identified and those deviations should be highlighted which are beyond the acceptable range. If minor deviations are also highlighted and acted upon, then it may happen that the major deviations lose out on priority.

Under the technique of budgetary control, budgets are prepared for each activity and operation in the organisation. Here, the term budget refers to defining the goals and objectives which are to be achieved in quantitative terms. Then the actual results of the activities are compared with the budgetary standards. Accordingly, the work done is assessed and evaluated. Deviations from the set standards are identified and corrective actions are decided. In an organisation, a budget can be prepared for various divisions such as the sales budget and the production budget. However, it must be remembered that for the budgeting technique to be effective, the estimates with regard to the future should be made carefully.

By setting budgets, employees know the standards against which their performance would be evaluated. This motivates employees to improve their performance and achieve the standards so set. In addition, budgetary standards promote coordination among different divisions/departments of the organisation. Moreover, through proper budgeting, the resource requirement of various departments can be assessed. Accordingly, the resources can be allotted to different divisions. In this way, it helps in optimum utilisation of resources.

A management audit refers to the critical appraisal of the overall performance of the management. The basic objective of audit is to improve performance effectiveness and efficiency of the management. Under this technique, various activities of managers are evaluated, and accordingly, deficiencies and deviations are identified.

A management audit is an effective form of controlling. This can be explained as follows:  

1. Identification of Deficiencies: This technique helps in identifying the deficiencies in the present work. In addition, it helps in recognising the probable deficiencies which may crop up in the future performances. Accordingly, it helps in identifying the corrective measures which would be required.
2. Improves Efficiency: This technique helps in keeping a close watch on various management activities. In this way, it helps in improving the effectiveness and efficiency management operations.
3. Enhances Coordination: By closely monitoring the work, this technique promotes coordination among various departments in the organisation.
4. Adapting to Environmental Changes: A management audit technique keeps a close watch on managerial practices. It ensures that the policies and strategies of the management are up-to-date and according to the changes taking place in the business environment.

Steps involved in the controlling process:

1. Setting Standards: The first step is setting standards against which the actual performance is evaluated. The standards can be in both qualitative terms (such as improved coordination, higher goodwill) and quantitative terms (such as sales targets, production targets). It must be kept in mind that the set standards should facilitate easy comparison.

2. Measuring Actual Performance: The next step in the controlling process is to measure the performance of the various activities. For this, various techniques can be used such as personal observation and performance reports. This measurement should be exact and reliable such that it facilitates easy comparison with the set standards. Moreover, the measurement of performance can be at various stages in the activity or at the completion of the activity.
3. Comparing Performance: After the actual performance is measured, it is then compared with the pre-defined standards. This helps in assessing whether there are any deviations/deficiencies in performance. Accordingly, it helps in identifying the required corrective actions to be taken.
4. Analysing Deviation: With the comparison of the actual performance with the set standards, the deviations in performance are identified. For analysing deviations, the following methods can be used:
   

   Critical Point Control: According to this technique, rather than controlling all the activities in the management, only the key result areas (those that affect the entire organisation) should be focused on.

   Management by Exception: According to this technique, only significant deviations which are above an acceptable range should be controlled. An attempt must not be made to control everything.

   Not only should deviations be identified, but their causes must also be recognised. Some causes for deviations can be infeasible standards, deficiencies in process and dynamic business environment.

5. Corrective Measures: In case deviations are beyond the acceptable range, it becomes necessary to take corrective action. It must be ensured that the deviations do not occur again. 

The techniques of managerial control can be classified in two categories as Traditional Techniques and Modern Techniques.

Traditional techniques have been in use by managers since long ago. The following are traditional techniques of managerial control:

1. Personal Observation: Under this technique, managers directly oversee the work done. It ensures that managers get the right information, and prompts workers to perform up to the mark. However, this technique proves to be very time consuming and cannot be used in cases where a large number of activities are to be used.
2. Statistical Reports: A statistical analysis of the performance is done in the form of averages, ratios and percentages. Such statistical analysis helps in easy comparison of the actual performance with the set standards.
3. Break-Even Analysis: It comprises a study of relationship between costs, volume and profits. Under this technique, the costs and profits at various levels of quantity are studied. Accordingly, the level of output where the profit is maximised is identified. Break-Even is said to occur when there is neither profit nor loss. That is the total revenue earned by the organisation equals the total cost incurred.
4. Budgetary Control: Under the technique of budgetary control, budgets are prepared for each activity and operation in the organisation. Here, the term budget refers to defining the goals and objectives which are to be achieved in quantitative terms. Then the actual results of the activities are compared with the budgetary standards. Accordingly, the work done is assessed and evaluated. Deviations from the set standards are identified and corrective actions are decided. 

