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ENTERPRISE PERFORMANCE

MANAGEMENT
(Strictly as per the Syllabus of Pune University for
MBA, Semester – III)

Prof. Babasaheb R. Jadhav


Assistant Professor,
MAEER’s, MIT College of Engineering,
Centre for Management Studies and Research,
Pune, India.

Prof. Priyanka P. Kulkarni


Assistant Professor,
MAEER’s, MIT College of Engineering,
Centre for Management Studies and Research,
Pune, India.

MUMBAI  NEW DELHI  NAGPUR  BENGALURU  HYDERABAD  CHENNAI  PUNE  LUCKNOW


 AHMEDABAD  ERNAKULAM  BHUBANESWAR  INDORE  KOLKATA  GUWAHATI
© Authors
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Preface

It is our indeed pleasure and privilege to offer this book, ‘Enterprise Performance Management’
to our young, dynamic and beloved readers and students of management studies.
In the recent past, Enterprise Performance Management has emerged as a commanding for the
entire corporate world where the business world is more and more competitive. Now, the corporate
cannot afford only to workout plans or strategies without its ground reality.
Hence, the corporate managers have to be familiar with the basics of Enterprise Performance
Management as it would facilitate the corporate to gain, retain and sustain competitive advantage and
ensure the long-term success and prosperity. This book has been written in a lucid and simple
language with a view to facilitating and understanding of the basic concepts and their applications
from the viewpoint of decision making.
We express our deep gratitude towards our Vice-Chancellor Dr. W.N. Gade, Dean, Faculty of
Management; Dr. E.B. Khedkar, Father Founder and President of MAEER’s MIT; Dr. V.D. Karad,
Vice President and Executive Director of MAEER’s MIT; Dr. Mangesh T. Karad and Principal
Dr. R.V. Pujeri for his timely guidance and motivation for completion and writing of this book. A
successful achiever has to work on all possible parameters to maintain work-life balance. One
important parameter is ‘time’. Our parents kept reminding and encouraging us about the timely
completion of this book.
Our students, colleagues and readers have always appreciated our writings. They are the ultimate
‘value drivers’. Their ‘value expectations’ assess our performance towards quality of work. As an
author, our indebtedness to all of them is perpetual.
At the end, how do we forget the ‘almighty’ who reminds us of our inner strength!
We also take an opportunity to express our sincere thanks to publisher, Himalaya Publishing
House Pvt. Ltd., Mr. S.K. Srivastav, Mr. Abhijit Mane and their entire staff for their encouragement,
active co-operation and help in bringing out this publication.
Readers are most welcome to help us to improve the contents and presentation of this book. Let
‘creative thinking’ continue endlessly, so that the purpose and quality of book, ‘Enterprise
Performance Management’ improve perpetually.

Prof. Babasaheb R. Jadhav


Prof. Priyanka P. Kulkarni
Syllabus
Semester III
Course Code: 302
Course Title: Enterprise Performance Management

Course Objective:
1. To acquaint the students with a perspective of different facets of management of an enterprise.
2. To provide inputs with reference to the Investment Decisions along with the techniques for those decisions.
3. To inculcate the evaluation parameters of enterprise in terms of expenses, control system and pricing.
4. To develop the knowledge of the concept of auditing and its applicability as performance management tool.

