Republic of the Philippines

NORTHERN ILOILO POLYTECHNIC STATE COLLEGE

VICTORINO SALCEDO CAMPUS
Sara, Iloilo

Course Code : BM 102

Descriptive Title : ORGANIZATION AND MANAGEMENT
Term and Academic Year : 2nd Semester, AY 2020-2021
Department and Year Level : BSHM 1
Professor : GIRLIE B. CHAVEZ

Module 10
Controlling
I. Introduction
Controlling is one of the main functions of management. It comes after planning, organizing, and directing.
Controlling is aimed to determining if objects were realized by providing means for achieving unrealized goals. In this
module you will be introduced on the importance of controlling as complements the other management functions.

In order to gain a thorough understanding of this lesson, you have to read the discussion. You are tasked to
answer the activity after some topics and the assessment found in the “assessment” section.

Time Frame: 6 hours Date of Submission:

II. Learning Outcomes:

At the end of the lesson, you must have:
1. discussed organizational plans and objectives;
2. identified the basic types of control;
3. described analysis of financial performance and ratio as example of controlling; and
4. discussed the relationship of controls and performance.

III. Learning Contents

Understanding Controlling
Introduction
The long-term existence of many companies is placed in jeopardy because of difficulties caused by problems,
which could have been avoided in the first place. Examples of such problems are as follows:
1. The Transmission of Confidential Information to Competitors. For instance, if the introduction of a new product
by the company is known in advance by the competitor, much of the advantage of such introduction is negated.
2. The Hiring of Personnel Way above the Required Number. Unnecessary additions to the existing workforce
mean waste of manpower and scarce resources.
3. Unethical Conduct of an Employee. For instance, the loan officer of a bank, for consideration, connives with a
borrower for loan approval in spite of defective collaterals. The bank suffers in the end when it forecloses on
the mortgage.
The above-cited examples are typical errors, which happen every now and then. If left unchecked, they may be
enough to get some businesses bankrupt. When this happens, unemployment occurs and there will be some disruptions
in the provision of products and services to the public. These will not happen, however, if adequate controls are
instituted.

What is Controlling?
Controlling refers to the process of ascertaining whether organizational objectives have been achieved; if not,
to determine why not; and determining what activities should be taken to achieve objectives better in the future.
Controlling completes the cycle of management functions. Objectives and goals at any given point in the organizing and
implementing stage are verified as to achievement or completion. When expectations are not met at scheduled dates,
corrective measures are usually undertaken.

Importance of Controlling
When controlling is properly implemented, it will help the organization achieve its goal in the most efficient and
effective manner possible.
In any organization, deviations, mistakes, and shortcomings happen once in a while. When they occur, they
contribute to unnecessary expenditures, which add up to the cost of producing goods and services. The introduction f
effective control measures minimize the ill effects of such negative occurrences. An effective inventory control system,
for instance, minimizes, if not totally eliminates losses in inventory.
The importance of controlling may be illustrated as it is applied in a typical factory. If the required standard daily
output for individual workers in 100 pieces all workers who do not produce the requirement are given sufficient time to
improve; if no improvements are forthcoming, they are asked to resign. This action will help the company keep its

Module 10 Controlling Page | 52

 Republic of the Philippines
NORTHERN ILOILO POLYTECHNIC STATE COLLEGE
VICTORINO SALCEDO CAMPUS
Sara, Iloilo

overhead and other costs at expected levels. If no such control measure is applied, the company will be saddled with
escalating production costs, which will place the viability of the firm in jeopardy.
Steps in the Control Process
The control process consists of four steps, namely:

