NCERT Solutions for Class 12 Business Studies Chapter 8: Controlling

Controlling is referred to as the process of evaluation of the work that is done. It is all about setting standards for the work and then comparing the actual work that is done with the standard. It ensures that all the activities in an organisation are performed as per the decided plan.

The principle that should be adopted to deal with deviations is management by exception. An organisation’s control system loses effectiveness when standards are not able to be defined in quantitative terms. For example, job satisfaction will be different for different employees.

A control system is bound to lose its effectiveness whenever the standards cannot be defined in quantitative terms, thereby making it difficult to measure deviations happening between actual and standard performance. For example, job satisfaction cannot be described in quantitative terms as it is different for different employees.

Standards that are used by a company for evaluating the performance of the Finance and Accounting department are as follows:

1. Liquidity

2. Flow of Capital

The deviation is the term that is used to indicate the difference between standard and actual performance.

Planning is the process of creating a structure in advance regarding the work that needs to be done. It is helpful in defining the objectives and goals that need to be achieved by an individual or organisation. Therefore, it is said that planning is about looking ahead, which involves predicting about future. Controlling takes into consideration the assessment of past performance and comparing them with set standards. Due to these characteristics, it can be said to be a backward-looking future. But all these statements are partially correct, as planning is done based on past experiences and how to do better, similarly controlling although looks at past performance, its aim is to improve future performance. Hence, it can be said that both planning and controlling are forward and backward-looking functions.

This statement is with regard to the principle of management by exception. As stated in this rule, it is not possible to control everything effectively. This principle states that instead of trying to control all the deviations, there should be some defined ranges that are set up, and only when the deviations go beyond the range they should be notified to managers for control measures.

Budgetary control is a technique that is related to preparing plans in the form of budgets. It is a financial statement that tells us what needs to be achieved and the policies that need to be followed for the time period. Performance is compared with the standards that were set in the budget. Such a comparison helps in the identification of deviation and helps in taking corrective steps. There can be different budgets for different divisions. Budgets act as motivation for employees and encourage them to reach their objectives. With proper budgeting measures, resources can be evenly distributed and utilised appropriately.

Management audit is the process of appraisal of the management in an organisation. It is useful in improving the effectiveness of the management to carry out its objectives. It evaluates the functions of the managers and highlights areas where deficiencies are observed. The following point will be helpful in explaining the importance of management audit as a technique of controlling:

1. It helps in identifying deficiencies in the work, which will help in taking corrective measures necessary for improvement.

2. By performing a management audit, various management activities can be monitored, which helps in improving the overall efficiency of the organisation.

3. Enhanced coordination can be observed between employees and departments as work is monitored for effectiveness.

4. Helps organisation to adapt to environmental changes, and this can be ensured by having strategies and policies updated continuously.

In this situation, the principle of management by exception should be followed. This principle states that any effort to control everything may end up having control of nothing. Only deviations that are beyond the limit will need to be acknowledged, and appropriate actions need to be taken. Therefore, Mr. Bhanu should not be terminated for such a small reason.

Controlling is a systematic approach to managing the activities in an organisation. It includes the following steps:

1. Setting standards: This step involves setting standards and developing benchmarks on the basis of which actual performance can be determined. Standards can be either qualitative or quantitative.

2. Measure actual performance: After setting standards, the next step is determining the actual performance that is taking place through the activities. These can be determined by observation and obtaining data from performance reports.

3. Comparing performances: This step involves comparing the actual performance with the standard. It helps determine the deviations, which guides managers in assessing the performance and taking necessary steps.

4. Analysing deviation: When comparing actual performance with set standards, there will be deviations. It is, therefore, important to find these deviations in the key areas. The methods most used are Critical Point Control and Management by exception.

5. Corrective measures: When deviations reach beyond admissible limits, the management needs to take corrective actions. This step is all about correcting the errors so that they do not happen again. It is the last step that is taken in the process of controlling.

Managerial control techniques can be divided into two categories:

1. Traditional Technique

2. Modern Technique

Traditional techniques are techniques that were followed by managers in the old days. The following are the techniques followed:

1. Personal observation: Managers oversee the work conducted by employees in this technique. Managers will be getting the right information which makes workers keen on performing well. But, it is a time-consuming process.

2. Statistical reports: Managers can get the performance data which is in the form of average percentages or ratios, and it can be easily represented in charts and graphs. Therefore, a comparison of performance with standards is determined.

3. Break-even analysis: To determine profit or loss, break-even analysis is used. It is that point where total costs become equal to total revenue. Using this technique, managers can determine profit or loss and thereby devise ways to generate profit.

4. Budgetary control: It is a technique where future business operations are determined in the form of budgets. It sets standards for measuring actual performance.

Modern techniques are more recently introduced. It provides ideas for having better control. The following are the modern methods:

1. Return on investment: It is referred to as the gains or similar benefits that are earned on the amount of investment done. It gives a good idea of the returns a company is earning with the amount of investment done.

2. Ratio analysis: It is calculating various ratios for analysing the financial statement. Ratios such as liquidity ratio, solvency ratio etc., help determine the stability of a business.

3. Responsibility accounting: Various responsibility centres are established, and each centre head is responsible for the outcome of the centres. The responsibility centre includes the cost centre, revenue centre, investment centre and profit centre.

4. Management audit: It is an audit of the management processes. It checks the capability of the management and identifies the deficiencies present in the system. It is done through continuous monitoring.

