Techniques of Managerial Control
Management is dynamic and so has to be it’s functions. Controlling function of management in this context has been evolved in due times.
A large number of techniques are available to enable managers effectively control the organisational activities. A manager should know these techniques and in which situation it should be applied and how it is to be applied to gain maximum of the efforts.
The techniques of managerial control have been broadly classified in two categories:
(I) Traditional techniques
(II) Modern techniques
Traditional techniques – Techniques of Managerial Control
Traditional techniques are those techniques which have been in use by the business organisation from the primitive era and are continued to be used still. These are the effective techniques and had not become obsolete with due change in time.
The most traditional technique is personal observation of the employees or subordinates by the manager or superior. It provides the first hand ,raw and real information. The managers need to hold discussion with the persons whose work is being controlled and they should watch the actual operations. It also creates a positive pressure on the employees to perform well in the tasks assigned to them as they know that their activities are being noted. Through this, managers are able to establish discipline in the organisation. The manager is given ample power to take necessary actions as and when required in order to ensure coordination.
However , this technique is time consuming and may reflect effects of personal-biasness towards employees. It may sound negative to an employee who does not get regular appraisal. Thus, it depends on the manager in how efficient is he/she in collecting the information through this technique.
The reason behind origin of statistics was that it made understanding of concepts and conclusions easier. Statistical analysis done in the form ratios, percentages, preparing graphs in different ways etc. present useful and easy to analyse information to the managers regarding work of the employees. It enables them to suggest solutions in lesser time as compared. The preparation of statistical data enables comparison among employees’ performance over time and also with the benchmarks set by the top level management.
It is also called as –’cost volume profit analysis.’ It analyses relationship among cost of production, volume of production, volume of sales and profits. Here, total costs are divided into two i.e., fixed cost and variable cost. Fixed cost is that cost which does not change with change in volume of production . Variable cost varies according to the volume of production. This analysis helps in determining the volume of production or sales and the total cost which is equal to the revenue.
Profit is termed as the excess of total revenue over total cost .The point at which revenue is equal to the total cost is known as ‘Break Even Point’ (BEP). In other words, the break-even point is the point at which there is no profit or loss to the organization .
The break-even point analysis helps in managerial control in several ways.
A budget is a quantitative statement for a definite period of time so that financial and other resources can be utilised properly to achieve the objectives of the organisation. It is a statement which reflects the policy of that particular period. It is that technique of managerial control in which all the operations are planned in advance in the form of budgets and actual results are compared with budgetary standards. Different types of budgets include the following :
Sales budget :A statement of what an organisation in expect to sell in terms of quantity as well as value.
Production budget: A statement of what an organisation plans to produce in the prescribed year or the budgeted period.
Material budget: A statement of estimated quantity and cost of raw materials ,tools required for production
Cash budget: Anticipated level of cash inflows and outflows for the budgeted period.
Capital budget: The estimated spending on major long term Assets such as on factories, on major equipment.
Research and development budget : The estimated level of spending for the development and refinement of products and processes.
Budgeting ensures optimum utilisation of scarce resources ny allocation them in a proper manner to different departments of an organization . Budgeting helps in a way to focus on specific and time-bound targets and helps in attainment of organisational objectives.
Budgeting also helps to ensure coordination among different departments as the budget for sales has been set according to production programs and schedules. It also facilitates Management by exception by stressing on those operations which deviate from budgeted standard in a significant way.
However, the effectiveness of budgeting depends on how accurately estimates have been made about future and the budget should be flexible enough so that there is a possibility to accommodate the environmental changes.
Modern techniques – Techniques of Managerial Control
Modern techniques are those techniques which are very new in management world. These techniques provide various new and better aspects for controlling the activities of an organisation. With time, new techniques need to be adopted as the situation demands so.
