Problem:
Wayne Terrago, controller for Robbin Industries, was reviewing production cost reports for the year. One amount in these reports continued to bother him-advertising. During the year, the company had instituted and expensive advertising campaign tgo sell some of its slower-moving products. It was too early to tell whether the advertising campaign was successful.
There had been much internal debate as how to report advertising cost. The Vice president of finance argued that advertising costs should be reported as a cost of production, just like direct materials and direct labor. He therfore recommended that this cost be identified as manufacturig overhead and reported as part of inventory costs until sold. Terrago believed that this cost should be reported as an expense of the current period. or as prepaid advertising (current asset) The president decided to report as inventory. He noted that the company was experiencing financial difficulty and expensing this amount in the current period might jeopardize a planned bond offering. Also, by reporting the advertising costs as inventgory less attention would be directed to it by the financial communuty.
1. Who are the stakeholders in this situation?
2. What are the ethical issues involved in this situation?
3. What would you do if you were Wayne Terrago?