EXERCISE 10-15 (CONTINUED) ALTERNATIVE SOLUTION

1. Lansing has evidently set very loose standards in which the standard prices and standard quantities are far too high. This guarantees that fa-vorable variances will ordinarily result from operations. If the standard costs are set artificially high, the standard cost of goods sold will be arti-ficially high and thus the division’s net operating income will be de-pressed until the favorable variances are recognized. If Lansing saves the favorable variances, he can release just enough in the second and third quarters to show some improvement and then he can release all of the rest in the last quarter, creating the annual “Christmas present.”