Definition
Management by Exception (MBE) is a management principle where operational decisions that cannot be adequately handled at a lower level are escalated to higher management levels. It enables higher management to focus on more critical decisions. In the context of budgetary control, it implies that only significant variances in budgeted and actual performance require management intervention.
Examples
- Operational Example:
- A factory manager notices that machinery maintenance costs have slightly exceeded the budget. These minor variances don’t require higher management’s attention. However, if there’s a sudden, substantial increase in costs due to machinery breakdown, it will be escalated to the senior management for review and decision-making.
- Financial Example:
- During quarterly budget reviews, small variances between projected and actual sales are noted but do not prompt any action. A significant drop in sales revenue, however, must be reported to and addressed by senior financial managers immediately.
Frequently Asked Questions
What is the primary benefit of Management by Exception?
Answer: It allows management to focus on critical issues and decisions, improving efficiency and effectiveness by not getting bogged down with minor issues.
How does Management by Exception relate to budgetary control?
Answer: In budgetary control, MBE helps focus on significant deviations from budgeted figures (adverse variances), ensuring resources are allocated effectively to address critical discrepancies.
When should a manager escalate an issue using MBE?
Answer: A manager should escalate issues when they involve significant variances that affect the overall performance, and when lower-level management cannot resolve them adequately.
Can MBE be applied in non-financial contexts?
Answer: Yes, MBE can be used in various contexts, such as operational management, human resources, and supply chain management, where it helps to prioritize critical issues.
Are there any downsides to Management by Exception?
Answer: Potential downsides include the risk of lower-level management becoming passive, over-reliance on senior management, and possible neglect of minor issues that could escalate over time.
Related Terms
- Budgetary Control: The process of managing income and expenses by comparing budgeted figures with actual performance and taking necessary actions based on variances.
- Variance: The difference between planned financial outcomes and actual financial outcomes.
- Adverse Variance: A situation where actual financial performance is worse than the projected performance.
Online Resources
Suggested Books for Further Studies
- “Principles of Management” by Harold Koontz and Heinz Weihrich
- “Managerial Economics and Business Strategy” by Michael R. Baye and Jeffrey T. Prince
- “Financial and Managerial Accounting” by Carl S. Warren and James M. Reeve
Accounting Basics: “Management by Exception” Fundamentals Quiz
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