Establish Performance
Objectives and Standards

Measure Actual Performance

Actual Performance Do Nothing

Match the Standards

Take Corrective Action

Figure 10 – 1
Steps in the Control Process

1. Establishing Performance Objectives and Standards. For effective controlling, what has to be achieved must
first be determined. Typical examples of objectives and standards are as follows:
a. Sales Targets - are expressed in quantity or monetary terms;
b. Production Targets are expressed in quantity and quality;
c. Worker Attendance – is expressed n terms of rate of absences;
d. Safety Records – are expressed in number of accidents for given periods; and
e. Supplies Used – are expressed in quantity or monetary terms for given periods.
Once objectives and standards are established, the measurement of performance will be facilitated.
Standards differ among various organizations. In construction firms, project completion dates are useful
standards. In chemical manufacturing firms, certain pollution measures form the basis for standard
requirements.
After the performance objectives and standards are established, the methods for measuring
performance must be designed. Every standard established must be provided with its own method of
measurement.
2. Measuring Actual Performance. There is a need to measure actual performance so that when shortcomings
occur, adjustments could be made. The adjustments will depend on the actual findings.
The measuring tools will differ from organization to organization, as each have has its own unique
objectives. Some firms, for instance, will use annual growth rate as standard basis, while other firms will use
some other tools like the market share approach and position in the industry.
3. Comparing Actual Performance to Objectives and Standards. Once actual performance has been determined,
this will be compared with what the organization seeks to achieve. Actual production output, for instance, will
be compared with the target output. This may be illustrated as follows:
A construction firm entered into a contract with the government to construct a 100-kilometer road
within ten months. It would be, then, reasonable for management to expect at least 10 kilometers to
be constructed every month. As such, this must be verified every month, or if possible, every week.
4. Taking necessary Action. The purpose of comparing actual performance with the desired result is to provide
management with the opportunity to take corrective action when necessary.
In the illustration cited above, the management of the construction firm found out that only 15
kilometers were constructed after two months, then, any of the following actions may be undertaken.
a. Hire additional personnel;
b. Use more equipment; or
c. Require overtime work.

Module 10 Controlling Page | 52

 Republic of the Philippines
NORTHERN ILOILO POLYTECHNIC STATE COLLEGE
VICTORINO SALCEDO CAMPUS
Sara, Iloilo

Types of Control
Control consists of three distinct types, namely:

Pre-Operations Phase Feedforward Control

Actual Operations Concurred Control

Phase

Post-Operations Phase Feedback Control

Figure 10 – 2
Types of Control and their Relation to Operations

1. Feedforward Control. When management anticipates problems and prevents their occurrence, the type of
control measure undertaken is called feedforward control. This type of control provides the assurance that the
required human and nonhuman resources are in place before operations begin. An example is provided as
follows:
The manager of a chemical manufacturing firm makes sure that the best people are selected and hired
to fill jobs. Materials required in the production process are carefully checked to detects. The foregoing control
measures are designed to prevent wasting valuable resources. If those measures are not undertaken, the
likelihood that problems will occur is always present.
2. Concurrent Control. When operations are already ongoing and measures to detect variances are made,
concurrent control is said to be undertaken. It is always possible that deviations from standards will happen in
the production process. When such deviations occur, adjustments are made to ensure compliance with
requirements. Information on the adjustments is also necessary inputs in the pre-operation phase.
Examples of activities using concurrent control are the following:
The manager of a construction firm constantly monitors the progress of the company’s activities. When
construction is behind schedule, corrective measures like the hiring of additional manpower are made.
In a firm engaged in the production and distribution of water, the chemical composition of the water
procured from various sources is checked thoroughly before they are distributed in the consumers.
The production manager of an electronics-manufacturing firm inspects regularly the outputs consisting
of various electronic products coming out of the production lines.
3. Feedback Control. When information is gathered about a completed activity for purposes of evaluation and
deriving required steps for improving the activity, feedback control is undertaken. Corrective actions aimed at
improving future activities are features of feedback control
Feedback control validates objectives and standards. It accomplishments consist only of a percentage
of standard requirements; the standard may be too high or inappropriate.
An example of feedback control is the supervisor who discovers that continuous overtime work for
factory workers lowers the quality of output. The feedback information obtained leads to some adjustments in
the overtime schedule.

