Cost Classification and Profitability Analysis of the Film "Forrest Gump"

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Cost Classification and Profitability Analysis of the Film "Forrest Gump"4‐28Product and period costs(LO3,5) (Case and requirements c, d and e are reprinted fromJournal ofAccounting Education, Vol. 15, Charles E. Davis, “Accounting Is Like a Box of Chocolates: A Lesson in CostBehavior,” 307-308, Copyright (1997), with permission from Elsevier)Forrest Gumpwas one of the biggest movie hits of 1994. The movie's fortunes continued to climb in 1995, asit took home Oscars in six of 13 categories in which it was nominated, including best picture, best director, andbest actor. One analyst has estimated that the film could generate cash flow as much as $350 million forViacom, Inc., Paramount Pictures' parent company. Such success has insured the film a place among the topgrossing films of all times. This is quite an accomplishment for a movie that took nine years to make it to thebig screen and whose script was not considered material likely to generate a runaway movie hit.But wasForrest Gumpa money maker for Paramount in 1994? Films are typically distributed to theaters underan agreement that splits the gross box office receipts approximately 50/50 between the theater and the moviestudio. Under such an agreement, Paramount had received $191 million in gross box office receiptsfromtheatersas of December 31, 1994. Paramount reports that the film cost $112 million to produce, includingapproximately $15.3 million each paid to star Tom Hanks and director Robert Zemeckis, and “productionoverhead” of $14.6 million. This production overhead is charged to the movie at a rate equal to 15% of otherproduction 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 atthe end of 1994. An additional $6.7 million “advertising overhead charge” (equal to 10% of the $67 millionpromotion expenses) was charged to the film by Paramount. These charges represent the film's allocation ofthe studio's cost of maintaining an in‐house advertising department. Paramount also charged the film a“distribution fee” of 32% of its share of gross box office receipts. This fee is the film's allocation of the costsincurred 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.Requireda.Identify each of the costs mentioned above as a product or period cost.a. Identification of Product and Period CostsIn film production, costs are categorized as either product costs (capitalized as part of thefilm's productioncosts) or period costs (expensed in the period incurred).•Product Costs:oProduction Costs: The $112 million spent on producing "Forrest Gump," including $15.3million each for actor Tom Hanks and director Robert Zemeckis, and $14.6 million inproduction overhead.people.stern.nyu.eduoProduction Overhead: The $14.6 million charged at a rate of 15% of other productioncosts.•Period Costs:oPromotion Expenses: The $67 million for advertising, premieres, screenings,transportation, and storage.oAdvertising Overhead: The $6.7 million charged at 10% of promotion expenses.oDistribution Fee: The 32% fee on Paramount's share of gross box office receipts.oInterest Expense: The $6 million interest on the $112 million production costs.b.What application bases did Paramount use to apply overhead to this “job“?b. Application Bases for Overhead

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