Movie Production Job Costing

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Ever heard of Art Buchwald? He was a famous writer for the Los Angeles Times and is credited writing certain movie scripts. One script was for the movie "Coming to America" for which he won a lawsuit against Paramount Studios. Art Buchwald claimed that he never knew a movie that made money - a reference to the unique accounting methods studios had. More about that some another time.

A few years back, before everything went digital, movies were shown in theatres via 35mm reels. These reels were the size of a small car tire. Each reel (called a duplicate because they duplicated the master copy) may cost up to $1500 and some movies needed two reels. If a movie was thought to be a potential hit the distribution arm of the studio would arrange for the movie to be sent to 2000-2500 movie theatres all over the nation. So, you see this would be a major cost to the production company.

Studio's set up a job cost system for each movie and kept track of all production costs and revenue for each production company along with their own bank account. We all know of quantity discounts when purchasing and the studio took advantage of this opportunity and enter into a separate contract with the film duplicating houses for these rebates. The film duplicating houses would charge a certain amount per film duplicated and send the bill out to the production company for payment. The total amount of film duplicated for all movies over a year would earn a rebate at the end of the year for the studio. One movie duplicated 2000 times for 2000 theaters or $4-5,000,000 (a figure not meeting the threshold for any rebate at the end of the year) for the production company). But if the studio had 15 movies and those 15 movies had 1500 duplicates sent to 1500 theaters the total cost of duplicates would be $35-45,000,000 for the year and large enough to earn a rebate. The rebate check would be made out to the studio based on all the duplication work the studio sent them for the year..

What do you think of this practice? Is it legal?