Controlling

CONTROLLING: COMPREHENSIVE CHAPTER NOTES FOR CBSE CLASS 12 BUSINESS STUDIES

Meaning of Controlling

**Controlling is the management function that ensures activities in an organisation are performed as per the plans and that organisational resources are being used effectively and efficiently for the achievement of predetermined goals.** It is thus a goal-oriented function.

**Key characteristics of controlling:**

**Pervasive function**: Required at all levels of management — top, middle, and lower management

**Universal application**: Applicable in educational institutions, military, hospitals, clubs, and business organisations equally

**Not the final function**: Often misunderstood as the last function of management, but it brings the management cycle back to planning

**Continuous process**: Not a one-time activity but an ongoing process

**Corrective in nature**: Identifies deviations from standards and initiates corrective measures to ensure events conform to plans

**Relationship with planning**: Controlling identifies how far actual performance deviates from standards set by planning, analyses causes of such deviations, and attempts corrective actions. This helps formulate future plans based on identified problems, improving planning in subsequent cycles.

**Example**: An airline uses Departure Control System (DCS) to automate airport operations — managing check-in, boarding passes, baggage acceptance, and aircraft checks. This system tracks all operations against predetermined standards, ensuring deviations (like overbooked flights or delayed departures) are identified and corrected immediately.

---

Importance of Controlling

A good control system helps an organisation in six fundamental ways:

**(i) Accomplishing organisational goals**: The controlling function measures progress towards organisational goals and brings deviations to light, indicating corrective action. It guides the organisation and keeps it on track so that organisational goals are achieved. Example: If a manufacturing company's target is 1000 units per day, daily checking ensures this target is met or reasons for shortfall are identified.

**(ii) Judging accuracy of standards**: A good control system enables management to verify whether the standards set are accurate and objective. It keeps careful check on changes in the organisation and environment, helping to review and revise standards in light of such changes. Example: During inflation, revenue targets may need revision if the cost structure changes.

**(iii) Making efficient use of resources**: By exercising control, a manager reduces wastage and spoilage of resources. Each activity is performed according to predetermined standards and norms, ensuring resources are used most effectively and efficiently. Example: Inventory control systems prevent overstocking or stockouts, reducing wastage and ensuring optimal use of working capital.

**(iv) Improving employee motivation**: A good control system ensures employees know in advance what is expected of them and the standards on which they will be appraised. This motivates them and helps them give better performance. Example: Clear production targets and performance standards give employees clarity on expectations and benchmarks for evaluation.

**(v) Ensuring order and discipline**: Controlling creates an atmosphere of order and discipline in the organisation, minimising dishonest behaviour by keeping close check on activities. Example: An import-export company installed software to log computer keystrokes, which revealed two employees embezzling $3 million over 2.5 years by deleting orders and pocketing revenues. This control system caught the dishonesty before the firm suffered complete loss.

**(vi) Facilitating coordination in action**: Controlling provides direction to all activities and efforts for achieving organisational goals. Each department and employee is governed by predetermined standards well coordinated with one another, ensuring overall organisational objectives are accomplished. Example: In a hotel chain, front desk, housekeeping, and restaurant operations are coordinated through service standards that ensure consistent guest experience across all departments.

---

Limitations of Controlling

Although controlling is an important management function, it suffers from important limitations:

**(i) Difficulty in setting quantitative standards**: Control system loses effectiveness when standards cannot be defined in quantitative terms, making measurement of performance and comparison with standards difficult. Areas like employee morale, job satisfaction, and human behaviour present this challenge. Example: How does a manager quantitatively measure "good customer service"? This qualitative standard is harder to control than "process 50 customer complaints per day."

**(ii) Little control on external factors**: Generally, an enterprise cannot control external factors such as government policies, technological changes, competition, natural disasters, etc. Example: During the COVID-19 pandemic, no matter how good a restaurant's control system, government lockdowns halted operations completely — an uncontrollable external factor.

**(iii) Resistance from employees**: Control is often resisted by employees who see it as a restriction on their freedom. Example: Employees might object to strict surveillance through Closed Circuit Televisions (CCTVs), viewing it as an invasion of privacy.

**(iv) Costly affair**: Control involves significant expenditure, time, and effort. Small enterprises cannot afford expensive control systems and cannot justify costs involved. Managers must ensure that costs of installing and operating a control system do not exceed benefits derived. Example: Installing ERP (Enterprise Resource Planning) systems costs lakhs of rupees in software and training — a small business may not afford this despite benefits.

---

Relationship Between Planning and Controlling

**Planning and controlling are inseparable twins of management.**

**Why they are interdependent:**

**Planning provides standards for controlling**: A system of control presupposes the existence of certain standards. Standards of performance provided by planning serve as the basis of controlling.

