principles of management control techniques and informational technology gtu mba

7/31/2019 Principles Of Management Control Techniques and Informational Technology GTU MBA

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Control Techniques andInformational Technology


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What is Budgeting?

Budget is a statement of planned allocationof resources expressed in numerical or

financial terms. Essential features of a budget are:

1. It is a statement in terms of money

2. It is prepared for a definite future period

3. It is prepared in advance

4. Its purpose is to attain a given objective


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Budgetary Control

The establishment of budgets, relating the

responsibilities of executive to the requirements of apolicy and the continuous comparison of actual with

budgeted results to provide a firm basis for its revision.

The primary objectives of budgetary control may bestated, thus:

1. To provide a detailed plan of action for a business overa period of time.

2. To coordinate the different units and activities of theorganization with a view to utilize resourcesjudiciously.


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Budgetary Control

3. To motivate organizational members toperform well.

4. To exercise control over cost throughcomparison of actual results with budgetedones and initiating rectification steps promptly.


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Advantages of Budgetary Control

It serves as an invaluable aid to managementthrough planning, coordination and control:

Planning

Habit of thinking ahead

Pooled judgment and experience

Realistic goals and policies

Planned way to secure economy

Reduces uncertainty


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Advantages of Budgetary Control

Coordination

Establishes coordination

Relates business activity with generaleconomic trends

Control

Indicates weaknesses Prevents waste

Motivates people


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Limitations of Budgetary Control

Accuracy is open to doubt

Constant review needed

Costs may be prohibitive


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Budgetary Control Methods

Responsibility Centers: Any organizationalfunction or unit whose manager is responsible

for all its activities. All responsibility centersuse resources (inputs or costs) to producesomething (outputs or revenues)

Typically, responsibility is assigned to a

revenue, expense, profit or investment centre. Revenue center: Organizational unit in which

outputs are measured in monetary terms butare not directly compared to input costs. Eg.

Sales department


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Budgetary Control MethodsCont

Expense Center or cost center: Organizationalunits, such as administrative, service, andresearch departments, where inputs are measured

in monetary terms, but outputs are not. Profit Center: Organizational unit where

performance is measured by numerical differencesbetween revenues and expenditures. Eg. Divisions

responsible for its own product line Investment Center: Organizational units that not

only measures the monetary value of inputs andoutputs, but also compares the outputs with the

assets used in producing them.


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The budgeting process

Usually begins when managers receive topmanagements economic forecast and sales

and profit objectives for the coming year. In few organizations the preference is for Top-

down budgeting.

Most companies however, prefers the process

of Bottom-up budgeting. Budgets are prepared, at least initially, by

those who must implement them, they are thensent up for approval to higher level managers.


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Advantages of Bottom-upbudgeting

Supervisors and lower-level department headsa more intimate view of their needs then do

managers at the top. They are less likely to overlook some vital

information or hidden flow.

Managers are more strongly motivated to

accept and meet budgets they have had ahand in shaping.


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Problems in budgetdevelopment

Managers could fear that they will not be giventhere fair share.

Tension can grow as competition with othermanagers increases.

Anxieties might arise because managers knowthey will be judged by their ability to meet

budgeted standards. Conversely, senior managers will often try to

trim expenditure requests or raise theirrevenue targets.


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Types of Budgets

Operating Budget: Budget indicating the goods andservices the organization expects to consume in abudget period. Most common types of operating budget

are expense, revenue and profit budgets. Expense Budget: Budget explaining where money was

applied. Two types of expense centers are:

a) Engineered cost budgets: Usually describes the labour,

material and overhead expenses involved inmanufacturing

b) Discretionary cost budget: Typically used for expensecenters in which output cannot be accurately

measured. Eg. Administrative, legal, accounting and


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Revenue Budgets: Budget for projected salesrevenue, used to measure and sales

effectiveness. They consist of the expectedquantity of sales multiplied by the expectedunit selling price of each product.

The revenue budget is the most critical , yet it is

also one of the most uncertain because it is basedon projected future sales

Profit Budgets: Combines cost and revenuebudgets in on statement, also known as

master budget.

Types of Budgets


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Financial Budget: Budget detailing the moneyexpected to be spent during the budget period

and indicating its sources. Variable budget: Also known as flexible

budget, they are cost schedules that show howeach costs should vary as the level of activity

or output varies. Fixed, variable and semi-variable costs should be considered.

Fixed Budget: Expresses what individual costsshould be at one specified volume.

