The correct answer is: Focusing management reports on areas which require attention and ignoring those which appear to be performing within acceptable limits.

When management by exception is operated within a standard costing system, only the variances which exceed acceptable tolerance limits need to be investigated by management with a view to control action. Adverse and favourable variances alike may be subject to investigation, therefore using management reports to highlight exceptionally good performance, so that favourable results can be built upon to improve future outcomes is incorrect.

Any efficient information system would ensure that only managers who are able to act on the information receive management reports, even if they are not prepared on the basis of management by exception. Therefore sending management reports only to those managers who are able to act on the information contained within the reports is incorrect.