**Controlling monitors plan implementation**: Once a plan becomes operational, controlling is necessary to monitor progress, measure it, discover deviations, and initiate corrective measures ensuring events conform to plans.

**Mutual dependency**: Planning without controlling is meaningless (best plans can fail without monitoring); controlling is blind without planning (no standards to control against)

**Planning vs Controlling — Nature of Functions:**

**Planning is prescriptive** (prescribes what should be done) while **controlling is evaluative** (evaluates whether what was planned was actually done)

**Planning is intellectual** (involves thinking, analysis, discovery) while **controlling is evaluative** (checks if decisions translated into desired action)

**Forward-looking vs Backward-looking:**

**Planning is forward-looking**: Prepared for future based on forecasts about future conditions

**Controlling appears backward-looking**: Like postmortem of past activities to find deviations from standards

**Both are actually forward and backward**: Planning guided by past experiences; corrective action from control aims to improve future performance

**Reinforcement relationship:**

1. **Planning based on facts makes controlling easier and effective**: Realistic, well-researched plans with clear standards facilitate objective measurement and control

2. **Controlling improves future planning**: Controlling provides information derived from past experience, helping better planning in next cycle

**Example**: A retail chain plans to increase sales by 20% in the next quarter (planning). Control systems track weekly sales against targets, identify that some stores are below 20% target trajectory (controlling). Investigation reveals those stores lack trained staff. Corrective action includes staff training. Next quarter's planning incorporates this learning, budgeting more for staff training from the outset.

---

Controlling Process — Five Steps

**Controlling is a systematic process involving five sequential steps:**

Step 1: Setting Performance Standards

**Definition**: Standards are the criteria against which actual performance will be measured. They serve as benchmarks towards which an organisation strives to work.

**Types of standards:**

**Quantitative standards**: Defined in measurable, numerical terms

Cost to be incurred (e.g., maximum raw material cost per unit: ₹50)

Revenue to be earned (e.g., monthly revenue target: ₹10 lakh)

Product units to be produced and sold (e.g., 1000 units per day)

Time to be spent performing a task (e.g., customer service response: 2 hours)

**Qualitative standards**: Non-numerical, more abstract

Improving goodwill of the organisation

Enhancing motivation levels of employees

Building strong customer relationships

**Standards across functional areas** (table from chapter):

| Functional Area | Type of Standard |

|---|---|

| **Production** | Quantity, Quality, Cost, Individual job performance |

| **Marketing** | Sales volume, Sales expense, Advertising expenditures, Salesperson's performance |

| **Human Resource** | Labour relations, Labour turnover, Labour absenteeism, Individual motivation |

| **Finance & Accounting** | Capital expenditures, Inventories, Flow of capital, Liquidity |

**Best practices in setting standards:**

**Quantitative wherever possible**: Reduction of defects from 10 in every 1,000 pieces to 5 in every 1,000 pieces by quarter-end is measurable; easier comparison with actual performance

**Make qualitative standards measurable**: For customer satisfaction in fast-food chain — set standards in terms of time taken to wait for table, time to place order, time to collect order

**Flexibility**: Standards should be modifiable when internal and external business environment changes; otherwise they become unrealistic

**Precision**: Standards should be clearly defined to avoid confusion during measurement and comparison

**Example**: TCS (Tata Consultancy Services) sets standards for software development: turnaround time for bug fixes (24 hours), code review completion (48 hours), customer satisfaction score (minimum 4.5 out of 5). These quantitative standards make control objective.

Step 2: Measurement of Actual Performance

**Definition**: Once performance standards are set, actual performance must be measured objectively and reliably to compare against standards.

**Principles of measurement:**

**Objective and reliable manner**: Use verifiable, factual data — not subjective assessment

**Same units as standards**: If standards set in quantitative terms (units/day), measure actual performance in same units (units/day produced) for easy comparison

**Timing of measurement**: Ideally during performance, not just after completion

In assembling tasks: each part checked before assembly

In manufacturing plants: gas particle levels monitored continuously for safety

Better to catch defects during process than after production completes

**Techniques of measurement:**

**Personal observation**: Manager directly observes employee's work

**Sample checking**: In large organisations, random checking of products for quality rather than checking each piece

**Performance reports**: Prepared by superiors assessing employee performance

**Financial calculations**: Gross profit ratio, net profit ratio, ROI calculated at periodic intervals

**Operational metrics**: Units sold, market share increase (marketing); pieces produced and defective pieces count (production)

**Practical examples:**

Manufacturing plant: Daily production reports showing 500 units produced (actual) vs 480-unit standard

Banking: Daily check of customer service turnaround time — average 3 hours for loan processing vs 2-hour standard

E-commerce: Daily tracking of website downtime (actual 2 hours vs 0-hour standard)

Step 3: Comparing Actual Performance with Standards

**Process**: Direct comparison of actual performance against the standard reveals **deviations** (differences between actual and desired results).

