Question

Variance analysis enables management-by-exception, describe this action?

Option 1: Focusing on significant deviations from the budgeted or standard performance
Option 2: Ignoring all variances and maintaining a fixed budget
Option 3: Analyzing only positive variances to motivate employees
Option 4: Comparing actual performance to budgeted performance without any exceptions

Answer 1

Option 1: Variance analysis enables management-by-exception by focusing on significant deviations from the budgeted or standard performance.

Step-by-step explanation:

Variance analysis enables management-by-exception by focusing on significant deviations from the budgeted or standard performance. This means that management only pays attention to variations that are considered significant, rather than all variances. By analyzing these significant deviations, management can identify areas where corrective actions are needed and take appropriate measures to address the discrepancies. This allows management to identify areas where corrective actions are needed.

For example, if a company budgets $10,000 for advertising expenses in a month, but actual expenses amount to $15,000, this would be a significant negative variance. Management would investigate the reasons behind this deviation and take corrective actions to control and reduce future advertising expenses.

Therefore, option 1: Focusing on significant deviations from the budgeted or standard performance, accurately describes the action of management-by-exception through variance analysis.