Question

Explain what is meant by the term management by exception. What is the relationship between the process of standard cost variance analysis and management by exception?

Answer 1

MBE or Management by Exception :

If a manager tries to control all the deviations may end up with controlling nothing. As per MBE to make the controlling effective, manager only focuses on such deviations which are out of the tolerance range. Minute and very minor deviations should be ignored. It helps the manager to reduce ineffective work burden and wastage of time and energy.

Suppose it has been decided that due to inflation the cost price per unit of output will increase by $ 2. If at the time of actual production , cost price increased by less than $ 2 no further action to be taken by the manager because it is with in the range. But if the deviation is more than $ 2 then curative activities must have to be taken by the manager by the name of controlling .

Relationship between standard cost variance analysis and management by exception :

Standard cost variance analysis specks about the list of difference or variances between standard cost or predetermined cost of the product and the actual cost of the product. It plots the list of deviations in the variance sheet. Out of which by the MBE approach , manager only focuses or concentrate on such deviations which are out of the predetermined tolerance range. Standard cost variance analysis provide all the cost variance data for controlling and out of which selected deviations are considered for controlling activities by MBE to make sure that such deviations will not occur again in future.

Summary :

All minor & major, significant & insignificant cost variance data provided by Standard cost variances analysis, But of which only selected variances are considered by MBE approach.