Components of Organization Control Systems

To actively control activities, organizations adapt control systems consisting of the following components:
1. Strategic Plan. The strategic plan provides the basic control mechanism for the organization. When there are
indications that activities undertaken do not facilitate the accomplishments of strategic goals, these activities
are set aside, modified, or expanded. These corrective measures are made possible with the adoption of
strategic plans.
2. Long-Range Financial Plan. The planning horizon differs from company to company. Most firms will be satisfied
with a one-year plan. Engineering firms, however, will require longer-term financial plans. This is because of
the long lead times needed for capital projects. An engineering firm assigned to construct a modern airport
within three years is a good example. In such case, the three-year financial plan will be very useful.
Module 10 Controlling Page | 52
 Republic of the Philippines
NORTHERN ILOILO POLYTECHNIC STATE COLLEGE
VICTORINO SALCEDO CAMPUS
Sara, Iloilo

The financial plan recommends a direction for financial activities. If the goal does not appear to be
where the firm is headed, the control mechanism should be made to work.
3. The Operating Budget. This indicates the expenditures, revenues, or profits planned for some future period
regarding operations. The figures appearing in the budget are used as standard requirements for performance.
4. Performance Appraisal. This measures employee performance. As such, if provides employees with a guide on
how they could do their jobs better in the future. Performance appraisals also function as effective checks on
new policies and programs. For example, if new equipment has been acquired for the use of an employee, it
would be useful to find out if it had a positive effect on performance.
5. Statistical Reports. These are those that contain data on various developments within the firm. Among the
information which may be found in a statistical report are the following:
a. Labor efficiency rates;
b. Quality control rejects;
c. Accounts receivable;
d. Accounts payable;
e. Sales reports;
f. Accident reports; and
g. Power consumption reports.
6. Policies and Procedures. Policies refer to the framework within the objectives of the organization must be
pursued. An example of policy is, whenever two or more activities compete for the company’s attention, the
client takes priority.
Procedure is a plan that describes the exact series of actions or steps to be taken in a given situation.
Following is an example of a procedure in the purchase of equipment:
a. The concerned manager forwards a request to purchase to the purchasing officer;
b. The purchasing officer forwards the request to top management for approval.
c. If approved, the purchasing officer makes a canvass of the requested item’s price; if disapproved, the
purchasing officer returns the request form to the requesting manager.
d. For approved request, the purchasing officer negotiates with the lowest complying bidder.
It is expected that policies and procedures laid down by management are followed. When they are
breached once in a while, management must have some means to directly inquire on the deviations. Occasional
breaches notwithstanding, policies and procedures provide a good way of controlling activities.

Financial Controls
To be able to assure the accomplishment of the strategic objectives of the company, strategic control systems
become necessary. These systems consist of:
1. Financial Analysis. The success of most organizations depends heavily on its financial performance. It is
necessary that certain measurements of financial performance be made so that whenever deviations from
standards are found out, corrective actions may be introduced.
A review of financial statements reveals important facts about the company’s performance. One
statement, the balance sheet, contains information about the company’s assets, liabilities, and capital accounts.
Comparing the current balance sheet accounts with previous ones may reveal important changes which may
provide clues to performance.
The income statement contains information about the company’s gross income, expenses, and profits.
When compared with previous year’s income statement, any change in the figure provided will help
management determine if the company did well on the current year.
2. Financial Ratio Analysis. This is a more elaborate approach used in controlling business activities. Under this
method, one account appearing in the financial statement is paired with another to constitute a ratio. The result
is compared with a required norm, which is usually related to what other companies in the industry have
achieved, or what the company has achieved in the past. When deviations occur, explanations are sought in
preparation for whatever action is deemed necessary.
Financial ratios may be categorized into the following types:
a. Liquidity Ratios. These ratios are used to assess the ability of a company to meet its current obligations.
The following ratios are important indicators of liquidity.
 Current Ratio – shows the extent at which current assets of the company can cover its current
liabilities. The formula for computing current ratio is as follows:
Current ratio = current assets / current liabilities
 Acid-Test Ratio – is a measure of the firm’s ability to pay off short-term obligations with the use
of current assets and without relying on the sales of inventories. The formula used is as follows:
Acid-test ratio = current assets – inventories / current liabilities