**Why comparison matters:**

Identifies where actual performance matches expectations

Highlights areas needing managerial attention

Reveals magnitude of deviation (minor vs major)

Provides basis for analysis and corrective action

**Ease of comparison:**

**Easier with quantitative standards**: A worker producing 420 units/week vs 450-unit standard shows 30-unit shortfall — numerical and clear

**Difficult with qualitative standards**: "Employee morale is low" (actual) vs "high morale" (standard) — subjective, harder to measure gap

**Example**: A bank standard: process home loan applications in 15 days. Actual performance tracking for March shows average of 18 days. Comparison reveals 3-day deviation — triggering need for analysis and corrective action.

Step 4: Analysing Deviations

**Definition**: After identifying deviations, they must be analysed to determine:

Which deviations matter (acceptable vs unacceptable range)

Why deviations occurred (root causes)

Which deviations demand immediate managerial attention

**Acceptable range of deviations:**

**Not all deviations are problematic**: Some variance is normal in any operation

**Define permissible limits**: If standard is 2% increase in labour cost, only increases beyond 2% require managerial attention

**Major deviations demand priority**: If labour cost increases 5% (vs 2% acceptable range), immediate senior management attention needed

**Key concepts in analysing deviations:**

**Critical Point Control**:

It is neither economical nor practical to monitor every activity. Control should focus on **Key Result Areas (KRAs)** critical to organisational success — these become critical points. If anything goes wrong at critical points, entire organisation suffers.

Example: In manufacturing:

5% increase in labour cost = CRITICAL (directly impacts profitability) → immediate attention

15% increase in postal charges = NOT CRITICAL (minor impact on overall cost) → routine handling

**Management by Exception (Control by Exception)**:

Based on the principle that attempting to control everything results in controlling nothing. Only **significant deviations exceeding permissible limits** should receive management's attention.

**Advantages of critical point control and management by exception:**

1. **Saves time and managerial effort**: Managers deal only with significant deviations, not routine variations

2. **Better utilisation of managerial talent**: Focus on important areas where expertise is needed

3. **Facilitates delegation**: Routine problems handled by subordinates; increases employee morale

4. **Identifies critical problems**: Timely action on crucial issues keeps organisation on track

**Causes of deviations** (may be multiple):

Unrealistic standards set initially

Defective processes or procedures

Inadequacy of resources (materials, equipment, workers)

Structural drawbacks in organisation

Organisational constraints (conflicts, lack of coordination)

Environmental factors (competition, government policy, inflation) — often beyond organisation's control

**Importance of identifying causes**: Failing to identify exact cause(s) of deviations means corrective action may not be appropriate. Example: If sales target missed because market demand dropped (external factor), training salespeople (internal action) won't solve the problem.

Step 5: Taking Corrective Action

**Definition**: Final step in controlling process — implementing actions to eliminate deviations and ensure standards are accomplished.

**When corrective action needed:**

**No action required**: When deviations are within acceptable limits (within permissible range)

**Action required**: When deviations exceed acceptable range, especially in important areas — demands immediate managerial attention

**Prevent recurrence**: Corrective action aims not just to fix current deviation but ensure it doesn't occur again

**Types of corrective actions** (based on cause):

| Cause of Deviation | Corrective Action |

|---|---|

| Poor employee performance/skills | Training and development programmes |

| Project behind schedule | Assign additional workers and equipment; allow overtime |

| Inadequate resources | Allocate more budget, materials, or personnel |

| Unrealistic standards | Revise standards to be realistic in changed environment |

| Defective process | Redesign process, introduce new technology |

| Lack of coordination | Improve communication, redefine responsibilities |

**Flexibility in corrective action:**

If deviation cannot be corrected through managerial action, standards may need revision

Example: If pandemic causes permanent reduction in market size, revenue standards must be revised downward rather than expecting impossible increases in sales efforts

**Important distinction**: Corrective action is not about finding who is responsible or punishing — it's about **fixing the problem and preventing recurrence**. The focus is on systems and processes, not blame.

**Example**: Restaurant consistently receives complaints about slow service (deviation from 20-minute service standard).

Analysis reveals: Understaffed during peak hours

Corrective action: Hire 2 additional servers; schedule staggered timings; provide speed-service training

Result: Service time improved to 18 minutes average

**Real-world example from chapter**: FedEx's control system enables real-time tracking of shipments, package sorting, and delivery performance against standards. When deviations detected (package delayed), corrective action triggered immediately — rerouting, additional vehicles, management notification — to prevent customer impact.

