Chapter 23, Problem 7QS

1)

To determine

Introduction:

Management by exception

• Management by exception refers to focusing efforts of the management on problem areas or issues that need resolution. Examples of such issues are Unfavorable variances, exceptional increase in costs or decrease in revenues etc.
• Variances are the difference between the budgeted values and actual values of the cost and revenue items and are analyzed for components of direct and indirect costs. In case of costs, the change is deemed unfavorable if the actual costs exceed the budgeted costs and the change is deemed favorable if the actual costs do not exceed the budgeted costs.
• In case of revenues, the change is deemed favorable if the actual revenues exceed the budgeted revenues and the change is deemed unfavorable if the actual revenues are less than the budgeted revenues.
• Management by exception has an underlying principle of directing efforts on issues that need immediate attention first, and focusing on other aspects of the business later.

To explain:

Concept of Management by exception

2)

To determine

Introduction:

Standard Costing:

• It is a cost estimation and analysis where the standard costs for variable components such as material, labor and overheads and for fixed costs such as depreciation, administrative expenses etc. are calculated for a fixed quantity of goods.
• The calculations for the estimated goods to be produced is considered and compared against the actual cost components and the differences are analyzed through variance analysis of measures such as price variance analysis, efficiency variance etc.
• Favorable variances have a positive impact on the costs and profitability and the unfavorable variances have an adverse impact on costs and profitability.

Variance Analysis

• Variances are the difference between the budgeted values and actual values of the cost and revenue items and are analyzed for components of direct and indirect costs.
• In case of costs, the change is deemed unfavorable if the actual costs exceed the budgeted costs and the change is deemed favorable if the actual costs do not exceed the budgeted costs.
• In case of revenues, the change is deemed favorable if the actual revenues exceed the budgeted revenues and the change is deemed unfavorable if the actual revenues are less than the budgeted revenues.

Management by exception

• Management by exception refers to focusing efforts of the management on problem areas or issues that need resolution. Examples of such issues are Unfavorable variances, exceptional increase in costs or decrease in revenues etc.
• Management by exception has an underlying principle of directing efforts on issues that need immediate attention first, and focusing on other aspects of the business later. This is achieved through variance analysis.

To Determine:

How standard costs help in implementing management by exception.