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Management By Exception: Definition and Limitations Video

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  • 0:02 Management by Exception
  • 0:57 Variance Analysis
  • 1:31 Example
  • 2:42 Advantages
  • 3:16 Disadvantages
  • 4:04 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Sometimes things go as planned, and sometimes they don't. In this lesson, you'll learn about management by exception, including how it works and its advantages and disadvantages. You'll also have an opportunity to take a short quiz.

Management by Exception Defined

Management by exception is a management system where business results are compared against the results that were either budgeted or planned. Unlike other types of management systems, management by exception means that management intervenes in daily operations only if there is a deviation, or variance, between the actual results and the planned results.

Minor deviations may be brought to the attention of low-level supervisors, while huge deviations may be shot straight up to the top levels of management. This, theoretically, allows managers to focus on the most pressing and important issues and problems. For example, if productivity goals are being met, managers are busy dealing with other problems rather than walking around the production floor monitoring activity.

A Crucial Tool: Variance Analysis

One of the most important tools used in management by exception is variance analysis. Variance analysis is a process that is used to determine the variance, or difference, between the actual results and the planned for results and the cause of the difference. In other words, it's the technique used to determine whether there is a problem needing management's attention when managing by exception.

Example

Let's look at a quick example of management by exception and the use of variance analysis. Edward is an accountant who is responsible for tracking the production costs for his company's production division, which produces toys. Edward's company has launched a new toy line. The cost per unit of production was budgeted during the beginning of the project.

In reviewing the monthly invoices and receipts, Edward has determined that the production division is 10% over budget on the new toy. Company procedure only gives him authority to address overages of 5%, so he must bring this issue to his manager, Marty.

Marty has the authority to investigate and address variances of up to 10%. He investigates and determines that about a third of the variance was due to an unexpected increase in the price of one of the commodities used in production. The other two-thirds of the variance were related to price increases from some suppliers that are out of line with market prices. Edward's manager meets with the company's purchasing agent to discuss alternative vendors to correct the variance.

Advantages

Managing by exception has some distinct advantages. Let's look at some.

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