MANAGEMENT

ACCOUNTING

PROJECT REPORT

BOLLYWOOD MOVIE COST

ANALYSIS

GROUP - 6

Ashik Ahmed - 190101032

Chirag Chaudhary - 190103046
Danish Saeed - 190101039
Naincy Chittransh - 190101067
Smriti Shukla - 190101116
Varun Sunil Kaore - 190103165

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TABLE OF CONTENTS
1. INTRODUCTION - 3-4

2. LITERATURE REVIEW - 5-7

3. DATA & METHODOLOGY - 8-10

4. EMPIRICAL ANALYSIS - 11-14

5. CONCLUSION - 15

6. REFERENCES - 16

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INTRODUCTION

The Indian Film Industry plays a large part on the global cinematic map where
approximately 1600 films are produced every year in various languages. As of
2013, India is ranked first in terms of annual film output and the industry reached
overall revenues of $1.86 billion (₹93 billion) in 2011. In 2015, India had a total
box office gross of US$2.1 billion, third largest in the world. The Hindi language
film industry, Bollywood, represents 43% of box office revenue. However, these
great revenue figures are associated with great cost that are incurred while making
these movies.

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This report focuses on these costs that are associated with the making of these
films and will provide a detailed analysis of the break-up of these costs at each
level of the production of Bollywood movies.
"Financing in Bollywood has never been a problem, for better or worse. In the
past, banks and financial institutions were not allowed to invest in the Indian film
industry, because the government didn’t recognize it as an “industry” in the first
place. Records of the mafia (called “Underworld” in the country) and other shady
sources pouring money into the industry have been corroborated on various
occasions. In 2001, the Central Bureau of Investigation (India’s version of the FBI)
seized all prints of the movie “Chori Chori Chupke Chupke” because members of
Mumbai’s underworld had funded it.

This scenario precluded global financiers and studios from entering production in
India until 2001, when cinema was accorded industry status. Today, every major
American studio — from Walt Disney to 20th Century Fox — has a presence in
India, either by itself or via partnership. This has been a two-way exchange: the
Mumbai-based Reliance group is now the parent company of Steven Spielberg’s
DreamWorks. Post 2001, the budgets of films have increased, as have the
frequency of their worldwide releases and the scale of their grosses." - IndieWire.

There are more than 1000 production organizations running in India like Yash Raj
films, Dharma Productions, Eros International, Red Chili Entertainment etc., but
only a few of the are successful with AVM Productions being the oldest surviving.

With the growing demand and popularity of the Indian Cinema, many foreign
production organizations are coming to India to produce Bollywood Movies.
The list includes very famous names like:
1. Warner Bros
2. Viacom18
3. Sony
4. Fox Star Studios
5. Walt Disney Pictures
6. UTV Motion Pictures

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LITERATURE REVIEW

Despite being the largest producer of movies in the world, Bollywood—the Hindi
movie industry—is under-researched. With over 1,200 film releases and over 2
billion box office (BO) ticket sales in a year, Indian film industry is the world’s
largest producer of motion pictures. Valued at `138.2 billion in 2015, the Indian
film industry is slated to touch `174.1 billion in 2017 (Kapoor, 2017). The Indian
film industry comprises of several small regional film industries producing movies
in as many as 23 regional languages. The biggest contributor among these is the
Hindi movie industry, colloquially known as “Bollywood”, which although
accounts for only 15% of the films made in India but also contributes about 43% in
terms of the BO collection. A comparison of the size and the business that
Bollywood does vis-à-vis other film industries worldwide can also be inferred from
the facts that among the world’s top 10 highest paid actors in 2017, 3 work
exclusively in Bollywood; the production budget of some of the films released in
recent years was as high as `1.8 billion, and some of the movies produced in
Bollywood have generated overseas BO collection of more than USD200 million.
One of the plausible reasons for Bollywood receiving about 1/20th of the research
attention by Hollywood could be the fact that most of the studies on film industries
have been carried out by researchers based in the USA and European countries,
and the assumption that the findings of those studies apply to Bollywood as well.
That is, as results are available from Hollywood and European film industries, it
does not make sense for researchers to study the same phenomenon in the context
of the Hindi movie industry. However, this does not seem to be true for three
reasons:
(a) significant difference in the industry structure;
(b) significantly different product; and
(c) significantly different consumer behavior
As part of this literature review, we will look at three things namely the cost
classification of a typical Bollywood film and the directly attributable costs related
to the same. Secondly, we will also look at film cost amortization and the

