Management by Exception

Definition

Management by exception is a control technique where managers focus their attention on addressing significant deviations from planned performance rather than monitoring every aspect of an operation. The core idea is to prioritize addressing issues that fall outside of normal or expected parameters, allowing managers to be more efficient and effective in their oversight responsibilities.

5 Must Know Facts For Your Next Test

1. Management by exception allows managers to focus on addressing significant deviations from planned performance rather than monitoring every aspect of an operation.
2. This approach helps managers be more efficient and effective in their oversight responsibilities by prioritizing issues that fall outside of normal or expected parameters.
3. Budgets play a key role in management by exception, as they provide the baseline for identifying significant variances that require managerial attention.
4. Responsibility accounting systems assign accountability for costs and performance to specific managers, enabling the application of management by exception.
5. Variance analysis is a critical tool used in management by exception, as it identifies and explains the differences between actual and planned/budgeted results.

Review Questions

• Explain how management by exception is used to evaluate goals in the budgeting process.
  • In the context of budgeting, management by exception allows managers to focus their attention on addressing significant variances between actual and budgeted performance. By setting thresholds for acceptable deviations, managers can quickly identify areas that require intervention, rather than scrutinizing every budget line item. This enables them to allocate their time and resources more effectively towards achieving the organization's goals, as outlined in the budget.
• Describe how management by exception is applied in the context of different responsibility centers.
  • Management by exception is well-suited for use in various responsibility centers, such as cost centers, revenue centers, and profit centers. In a cost center, managers can use management by exception to identify and address significant variances from budgeted expenses. In a revenue center, they can focus on investigating major deviations from expected sales or revenue. For profit centers, management by exception allows managers to prioritize addressing significant gaps between actual and planned profitability. By tailoring the approach to the specific responsibilities of each center, organizations can leverage management by exception to enhance performance and accountability.
• Evaluate how management by exception can help organizations achieve their strategic goals more effectively.
  • Management by exception enables organizations to allocate their limited managerial resources more efficiently towards addressing the most critical issues and deviations from planned performance. By focusing on significant variances, managers can quickly identify and resolve problems that pose the greatest threat to the achievement of strategic goals, rather than wasting time on minor, inconsequential issues. This selective approach allows organizations to course-correct more rapidly, adapt to changing conditions, and devote their attention to the highest-impact initiatives. Ultimately, management by exception can help organizations achieve their strategic objectives more effectively by directing managerial attention and effort where it is most needed.

Related terms

Budgetary Control: The process of using budgets to monitor and control an organization's activities and financial position.

Responsibility Accounting: A system that assigns accountability for the planning and control of costs to the managers who are responsible for them.

Variance Analysis: The process of identifying and explaining the differences between actual and budgeted or standard performance.