What is comparing actual performance against standards?
Learning Objective
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Let’s pause for a minute and reflect on the management functions that we’ve discussed so far—planning, organizing, and directing. As founder of Notes-4-You, you began by establishing plans for your new company. You defined its mission and set objectives, or performance targets, which you needed to meet in order to achieve your mission. Then, you organized your company by allocating the people and resources required to carry out your plans. Finally, you provided focus and direction to your employees and motivated them to achieve organizational objectives. Is your job finished? Can you take a well-earned vacation? Unfortunately, the answer is no: your work has just begun. Now that things are rolling along, you need to monitor your operations to see whether everything is going according to plan. If it’s not, you’ll need to take corrective action. This process of comparing actual to planned performance and taking necessary corrective action is called controllingManagement process of comparing actual to planned performance and taking corrective actions when necessary.. A Five-Step Control ProcessYou can think of the control function as the five-step process outlined in Figure 6.10 "Five-Step Control Process". Figure 6.10 Five-Step Control Process Let’s see how this process might work at Notes-4-You. Let’s assume that, after evaluating class enrollments, you estimate that you can sell one hundred notes packages per month to students taking the sophomore-level geology course popularly known as “Rocks for Jocks.” So you set your standard at a hundred units. At the end of the month, however, you look over your records and find that you sold only eighty. Comparing your actual performance with your planned performance, you realize that you came up twenty packages short. In talking with your salespeople, you learn why: it turns out that the copy machine broke down so often that packages frequently weren’t ready on time. You immediately take corrective action by increasing maintenance on the copy machine. Now, let’s try a slightly different scenario. Let’s say that you still have the same standard (one hundred packages) and that actual sales are still eighty packages. In investigating the reason for the shortfall, you find that you overestimated the number of students taking “Rocks for Jocks.” Calculating a more accurate number of students, you see that your original standard—estimated sales—was too high by twenty packages. In this case, you should adjust your standards to reflect expected sales of eighty packages. In both situations, your control process has been helpful. In the first instance, you were alerted to a problem that cut into your sales. Correcting this problem would undoubtedly increase sales and, therefore, profits. In the second case, you encountered a defect in your planning and learned a good managerial lesson: plan more carefully. Key TakeawayThe process of comparing actual to planned performance and taking corrective action is called controlling. The control function can be viewed as a five-step process: (1) establish standards, (2) measure performance, (3) compare actual performance with standards and identify any deviations, (4) determine the reason for deviations, and (5) take corrective action if needed. Exercise(AACSB) Analysis Have you ever gone to an ice cream stand and noticed that the “double dipper” ice cream cone the customer beside you bought has a lot more ice cream than does your “double dipper?” If you were the supervisor of the ice cream stand, how would you ensure that all cones received the same amount of ice cream? What if, instead of being the supervisor of the ice cream stand, you are the manager of a professional baseball team? How would you apply the five-step control process to your job as manager? ControllingControlling involves ensuring that performance does not deviate from standards. Controlling consists of five steps: (1) set standards, (2) measure performance, (3) compare performance to standards, (4) determine the reasons for deviations and then (5) take corrective action as needed (see Figure 1, below). Corrective action can include changes made to the performance standards—setting them higher or lower or identifying new or additional standards. Performance standards are often stated in monetary terms such as revenue, costs, or profits but may also be stated in other terms, such as units produced, number of defective products, or levels of quality or customer service. Figure 1. Five-Step Control Process The measurement of performance can be done in several ways, depending on the performance standards, including financial statements, sales reports, production results, customer satisfaction, and formal performance appraisals. Managers at all levels engage in the managerial function of controlling to some degree. The managerial function of controlling should not be confused with control in the behavioral or manipulative sense. This function does not imply that managers should attempt to control or to manipulate the personalities, values, attitudes, or emotions of their subordinates. Instead, this function of management concerns the manager’s role in taking necessary actions to ensure that the work-related activities of subordinates are consistent with and contributing toward the accomplishment of organizational and departmental objectives. Effective controlling requires the existence of plans, since planning provides the necessary performance standards or objectives. Controlling