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possibility of using the discounted cash flow model to determine a film’s value in
use.
In terms of the numbers, secondary data from websites (Box Office India and
IMDb) was used for variables such as movie’s theatrical performance (measured
through weekly BO collection for the first five weeks), number of theater screens
the movie was released on, IMDb rating, theater footfall for the movie, budget,
satellite right price, and window period (defined as the time between a movie’s
theatrical release and television premier). Primary data from the Broadcast
Audience Research Council (BARC, the organization responsible for tracking
audience response for television content in India) was taken for the performance
metric ATS, which is defined as the average time spent by the viewers during the
TV premier of the movie. We collected data on these variables on a sample of 30
movies released during 2016

COSTING OF A BOLLYWOOD FILM

Examples of ‘directly attributable’ film costs that can be capitalized could include:
•Direct labor: e.g. actors, film crew, security
•Production costs: e.g. editing, visual effects

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•Production overhead costs: e.g. studio rent, costumes, catering
•Production-related administrative costs: e.g. insurance
•Interest costs: if directly attributable

FILM COST AMORTIZATION

Does cost classification impact amortization? In practice, regardless of whether
film producers present their capitalized film costs as intangible assets under IAS 38
or inventories under IAS 2, they select the amortization method that most
appropriately reflects underlying economic reality subject to pragmatic constraints
such as simplicity of application and the availability of reliable data. In that sense,
the presentation as inventories or intangible assets is irrelevant. What revenues
should be included when assessing amortization methods? Under the approach
outline above - of accelerating amortization based on the decline in asset value -
we would expect that film producers will continue to model expected revenues to
help them assess appropriate useful economic lives and to support the carrying
value of film cost assets at each reporting date. Generally, film revenues should
include estimates of revenues from all markets and territories where persuasive
evidence exists that such revenue will occur e.g. because the film producer can
demonstrate a history of earning such revenues. These revenues can typically
include revenues associated with theatrical release of the film, DVD sales,
licensing sales to broadcast or cable networks and release via digital platforms. In
some instances, revenues from other sources – such as video games and other
merchandising revenues from the sale of consumer products – may be included, if
they can be reasonably estimated based on historical experience with similar films.

How should costs related to a film producer’s distribution system be included

in a discounted cash flow model to determine a film’s value in use?
A key consideration in determining the net outflows involves the remaining
distribution costs. The major film producers have mature distribution networks

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with minimal incremental distribution costs for individual films; whereas for an
independent producer’s perspective, the cash outflows from distribution could be
significant because it will be need to pay a distribution fee (typically 8-15% of
revenues, often in the form of an advance funding payment from the distributor
that will be recouped from theatre and broadcast revenues).

DATA AND METHODOLOGY

The Cost of a Big-budget Bollywood Movie

Production Heads ₹Crore Income Service VAT Total
Tax ₹Cr Tax ₹Cr ₹Cr Tax ₹Cr
Artists & Technicians 40 8 4.4
Shooting/ Production 50 2.5 5 2.5
Expenses
Interest. Insurance & 5
Financing Cost
Total Production Cost 95 10.5 9.4 2.5 22.4
Print Cost 5 0.25 0.5 0.25
Publicity Cost 10 0.5 1 0.5
Total Cost of Film 110 11.25 10.9 3.25 25.4
Total Cost of Film 135.4
(incl Tax)

Taxes have been calculated assuming a revenue of ₹100 Crore.

Income Tax: The pay of artists and technicians falls In the highest tax slab but an
average tax rate of 20% has been used for calculation; for shooting, print and
publicity. an average rate of 5% has been used.

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Service Tax: All artists and technicians services must pay a service tax of 1236%
(an average rate or 11% has been used here for calculation). However, some
production expenses also include the purchase of certain goods, which attract VAT
of about 5 to 12%.
(An average service tax of 10% and VAT of 5% on all production expenditure has
been used for calculation.)

Profit/Loss for the Producer

Film Revenue ₹Cror Entert Income Service VA Total
e ainmen Tax Tax T Tax
t Tax ₹Cr ₹Cr ₹C ₹Cr
₹Cr r
Box Office 175
Collection
Less: Avg (43.75) 43.75 43.75
Entertainment Tax
@ 25%
Net Box Office 131.25
Collection
Less: Avg Exhibitor (59.06) 1.77 7.3 9.07
Share @ 45%
Net Collection to 72.19
Distributors
Less: Avg (7.22) 0.22 0.22
Distribution Cost @
10%
Net Collection - 64.97
India
Satellite Revenue 45 1.35 2.25 3.6
Music & Home 5 0.15 0.25 0.4
Video Revenue

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Overseas Revenue 20
Total 134.97 43.75 3.49 7.3 2.50 57.04
Gain/Loss to (₹134.97 Cr - ₹110 Cr) = 224.97 Cr
Producer

Average rates or 3%. 12.36% and 5% have been used for calculation of income
tax, service tax and VAT. respectively.

