Chapter 9 Flashcards
This refers to the process of ascertaining whether organizational objectives have been achieved: if not, why not; and determining what activities should then be taken to achieve objectives better in the future.
Controlling
This completes the cycle of management functions.
Controlling
The control process consists of four steps, namely:
- establishing performance objectives and standards
- measuring actual performance
- comparing actual performance to objectives and standards
- taking necessary action based on the results of the comparisons
In controlling, what has to be achieved must first be determined. Examples of such objectives and standards are as follows:
- Sales targets
- Production targets
- Worker attendance
- Safety record
- Supplies used
These are expressed in quantity or monetary terms.
Sales targets
These are expressed in quantity or quality.
Production targets
These are expressed in terms of rate of absences.
Worker attendance
These are expressed in number of accidents for given periods.
Safety record
These are expressed in quantity or monetary terms for given periods.
Supplies used
This is necessary so that when shortcomings occur, adjustments could be made. The adjustments will depend on the actual findings.
measuring actual performance
Control consists of three distinct types, namely:
- feedforward control
- concurrent control, and
- feedback control.
This type of control measure must be undertaken when management anticipates problems and prevents their occurrence.
Feedforward Control
This type of control provides the assurance that the required human and nonhuman resources are in place before operations begin.
Feedforward Control
This type of control is undertaken when operations are already ongoing and activities to detect variances are made.
Concurrent Control
This type of control is undertaken when information is gathered about a completed activity, and in order that evaluation and steps for improvement are derived.
Feedback Control
This validates objectives and standards.
If accomplishments consist only of a percentage of standard requirements, the standard may be too high or
inappropriate.
Feedback control
Organizational control systems consists of the following:
- strategic plan
- the long-range financial plan
- the operating budget
- performance appraisals
- statistical reports
- policies and procedures
This provides the basic control mechanism for the organization.
strategic plan
This is required in engineering firms because of the long lead times needed for capital projects.
Long-Range Financial Plan
This indicates the expenditures, revenues, or profits planned for some future period regarding operations. The figures appearing in this are used as standard measurements for performance.
Operating Budget
This measures employee performance. As such, it provides employees with a guide on how to do their jobs better in the future.
Performance appraisal
This function as effective checks on new policies and programs.
Performance appraisal
This pertain to those that contain data on various developments within the firm.
Statistical reports
Among the information which may be found in a statistical report pertains to the following:
- labor efficiency rates
- quality control rejects
- accounts receivable
- accounts payable
- sales reports
- accident reports
- power consumption report
This refer to the framework within which the objectives must be pursued.
Policies
This is a plan that describes the exact series of actions to be taken in a given situation.
Procedure
To be able to assure the accomplishment of the strategic objectives of the company, ____________________ become necessary.
strategic control systems
Strategic control system consist of the following:
- financial analysis
- financial ratio analysis
A review of the ______________ will reveal important details about the company’s performance.
financial statements
This contains information about the company’s assets, liabilities, and capital accounts.
balance sheet
This contains information about the company’s gross income, expenses, and profits.
income statement
This is a more elaborate approach used in controlling activities. Under this method, one account appearing in the financial statement is paired with another to constitute a ratio.
Financial ratio analysis
Financial ratios may be categorized into the following types:
- liquidity
- efficiency
- financial leverage
- profitability
These ratios assess the ability of a company to meet its current obligations.
Liquidity Ratios
The following ratios are important indicators of liquidity:
- Current Ratio
- Acid-test Ratio
This shows the extent to which current assets of the company can cover its current liabilities.
Current Ratio
formula for computing current ratio
Current ratio = current assets/current
liabilities
This 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 sale of inventories.
Acid-test Ratio
formula for acid-test ratio
Acid-test ratio = (current assets -inventories)/current liabilities
These ratios show how effectively certain assets or liabilities are being used in the production of goods and services.
Efficiency Ratios
Among the more common efficiency ratios are:
- Inventory turnover ratio
- Fixed asset turnover
This ratio measures the number of times an inventory is turned over (or sold) each year.
Inventory turnover ratio
Inventory turnover ratio is computed as
follows:
Inventory turnover ratio = cost of goods
sold/inventory
This ratio is used to measure utilization of the company’s investment in its fixed assets, such as its plant and equipment.
Fixed Asset Turnover
The formula used for fixed asset turnover is as follows:
Fixed asset turnover = net sales/net fixed
assets
This is a group of ratio designed to assess the balance of financing obtained through debt and equity sources.
Financial Leverage Ratios
Some of the more important leverage ratios are as follows:
- Debt to total assets ratio
- Times interest earned ratio
This ratio shows how much of the firm’s assets are financed by debt.
Debt to total assets ratio
Debts to total assets ratio may be computed by using the following formula:
Debt to total assets ratio = total debt/total
assets
This ratio measures the number of times that earnings before interest and taxes cover or exceed the company’s interest expense.
Times interest earned ratio
Times interest earned ratio may be computed with the formula:
Times interest earned ratio = (profit before tax + interest expense)/interest expense
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.
Profitability Ratios
Among the more notable profitability ratios are as follows:
- Profit margin ratio
- Return on assets ratio
- Return on equity ratio
This ratio compares the net profit to the level of sales.
Profit margin ratio
The formula used in computing profit margin ratio is as follows:
Profit margin ratio = net profit/net sales
This ratio shows how much income the company produces for every peso invested in assets.
Return on assets ratio
Formula in computing return on assets ratio:
Return on assets ratio = net income/assets
This ratio measures the returns on the owner’s investment.
Return on equity ratio
Return on equity ratio may be computed through the formula:
Return on equity ratio = net income/equity
When operations become complex, the engineer manager must consider useful steps in controlling. Kreitner mentions three approaches:
- executive reality check
- comprehensive internal audit
- general checklist of symptoms of inadequate control
This is undertaken to determine the efficiency and effectivity of the activities of an organization.
internal audit
Symptoms of Inadequate Control (Kreitner)
- An unexplained decline in revenues and profits
- A degradation of service (customer complaints).
- Employee dissatisfaction (complaints, grievances,
turnover). - Cash shortages caused by bloated inventories or
delinquent accounts receivable - Idle facilities or personnel.
- Disorganized operations (work flow bottlenecks,
excessive paperwork). - Excessive costs.
- Evidence of waste and inefficiency (scrap, rework)