Modern Techniques refer to techniques which are recent in origin. The following are modern techniques of controlling:

1. Return on Investment: Return on investment refers to the benefits from investment. In other words, it is an assessment of whether the investment is beneficial. In an organisation, managers use this technique for comparing the performance of various departments or for comparing present actions and past performance.
2. Ratio Analysis: Various ratios are calculated to analyse the financial statements. The most commonly used ratios are as follows:

a. Liquidity Ratio: Analyses the short-term solvency of a business

b. Solvency Ratio: Evaluates the long-term solvency of a business

c. Profitability Ratio: Determines the position of the business with regard to profitability

d. Turnover Ratio: Analyses whether the activities are carried out efficiently

3. Responsibility Accounting: Under the system of responsibility accounting, various divisions in the organisation are set up as responsibility centres. Each division is given a target and it is the responsibility of the head of the division to achieve the set target. Different types of responsibility centres in an organisation can be cost centre, investment centre, profit centre and revenue centre.
4. Management Audit: Under this technique, a systematic assessment is made of the overall work and activities of the management of the company. The basic objective of this technique is to evaluate efficiency and effectiveness in the tasks of the management. Accordingly, it helps in identifying the areas which require corrective actions.
5. PERT and CPM: Programme Evaluation and Review Technique (PERT) and Critical Path Method (CPM) are based on network analysis. Under these techniques, the entire task is divided into various smaller activities. Each activity is then accorded a timeline and a cost estimate. In this way, it helps in effective execution of the tasks and activities.
6. MIS: Management Information System (MIS) is a computer-based controlling technique wherein managers are provided with timely data and information so as to help in the decision-making process. MIS proves to be cost effective in terms of information management.  

Controlling refers to making sure that the various activities and tasks in an organisation are carried out according to the predefined goals and objectives.

Points highlighting the importance of planning in an organisation:

1. Achieving goals: Controlling ensures that various activities are carried out correctly according to the plans. It ensures that deviations if any are identified and appropriate corrective action is taken.
2. Reviewing standards: An effective control system ensures that the standards are set accurately. As the business environment changes, it ensures that the standards are also reviewed so as to adapt to the changes taking place.
3. Enables efficiency in resource utilisation: An effective control system ensures that there is minimum wastage of resources. In other words, it ensures that the resources are utilised optimally and in the most efficient manner.
4. Better motivation: With controlling, employees know what is expected from them and how their performance would be evaluated. This clarity motivates employees to perform better.
5. Maintain order: Controlling helps keep a close watch on the activities and behaviour of employees. In this way, it helps in maintaining order and discipline in the organisation.

6. Ensures coordination: With proper controlling, the efforts of the various departments can be unified towards the common goals and objectives of the organisation. The existence of predefined standards of evaluation ensures coordination in the activities of various departments.

   The controlling function has some limitations as well. Points highlighting the problems faced in an effective control system:

   1. Setting standards in quantitative terms: For an effective control system, it is important that the standards are set in measurable or quantitative terms. However, it may not be possible in every case. When the standards are not set in quantitative terms, it becomes difficult to evaluate the performance.
   2. No control over external forces: An organisation cannot control external forces such as government policies and technical changes. A change in such forces changes the standards of evaluation and thereby the entire control system.
   3. Resistance: Close and continuous monitoring may receive resistance from employees which would make controlling difficult.
   4. Expensive: A controlling system involves cost in terms of money, time and effort. A small organisation may not be able to afford the costs involved in the control system.

Controlling is closely related to planning. A good control system requires set standards for evaluation. These standards are provided by the plans defined by the organisation. In other words, plans serve as the base for controlling.

Controlling is essential for effective implementation of plans. It is essential to keep a close watch on the plans, identify any deviations and take appropriate corrective actions. Without proper controlling, planning would be futile.

In a similar manner, planning forms the base for controlling. Without planning, there would be nothing to control. Controlling is done only when there are predetermined standards against which evaluation can be done.

While planning involves intellectual thinking, decision making and deciding a course of action, controlling ensures that plans take the required course of action.

Both concepts of planning and controlling are interlinked as they are forward looking and backward looking. Planning is a process wherein it is decided what is to be done and accordingly deciding the required course of action. In other words, planning involves deciding the goals and objectives which are to be achieved and deciding the actions through which they are to be achieved. In this way, planning helps in predicting future actions; thus, it can be said to be looking ahead.

