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Bharath R.

asked • 07/20/20

What would you do if you were En Kamal?

En. Kamal, is an accountant for ABC. Sdn Bhd. He was reviewing production cost report for the year. One amount in this report continued to bother him - advertising. During the year the company had carried out 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 internal debate regarding how to report advertising cost. The director of finance argued that the advertising cost should be reported as cost of production, just like the direct material and direct labour. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs unit sold. Others disagreed.

En Kamal believed that this cost should be reported as an expense of the current period based on the prudential principle. Others argued that it should be reported as prepaid advertising and reported as a current asset.

The CEO 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 entity was experiencing financial difficulty and expensing this amount in the current period might jeopardize a plan debenture 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.

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