1. 13
Effective Control

2. Learning Objectives
Define the concept of control and explain why control is needed?
Explain how to design control systems?
Discuss financial control and financial statements.
Balance sheet
Income statement
Explain the budgetary control methods.
Discuss the budgeting process.
Types of Budgets
Operating budgets
Expense budgets
Revenue budgets
Profit budgets

3. Learning Objectives Differential between variable and fixed budgets.
Discuss the concept of auditing.
External auditing
Internal auditing
Discuss the contemporary issues in control.
Adjusting controls for cross-cultural differences
Workplace concerns
Workplace violence

4. Learning Objectives
Discuss the role of corporate governance in control.
The role of boards of directors
Financial reporting and the audit committee

5. Meaning of Control
It is a process of ensuring that actual activities conform to planned activities .
Control helps managers to monitor the effectiveness of their planning their organizing and their leading activities.

6. Steps in Control
Establish standards and methods for measuring performance:
Goals and objectives are established during the planning process with deadlines.
Removes in ambiguity in setting goals, eg., improvement in work.
Precisely worded goals are easy to measure.
They are easy to communicates and translate into standards and methods.
Measure the performance:
Frequency of measurement depends upon the type of activity.
Determine whether performance matches the standard.

7. Basic Steps in Control Process
Establish standards and methods for measuring performance
Measure the performance
Determine whether performance matches the standard
Take corrective actions and re-evaluate standards No
Yes
Do Nothing

8. Why Control is Needed To create better quality To cope with change
To create faster cycles
To add value
To facilitate delegation and teamwork

9. Designing Control System
Control system is a multistep procedure applied to various types of control activities.
Two important steps are
Identifying key performance areas
Identifying strategic control points

10. Identifying Key Performance Areas
Key performance or Key result areas (KRAs):
Aspects of a unit or organization that must function effectively if the entire unit or organization is to succeed.

11. Identifying Strategic Control Points
These are critical points in a system at which monitoring or collecting information should occur.
Important and useful method of selecting strategic control points is to focus on the most significant elements in a given operation.

12. Financial Control Financial statements:
Monitory analysis of the flow of goods and services to, within and from the organization.
They provide a means for monitoring following major financial conditions.
Liquidity
General financial condition
profitability

13. Balance sheet: Description of the organization in terms of its assets, liabilities and net worth.
Income statement: Summary of the organization’s financial performance over a given interval of time.
Cash flow statements: Summary of an organization’s financial performance that shows where cash or funds come from during the year and where they were applied.

14. Budgetary Control Methods
Budget : Formal quantitative statement of resources allocated for planned activities over stipulated periods of time.
Budget is easily used as a common denominator for wide variety of organizational activities.
Monetary aspect of budget directly convey information on key organizational resource–capital and goal-profit.
It establish clear and unambiguous standards of performance.

15. Budgetary Control Methods
Responsibility center: Any organizational function or unit whose manager is responsible for all or its activities.
Revenue centers: Organizational unit in which outputs are measured in monetary terms but are not directly compared to input costs.
Expense or cost center: Organizational units such as administrative, service and research departments, where inputs are measured in monetary terms, but outputs are not.
Profit center: Organizational unit where performance is measured by numerical difference between revenues and expenditure.
Investment center: Organizational unit that not only measures the monetary value of inputs and outputs, but also compares outputs with assets used in producing them.

16. Budgeting System for Controlling Functions
Revenue Centers
Expense Centers
Profit Centers
Investment centers
Outputs
Inputs
Output-Inputs
Output compared with Assets

17. The Budgeting Process Types of Budgets:
Engineered cost budgets : Budgets indicating the goods and services the organization expects to consume in the budget period
Expense budgets: Budget explaining where money was applied
Engineered cost budgets: Type of budget that describes material and labour costs of each item produced, including estimated overhead costs.
Used in units where output can be accurately measured.
Discretionary cost budgets: Used for departments where output cannot be accurately measured. Eg., Administrative, legal, accounting, research etc.
Revenue Budgets: Budgets for projected sales revenue, used to measure marketing and sales effectiveness.
Profit Budgets: Budget combining expense and revenue budgets in one unit.

18. Variable VS Fixed Budgets
Fixed costs: Those expenses unaffected by the amount of work accumulated in the responsibility center.
Variable costs: Expenses that vary directly with the amount of work being performed.
Semivariable costs: Those expenses, such as short-term labour costs, that vary with the amount of work performed but not in a proportional way.

19. Auditing Auditing is associated with detecting fraud.
External Audit: Verification process involving the independent appraisal of financial accounts and statements.
Internal Audit: Audit performed by the organization to ensure that its assests are properly safeguarded and its financial records reliably kept.

20. Contemporary Issues in Control
Adjusting controls for cross-cultural differences
Workplace concerns
Workplace privacy
Managers are concerned about the workplace privacy because they don’t want to risk being sued for creating a hostile workplace environment because of offensive messages or an inappropriate image displayed on a coworker’s computer screen.
They also want to ensure that company secrets aren’t being leaked.
Employee theft
It is defined as any unauthorized taking of company property by employees for their personal use.
Workplace violence

21. Corporate Governance
The system used to govern a corporation so that the interests of corporate owners are protected.
Role of board of directors
Financial reporting and the audit committee