Management by exception
In one sentenceA control approach in which management focuses on large variances that exceed a predetermined threshold and leaves the usual small differences alone.
Simply put
You won't have time to ask about every riyal in every line. So you set a threshold in advance, such as a percentage of the budget or a set amount, and investigate only the variances that exceed it.
Watch out for a small variance that repeats in the same direction every month: it may be small monthly but point to an ongoing problem.
Worked example
A factory decides to investigate only variances that exceed 5% of the budget (an assumed threshold for illustration).
Electricity: budgeted 8,000, actual 8,200200 SAR = 2.5% (not investigated)
Raw materials: budgeted 100,000, actual 112,00012,000 SAR = 12% (investigated)
Line that needs management actionRaw materials only
Don't confuse it with
Variance analysisAnalysis calculates and explains all the variances, and management by exception picks out the ones worth following up.