Techniques of Managerial Control: Traditional and Modern Techniques
Traditional techniques refer to the techniques that have been used by business organisation for longer period of time and are still in use.
Such techniques are:
- Personal Observation
- Statistical Reports
- Breakeven Analysis
- Budgetary Control
(a) Personal Observation: This is the most traditional technique of control. It helps a manager to collect first hand information about the performance of the employees. It also creates psychological pressure on the employees to improve their performance as they are aware that they are being observed personally by the manager. However, this technique is not to be effectively used in all kinds of jobs as it is very time consuming.
(b) Statistical Reports: Statistical analysis in the form of percentages, ratios, averages etc. in different areas provides useful information regarding performance of an organisation to its managers. When such information is presented in the form of tables, graphs, charts etc., it facilitates comparison of performance with the standards laid and with previous years’ performance.
(c) Breakeven Analysis: The technique used by managers to study the relationship between sales volume, costs and profit is known as Breakeven Analysis. This technique helps the managers in estimating profits at different levels of activities. The following figure shows breakeven chart of a firm.
The point at which the total revenue and total cost curves intersect is breakeven point. The figure shows that the firm will have the breakeven point at 60,000 units of output. At this point, there is neither profit nor loss. The firm starts earning profit beyond this point.
Breakeven Point= Fixed Cost/ (Selling Price per unit- Variable cost per unit).
Through breakeven analysis, a firm can keep a check on its variable cost and can also determine the level of activity at which it can earn its profit target.
(d) Budgetary Control: Under this technique, different budgets are prepared for different operations in an organization in advance. These budgets act as standards for comparing them with actual performance and taking necessary actions for attaining organizational goals.
A budget can be defined as a quantitative statement of expected result, prepared for a future period of time. The budget should be flexible so that necessary changes, if need be, can be easily made later according to the requirements of the prevailing environment.
Modem techniques are those techniques which are very new in management world. These techniques provide various new aspects for controlling the activities of an organisation.
These techniques are as follows:
(a) Return on Investment.
(b) Ratio Analysis.
(c) Responsibility Accounting.
(d) Management Audit.
(e) PERT and CPM.
(f) Management Information System.
(a) Return on Investment: Return on investment is very useful technique for determining whether the capital invested in the business has been effectively used or not for generating reasonable amount of return.
Return on Investment= (Net Income / Total Investment) X 100 Net Income before or after tax can be used for calculating ROI. Total investment includes investment in fixed Assets as well as working capital.
It acts as an effective control device in measuring and comparing the performance of different departments. It also helps departmental managers to find out the problems which adversely affect ROI.
(b) Ratio Analysis: Ratio Analysis is a technique of analyzing the financial statements of a business firm by computing different ratios.
(c) Responsibility Accounting: Under this system of accounting, various sections, departments or divisions of an organization are set up as ‘ Responsibility Centers’. Each centre has a head who is responsible for attaining the target of his centre.
(d) Management Audit: Management Audit is a process of judging the overall performance of the management of an organisation. It aims at reviewing the efficiency and effectiveness of management and improving its future performance. Its basic purpose is to identify the deficiencies in the performance of management functions. It also ensures updating of existing managerial policies.
(e) PERT and CPM: PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are two important techniques used in both planning and controlling. These techniques are used to compute the total expected time needed to complete a project & it can identify the bottleneck activities that have a critical effect on the project completion date. Such techniques are mainly used in areas like construction projects, aircraft manufacture, ship building etc.
The various steps involved in using these techniques are as follows:
(i) The project is first divided into various activities and then these activities are arranged in a logical sequence.
(ii) A network diagram is prepared showing the sequence of activities.
(iii) Time estimates are laid down for each activity. PERT prepares three time estimates-(1) Optimistic (shortest time) (2) Most likely time & (3) Pessimistic (longest time).In CPM, only one time estimate is prepared. Along with this, CPM also lays down the cost estimates for completing the project.
(iv) The most critical path in the network is the longest path. Longest path consists of those activities which are critical for completing the project on time; hence the name CPM.
(v) If required, necessary changes are made in the plan for completing the project on time.
(f) Management Information System (MIS): Management Information System (MIS) is a computer based information system which provides accurate, timely and up-to-date information to the managers for taking various managerial decisions. Thus, it is an important communication tool as well as an important control technique. It provides timely information to the managers so that they can take appropriate corrective measures in case of deviations from standards.