Return on Investment
Return on investment is also known as return on the capital employed. The rate of profitability is ascertained by the management with the help of this technique . The amount of profits earned by the company is different from the rate of profitability of the company. It provides the basic yardstick for measuring whether invested capital has been used effectively for generating reasonable amount of return. It can be used to measure overall performance of an organisation or of its individuals, departments etc. RoI proves to be an effective means of Control for analysing performance.
Ratio analysis furnishes the comparison between the elements of financial statements. This enables the management to compare performance of the employees in organisation overtime and with other organisations as well.Ratio analysis includes following types of ratios:
Liquidity ratios: These ratios are calculated to determine and estimate the short term solvency of business. In other words, it determines the amount of assets available to pay off the current debts.
Solvency Ratios: These ratios help to determine long term solvency of the business and prove of immense help to the management to frame further policies and plans ,especially capital formation policies.
Profitability Ratios: These ratios help to analyse the profitability of the business operations and involve ways and techniques to improve it further.
Turnover Ratios: These help to determine efficiency of operations and effective utilisation of resources. There is positive relationship between turnover and better utilisation of resources.
Responsibility accounting can be defined as a system of accounting in which overall involvement of different sections, divisions & departments of an organization are set up as ‘Responsibility centers’. The head of the center is responsible for achieving the target set for his center. Responsibility centers may be of the following types:
Cost Centre: Cost centre, also known as expenses record centre, refers to a department of an organisation whose manager is held responsible for the cost incurred in the centre but not the revenuese earned . For example, Production department of an organisation can be termed as the cost center as it is the one which purchase raw materials and is involved in the process.
Revenue Centre:A revenue centre refers to a department which is responsible for generating revenues from the operation of an organisation . For example, marketing department.
Profit Centre: A profit centre refers to a department whose manager is responsible for both cost and revenues and has to look after those activities which directly affect profitability of an organisation . For example, Repair and Maintenance department.
Investment Centre: An investment centre is responsible for profits as well as investments made in the form of various assets. ROI, return on investment is calculated to ascertain the effectiveness of various investments made by the organisation. This ratio is compared with the organization’s previous ratios and with the current and previous ratios of other organisation working in the similar line.
It refers to systematic appraisal of overall performance of the management of an organisation. The purpose is to review the efficiency and effectiveness of management and to improve its performance in successive periods. It is helpful in identifying the deficiencies in performance of Management functions. It may be defined as evaluation of the function performance and effectiveness of management of an organisation.
It helps to locate the present in potential deficiencies in the performance of managerial functions. It helps to improve the control system of an organisation by continuously monitoring the activities. It helps to improve the coordination among the various departments and ensure the updating of existing managerial policies in light of environmental changes.
However, conducting management audit may sometimes was a problem as there are no standard techniques for it but enlightened managers understand its usefulness in improving the efficiency of the organisation operations.
PERT and CPM
PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are two important techniques that form an important aspect of planning and controlling functions. These techniques are used to compute the expected time required to complete specific tasks & identifying the major activities which directly impact the working of the organization These techniques are mainly used in areas like construction projects, aircraft manufacture, ship building , automobile industries etc.
The various steps involved in using these techniques are as under:
(i) The project is first divided into various set of activities and then these activities are arranged in a logical sequence chronologically.
(ii) A network diagram which is easy to explain is prepared showing the sequence of activities.
(iii)Time estimates are set for each activity that has to be done.
PERT provides three time estimates-
(A) Optimistic (shortest time)
(B) Most likely time
(C) Pessimistic (longest time).
In CPM, only one time estimate is prepared. CPM also concentrates on cost of completing a particular project in particular manner.
(iv) The most critical path in the network is the longest path. Longest path consists of those activities which are critical for completing the project on time; hence the name CPM.
(v) If required, necessary changes are introduced in the pre-decided plan for completing the project on time.
Thus, these techniques are so interconnected and are necessary to determine speed and efficiency of organisations operations. These techniques prepare the managers before hand for with the cost and time analysis which would be required to complete the process.