Q5SE - Horngren'S Financial And Managerial Accounting

Question

Management by exception is a term often used in performance evaluation. Describe management by exception and how it is used in the evaluation of cost, revenue, and profit centers.

Step-by-Step Solution

Answer

The management exception is to ignore smaller problems and focus on solving bigger problems.

Step 1: Management by exception

Management by exceptions refers to the practice which is followed in the offices, in which the financial and operational results of a business and the management will focus on issues that need the attention of the management of the company.

Step 2 Its usage in the evaluation of cost, revenue, and profit centers

Performance reports for costs, revenue, and profit centers generally show all the amounts whether it is actual or budgeted amounts along with the dollar and percentage variances computed. 

The practice of management by exception helps the management to focus only on variances that exceed some dollar amount. Management does not have to investigate smaller variances.