Unit Number of
Contents
Number Sessions
Unit - 1 1.1 Performance Management: Concept, Need, Linkages with Strategic Planning, 7+2
Management Control and Operational Control.
1.2 Performance Evaluation Parameters: Financial – Responsibility Accounting – Concept
of Responsibility Centres, Revenue Centre, Expense Centre – Engineered and Discretionary
Costs – Committed Costs, Profit Centre, Investment Centres. ROI, ROA, MVA, EVA –
DuPont Analysis (Numerical Not Expected – Interpretation Only) Limitations of Financial
Measures.
1.3 Performance Evaluation Parameters: Non-financial Performance Measures – Balanced
Scorecard, Malcolm Baldrige Framework.
1.4 Measuring SBU Level Performance: Concept, Need, Linkages with Enterprise
Performance Management – Goal Congruence. Transfer Pricing – Objective, Concept,
Methods – Cost Based, Market Price Based and Negotiated, Applicability of Transfer Pricing.
Unit - 2 2.1 Capital Expenditure Control: Concept, Need, Process of Capital Budgeting, Types of 7+2
Capital Expenditure Decisions – Pre-sanction, Operational and Post-sanction Control of
Capital Expenditure.
2.2 Tools and Techniques of Capital Expenditure Control: Performance Index, Technical
Performance Measurement, Post Completion Audit.
Unit - 3 3.1 Performance Evaluation Parameters for Banks: Customer Base, NPAs, Deposits, RoI, 7+2
Financial Inclusion, Spread, Credit Appraisal, Investments.
3.2 Performance Evaluation Parameters for Retail: ABC Analysis, Sell Through Analysis,
Multiple Attribute Method, Gross Margin Return on Investment (GMROI), GMROI as Gross
Margin/Average Inventory at Cost.
Unit - 4 4.1 Performance Evaluation Parameters for Projects: Project Control Process: Setting Base 7+2
Line Plan, Measuring Progress and Performance, Comparing Plan against Action, Taking
Action, Schedule Variance (Time Overruns), Project Cost Variance (Cost Overruns).
4.2 Performance Evaluation Parameters for Non-profit: Features of Non-profit
Organisations, Fund Accounting, Governance, Product Pricing, Strategic Planning and Budget
Preparations, Social Audit.
Unit - 5 5.1 Audit Function as a Performance Measurement Tool: Financial Audit, Internal Audit, 7+2
Cost Audit, Management Audit – Principles and Objectives (Audit Reports/Formats are
Expected to be Discussed in the Class From a Performance Measurement Perspective).
Contents

Sr. No. Name Page No.

