Management by Exception: A Critical Review Prepared To: Dr. Mohiuddin Ahmed Professor Department of Management Studies University of Dhaka Prepared By: Md. Sumsul Arifln Batch-16th Sec-A Roll-042 Submission Date: 13. 12. 2013 Management by Exception Perhaps the most fundamental of all control techniques is management by exception (MBE), a control principle which suggests that managers should be informed of situation only if control data show a significant deviation from standards. What is Management by Exception?
A style of business management that focuses on identifying and handling cases that eviate from the norm. Practice whereby only the information that indicates a significant deviation of actual results from the budgeted or planned results is brought to the management’s notice. Its objective is to facilitate management’s focus on really Important tactlcal ana strateglc tasks Management Dy exceptlon Is tne 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, the company ontroller 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. 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.
Management by Exception (MBE) is a practice where only significant deviations from a budget or plan are brought to the attention of management. Advantages of Management by Exception The process focuses management time and attention on the most critical variances, which should be a more efficient use of time. 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.
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. The company’s auditors will make inquiries about large xceptions as part of their annual audit activities, so management should investigate these issues in advance of the audit. Disadvantages of Management by Exception There are several issues with the management by exception concept, which are: 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. 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. 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. 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 s soon as they arise, there would be little need for management by exception.
The process assumes the budget is well designed, and that there are no issues that need to be addressed if results match the budget. The process assumes staff cannot handle variances; instead management must be brought in. Conclusion Management by Exception is a practice where management is only notified when results vary Trom tne plan. laeally tnls allows management to Tocus only on tnose areas that need their attention, and spend their remaining time on other areas, such as strategy.