Management by exception is the practice of examining the financial and operational results of a business, and only bringing issues to the attention of management if results represent substantial differences from the budgeted or expected amount. For example, a company controller may be required to notify management of those expenses that are the greater of $10,000 or 20% higher than expected.
The
purpose of the management by exception concept is to only bother management
with the most important variances from the planned direction or results of the
business. Managers will presumably spend more time attending to and correcting
these larger variances.
The
concept can be fine-tuned, so that smaller variances are brought to the
attention of lower-level managers, while a massive variance is reported straight
to senior management.
Advantages of Management by
Exception:
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It reduces the amount of financial and operational results that management must
review, which is a more efficient use of their time.
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The report writer linked to the accounting system can be set to automatically
print reports at stated intervals that contain the predetermined exception
levels, which is a minimally-invasive reporting approach.
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This method allows employees to follow their own approaches to achieving the
results mandated in the company's budget. Management will only step in if
exception conditions exist.
Disadvantages of Management by
Exception:
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This concept is based on the existence of a budget against which actual results
are compared. If the budget was not well formulated, there may be a large
number of variances, many of which are irrelevant, and which will waste the
time of anyone investigating them.
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The concept requires the use of financial analysts who prepare variance
summaries and present this information to management. Thus, an extra layer of
corporate overhead is required to make the concept function properly.
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This concept is based on the command-and-control system, where conditions are
monitored and decisions made by a central group of senior managers. You could
instead have a decentralized organizational structure, where local managers
could monitor conditions on a daily basis, and so would not need an exception
reporting system.
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The concept assumes that only managers can correct variances. If a business were
instead structured so that front line employees could deal with most variances
as soon as they arise, there would be little need for management by exception.
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