Unit 1 Performance Management 1 – 77

Unit 2 Capital Expenditure Control 78 – 107

Unit 3 Performance Evaluation Parameters for Banks 108 – 146

Unit 4 Performance Evaluation Parameters for Projects 147 – 176

Unit 5 Audit Function as a Performance Measurement Tool 177 – 217

Multiple Choice Questions 218 – 234

Case Studies 235 – 262


Unit: 1

PERFORMANCE MANAGEMENT

Introduction
The world is fast becoming boundaryless. It is now evident that nations cannot be isolated from
others and prosper independently. Be it the sub-prime crises of 2008 in the US or the situation faced
by the South East Asian economies, it has a cascading effect the world over. Many nations are opening
doors for FDIs in different sectors which encourage the transnational movement of businesses and
organisations more swiftly.
India too has witnessed a similar situation after 1991. The acceptance of LPG policy (Libera-
lisation, Privatisation and Globalisation) has been helpful in eradicating the license raaj from India
and opening the doors of Indian Economy for Foreign Direct Investment in many public sector as well
as private sector organisations.
The License Raaj
Before the process of reform began in 1991, the government attempted to close the Indian economy
to the outside world. The Indian currency, the rupee, was inconvertible and high tariffs and import
licensing prevented foreign goods from reaching the markets. India also operated a system of central
planning for the economy in which firms required licenses to invest and develop. The labyrinthine
bureaucracy often led to absurd restrictions — up to 80 agencies had to be satisfied before a firm could
be granted a license to produce and the state would decide what was produced, how much, at what price
and what sources of capital were used. The government also prevented firms from laying-off workers or
closing factories. The central pillar of the policy was import substitution, the belief that India needed to
rely on internal markets for development, not international trade — a belief generated by a mixture of
socialism and the experience of colonial exploitation. Planning and the state, rather than markets, would
determine how much investment was needed in which sectors.
The LPG Policy
Liberalisation: It refers to slackening of Government Regulations. Some characteristics of Libera-
lisation are as under.
 Reduction in import tariffs
 Deregulation of markets
 Reduction of taxes
 Greater Foreign Investment
Privatisation: It allows the private businesses or services to take up the ownership of public
sector units or government enterprises.
Globalisation: It refers to joining with different economies to maximise progress.
The key recommendations of the Narasimha Rao Committee on LPG policy were as under:
● Bringing in the Security Regulations (Modified) and the SEBI Act of 1992 which rendered
the legitimate power to the Securities Exchange Board of India to record and control all the
mediators in the capital market.
● Doing away with the Controller of Capital matters in 1992 that determined the rates and
number of stocks that companies were supposed to issue in the market.
● Launching of the National Stock Exchange in 1994 in the form of a computerised share
buying and selling system which acted as a tool to influence the restructuring of the other
stock exchanges in the country. By the year 1996, the National Stock Exchange surfaced as
the biggest stock exchange in India.
● In 1992, the equity markets of the country were made available for investment through
overseas corporate investors. The companies were allowed to raise funds from overseas
markets through issuance of GDRs or Global Depository Receipts.
● Promoting FDI (Foreign Direct Investment) by means of raising the highest cap on the
contribution of international capital in business ventures or partnerships to 51 per cent from
40 per cent. In high priority industries, 100 per cent international equity was allowed.
● Cutting down duties from a mean level of 85 per cent to 25 per cent, and withdrawing
quantitative regulations. The rupee or the official Indian currency was turned into an exchange-
able currency on trading account.
● Reorganisation of the methods for sanction of FDI in 35 sectors. The boundaries for
international investment and involvement were demarcated.
The Impact of LPG Policy on Indian Organisations
The greatest threat the Indian organisations faced was FDI. It was allowed not only through
partnerships but the foreign organisations were allowed to start up their campuses in India. These
organisations came up with their set ups, state of the art technologies, cultures, styles of management,
policies, practices and none the less pay packages. They created a cut throat competition for the
indigenous organisations. The Indian organisations had a pressure to perform and provide quality
products and services to sustain the competition. Thus the challenges before the Indian Organisations
were to be
 Cost Effective/Efficient
 Competitive
 Restructuring themselves
 Involved in R&D
 Managing professionally
 Attracting and retaining talent
 Building brand
 Gaining market share
 Thinking globally and acting locally
In short to be successful in the struggle for their existence, what the Indian organisations
needed the most was an effective performance management.
PERFORMANCE MANAGEMENT
Managing employee or system performance and aligning their objectives facilitates the effective
delivery of strategic and operational goals. Some proponents argue that there is a clear and immediate
correlation between using performance management programmes or software and improved business
and organisational results. In the public sector, the effects of performance management systems have
differed from positive to negative, suggesting that differences in the characteristics of performance
management systems and the contexts into which they are implemented play an important role to the
success or failure of performance management.
Concept of Performance Management
Performance Management in simple term means managing the performance of an organisation.