Module 10 Controlling Page | 52

 Republic of the Philippines
NORTHERN ILOILO POLYTECHNIC STATE COLLEGE
VICTORINO SALCEDO CAMPUS
Sara, Iloilo

b. Efficiency Ratios. These ratios show how certain assets or liabilities are used efficiently in the production
of goods and services. Among the more common efficiency ratios are:
 Inventory Turnover Ratio – measures the number of times an inventory is turned over (or sold)
each year. This is computed with the use of the following formula:
Inventory turnover ratio = costs of goods sold / inventory
 Fixed Assets Turnover – is used to measure utilization of the company’s investment on its fixed
assets, such as plant and equipment. The formula used is as follows:
Fixed assets turnover = net sales / net fixed assets
c. Financial Leverage Ratios. This is a grouping of ratios designed to assess the balance of financing
obtained through debt and equity sources. Some of the more important leverage ratios are the following:
 Debt to Total Assets Ratio – shows how much of the firm’s assets are financed by debt. It may
be computed by using the following formula:
Debt to total assets ratio = total debt / total asset
 Times Interest Earned Ratio – measures the number of times that earnings before interest and
taxes cover of exceed the company’s interest expense. It may be computed by using the
following formula:
Times interest earned ratio = profits before tax + interest expense
Interest expenses
d. Profitability Ratios. These ratios measure how much operating income or net income a company is able
to generate in relation to its assets, owner’s equity and sales. Among the more notable profitability ratios
are the following:
 Profit Margin Ratio – compares the net profits with the level of sales. The formula used is as
follows:
Profit Margin Ratio = net profit / net sales
 Return on Assets Ratio – shows how much income the company produces for every pesos
investment in assets. The formula used is as follows:
Return on assets ratio = net income / assets
 Return on Equity Ratio – measures the returns on the owner’s investments. It may be
determined by using the following formula:

Return on equity ratio = net income / equity

Identifying Control Problems

Recognizing the need for control is one thing actually implementing it is another. When operations become
complicated, the managers must consider useful steps in controlling. The following approaches may be useful:
1. Executive Reality Check. Employees meaning the frontlines often complain about management’s imposition of
certain requirements that are not realistic. This happens because, most often, the manager is inaccessible to his
subordinates and he has no way of knowing what is really happening inside the workplaces. In a certain state
university, for instance, without the knowledge of the president, requests for purchase of classroom materials
and supplies take last priority. This is irregular because requests of such kind must be of the highest priority
considering that the organization is an educational institution. Ironically, because certain officers of the non-
academic staff have direct access to the president, their purchase requests, no matter how trivial, almost always
get top priority. Later on, when the president made an inspiration speech on quality teaching, many members
of the faculty just shrugged their shoulders and listened passively.
One school, the Central Luzon State University provides a good example of how the executive reality
check may be exercised. It requires its executives to handle at least one subject each. Even the president is
required to teach. What these executives will experience in the classrooms will make them more responsive in
the preparation, execution, and controlling of academic plans.
The manager of a construction firm could, once in a while perform the work of one of his laborers. In
doing so, he will be able to see things he could not see inside the confines of his air-conditioned office. Because
the said action exposes the manager to certain realities the term “executive check” is very appropriate.
2. Comprehensive Internal Audit. An internal audit is undertaken to determine the efficiency and effectiveness of
the activities of an organization. Among the many aspects of operations within the organization, a small activity
that is not done right may be done continuously and without anybody noticing it until it snowballs into a full-
blown problem.

Module 10 Controlling Page | 52

 Republic of the Philippines
NORTHERN ILOILO POLYTECHNIC STATE COLLEGE
VICTORINO SALCEDO CAMPUS
Sara, Iloilo

An example is the resignation of an employee after serving the company for 15 years. After one week,
another employee with ten years of service also resigned. Both were from the same department. When after
another week, a third employee was resigning, a full investigation was in order. Even if the source of the problem
is identified, it may already have caused considerable losses to the organization.
To minimize the occurrence of such problems, it is necessary to use the comprehensive internal audit,
which aims to detect dysfunctions in the organization before they bring bigger troubles to management.
3. Symptoms of Inadequate Control. If a comprehensive internal audit cannot be availed of for some reason, the
checklist for symptoms of inadequate control may be used. Some of the most common symptoms of inadequate
control are the following:
a. An unexplained decline in income and profits;
b. Customers complaining about poor service they get from the company;
c. Employee dissatisfaction characterized by complaints, grievance and resignations;
d. Cash shortage caused by overstocking of inventories or delinquent accounts receivables;
e. Idle facilities or personnel;
f. Disorganized operations characterized by work flow bottlenecks, excessive paperwork, etc.
g. Excessive costs;
h. Evidence of waste and inefficiency such as scrap rework.
It must be noted that behind every symptom is a problem waiting to be solved. Unless the problem is
clearly identified, no effective solution can be derived. Nevertheless, problems are easily recognized if adequate
control measures are in place.