As against planning, the controlling function involves assessing and evaluating past performance against the pre-defined standards. As controlling assesses past performance, it can be said to be backward looking.

However, it must be remembered that planning decides the goals and actions for the future, but these decisions are taken on the basis of experiences and previous controlling actions. Thus, planning involves looking back as well.

In a similar manner, controlling not just involves assessing the past performance but also decides the corrections actions to be taken (in the future) and forms the base for plans.

Thus, the controlling function looks forward as well.

The features of Controlling highlighted in the above case are:

1)    Goal-oriented function: It ensures that everyone follows the plan or the work is accomplished as per the plan and tries to achieve the goals of the organisation.

2)    Pervasive function: It is an activity performed not only by top level managers but also by managers working at all levels, i.e. top, middle and operational levels.

Following are the points of Importance of Controlling:

1) Achieving goals: Controlling ensures that various activities are carried out correctly according to the plans. It ensures that deviations if any are identified and appropriate corrective action is taken. This helps the organisation to be on track and achieve its goals.

2) Reviewing standards: An effective control system ensures that the standards are set accurately. As the business environment changes, it ensures that the standards are also reviewed so as to adapt to the changes taking place.

3) Enables efficiency in resource utilisation: An effective control system ensures that there is minimum wastage of resources. In other words, it ensures that the resources are utilised optimally and in the most efficient manner.

4) Better motivation: With controlling, employees know what is expected from them and how their performance would be evaluated. This clarity motivates employees to perform better.

5) Maintain order: Controlling helps to keep a close watch on the activities and behaviour of employees. In this way, it helps in maintaining order and discipline in the organisation.

6) Ensures coordination: With proper controlling, the efforts of the various departments can be unified towards the common goals and objectives of the organisation. The existence of predefined standards of evaluation ensures coordination in the activities of various departments.

1. The company would derive the following benefits from a proper controlling system:
   1. Controlling ensures that various activities are carried out correctly according to the plans. It ensures that deviations if any are identified and appropriate corrective action is taken.
   2. An effective control system ensures that the standards are set accurately. As the business environment changes, it ensures that the standards are also reviewed so as to adapt to the changes taking place.
   3. An effective control system ensures that there is minimum wastage of resources. In other words, it ensures that the resources are utilised optimally and in the most efficient manner.
   4. With controlling, employees know what is expected from them and how their performance would be evaluated. This clarity motivates employees to perform better.
   5. Controlling helps keep a close watch on the activities and behaviour of employees. In this way, it helps in maintaining order and discipline in the organisation.
   6. With proper controlling, the efforts of the various departments can be unified towards the common goals and objectives of the organisation. The existence of predefined standards of evaluation ensures coordination in the activities of various departments. company would derive the following benefits from a proper controlling system:

2. Controlling is closely related to planning. A good control system requires set standards for evaluation. These standards are provided by the plans defined by the organisation. In other words, plans serve as the base for controlling.

   Controlling is essential for effective implementation of plans. It is essential to keep a close watch on the plans, identify any deviations and take appropriate corrective actions. Without proper controlling, planning would be futile.

   In a similar manner, planning forms the base for controlling. Without planning, there would be nothing to control. Controlling is done only when there are predetermined standards against which evaluation can be done.

   While planning involves intellectual thinking, decision making and deciding a course of action, controlling ensures that plans take the required course of action.
   

3. Steps to be followed in the controlling process:

1. Setting Standards: The first step is setting standards against which the actual performance is evaluated. The standards can be in both qualitative terms (such as improved coordination, higher goodwill) and quantitative terms (such as sales targets, production targets). It must be kept in mind that the set standards should facilitate easy comparison.
2. Measuring Actual Performance: The next step in the controlling process is to measure the performance of the various activities. Techniques such as personal observation and performance reports can be used. This measurement should be exact and reliable such that it facilitates easy comparison with the set standards. Moreover, the measurement of performance can be at various stages in the activity or at the completion of the activity.
3. Comparing Performance: When the actual performance is measured, it is then compared with the pre-defined standards. This helps in assessing whether there are any deviations/deficiencies in performance. Accordingly, it helps in identifying the required corrective actions to be taken.
4. Analysing Deviation: With the comparison of the actual performance with the set standards, deviations in performance are identified. For analysing deviations, Critical Point Control or Management by Exception can be used.
5. Corrective Measures: For deviations beyond the acceptable range, it becomes necessary to take corrective actions. It must be ensured that the deviations do not occur again.

4. The management can follow management by exception technique of controlling. According to this technique, only significant deviations which are above an acceptable range should be controlled. An attempt must not be made to control everything.