Any organisation operating in a business environment works for achieving the vision, mission and
objectives. Also it aims at creating a position and brand for itself in the market so that it can gain
maximum market share and be more effective and efficient. An effective method of performance
management helps in achieving these objectives.
Management basically means doing right things and doing things rightly. For doing the things
rightly a manager has to plan, direct, organise and control the resources of an organisation. This helps
in getting the job done right at the first time with minimum or no wastage and increasing the profit.
For doing the right things the manager has to have complete understanding of organisation’s vision
and mission, complete understanding of organisation’s strengths and weaknesses, effective strategy
formulation, effective planning and forecasting of business goals and objectives, effective manage-
ment of finances and effective management of supply chain so that the goods reach the customers in
time.
For both the above mentioned activities that is doing right things and doing things rightly, a
manager has to establish the value or standards of “right” and then compare the actual with the
standards so that the gap can be understood and then take corrective action to bridge the gap or match
the variance.
Performance management is all about improvement—Synchronising improvement to create value
for and from customer with the result of economic value creation to stakeholders and owners.
Performance Management can be broadly defined as assessment of employee, process, equip-
ment or other factors to gauge progress towards predetermined goals.
Definitions of Performance Management by Different Authors
A means of getting better results by understanding about what is to be achieved and of managing and
developing people in a way which increases the probability that it will be achieved in the short and the
longer term. – Armstrong
Performance management is a “process by which the company manages its performance in line with
its corporate and functional strategies and objectives”. This definition is often used in management
research studies. – Bititci, Carrie & McDevitt, 1997
Performance management is the objective of that process to provide an integrated control system,
where the corporate and functional strategies are deployed to all business processes, activities, tasks and
personnel, and feedback is obtained through the performance measurement system to enable appropriate
management decisions. The ultimate purpose of that process is to improve company performance.
– Bititci, Carrie & McDevitt
Performance management is both a strategic and an integrated approach to delivering successful
results in organisations by improving the performance and developing the capabilities of teams and
individuals. – Armstrong and Baron
Aims of Performance Management
As Armstrong and Baron (2005, p.2) stated that “the overall purpose of performance
management is to contribute to the achievement of high performance by organisation and its people.”
High performance is referred to the means of acquiring the desired targets by developing the capacity
and potentials of present people who are contributing in the achievement of the organisational goals.
On the other hand, according to (Lockett, 1992), performance management is aiming at
developing the people concerned with the required commitment and competencies for working
towards the shared objectives within the organisational structure.
The structure is designed with the main aim of improving both the individual and organisational
performance by providing developmental feedback, assisting employees, giving them the proper tools
and equipment to deliver good quality tasks and moving on the path to a better performance.
Performance management does make sure that there is improvement in the organisation’s process
on a continuous basis in order to raise the competency bar of the subordinates by enhancing their own
skills and knowledge in terms of roles, responsibilities, accountabilities and the expected behaviours.
The continuous review will drive the people towards doing the right things at the right time.
Teamwork cannot be left behind in the main aim of performance management, as it contributes in
accomplishing optimum results through people.
Below is a summarised list of the major aims of performance management:
 To enable the employees towards achievement of better-quality standards of work perfor-
mance.
 To help the employees in identifying the knowledge and skills required for performing the
job efficiently as this would drive their focus towards performing the right task in the right
way.
 Boosting the performance of the employees by encouraging employee empowerment,
motivation and implementation of an effective reward system.
 Promoting a two-way system of communication between the supervisors and the employees
for clarifying expectations about the roles and accountabilities, communicating the
functional and organisational goals, providing a regular and a transparent feedback for
improving employee performance and continuous coaching.
 Identifying the barriers to effective performance and resolving those barriers through
constant monitoring, coaching and development interventions.
 Creating a basis for several administrative decisions strategic planning, succession planning,
promotions and performance based payment.
 Promoting personal growth and advancement in the career of the employees by helping them
in acquiring the desired knowledge and skills.
Therefore, we can say that performance management approach has become a fundamental tool in
the hands of the corporate as it ensures that the people maintain the corporate values and tread in the
path of accomplishment of the ultimate corporate vision and mission. It is a forward-looking process
as it involves both the supervisor and also the employee in a process of joint planning and goal setting
in the beginning of the year.
Process of Performance Management
Planning