Controlling Responsibilities
Managers must motivate employees while monitoring performance and often instituting unpopular control
techniques. They must also harmonize diverse interests. Control is an exercise of authority.
A control tool provides information for implementing control strategy. It is a specific procedures or technique
that presents pertinent organizational information in a way that helps managers develop and implement appropriate
strategy. It helps managers pinpoint organizational strengths and weaknesses on which useful control strategy must
focus.

Deciding What to Control

Management by exception is a control technique that allows only significant deviations between planned and
actual performance to be brought to a manager’s attention. Actually, management by exception is based/on the
exception principle, a management principle that appears in early management literature. The exception principle
recommends that subordinates handle all routine organizational matters, leaving managers to handle only non-routine,
or exceptional, organization issues.
Since managers cannot possibly control everything, they must decide what operations are essential to control.
Some activities require close supervision, others need only periodic examination, and still others can be ignored. For
those that must be tightly controlled managers have to determine critical control points.
Control Points are designated places or times during operational activities to measure progress, sample results,
or test products
Control points are places or times selected during operational activities for testing, sampling, or measuring
progress.

Setting Standards
Managers must determine what standards of performance are satisfactory. Standards must conform to
organizational objectives. They are generally related to output, expense, or resource controls. Standards reflecting
production output or services are usually expressed in quantities.
Initial Controls is preventive control measures to guide managers in resource allocations and other decisions
such as hiring, purchasing, and capital funding.

Measuring Results
Actual measurement of results is often left to staff specialists who can deal with data more expertly than line
managers, and without disrupting work. For example, cost accountants are responsible for accumulating expense data,
comparing actual to standard results, and developing appropriate reports. With rapid implementation of computers,
these analyses are becoming instantaneous, or “real time”, allowing nearly constant reporting.

Reporting
Reports must have value to those who receive them. Reports that are well designed provide managers with
timely and relevant information without overloading them with extraneous data.
Real-time reports represent a quantum leap in communication because activities are continuously monitored
and status reports are instantly available. Inventory control is one area where real-time systems have wide application.
Computers can store data on inventory stock, update files with new purchases or issues, describe locations of stock,
assimilate pride and cost information, and provide a rich assortment of reports, including ones about stock status, orders,
Module 10 Controlling Page | 52
 Republic of the Philippines
NORTHERN ILOILO POLYTECHNIC STATE COLLEGE
VICTORINO SALCEDO CAMPUS
Sara, Iloilo

and vendor analysis. When a part is issued – sold or transferred to production – on-line computer programs automatically
update stock status.
To be useful in developing effective control systems, reports must communicate sufficient and accurate
information to the people responsible for taking corrective actions. Good reports are joint productions of staff experts
and operating managers. Those who request must define what information is needed; those who create reports must be
expert at accumulating and analyzing the information requested.

Corrective Actions
The firing line is where correction actions take place. Not all managers set standards or evaluate results, but
they all are responsible for taking corrective actions because it is the manager’s job to solve problems. Corrective actions
lead to revised information or revised standards that influence future plans, which brings us full cycle to the stage of
preplanning.

