PowerPoint Presentation by Charlie Cook Copyright © 2005 South-Western. All rights reserved. Chapter 13 Control Systems

Copyright © 2005 South-Western. All rights reserved.13–2 Elements of the Control Process Control is a process that:  Evaluates actual performance.  Compares actual performance to goals.  Takes action on the difference between performance and goals.

Copyright © 2005 South-Western. All rights reserved.13–3 Elements of the Control Process (cont’d) Elements of control  Specification: a statement of the intended outcome or objective (standard of performance) to be achieved).  Production: making the product or delivering the service (the work required to achieve objectives).  Inspection: a judgment concerning whether the outcome or production meets the specifications or that corrective action need to be taken.

Copyright © 2005 South-Western. All rights reserved.13–4 Exhibit Steps in the Control Process

Copyright © 2005 South-Western. All rights reserved.13–5 Types of Control Preliminary control  An input-level control that focuses on preventing deviations in the quality and quantity of resources used in an organization.  Human resources management: personnel selection.  Raw materials: pre-production quality checks.  In-process materials: buffer stocks.  Capital: capital budgeting.

Copyright © 2005 South-Western. All rights reserved.13–6 Preliminary Control of Human Resources Exhibit 13. 2

Copyright © 2005 South-Western. All rights reserved.13–7 Types of Control (cont’d) Capital controls  Payback method  Calculates the number of years needed for the proposed capital acquisition to repay its original cost out of future cash earnings.  In situations where the technology changes rapidly and new products become obsolete quickly, firms look for investments that pay back within a short period of time.

Copyright © 2005 South-Western. All rights reserved.13–8 Types of Control (cont’d) Payback method (cont’d)  Implementing new technology that reduces labor costs by $20,000 per year for each of the four years of the technology’s expected life. The cost is $40,000. Using a 36% marginal tax rate, the additional after-tax cash inflow from which the machine’s cost must be recovered is calculated as follows:

Copyright © 2005 South-Western. All rights reserved.13–9 Types of Control (cont’d) Capital controls (cont’d)  Simple rate of return on investment  The rate of return is the ratio of additional net income to the original cost. –The calculated rate of return is compared to a minimum acceptable return, and the decision to accept or reject depends on that comparison.  Discounted rate of return on investment  A measurement of profitability that takes into account the time value of money. –This method is widely used because it is considered the correct method for calculating the rate of return.

Copyright © 2005 South-Western. All rights reserved.13–10 Types of Control (cont’d) Simple rate of return  Implementing new technology that reduces labor costs by $20,000 per year for each of the four years of the technology’s expected life. The cost is $40,000. Using a 36% marginal tax rate, the additional after-tax cash inflow from which the machine’s cost must be recovered is calculated as follows:

Copyright © 2005 South-Western. All rights reserved.13–11 Types of Control (cont’d) Discounted rate of return  Implementing new technology that reduces labor costs by $20,000 per year for each of the four years of the technology’s expected life. The cost is $40,000. Using a 36% marginal tax rate, the additional after-tax cash inflow from which the machine’s cost must be recovered is calculated as follows:

Copyright © 2005 South-Western. All rights reserved.13–12 Types of Control (cont’d) Concurrent control  Monitoring ongoing operations to ensure that objectives are pursued.  Standards guiding ongoing activity are derived from job descriptions and from policies resulting from the planning function.  Direction: the actions of managers when they instruct subordinates in proper methods and procedures and oversee subordinates’ work to ensure that it’s done properly.

Copyright © 2005 South-Western. All rights reserved.13–13 Types of Control (cont’d) Feedback control  Control methods that focus on end results to provide feedback that guides future corrective actions to improve either the resource acquisition process or actual operations.  Widely used feedback control methods include financial statement analysis and standard cost analysis.

Copyright © 2005 South-Western. All rights reserved.13–14 Types of Control (cont’d) Financial statement analysis  Balance sheet  Describes an organization’s financial condition at a specified point in time.  Income statement  Summarizes an organization’s financial performance over a given time period.  Ratio analysis  Liquidity  Composition of assets  Solvency

Copyright © 2005 South-Western. All rights reserved.13–15 Types of Control (cont’d) Standard cost analysis  Standard cost system  Provides information that enables management to compare actual costs with standard costs.  Three elements of manufacturing costs:  Direct labor  Direct materials  Overhead  Activity-based accounting  Activities consume resources and products consume activities.

Copyright © 2005 South-Western. All rights reserved.13–16 Quality Control Techniques Statistical process control (SPC)  Assumptions:  Nature is imperfect.  Variability exists everywhere in systems.  Control of variation is control of quality.  Random variation: the “normal” variation of a system that has a common cause and cannot be reduced or eliminated by observation and corrective action.  Nonrandom variation: variation that has a special (discoverable) cause and can be reduced or eliminated through observation and corrective action.

Copyright © 2005 South-Western. All rights reserved.13–17 Quality Control Techniques (cont’d) Statistical process control (cont’d)  Descriptive statistics  The computed measures of some property of a set of data, making possible a statement about its meaning.  Inferential statistics  Computations done on a set of data, or among several sets of data, to facilitate prediction of future events, or to guide decisions and actions.

Copyright © 2005 South-Western. All rights reserved.13–18 Quality Control Techniques (cont’d) Seven tools of quality control  Flowcharts  Run charts  Control charts  Fishbone diagrams  Pareto charts  Histograms (also called bar charts)  Scatter diagrams Management Highlight

Copyright © 2005 South-Western. All rights reserved.13–19 Quality Control Techniques (cont’d) Total quality control (TQC) defined  A system integrating the quality development, maintenance, and improvement efforts of an organization at the most economical levels which allow for full customer satisfaction. TQC’s purpose  To manufacture products or deliver services that meet the level of quality demanded by customers.

Copyright © 2005 South-Western. All rights reserved.13–20 Quality Control Techniques (cont’d) Quality planning concerns  Establishing quality guidelines.  Building quality into the design.  Procurement quality.  In-process and finished product quality.  Inspection and test planning.  Control of nonconforming material.  Handling and following up on customer complaints.  Education and training for quality.

Copyright © 2005 South-Western. All rights reserved.13–21 Quality Control Techniques (cont’d) Total quality management defined  A systems approach in that the entire organization is considered a system as the primary source of error or defects in manufacturing or service work.  Incorporates SPC techniques to control processes and offers fundamental lessons for control from a human psychology perspective.  Management leadership, worker trust, and pride of workmanship play an important role in implementing TQM programs.

Copyright © 2005 South-Western. All rights reserved.13–22 Deming’s 14 Points of Total Quality Management Create constancy of purpose for improvement of product and service. Adopt the new philosophy. Cease dependence on mass inspection. End the practice of awarding business on price tag alone. Improve constantly the system of production and service. Institute training. Institute leadership. Drive out fear. Break down barriers between staff areas. Eliminate slogans, exhortations, and targets for the workforce. Eliminate numerical quotas. Remove barriers to pride of workmanship. Institute a vigorous program of education and retraining. Take action to accomplish the transformation. Sources: W. Edwards Deming. Out of the Crisis, 2nd ed. (Cambridge, MA: MIT Center for Advanced Engineering Study, 1986); Lloyd Dobyns and Clare Crawford-Mason, Quality or Else (Boston: Houghton Mifflin, 1991); and Marshall Sashkin and Kenneth J. Kiser, Total Quality Management (Seabrook, MD: Ducochon Press, 1991). Management Highlight