Establishing standards
of performance

Taking corrective Monitoring actual


action performance

Comparing actual
against standards

The process of performance management starts with Planning.


1. Planning:
Here planning means understanding of what exactly is to be achieved. Planning includes
plans or objectives and ways to achieve them. While formulating plans or objectives the
managers must remember that there has to be congruence with organisation’s strategic and
operational objectives, available finances, and are formulated after analysing strengths and
weaknesses of the organisation’s resources, processes and people.
2. Establishment of Performance Standards:
During the process of planning the management understands about the exact position of
organisation’s resources. Thus proper planning leads to Establishment of performance
standards. Here in this stage based on the quality of resources, equipment and processes and
the skills of available employees’ realistic standards of performance are set. While setting
the performance standards the managers can discuss with all concerned and then finalise the
standards. This helps in establishing realistic performance standards.
3. Monitoring Performance:
Next stage is measuring the actual performance and comparing it with the standards. This is
also called performance monitoring or reviewing of performance. This is an ongoing process.
It provides the managers an opportunity to take corrective actions as and when required.
This kind of online correction system helps in making the employees aware of the progress
or short falls and offers chances to rectify the mistakes. Monitoring also makes available
occasions for redeveloping the employee skills or repairing the processes and helps in
enhancement of the performance.
4. Comparing Actual Performance with Standards:
This is possible after comparing the actual performance with the standards set. If there is not
much variation in the standard and actual performance the employees can be rewarded, but if
the variance is more they get a chance to correct the processes etc.
5. Taking Corrective Actions:
The final step in the control process is determining the need for corrective action. Managers
can choose among three courses of action:
(i) They can do nothing;
(ii) They can correct the actual performance; or
(iii) They can revise the standard.
Maintaining the status quo if preferable when performance essentially matches the standards.
When standards are not met, managers must carefully assess the reasons why and take corrective
action. Moreover, there is a need to check standards periodically to ensure that the standards and the
associated performance measures are still relevant for the future.
The final phase of controlling process occurs when managers must decide action to take to
correct performance when deviations occur. Corrective action depends on the discovery of deviations
and the ability to take necessary action. Often the real cause of deviation must be found before
corrective action can be taken. Causes of deviations can range from unrealistic objectives to the wrong
strategy being selected achieve organisational objectives. Each cause requires a different corrective
action. Not all deviations from external environmental threats or opportunities have progressed to the
point a particular outcome is likely, corrective action may be necessary.
Need and Importance of Performance Management
The performance management is needed to:
1. Monitor and control business operations
2. Drive improvement of process efficiency
3. Maximisation shareholders’ wealth
4. Maximise the effectiveness of the improvement effort
5. Achieve strategic organisational goals and objectives
6. Be more cost conscious
7. Setting organisational goals and standards
8. Benchmarking of performance
9. Be more innovative by means of R&D activities
10. Be able to sustain in cut-throat competition
11. Help in getting competitive advantage
12. Be able to manage business unit professionally
13. Enhance the productivity
14. Efficient management of logistics and supply chain activities
15. Build organisational image and brand loyalty
Importance of performance management:
According to Lawson (1995), effective performance management means:
1. It articulates organisation’s vision.
2. It establishes key results, objectives and measures at key business unit level.
3. It identifies business process objectives and the key indicators of performance for those
processes.
4. It identifies and installs effective departmental measures.
5. It monitors and controls four key performance measures namely quality, delivery, cycle time,
and waste.
6. It manages the continuous improvement of performance in those key areas.
7. It prepares to aim for breakthrough improvements in performance when this is required by a
significant shortfall in performance measured against the performance of major competitors.
Important aspects of Performance Management is basically a system of different processes that
combine to create an effective workforce within your company that can effectively reach your
business goals. There are many different aspects of performance management, but in most cases it can
be broken down into a few simple steps. If you're adopting a performance management process for the
first time or want to modify your current one to maximise its effectiveness, there are three key aspects
that are the most important in your performance management system. Obviously these are up for
debate, but in most cases of performance management you can plan on these to have the most impact
on the success or failure of your performance management efforts.
1. Planning: The first step in any good performance management process is likely also the most
important. Haphazardly stumbling towards goals will usually only end in disaster, so it's
important that proper planning is used during performance management. This applies not only