---

Controlling Techniques

**Controlling techniques are specific tools and methods used by managers to monitor performance and control operations.** The chapter mentions several important techniques:

1. Budgetary Control

**Definition**: Control of actual expenditure against budgeted amounts to ensure resources are used within planned limits.

Set budgets for each department/activity (planned expenditure)

Monitor actual spending regularly

Compare actual vs budgeted amounts

Identify deviations and take corrective action

Example: Marketing budget is ₹5 lakhs for Q1. If actual spending by mid-quarter is ₹3.5 lakhs (tracking towards ₹7 lakhs), deviation requires investigation and corrective action.

2. Break-Even Analysis

**Definition**: Determines the point where total revenue equals total cost, with no profit or loss.

Helps control pricing and sales strategies

Identifies minimum sales volume needed to avoid loss

Used to monitor whether operations are moving towards or away from break-even point

3. Return on Investment (ROI)

**Definition**: Measures profitability of investment by comparing profit earned to amount invested.

**Formula**: ROI = (Net Profit / Investment) × 100

Monitor actual ROI against target ROI to ensure investments are yielding expected returns

Higher ROI indicates better control of resources

Example: If company invests ₹10 lakh and earns ₹1.5 lakh profit, ROI = 15%. If standard ROI is 18%, deviation signals need for improved operational efficiency.

4. Ratio Analysis

**Definition**: Analysis of financial ratios to assess organisation's financial health and performance.

Key ratios include:

Profitability ratios (gross profit, net profit ratio)

Liquidity ratios (current ratio, quick ratio)

Solvency ratios (debt-to-equity)

Efficiency ratios (asset turnover)

Regular ratio calculation helps identify trends

Ratios compared against industry standards and past performance

Significant deviations trigger investigation and corrective action

5. Responsibility Accounting

**Definition**: System where each manager is held responsible for performance of their specific area/department.

Clear accountability for revenue, costs, profit of assigned areas

Performance evaluated based on controllable vs non-controllable factors

Deviations in manager's responsibility area require their explanation and corrective action

6. PERT (Program Evaluation and Review Technique)

**Definition**: Network-based project management technique for planning and controlling complex projects with uncertain timelines.

Identifies critical path (sequence of activities determining minimum project duration)

Monitors progress against planned schedule

Identifies bottlenecks and delays

Enables proactive corrective action to keep project on schedule

Used for one-time, large, complex projects (infrastructure, R&D, product launch).

7. CPM (Critical Path Method)

**Definition**: Project management technique for planning and controlling projects with deterministic (known) timelines.

Similar to PERT but assumes activity durations are known with certainty

Maps all activities and dependencies

Identifies critical path and slack time

Controls project progress by monitoring critical activities

Used for well-defined projects with known timelines.

---

Key Exam Points to Remember

**1. Controlling vs Other Functions:**

Controlling is NOT the last function — it links back to planning

Controlling is continuous, not one-time

Controlling is pervasive (all management levels)

**2. Planning and Controlling Relationship:**

**Inseparable twins**: Cannot function effectively independently

**Sequential but cyclical**: Planning → Execution → Controlling → Improved Planning

**Mutually reinforcing**: Planning makes controlling effective; controlling improves planning

**3. Controlling Process — Five Steps (Memorise):**

1. Setting performance standards

2. Measurement of actual performance

3. Comparison with standards

4. Analysing deviations

5. Taking corrective action

**4. Critical Point Control and Management by Exception:**

Focus on Key Result Areas, not all activities

Only significant deviations need management attention

Saves managerial time and effort

Better utilisation of resources

**5. Standards Setting:**

Quantitative wherever possible (easier to measure and compare)

Qualitative standards should be made measurable

Must be flexible and realistic

**6. Why Controlling Matters:**

Ensures goals achieved (accomplishment)

Makes efficient use of resources (cost control)

Ensures order and discipline

Motivates employees

Identifies and fixes problems early

**7. Limitations of Controlling:**

Cannot quantify all standards (qualitative aspects)

Cannot control external factors

Employee resistance

Costly to implement

---

Case Study Analysis Format for Board Exams

**For 6-mark and 8-mark case-based questions on controlling:**

**Step 1**: Identify the controlling aspect/technique in the case

**Step 2**: Name the specific principle or step (e.g., "Step 2: Measurement of Actual Performance")

**Step 3**: Explain the relevant concept with features

**Step 4**: Connect to case facts

**Step 5**: Conclude how it helps achieve objectives

**Example template**:

*The case illustrates Step X of controlling process. [Define step]. This involves [explain key features]. In the case, [cite specific facts]. This helps the organisation by [explain benefit]. Thus, [conclude on effectiveness].*