Management by Exceptions

A2b. Management by Exception

"Management by exception is the 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."(source)
The purpose is to have management focused only on correcting those largest, the most important variances, thus ensuring efficiency of their time. Moreover, there is a certain cost associated with investigating the causes of variance and their corrective actions. In top of that, since the management will only step in if exception conditions exist, the lower management would have a chance to apply their own corrective actions to areas of smaller variances. Also, investigating different variances could help the company to detect possible fraudulent activities. 
To ensure that only those significant cost variances will reach the upper management the company needs to establish the threshold based on possible effects those variances could have on the company's bottom line. 
To take advantage of the concept the company's senior management needs to define a reasonable level of tolerance such as 7% or more of the flexible budget amount for each cost. This means that the management will only address those problems that exceed the threshold and will delegate less significant ones to the lower management. Expenses 7% or higher than the expected are to be reported to the higher management as soon as they accrue. By regularly updated the management with the variance reports would provide them with enough time to focus on those critical issues that could affect the company's profitability.  In addition, variances that are not that large but have unfavorable trend for a couple of months also require the management’s attention.  Management then has to investigate possible problems underlying those significant variances and develop a plan to correct them, before they get out of hand. Management is...