Forecasting and Cost Reporting

The first step when cost reporting is to ascertain what the production/series cost to date is.

Cost to date can be defined as follows:-

Cost to date = costs invoiced/paid to date + costs incurred but not yet invoiced/paid to date (accruals)

Costs  invoiced/paid to date

The costs invoiced or paid to date are a statement of fact and can be determined by referring to the expenditure codes on the trial balance at the cost report date. For completeness, all received invoices and petty cash should be on the system and both bank and petty cash reconciliations performed up to the cost report date.

All costs must be coded to the relevant budget account, the account description that most accurately matches the cost entry. If there is a new cost which doesn’t fit in an account that already exist, it is best practice to add a new cost code with a description that matches the entry and allocate an estimated final cost accordingly. What is not advisable is to code costs to accounts that aren’t relevant just because there is “money there”. It distorts the final cost position, can mislead overage and underage analysis, and the loss of that logic makes it difficult to trace costs.

Costs  incurred but not yet paid/invoiced (accruals)

These are the costs for goods and services that have been used or consumed at the cost report date but no invoice has been received or cash paid out yet.   Rarely will these costs be processed in the accounts system via a journal (possibly only at year end) and so the question arises of how best to account for these in the report.  There are two recommended ways:

1. To include all accruals in ‘commitments/purchase orders’ and thus ignoring the technical accounting definition of ‘accrual’.  This is probably the most common treatment and is best when using some of the more standard accounting software to produce your cost report.  In this scenario costs to date are therefore only those actually processed through the accounts system.

2. To identify and list in a separate ‘accruals’ column in your cost report.  This approach, whilst technically correct, is more complicated to put into practice unless you are using a spreadsheet based cost report which enables you to split out the accruals from the outstanding commitments and purchase orders.

The second step when cost reporting is to ascertain your commitments.  For our purposes they can be defined as a contracted (not always written) financial obligation entered into for goods/services that have been received or for future use.  It is worth noting here that it is common practice to ignore cancellation clauses from contracts when estimating the value of a commitment unless specifically requested to do so. For example, a 10 week contract for a Production Secretary would be valued in its entirety rather than just the notice provision in their contract of 2 weeks.

As can be judged by the broad definition there are a wide range of commitments and therefore various methods of estimating them.

1) A purchase order system: the production crew are required to issue sequentially numbered purchase orders whenever they contract any goods or service in excess of a set amount. The top copy is given to the supplier.  Two copies of the purchase order are then given to the accounts department who match the purchase orders to invoices as they come in (raising queries whenever the invoice differs from the supporting purchase order). When the cost report is prepared, the  Accountant is able to accrue for the costs for all unmatched purchase orders.

2) The Line Producer/Production Manager cost monitor system: the Line Producer/PM has a cost monitor set up which has columns for invoiced costs, committed costs and costs to come. As soon as a cost is incurred then they log the cost in the committed cost column and as invoices come in, the cost is moved from the committed column to the spent column.

At the time that the cost report is produced the Production Accountant is given the cost monitor and has to firstly agree that the PM’s invoiced costs correspond with the figures on the nominal ledger from the accounting system. All differences have to be discussed with the PM and resolved and the Production Accountant must effectively reconcile the nominal ledger spent to date figure per the monitor to the nominal ledger. Once differences have been resolved, the committed costs in the cost monitor should represent cost incurred but not yet invoiced. Theoretically, the un-invoiced cost should be made up of the unmatched purchase orders (assuming such a system is in place) but in reality, there are often additional commitments in the monitor that have to be accrued for in the cost report.

3) Consultation with heads of departments: each head of department will have been given a budget and responsibility for controlling that budget. At the time of cost reporting it is often helpful to meet the heads of departments to discuss with them the costs that they have incurred to date (and the costs that they are likely to incur in the future). An Art Director will usually, for example, have an estimate of the cost of each set that is to be constructed and dressed and will usually know what costs are already committed. A Location Manager will be able to provide a list of all locations contracted to date and an estimate of the cost of locations that have not yet been confirmed. The information gleaned from the heads of departments (including the Line Producer/PM) can be used to identify commitments that for one reason or another are not covered by a purchase order.

4) Reference to contract: every time a contract is issued by production, the accounts department must be given a copy. A contract represents a commitment and if any part of a contractual deal has yet to be invoiced or paid it should be accrued for.

5) Petty cash and floats: when the crew are given petty cash or floats it is often politic to consider the unaccounted for part of a float as a commitment. For example, if a wardrobe department has been given floats totalling £10,000 then there is a good chance that most of that float will be spent and the Production Accountant should consider whether he/she should consider this to be a commitment. However, care should be taken to ensure that the float is not already allowed for in unmatched purchase orders or other commitments.

6) Call sheets/casting advice notes etc: there are numerous documents issued during a production that give an indication of accrued costs. Daily call sheets generally list all the daily cast, crew and equipment requirements, and casting advice notes will indicate the likely cost of an artist.

7) Observation: the Production Accountant will generally be alert to what is going on in a production and needs to be aware of the cost implications of events. For example, breakages or damage to a location are likely to cost money and an insurance claim may well be subject to an excess (or the claim might fail!)

Commitments

Any contracted cost is a commitment and some Production Accountants like to accrue for all such costs as soon as they are incurred. Taking this policy literally, you would accrue for the total contracted cost of say a Production Secretary as soon as he/she was contracted and whilst this is not wrong, many accountants prefer to put the future cost of such crew as a cost to completion despite the fact that the cost is contractually committed.

Costs to complete

Having ascertained what the costs to date are, the Production Accountant, working with the Line Producer/PM, needs to forecast what additional costs will be incurred in completing the project. Many of the methods used to identify costs incurred but not yet invoiced are also used to identify costs to complete. The principal ways to quantify costs to complete are:-

1) The Line Producer/Production Manager cost monitor system: the Line Producer cost monitor includes estimates of cost to completion;

2) Consultation with heads of departments and the Line Producer/PM;

3) Analysis of the locations to be covered in the planned shooting itinerary or the script (in the case of drama), for example, if there are four weeks of production to completion then you need to allow for four weeks of crew/equipment costs  and decide (based on where the shooting is to occur) how much travel might occur and generally consider what costs are likely to be incurred in carrying out the planned shoot. Much of this analysis should be performed in conjunction with the Line Producer/PM but the Production Accountant should not rely completely on the Line Producer’s costings; the Production Accountant needs to use his/her experience to consider whether estimates are reasonable and should query items that appear suspect;

4) Observation: the Production Accountant needs to keep his/her eyes and ears open to identify potential additional costs.

The cost report commentary

Where a cost report is being sent to an external party it is helpful to send a written commentary on the cost report as part of the package. The extent of commentary is often down to personal style but as a general rule, it is best to keep the commentary relatively brief.  It is important that key information or assumptions are brought to the attention of the person receiving the cost report. This can be achieved by starting the commentary with a progress report in which important information can be highlighted,  but where a piece of information is fundamentally important to understanding the cost report it may be necessary to send a covering letter (or e-mail) with the cost report drawing attention to the matter of importance.