to the performance management system itself, but also to the inner workings of the business.
Speaking strictly about performance management, good planning begins by analysing the
exact goals you want your company to attain and to develop realistic ways to achieve them. It's
vital that your goals be realistic, otherwise your performance management plan will fail. It's
also important to take the time to create a real plan that can achieve your goals.
2. Monitoring: If any performance management system is to succeed it needs to involve a very
rigorous monitoring process. Closely surveying your overall company, each department, and
individuals is vital for performance management and for you to reach your goals.
Monitoring during performance management involves not just monitoring the progress of
each department and employee but also providing them with constant feedback whether it is
in the form of praise and reward or in constructive criticism. If you want your performance
management efforts to succeed you'll have to monitor each step towards your goal very
closely to ensure everything is going according to plan. If areas seem to be lacking, you'll
need to be able to take steps to improve them such as providing training.
3. Rewards: While some experts place this lower in importance than other aspects of
performance management, the truth is that your employees deserve rewards and that few
things will influence not only the success of your performance management efforts but also
the success of your entire company quite like appropriate rewards. Whether it is simple
public recognition or actual monetary rewards, no performance management process will be
complete or effective without good use of rewards. They can improve morale and employee
satisfaction, boost productivity, and help you move closer to your goals. If you want your
performance management to be successful, take the time to utilise rewards.
Linkages with Strategic Planning
Strategic Planning: Strategic Planning is defined as
an organisation’s process of stating its strategy, or direc-
Situational
tion, and making decisions on allocating its resources to
Analysis pursue this strategy. The process of strategic planning
begins with a detailed analysis of opportunities and
threats available in the external environment. Based on
this analysis the strengths and weaknesses of the
Stating organisation with references to its economic climate,
Objectives critical factors of production, political atmosphere are
investigated. This can be called as situational analysis.
This is immediately followed by identification of
Key Action organisation’s current available skills, strengths and
Step for
achieving weaknesses. During this analysis the organisation also
objective identifies its key competencies which differentiate it from
its competitors. This step helps in setting the objectives
both long term and short term. While setting the
Identifying objectives, the core competencies are tried to match with
key
performance the environmental opportunities to take the advantage of
indicators situation. This helps in obligating competitive advantage.
This step leads to decision of key actions to achieve
objectives. Key actions are those which make maximum
Linking use of key competencies to achieve the objectives
Resources effectively and efficiently. The key action steps focus on
key performance indicators. For best performance these
are supported by available resources to achieve the
desired outcomes.
Outcomes
The outcome of an effective strategic planning
process is the blueprint of a formal organisational
structure which indicates the flow of information and
hierarchy. This is useful in bringing the strategy into
Diagrammatic Representation of action. A formal organisational structure is the official
Strategic Planning Process way of allocating the authority and responsibility, putting
in place mechanisms and processes to get the work done
and most importantly establishing effective management and operational control.
Control systems thus help in achieving the desired results or objectives which are set by the
process of strategic planning. Strategic planning sets strategic objectives which the organisation wants
to achieve. But the people have their own personal goals. The central purpose of effective control
systems is to ensure a high level of Goal Congruence; that means the individual actions taken to
achieve personal goals also help to achieve organisational goals. In present world a perfect congruence
between the individual and organisational goals does not exist. But adequate control systems can
encourage the individuals not to act against the best interests of organisation.
Goal Congruence
The integration of multiple goals, either within an organisation or between multiple groups.
Congruence is a result of the alignment of goals to achieve an overarching mission.
The function of every organisation is to attain its goals. The goals are arrived at by the CEO with the
advice of other members of senior management and usually ratified by the board of directors. In many
well-known organisations the goals originally set by the founder persist for generations.
Goal congruence to a large extent is related to the individual behaviour at work. Both formal and
informal factors affect the degree to which goal congruence can be achieved. Formal factors include
strategic plans, budget and reports while the informal factors are again divided into external factors and
internal factors. External factors as the name suggests are external to the organisation. They are norms of
desired behaviour which are collectively called as work ethics. These include a set of attitudes which
manifest into employee’s loyalty towards the organisation, their diligence, their spirit and pride in doing
a good job. Some of these attitudes are city specific while some are industry specific and still others are
national. Internal factors include organisation’s culture, management style etc. Culture includes common
