March 02, 2022/ Steven Bragg
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. For example, the company
controller 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. Managers will presumably spend more time attending to and correcting these larger variances. 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. There are several valid reasons for using this technique. They are: It reduces the amount of financial and operational results that management must review, which is a more efficient use of their 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 exceptions as part of their annual audit activities, so management
should investigate these issues in advance of the audit. There are several issues with the management by exception concept, which are:
21. Principle of exceptions allows managers to focus on correcting variances between standard costs and actual costs. TRUE 22. Because accountants have financial expertise, they are the only ones that are able to set standard costs for the production area. FALSE 23. While setting standards, the managers should never allow for spoilage or machine breakdowns in their calculations. FALSE 24. A budget performance report compares actual results with the budgeted amounts and reports differences for possible investigation. TRUE 25. A favorable cost variance occurs when actual cost is less than budgeted cost at actual volumes. TRUE 26. An unfavorable cost variance occurs when budgeted cost at actual volumes exceeds actual cost. FALSE 27. Standards are designed to evaluate price and quantity variances separately. TRUE 28. If the standard to produce a given amount of product is 2,000 units of direct materials at $12 and the actual was 1,600 units at $13, the direct materials quantity variance was $5,200 favorable. FALSE 29. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual was 800 units at $12, the direct materials quantity variance was $2,200 unfavorable. FALSE 30. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual was 800 units at $12, the direct materials price variance was $800 unfavorable. TRUE Who are variances from standard costs are reported to?When standards are compared to actual performance numbers, the difference is what we call a “variance.” Variances are computed for both the price and quantity of materials, labor, and variable overhead and are reported to management.
What do cost variances measure?Cost variance (CV), also known as budget variance, is the difference between the actual cost and the budgeted cost, or what you expected to spend versus what you actually spent. This formula helps project managers figure out if they are over or under budget.
What does the controllable variance measure quizlet?Since the controllable variance measures the efficiency of using variable overhead resources, if budgeted variable overhead exceeds actual results, the variance is favorable. Standards are more widely used for nonmanufacturing expenses than for manufacturing costs.
Which of the following is not a reason standard costs are separated into two components?Answer and Explanation: The correct option is (d). If any differences or discrepancies brings in by the variances in the budget and requires managers to revise budgets closer to actual is not considered as the reason behind the separation of standard cost into two different components.
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