Toward Effective Control

Effective systems incorporate every type of control in appropriate and complementary relationships. Though
such systems are tailored for each organization environment, they have common characteristics.
Following is a list of several important points for developing effective control systems.
 Understandable. Standards of performance must be clear and include measurable criteria. Management
responsibility should be well defined, and performance expectations should be expressed in language or numbers
that everyone can understand.
 Justified. Controls will be effective if they are acceptable to operating personnel. Standards must therefore be
plausible, and expectations must be perceived as purposeful. Employees may well ignore or sabotage control
methods or standards they view as superficial or capricious.
 Coordinated. Controls must be integrated with one another and with plans so that corrective actions make sense.
Criteria must be valid measurements of desired activities, and prescribed adjustments must be realistic.
Coordination is crucial to assure that actions taken in one area do not create even greater problems in another.
 Accurate. Reports on which corrective actions are taken must reflect diligent analysis. Inaccurate information is
one of the most annoying problems managers face. Good decisions made on faulty data solve nothing.
 Timely. Information must be available to managers when they need if for making decisions. The attraction of real-
time systems is rapid access to an extraordinary amount of information. With technological advances such as new
production techniques and computer systems, the risk is that operating systems will outrun control capabilities,
controls must keep pace with technology.
 Realistic. Control Systems must achieve intended purposes without being excessive. Excessive controls can result
in oppressive monitoring that suffocates employee behavior and costs more than expected savings.
 Acceptable. Controls must be acceptable to employees as appropriate means of improving organizational
performance. Good controls establish boundaries of behavior without throttling initiative; the standards are
attainable and the evaluation methods foster harmony, not cynicism.

Controls and Performance

Since controlling is a process of evaluation decisions that ultimately affect future operations, control decisions
have an implicit risk factor. If we also consider that most controls involve sampling rather than comprehensive
monitoring, it is safe that errors are bound to be committed. The concern is not being correct all the time, but being
wrong at any time.

Human Resource Controls

Managers have long recognized that the labor dollar is an important element in running a profitable business,
but the nature of controlling labor costs has changed significantly in recent years. Compensation and benefit
management is concerned with wage and salary administration, benefit administration, pension, insurance, and a host
of other factors. Most line managers, although they do not become directly involved with managing benefits have
significant compensation responsibilities. For example, managers control most promotions, raises, bonuses, and
opportunities for overtime work. They also control assignments that influence performance evaluations opportunities
for development, and visibility for career advancement.
The advantages of human resource performance controls include lower turnover rates, less absenteeism, and
fewer grievances, accidents, and disciplinary problems.

Module 10 Controlling Page | 52

 Republic of the Philippines
NORTHERN ILOILO POLYTECHNIC STATE COLLEGE
VICTORINO SALCEDO CAMPUS
Sara, Iloilo

IV. Learning Assessment

Answer the following questions:
1) Explain how controlling ensures achievement of organizational plans and objectives.
2) Contrast the basic types of control.
3) Briefly discuss how analysis of financial performance and ratio as examples of control are useful in the achieving
organizational targets.
4) Described the relations between controls and performance.

Scoring Guide:
Each answer shall be evaluated using these criteria:
Content 10 pts.
Language facility 10 pts.
Originality/Effort 10 pts.
Total score: 30 pts

V. References
Payos, R.P., Espinosa, E.G. & Zorilla, O.S. (2016). Organization and management. Manila, Philippines: Rex Book
Store
Robbins, S.P., & Coulter, M. (2013). Management, England, Pearson Education
Medina, R.G. (2015). Business organization and management. Manila Philippines: Rex Book Store
Robbins, S.P., & Coulter, M. (2012). Introduction to management (11th ed.). Singapore: Pearson Education
South Asia Pte.
Sison, Payos, and Zorilla (2013). People management in the 21st Century, Rex Book Store
Emmanuel T. Santos (1999). Organization and management. Makati City, International Academy of
Management & Economics (I/AME)
William, C. (2005). Management (3rd Edition). South-Western College Publishing, a division of Thomson
Learning
Limson, J.C. (2017). Organization and management. Iloilo, Philippines: NIPSC Graduate School
Robbins, S., Decenzo, D. & Coulter, M. (2013). Fundamentals of management: essential concepts and
applications (9th Edition). Singapore: Pearson Education South Asia Pte.
Cole, G. A. &Kelly, P. (2011). Management theory and practice. Hampshire, England: Cengage Learning EMEA
Ghillyer, A. W. (2012). Management now (2nd Edition). New York: McGraw-Hill
Santos, E.T. (1999). Organization and management). Makati City, Philippines: International Academy of
Management and Economics

----End of Module 10----

Module 10 Controlling Page | 52