[lms1]

Please review my answer to this study question and let me know if I am on-track with the answer. Thanks!

Ethics Case
BYP1-7 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 an expensive advertising campaign to sell some of its slower-moving products. It was still 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 therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs until sold. Others disagreed. Terrago believed that this cost should be reported as an expense of the current period, based on the conservatism principle. Others argued that it should be reported as Prepaid Advertising and reported as a current asset.
The president finally had to decide the issue. He argued that these costs should be reported as inventory. His arguments were practical ones. 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 inventory rather than as prepaid advertising, less attention would be directed to it by the financial community.
Instructions
1. Who are the stakeholders in this situation?
Stakeholders in this situation include the president, vice president, managers, employees, customers, financial institution, stockholders, Board of Directors (if there is one), as well as any investors of the ‘planned bond’.
2. What are the ethical issues involved in this situation?
Ethical issues in this situation include reporting the expensive advertising incorrectly on the company’s reports. It is understandable that the company does not want to lose its chance at a ‘planned bond’ because they obviously need it to survive in their business, however, reporting expenses (any type expense) incorrectly is unethical in the field of accounting. The Vice President is correct is wanting to report the advertising under Product Costs as it belongs in Period Costs which is a part of this report. The President wanting to report the advertising costs where it is least obvious to the financial community is most unethical. The President is trying to find a way to keep the company solvent by means of deceit.
3. What would you do if you were Wayne Terrago?
As difficult as this may be, I would report the expensive advertising costs as I knew them to be ethically correct and take my chances at survival in the company. I would not want to work for a company that condones unethical behavior.

[morgaine300]

First, fire the VP of Finance cause he should know better than thinking advertising costs are part of production. It's selling costs.

Then report the president to the SEC.

:p

The Vice President is correct is wanting to report the advertising under Product Costs as it belongs in Period Costs which is a part of this report.

This is opposite statements. It can't be correct to report it under product costs if it belongs to period costs, because they are two different things. i.e. it can't be both.

3. What would you do if you were Wayne Terrago?
As difficult as this may be, I would report the expensive advertising costs as I knew them to be ethically correct and take my chances at survival in the company. I would not want to work for a company that condones unethical behavior.

Good for you. But good luck finding a company that never does anything unethical. (Although many of them aren't attempting to be unethical -- just a lot of managers don't know what they're doing and don't realize.)

You haven't actually stated anywhere how the advertising costs should be reported -- i.e. are they expensed in the current period, or recorded as prepaid advertising? You haven't actually addressed that issue. You have only stated you'd reported them as ethically correct. But what's correct?

Whatever I didn't address appears to me OK.