Every other process that is running smoothly and closely to the standard goals is ignored. These variances could be good or bad. The budget on one project might have been way over and the budget of another project might be way under budget. A manager who uses the management by exception philosophy will take a look at both projects to determine why the large variances exist and how they can be minimized.

What Does Management by Exception Mean?

Managers use budget reports, revenue reports, and production schedules to gather information about the company’s performance. In all of these areas, managers usually have performance standards or goals that need to be met. A production goal for example might be increased production in a smaller amount of time. A budgetary goal might include producing the extra products without increasing costs across the board. Managers get tons of information and reports like these to help manage the company or a department, but how to do know what to look for?

Example

Management by exception is a way for managers to effective save time and more efficiently run their department or business. Management by exception usually is most effective when managers have control over the problem areas. That way they can change processes to improve the company.

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What Does Make or Buy Decision Mean?

What is the definition of make-or-buy decision? The make vs buy decision traditionally relates to parts in a manufacturing process. If an organization finds that they can make one or more of the manufacturing inputs that they use in house, then the organization should evaluate the cost and compare it to the cost of purchasing those inputs elsewhere.

However, a company also has to make this decision as it relates to building software or carrying out business functions. For example, if an organization needs a certain type of software but does not have the IT resources necessary to build it in-house, then it makes sense for the business to look outside of the business to purchase this software.

There are pros and cons to each of the alternatives, and they depend on the amount and type of resources that the firm holds. Things that business should think about other than cost include: cost of ownership, legal considerations, and how often modifications will need to be made to the product.

Let’s look at an example:

Example

Organization QRS manufactures high quality cases for musical instruments. The COO is currently in the process of deciding if the foam inserts should be manufactured in-house or bought from an external manufacturer.

The cost of manufacturing these inserts in-house consists of:

• Direct labor: $200,000
• Direct materials: $240,000
• Overhead: $100,000

The cost of purchasing these inserts externally is $500,000. What should the COO choose?

The total cost of making these items in-house is $540,000. The COO should purchase the inserts externally.

Summary Definition

Define Make or Buy Decision: Make-or-Buy Decision means an analysis by management on whether the company should produce a product or part or purchase it from a vendor.

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What Does Industrial Engineering Method Mean?

What is the definition of industrial engineering method? Regardless of the specifics of a manufacturing process, units go in and outputs are created at a manufacturing company. When there is a physical between those inputs and outputs, analyzing that relationship can help managers to examine and control costs. This may include something like a time-and-motion studies that express how much direct machinery time is needed to produce a certain amount of output.

While engaging in the industrial engineering method is helpful in examining the physical relationship between inputs and outputs, particularly if the company is interested in performing activity-based costing, it is also very costly and time consuming. For smaller organizations, the industrial engineering method of cost estimation may simply be out of scope.

Let’s look at an example.

Example

Cara is the CFO of a large business that manufactures curtains. The inputs for these curtains include wood, dye, thread, machine hours, and labor. The output, of course, is the finished curtain. Her business uses the industrial engineering method to help estimate costs. Why is this a good choice for Cara’s organization? What information might it give her?

Cara’s organization benefits from the use of this method because it is large and there is a physical relationship between the inputs and the output. It might allow her to discover how much of an input produces a certain amount of output. She may discover, for example, that it takes two hours of direct labor to produce twenty square feet of curtain.

Summary Definition

Define Industrial Engineering Method: This means a way of comparing cost drivers and objects to see how the company can make its operations more efficient.

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