Essentials of Management Chapter 15 Essentials of Control

Essentials of Management Chapter 15 Essentials of Control © 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.

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. © 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.

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. © 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.

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. © 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.

Steps in Control Process 1. 2. 3. 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) © 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.

Steps in Control Process, continued 4. a. b. c. 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). © 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.

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. © 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.

Types of Budgets �Budgets can be fixed or variable. �Fixed budget allows for expenditures based on onetime 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. © 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.

Suggestions for Preparing a Budget � Judgment and political tactics enter into budget preparation. 1. Leave wiggle room. 2. Research the competition. 3. Embrace reality (such as studying facts, and taking historical perspective). 4. Do not neglect intuition. © 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.

Budgets and Financial Ratios as Control Devices 1. 2. a. 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 © 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.

Financial Ratios, continued b. c. d. Profit Margin = Net income Sales Return on Equity = Net income Owner’s equity Revenue per Employee = Revenue Number or Employees © 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.

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. © 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.

Managing Cash Flow � Sections of cash flow statement reflect cash from or used by the following: 1. Operating activities 2. Financing activities 3. Investing activities � Accounting firms may not agree with managers on definition of cash. � Free cash flow deducts capital expenses. © 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.

Investing in Positive Approaches to Cost Reduction � Investing money in right process or equipment often leads to useful cost reductions. a. Video conferencing equipment can help reduce travel expenses. b. Automation in general is a positive investment that reduces costs, such as self-service counters in supermarket. © 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.

Potential Hazards of Cost Reduction � Can lead to low morale, lower quality goods and services, and foster image of being a cheap company. a. Some of Toyota’s recall problems were attributed to heavy cost cutting. b. Fatal blowout of Deepwater Horizon oil rig in Gulf of Mexico (2010) was attributed in part to cost cutting. © 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.

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. © 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.

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. © 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.

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. © 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.

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. © 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.

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. ) © 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.

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. © 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.

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. © 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.

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. © 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.

Characteristics of Effective Controls 1. 2. 3. 4. 5. 6. 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. © 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.

Characteristics of Effective Controls, continued Not contradict itself (such as setting high quantity and quality standards) 8. Allows for random deviation from standard 9. Cost-effective (control system does not cost more than its savings) 10. Not limit innovation (such as too much emphasis on short-term profit vs. long-term investment) 7. © 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.