beliefs, shared values, and norms of behaviour and assumptions that are implicitly accepted and
explicitly manifested throughout the organisation. The internal factor that probably has strongest impact
on control systems if the management style. The management style percolates down from top to bottom
as the subordinates learn or develop their style of management by perceiving their superior’s style of
management.
Management Control
For effective working an organisation is divided into various units and sub units. Management
control is the process of monitoring, controlling and evaluating the performance of all these units and
sub units. The resources available with the organisation are to be distributed among these units and sub
units. They in turn are expected to use them effectively and efficiently so that they can achieve their
predetermined goals or objectives. The responsibility of individual unit or sub unit lies with the line
manager of that particular unit. It is his style of management on which the success or failure of his
department depends. Management control is control exercised by the management on the line managers.
Every individual unit or sub unit is termed as a responsibility centre and the management evaluates the
performance of every responsibility centre based on the standard performance set. The standard
performance is decided after discussions with the manager of responsibility centre. While deciding the
performance standards the things considered are the activities of the responsibility centre and the
resources available to them in terms of men, machine, material and money. Here the interesting point is
that the managers are not only responsible for the output generated by the responsibility centre but also
the monitory value of the output. In short they are responsible for both the quantity and quality of the
output generated by the responsibility centre. In case of management control planned and actual
performance are compared at regular intervals so as to identify resource gaps. This helps in providing
the managers with more resources in case of shortages and shifting of resources to other responsibility
centres in case of surplus resources. The main motive of management control is to provide for remedial
action if there is a visible deviation from planned performance. Yet another objective of management
control is to establish proper coordination between various responsibility centres by interrelating the
tasks being performed by them and deciding on allocation of resources. At the time of allocation of
resources there is a possibility of conflicts between the managers of different responsibility centres.
Thus continuous interaction among the managers is yet another important characteristic of management
control.
Responsibility Centre
A responsibility centre is an organisational unit headed by a manager, who is responsible for its
activities and results. Responsibility centres define exactly what assets and activities a manager is
responsible for. Managers prepare a responsibility report to evaluate the performance of each
responsibility centre. This report compares the responsibility centre’s budgeted performance with its
actual performance, measuring and interpreting individual variances. Responsibility reports should
include only controllable costs so that managers are not held accountable for activities they have no
control over. Using a flexible budget is helpful for preparing a responsibility report.
Management Control Activities
(a) Planning what the management should do
(b) Coordinating the activities of several parts of the organisation
(c) Communicating information
(d) Evaluating information
(e) Deciding action to be taken
(f) Influencing people to change the behaviour
Operational Control
Operational control is the control established by the managers of responsibility centres. It is the
concern of every manager to ensure that the sub unit under his control works efficiently and
effectively. Operational control systems are designed to ensure that day-to-day actions are consistent
with established plans and objectives. They focus on events in a recent period. Operational control
systems are derived from the requirements of the management control system. Corrective action is
taken where performance does not meet standards. This action may involve training, motivation,
leadership, discipline, or termination. Thus they establish control to perform the task and activities.
This includes scheduling and assigning of jobs, allocation of resources, procurement of raw material,
selling of products and so on. The activities that are controlled by operational control are repetitive in
nature. Also they are programmed or scheduled one after the other. In case of operational control it is
easy to determine the relationship between inputs and outputs and also between the level of activity
and the cost incurred.
The data generated in operational control is always non-monetary as against that of management
control.
E.g.: The number of PET bottles blown per hour etc. Exactness of data is another essential
quality of operational control. Daily output is reported in exact quantity or number.
Chart highlighting differences between Management Control and Operational Control
Characteristics Management Control Operational Control
Emphasis of Action Whole Organisation Single unit or sub unit (Department)
Decision Making Comparatively More Scope, Scope limited, Decisions taken within
subjective decisions the framework of rules
Structure Virtual (no formal organisational Balanced structure with proper
structure) hierarchy
Information Quantity of output and its financial Non-financial information. Precise, real
value both are considered. Useful time and on the spot solutions can be
for future decision making. provided.
Controlled by Management Supervisor or Line Manager

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