Types of BudgetsCont


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Essentials of Effective BudgetaryControl

In order to serve as an effective managerial tool,budgeting calls for the following:

Budgeting should have the wholehearted support of

top management. Practical and actionable budgeted level of attainment

must be decided upon.

The budget period should be neither too long nor too

short.

Managers must identify themselves with thephilosophy contained in budgets. They must committhemselves to budget objectives. They must feel

responsibility for actions and work under an


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Essentials of EffectiveBudgetary Control

To promote clear communications, budgetmanuals must be prepared well in advance. Thebudget manual should indicate the responsibilitiesof individuals at different levels.

Budgeting should be supported by a properaccounting system.

Budget should not be a temporary phenomenon. It

should be a continuous activity. Further, it shouldnot be partial, covering a few business activities,but should be a comprehensive one, covering allbusiness operations.

There should be no attempt to use budgets aswhipping devices or as pressure tactics to control


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Zero-Based Budgeting (ZBB)

The key element in ZBB is future-objective

orientation.

Instead of taking the last year's budgets andadjusting them for finding out the future level of

activity and preparation of budgets there from, ZBB

forces managers to review the current on-going

objectives and operations.

ZBB is, therefore, a type of budget that requires

managers to re-justify the past objectives, projects,

and bud ets and to set riorities for the future.


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Zero-Based Budgeting (ZBB)

The essential idea of ZBB that differentiates it

from traditional budgeting is that it requires

managers to justify their budget request indetail from scratch without any reference to the

level of previous appropriations.

It tantamount to recalculation of allorganizational activities to see which should be

eliminated, funded at reduced level, funded at

the current level or increased finances must be


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Auditing

Internal Audit: Audit performed by theorganization to ensure that its assets are

properly safeguarded and its financial recordsare reliably kept.

Because it concentrates on the operations ofthe organization, this process is also known as

operational auditing. It may be carried out as a separate project by

assigned members of the financial department,or by a full time internal audit staff.

It is a process of self-correction.


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Auditing

External Audit: Verification process involvingthe independent appraisal of financial accounts

and statements. The auditors purpose is not to prepare the

companys financial reports, their job is to

verify that the company, has followed generally

accepted accounting principles and appliedthem correctly.


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Information Technology &

Controlling

Data are the raw facts that may not be veryuseful until they become information, i.e., afterthey are processed and become meaningfuland understandable by the receiver.

The management information system is aformal system of gathering, processing, anddispersing information internal and external to

the enterprise in a timely, effective, andefficient manner to support managers in their

jobs.


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Management InformationSystem

MIS is an integrated technique for gatheringrelevant information from whatever source itoriginates, and transferring it into usable form forthe decision-makers in management.

It is a system of communications primarilydesigned to keep all levels of organizationalpersonnel abreast of the developments in theenterprise that affect them.

MIS provides working tools for all themanagement personnel in order to take the bestpossible action at the right time with respect tothe operations and functions of the enterprise forwhich they are largely responsible.


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Operational Control: Must provide highlyaccurate and detailed information on a daily or

weekly basis. Ex. A production supervisormust know if materials waste is excessive.

The MIS must provide a high volume of timelyand detailed information derived from daily

operations. Middle Management: Middle level managers,

such as division heads are concerned with thecurrent information on important matters that

will affect those units-large scale problem with

Differing Information forDifferent Management Levels


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Differing Information forDifferent Management Levels

Thus the type of information consists ofsummarized data from within the organization

and outside the organization Top Management: MIS must provide

information for strategic planning andmanagement control.

The external sources of information areeconomic conditions, technologicaldevelopments, the actions of competitors.

This information is more difficult to gather andcomputerize than internal information.


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Opportunities and ChallengesCreated by Information Technology

Challenges:

1. Resistance to computer use: some managers are reluctant touse computer as they are afraid of looking unskilled.

2. Information Security: Information security is concerned withthe confidentiality, integrity and availability of data regardlessof the form the data may take: electronic, print, or otherforms.


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Opportunities:

1. Telecommuting: Telecommuting means working at acomputer terminal at home instead of commuting to

work.2. Speech Recognition devices: to put data into computer

by speaking in a normal manner.

3. Computer networks: linking workstations tocommunicate with each other

4. Internet5. Groupware: Groupware makes it possible for a group of

people on a network to collaborate with others over longdistances at the same time.


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The Digital Economy

The emerging digital economy: The ability toeasily process vast amounts of data in researchand development has shortened the developmenttime of new products.

Today we have e-everything: e-mail, e-commerce,e-business, e-cash, e-travel, e-music, e-booksand many more.

