Controlling
Domain 5 tests how managers monitor performance, compare it with standards, and correct deviations. Control closes the loop with planning.
The control process and types
The control process: establish standards, measure actual performance, compare against standards, and take corrective action. Feedforward control prevents problems by regulating inputs (hiring, purchasing, training). Concurrent control corrects during work (supervision, real-time dashboards). Feedback control corrects after the fact (quality inspection, performance reviews). Management by exception focuses attention on significant deviations.
Control tools
- Budgets allocate resources and provide standards; variance analysis compares actual to budget. Separate price and quantity variances so managers are not blamed for volume-driven spending.
- Financial ratios: liquidity (current, quick), leverage (debt-to-equity), activity (inventory turnover), profitability (return on equity).
- Balanced scorecard (Kaplan and Norton): financial, customer, internal process, and learning-and-growth perspectives.
- TQM (Deming): continuous improvement, customer focus, employee involvement, and statistical process control. Benchmarking compares against best practice. JIT reduces inventory but increases supply-chain vulnerability.
- Internal controls include segregation of duties, authorization, reconciliation, and audits.
Worked example
Budget: 10,000 units at $5 material = $50,000. Actual: 11,000 units at $5.20 = $57,200. Total variance is $7,200 unfavorable, but the purchasing manager is not responsible for all of it. At the actual volume, the flexible budget is 11,000 × $5 = $55,000. The price variance is ($5.20 − $5.00) × 11,000 = $2,200 unfavorable. The volume variance is 1,000 extra units × $5 = $5,000, which may be appropriate if the extra output sells. Evaluate purchasing on the $2,200, and production/sales on the volume decision.
Traps
Feedback control is the most common but is not preventive. Control is not only financial; quality, behavior, and operations also need controls. Budgets can cause dysfunctional behavior (spending to protect next year's budget). Confusing favorable/unfavorable with good/bad is a trap: a favorable material price variance may signal cheap, poor-quality inputs. Control does not mean micromanagement.