also requires a clear understanding of where responsibility for deviations from standards lies. Two traditional control techniques are budget and performance audits. An audit involves an examination and verification of records and supporting documents. A budget audit provides information about where the organization is with respect to what was planned or budgeted for, whereas a performance audit might try to determine whether the figures reported are a reflection of actual performance. Although controlling is often thought of in terms of financial criteria, managers must also control production and operations processes, procedures for delivery of services, compliance with company policies, and many other activities within the organization. Controls also come at a cost. It is useful to know that there are trade-offs between having and not having organizational controls. Let’s look at some of the costs and benefits of organizational controls. CostsFinancial costs—direct (i.e., paying for an accountant for an audit) and indirect (i.e., people employed by the organization whose primary function is related to control—internal quality control, for instance). Culture and reputation costs—the intangible costs associated with any form of control. Examples include damaged relationships with employees or tarnished reputation with investors or government. Responsiveness costs—downtime between a decision and the actions required to implement it due to compliance with controls. Poorly implemented controls—implementation is botched or the implementation of a new control conflicts with other controls. BenefitsCost and productivity control—ensures that the firm functions effectively and efficiently. Quality control—contributes to cost control (i.e., fewer defects, less waste), customer satisfaction (i.e., fewer returns), and greater sales (i.e., repeat customers and new customers). Opportunity recognition—helps managers identify and isolate the source of positive surprises, such as a new growth market. Though opportunities can also be found in internal comparisons of cost control and productivity across units. Manage uncertainty and complexity—keeps the organization focused on its strategy, and helps managers anticipate and detect negative surprises and respond opportunistically to positive surprises. Decentralized decision making—allows the organization to be more responsive by moving decision making to those closest to customers and areas of uncertainty. The management functions of planning, organizing, leading, and controlling are widely considered to be the best means of describing the manager’s job, as well as the best way to classify accumulated knowledge about the study of management. Although there have been tremendous changes in the environment faced by managers and the tools used by managers to perform their roles, managers still perform these essential functions. KEY TAKEAWAYSThe control function can be viewed as a five-step process: (1) Establish standards, (2) Measure performance, (3) Compare actual performance with standards and identify any deviations, (4) Determine the reason for deviations, and (5) Take corrective action, if needed. Check Your UnderstandingAnswer the question(s) below to see how well you understand the topics covered in this section. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times. Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section. Licenses and AttributionsWhat is comparing actual performance against standards?The process of comparing actual to planned performance and taking corrective action is called controlling. What are the steps in the control process?Steps involved in Control Process. Establishing standards and methods or ways to measure performance.. Measuring actual performance.. Determining if the performance matches with the standard.. Taking corrective action and re-evaluating the standard.. Why is actual performance compared with standard in the process of controlling?Actual performance is compared with standards in the process of controlling to take corrective actions if significant deviation occurs. What are the 3 steps in the control process?Basically the process of control involves three steps i.e.- (i) setting up standards (ii) performance appraisal and (iii) corrective measures. What is comparing performance against standards?The third step in the control process is the comparison of performance with established standards. You can base your comparison on the monitoring information you collected for services that you have provided or activities you have organised. Then you summarise the outcomes as planned versus actual results.
Why is it important to compare performance to standards?Performance standards and important because they provide employees with a framework of how the company expects them to work. This allows for open communication between the employer and the employee, which can help the employee understand their responsibilities. It also explains how employees can meet these goals.
What is the difference between standard and performance?The term used to indicate the difference between standard performance and actual performance is 'Deviation'. On comparing Actual performance with Standard performance, the 'deviations' are revealed.
Which analysis is comparison of actual and desired performance?Gap Analysis is the comparison of actual performance with potential or desired performance; that is the current state and the desired future state. An important aspect of Gap Analysis is identifying what needs to be done in a Project.
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