The economic gains of e-commerce come from

the lower costs of online companies, reduction indistribution costs, and the elimination ofintermediaries.

Many stores transact their business through theweb, becoming clicks and mortar or click and

bricks companies


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E-Commerce, and M-Commerce

Four kinds of Internettransactions

Business to Consumers

(B2C) Consumer to Business(C2B)

Consumer to Consumer

(C2C) Business to Business(B2B)

M-commerce and wireless

communications

Consumer Business

Consumer

C2CeBay

(auction)

C2BPriceline (you

name the

pricetraveloffers)

Business

B2CAmazon

(books, etc)

B2BFord, General

Motors

(manufacturersto suppliers)


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Customer RelationshipManagement (CRM)

CRM are methods that companies use to interact

with customers Focusing on the needs of customers

CRM means promoting the interactions betweencustomer and the company by collecting, analyzingand using the information to serve the client.

Operational CRM provides support to "front office"

business processes, e.g. to sales, marketing andservice staff. Interactions with customers aregenerally stored in customers' contact histories,and staff can retrieve customer information as

necessary.


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Time-Event Network Analysis

Gantt Charts

The Gantt chart shows the time relationshipsbetween the events of a production program.

Program Evaluation and Review Technique(PERT)

PERT is a time-event network analysis system inwhich the various events in a program or projectare identified, with a planned time established foreach.

The critical path is the sequence of events that

takes the longest time and has zero slack time.


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Gantt Chart

A Gantt chart is a type of bar chart thatillustrates a project schedule.

Gantt charts illustrate the start and finish datesof the elements of a project.

Some Gantt charts also show the dependency(i.e, precedence network) relationships

between activities. Gantt charts can be used to show current

schedule status using percent-completeshadings and a vertical "TODAY" line.


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Limitations of Gantt Chart

Projects are often considerably more complex to becommunicated effectively with a Gantt chart.

Gantt charts do not represent the size of a project or the

relative size of work elements, therefore the magnitude of abehind-schedule condition is easily miscommunicated.

If two projects are the same number of days behind schedule,the larger project has a larger impact on resource utilization,

yet the Gantt does not represent this difference All activities of a Gantt chart show planned workload as

constant. In practice, many activities have front-loaded orback-loaded work plans, so a Gantt chart with percent-complete shading may actually miscommunicate the trueschedule performance status


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PERT & CPM (NetworkTechniques)

PERT and CPM represent two most popularcatch phrases in management parlance.

PERT (Programme Evaluation and ReviewTechnique): It is a scheduling tool that isessentially a network of project activitiesshowing estimates of time necessary tocomplete each activity and the sequential

relationship of activities that must be followedto complete the project.

CPM (Critical Path Method): It shows thesequence of events and activities within a

programme evaluation and review technique


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PERT & CPM (NetworkTechniques)

The main elements in PERT network areactivity, events, and the path.

Activity represented by an arrow, is anoperation required to reach the systemobjectives. Activity time is represented by thenumbers beside the arrows

Event, represented by a circle, show thesequence in which the events must occur

The series of activities and events through thenetwork is called the path.


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Network Fundamentals

In order to develop a PERT network, all of theindividual tasks to be completed in a givenprogramme must be visualized and identified

clearly so that their events and actions can belinked together.

Each activity must have antecedent and successorevent. Of course each event may have more than

one succeeding or preceding activity No activity can start until antecedent event is

completed.

No event is considered completed until all

activities leading to it have been completed


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PERT requires certain time estimates to beassociated with the completion of everyactivity. Such time estimates are made on a

three-way basis-optimistic, most likely, andpessimistic.

Optimistic time: What is the least time that theactivity takes, in the event that the work proceeds

without any problems, interferences andobstacles.

Most likely time: How much time is required tocomplete the activity under normal

circumstances?


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In order to calculate the time estimate of anactivity, these times are weighted in thefollowing fashion:

Te = o+4m+p

6

Where, Te = expected time

o = optimistic time

p = Pessimistic time

m = most likely time



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Critical Path Method (CostConsiderations)

In CPM, two time estimates are made-normaltime (N) and expedited time (E). Expedited

time is also known as crash time. Normal time is at a normal cost equal to N.

This cannot be reduced irrespective of howlong the activity completion time is extended.

At additional expenditure, however, theexpedited time can be shortened. The shortestpossible time is called crash time and can onlybe accomplished at crash cost E

principles of management control techniques and informational technology gtu mba

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