Management by exception here is the practice of investigating, resolving and handling such occurrences by using skilled staff and software tools.
If actual performances deviate significantly, the concern needs to be passed to the senior managers, as an “exception has occurred”.
Adverse variance "exists when the difference between the budgeted and actual figure leads to a lower than expected profit".
[14] Favourable variance "exists when the difference between the budgeted and actual figure leads to a higher than expected profit".
Management by exception focuses mainly on large adverse variances, to find the areas of business, which deviates from predetermined standards in a negative way.
[15] When reviewing management by exception and trying to determine where a skill set resides or what style they follow, it is important to keep in mind that this leadership method involves two distinct paths.
In a Laissez-faire, relaxed environment, where individuals understand their roles and are SMEs respectively, then following a more passive approach may encourage group morale and sense of independence.
In a more stringent, less straightforward environment with people who are only starting in the role or not fully understanding tasks, taking a more active position would most likely prove to be the more beneficial route, as the step-by-step guidance can improve competence, as well as confidence.
[10] Occurrences of mistakes in calculating budgets results in large variance differences and finding the errors can be time-consuming (thus expensive).