Revenue for the Government

Earnings/Revenue for the ₹Cr
Government
On Making of Film 25.4
On Recovering Investment 57.04
Total 82.44

Share of a Producer from the Movie Ticket

Ticket Price ₹100
Less: Average Entertainment Tax @ 35% (₹35)
Net Box Office Collection ₹65
Less: Average Exhibitors Share (50%) (₹32.5)
Net Collection to Distributors ₹32.5
Less: Distribution Expenses @ 5-20% (₹3.25)
Net Collection to Producer ₹29.25
Share (%) 29

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EMPIRICAL ANALYSIS

The above data shows different people that are associated with a movie and each of
these have a cost that any production house has to go through.

Starting from the ideation and finalizing the concept for the movie to writing
script, each job requires a skilled professional who would be paid. One of the
major tasks for Indian films is to cast the best fitted crew because Actors in the
Bollywood Industry are a major reason for the success or failure of a film.

Like any other business, a movie’s profit margins will swell only if it outruns
production costs. By this measure, 3 Idiots ranks as an all-time blockbuster
because Vidhu Vinod Chopra spent an estimated Rs 55 crore to make and market
the movie while it sold tickets worth more than Rs 200 crore.

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Digital prints have played an equally significant role because digitization enables
bigger releases. Hindi movies have increasingly embraced digital prints over
analog prints in the past five years. Currently, digital prints account for over 80%
of all Hindi film releases. Significant cost savings apart, digital prints provide
producers the flexibility to add or decrease screens according to their availability in
real time.

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The following are the reasons for the major part of the total cost in the making of a
film:

 Casting a lead actor in a Bollywood movie is becoming increasingly

expensive. Actors may charge upto 35crore for a movie depending on their
previous hits.

 Related expense like fees of a junior artist, equipments cost, music etc. are
rising too.

 Travel and Hospitality has become a lot more expensive since these
industries have increased cost due to government levies.

 Marketing and promotions of movies too, have shot up sharply. Aggressive

marketing has become the norm in Hindi movies, evoking similarities
with the practice in Hollywood.

However, with these costs increasing day by day, new ways for earnings have also
emerged for the producers which is shown in the image below:

 Cable and satellite rights, for one, are turning to be a cash cow. Last year,
four films earned more than Rs 30 crore from selling satellite rights.

 Marketing partnerships with foreign tourism boards in movies that are made
in some foreign tourist locations can also help offset the cost of making the
movie.

 Producers can also sell rights to TV channels, music companies and

distributors

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CONCLUSION AND SUMMARY

With the growing OTT Platforms, there is a large shift in consumer behavior from
mass produced content to specific content defined to audience segments,
particularly in the film industry.

The industry is revolutionizing, which is clear from the fact that in the last two
years, the story and the screenplay has played a significant role in marketing the
film to wider audiences, in addition to addressing important social causes.
Another stark contrast to the traditional modes of filmmaking in recent years is
focused on expenditure and execution of ideas to produce the finished content.
However, in the recent times, the trend has shifted to releasing movies with a small
budget (approx. INR 20 crores), with fresh and hard-hitting content and without an
ensemble star cast. In fact, of the 13 movies that hit the INR 100 crore mark in
2018, five were small-budget movies, in contrast to the single small budget film
which hit this mark in 2016.

According to industry reports, the contribution of big star cast movies to the box
office collections of the top-25 movies dropped to 23% in 2018, compared with
50% in 2015. Once again, smaller budgets and a smaller cast allows filmmakers to
take creative liberties with the content and premise of the films, as well as
introduce fresh talent in the market.

In addition to boosting the industry’s growth, such an approach also takes in the
dynamics of society and consumer sophistication.

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REFERENCES

1. www.bollyarena.net/highest-grossing-bollywood-movies-in-overseas/
2. Bagella, M., & Becchetti, L. (1999). The determinants of motion picture box office
performance: Evidence from movies produced in Italy. Journal of Cultural
Economics,23(4), 237–256
3. FICCI-KPMG Indian Media and Entertainment Industry Report 2013
4. https://www.pwc.com/kr/ko/industries/enm/pwc_miag_issue10_film-cost-
capitalisation.pdf
5. https://www.icaew.com/technical/financial-reporting/accounting-for-specific-
sectors/film
6. https://corporate.cyrilamarchandblogs.com/2019/05/indian-film-industry-challenges-
opportunities/
7. https://www.indiewire.com/2013/10/why-is-bollywood-such-a-powerful-industry-
mumbai-provides-an-answer-33491/
8. https://m.economictimes.com/industry/media/entertainment/business-of-rs-100-cr-films-
who-gets-what-and-why/articleshow/15700710.cms

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