Question 16
(Case and requirements c, d, and e are reprinted from
Journal of Accounting Education, Vol. 15, Charles E.
Davis, “Accounting Is Like a Box of Chocolates: A Lesson in Cost
Behavior,” 307–308, Copyright (1997), with permission from
Elsevier.)
Forrest Gump was one of the biggest movie hits of 1994.
The movie’s fortunes continued to climb in 1995, as it took home
Oscars in six of 13 categories in which it was nominated, including
best picture, best director, and best actor. One analyst has
estimated that the film could generate cash flow as much as $350
million for Viacom, Inc., Paramount Pictures’ parent company. Such
success has insured the film a place among the top grossing films
of all time. This is quite an accomplishment for a movie that took
nine years to make it to the big screen and whose script was not
considered material likely to generate a runaway movie hit.
But was Forrest Gump a money maker for Paramount in 1994?
Films are typically distributed to theaters under an agreement that
splits the gross box office receipts approximately 50/50 between
the theater and the movie studio. Under such an agreement,
Paramount had received $191 million in gross box office receipts
from theaters as of December 31, 1994. Paramount reports that the
fi lm cost $112 million to produce, including approximately $15.3
million each paid to star Tom Hanks and director Robert Zemeckis,
and “production overhead” of $14.6 million. This production
overhead is charged to the movie at a rate equal to 15% of other
production costs.
Not included in the $112 million production costs were the
following other expenses associated with the film. Promotion
expenses incurred to advertise, premiere, screen, transport, and
store the film totaled $67 million at the end of 1994. An
additional $6.7 million “advertising overhead charge” (equal to 10%
of the $67 million promotion expenses) was charged to the film by
Paramount. These charges represent the film’s allocation of the
studio’s cost of maintaining an in-house advertising department.
Paramount also charged the fi lm a “distribution fee” of 32% of its
share of gross box office receipts. This fee is the film’s
allocation of the costs incurred by Paramount to maintain its
studio-wide distribution services. Finally, $6 million in interest
on the $112 million in production costs were charged to the film by
Paramount.
Identify each of the costs mentioned above as a product or period cost. What application bases did Paramount use to apply overhead to this “job”? Was Forrest Gump an “accounting” hit in terms of net income, as computed by Paramount? |
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Question 16 (Case and requirements c, d, and e are reprinted from Journal of Accounting Education,...
Forrest Gump was one of the biggest movie hits of 1994. The movie’s fortunes continued to climb in 1995, as it took home Oscars in six of 13 categories in which it was nominated, including best picture, best director, and best actor. One analyst has estimated that the film could generate cash flow as much as $350 million for Viacom, Inc., Paramount Pictures’ parent company. Such success has insured the film a place among the top grossing films of all...
Forrest Gump was one of the biggest movie hits of 1994. The movie's fortunes continued to climb in 1995, as it took home Oscars in six of 13 categories in which it was nominated, including best picture, best director, and best actor. One analyst has estimated that the film could generate cash flow as much as $350 million for Viacom, Inc., Paramount Pictures' parent company. Such success has insured the film a place among the top grossing films of all...
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