5. PERT and CPM: These are modern management techniques that help determine the scheduling and resource allocation, it enables project execution in the most effective way. These techniques are used in construction, shipbuilding industries etc.

6. MIS: Management Information System is the process of controlling that helps in effective decision-making. It also is cost-effective and helps in the collection and dispersal of information across levels.

The following are the importance of controlling in an organisation:

1. Controlling helps in achieving organisational goals by optimum use of resources and correcting deficiencies in the process.

2. It helps in determining the accuracy of the standards set by management. It also helps in reviewing the standards as per changing business requirements.

3. It helps an employee to become motivated as they know what the management expects from them.

4. It also enables effective decision-making in the organisation by promoting order and discipline.

5. It improves coordination among employees and departments, which helps organisation productivity.

Controlling is effective for management, but there are certain problems that are faced by organisations which are highlighted below:

1. The set of standards cannot be set for both qualitative and quantitative terms, as qualitative terms make controlling less effective.

2. Changing factors in the business environment result in changing of control mechanisms in an organisation.

3. Controlling will be resisted if it is against the comfort level of employees.

4. Controlling is a costly affair as infrastructure needs to be set up.

Planning and controlling are very closely related functions of management. Planning is the process of creating a structure in advance regarding the work that needs to be done. It is helpful in defining the objectives and goals that need to be achieved by an individual or organisation. Therefore, it is said that planning is about looking ahead, which involves predicting about future. Controlling takes into consideration the assessment of past performance and comparing them with set standards. Due to these characteristics, it can be said to be backward-looking future.

Various objectives that are determined by planning will serve as a set of standards against which performance will be determined. If no standards and objectives are present, there will be no control necessary. Similarly, only by planning without control no one will monitor the work, which will lead to inefficiency and lack of productivity. Planning and control complement each other.

But all these statements are partially correct, as planning is done based on past experiences and how to do better, similarly controlling, although looks at past performance, its aim is to improve the future performance. Hence, it can be said that both planning and controlling are forward and backward-looking functions and are very important from an organisation’s point of view.

a. The company will derive the following benefits from a good control system:

i. Deficiencies in the system will be identified, and corrective steps can be taken accordingly. It helps the organisation to move towards the objective in the right way.

ii. Accuracy of set standards can be determined. If needed, the set of standards can be appropriately modified.

iii. Optimum resource utilisation will occur, so there will be less wastage of resources and more efficiency.

iv. The employees will be aware of their roles and expectations from the management, which motivates them to achieve the objective of the organisation.

b. Planning and controlling are closely related functions. While planning is all about what objectives need to be achieved and the steps to follow, controlling is about evaluating the work as per standards and taking necessary corrective actions as required. In the current situation, plans can be made with regard to customer satisfaction, sales and pricing policy. In the event of a lack of standards, there will be no control.

c. The company should follow the steps as mentioned below:

1. Standards should be set up which will serve as a benchmark for comparison against actual performance. Standards can be either qualitative or quantitative.

2. After setting the standards, actual performance needs to be analysed. It can be done by personal observation and collecting reports of performance.

3. The next step would be to compare the performances with standards and find deviations; then, necessary corrective steps can be taken to rectify them.

4. Deviations that are over the permissible range should be worked upon. It can be analysed using critical point control and management by exception methods.

5. The corrective steps are the last part of controlling as it works towards correcting deficiencies of the organisation.

a. The company will derive the following benefits from a good control system:

i. Deficiencies in the system will be identified, and corrective steps can be taken accordingly. It helps the organisation to move towards the objective in the right way.

ii. Accuracy of set standards can be determined. If needed, the set of standards can be appropriately modified.

iii. Optimum resource utilisation will occur, so there will be less wastage of resources and more efficiency.

iv. The employees will be aware of their roles and expectations from the management, which motivates them to achieve the objective of the organisation.

b. Planning and controlling are closely related functions. While planning is all about what objectives need to be achieved and the steps to follow, controlling is about evaluating the work as per standards and taking necessary corrective actions as required. In the current situation, plans can be made with regard to customer satisfaction, sales and pricing policy. In the event of a lack of standards, there will be no control.

c. The company should follow the steps as mentioned below:

1. Standards should be set up which will serve as a benchmark for comparison against actual performance. Standards can be either qualitative or quantitative.

2. After setting the standards, actual performance needs to be analysed. It can be done by personal observation and collecting reports of performance.

3. The next step would be to compare the performances with standards and find deviations; then, necessary corrective steps can be taken to rectify them.

4. Deviations that are over the permissible range should be worked upon. It can be analysed using critical point control and management by exception methods.

5. The corrective steps are the last part of controlling as it works towards correcting deficiencies of the organisation.

a. Following features of controlling are highlighted here:

i. By keeping a close watch on the progress of work and constantly engaging in work towards attaining the goals of the organisation, it is a goal-oriented approach.

ii. Controlling is a pervasive function which can be exercised by managers of any level, division or department.

b. Following are the points of controlling:

1. Controlling helps in achieving the organisational goals by optimum use of resources and correcting deficiencies in the process.

2. It helps in determining the accuracy of the standards set by management. It also helps in reviewing the standards as per changing business requirements.

3. It helps an employee to become motivated as they know what the management expects from them.

4. It enables effective decision-making in the organisation by promoting order and discipline.

5. It improves coordination among employees and departments, which helps organisation productivity.