c




 
Ê

„

The case is all about a film processing firm being threatened by a competitor because this
competitor charged lower rates on film processing fees. The firm͛s president wanted to know the
company͛s actual processing and printing costs and allocate these costs to the profit centers
properly in order to properly set prices considering the competitor͛s lower rates and its impact to
the firm͛s profitability. In connection to the identification of the actual processing and printing costs,
the manager wanted to know how to pay its employees so as to reduce costs and how to properly
allocate overhead costs that will have an impact on the total costs for pricing purposes.


   
The management dilemma is on how to set the firm͛s processing fees to a lower pricing scheme
without negatively affecting the firm͛s profitability.

  
 
How will the firm be able to maintain its market share despite of the threatening strategies of its
competitor without negatively affecting its profitability?




a. What are the company͛s actual processing and printing costs? What is the relevance of knowing
these costs?
b. In terms of wage payment policy, which is more favorable for the firm to implement, a fix wage
policy or a variable wage policy (footage basis)?
c. What is the appropriate allocation of the overhead expenses?
d. How will the firm price its offered services considering the competitor͛s threatening strategy?
 
  
G

 
  
   

„
 



This firm is mainly engaged in the post production of film processing. Film processing is a critical
link in the movie production chain. The firm has four main processing laboratories in which the
processing of films are done. These laboratories are the color positive, color negative, black and white
negative , and black and white positive laboratories. The firm͛s operation line started with the
processing of exposed negatives brought by the producer. Thus it is dependent on the producers of the
film in order for them to start their operations. In order to have a clearer understanding of the movie
making process, the following section is provided.

Movie making is a complicated business, but the workload is generally split into three sections:
pre-production, principal shooting and post production. Pre-production involves matters such as
scriptwriting, financial backing, hiring of cast and crew, and scouting for locations. Once all of these
details have been worked out, principal shooting can begin. This is the actual filming of individual
scenes, without any special effects or musical background. All of this planning and filming leads up to
the most vital aspect of film making -- post production work. Post production turns individual scenes,
called raw footage, into a finished motion picture. Editors splice all of the usable footage together into a
coherent storyline according to the script. Composers add background music to create dramatic or
comical effects.

 
 





The major sources of revenue is from the revenues generated from the four laboratories namely
the color positive, color negative, black and white negative, and black and white positive. Ninety-seven
percent of the total revenues of the firm are from these four laboratories. Three percent came from the
laboratory͛s special services (cleaning, dubbing, and special effects) which were billed separately.

Financial Reporting

It was the practice of the company͛s accountants to allocate most overhead items according to
the department͛s individual contribution to revenue. Thus, unallocable items in the laboratory expense
were distributed according to income contribution except for such expenses as insurance and chemical
consumption. The company records showed that the cost of chemicals used for black and white and
color film processing constituted BFI͛s direct materials expense.
 G

 
     
 


 


This industry is profiting from intensified demand from film producers who are seeking high end
digitally enhanced, audio and video quality and special effects for their audiences. This is increasingly
being achieved with less outlay on labor and technology and in a timely manner. Companies in this
industry are mainly engaged in the production of motion pictures on film or video for theatre or
television. The industry also includes such services as casting, film editing and titling but excludes film
and video productions undertaken by businesses directly associated with TV stations. This industry
comprises establishments primarily engaged in providing postproduction services and other services to
the motion picture industry, including specialized motion picture or video postproduction services, such
as editing, film/tape transfers, subtitling, credits, closed captioning, and computer-produced graphics,
animation and special effects, as well as developing and processing motion picture films. With regards to
its cyclical activity, the difference in the demand for the services is insignificant since movie producers
tend to produce movies anytime of the year. Yet, when film festivals are scheduled, the demand also
rises.

Ê Movies are a powerful force in Philippine society. Movies, more than just a source of
entertainment, reflect a nation͛s personality. On the silver screen takes shape all the hopes, dreams and
fantasies of the common man: legends, love, the stuff of myths and make believe. Its heroes become
larger than life, often attaining the stature of demigods. They are looked upon as role models, serving as
resources of inspiration. But most important, the movie industry has become a vital part of the national
economy.

The Business Lines in the Industry

The film industry in the Philippines is composed mainly of three important business lines that
are interdependent with each other. These components are: 1) Film Production; 2) Film Distribution;
and 3) Film Exhibition.

Producers
The producers are those which bankrolls film production. In 1999, these producers made a total
of 140 films a year, the fourth largest in the world. This comprises approximately a third of the films
shown here with the other two-thirds comprising the foreign movies. Most of the times, these local
producers are also the distributors of their own films, while there are still other producers who enter in
a distribution agreement with larger film companies.

Distributors
Distribution, meanwhile, makes up the next phase in the film business. Distributors are in charge
of marketing films, acting primarily as the marketing arm. In the Philippines, film distributors are
classified into three categories, with the principal players per category listed as follows:

·   



Also known as the majors. They are distributors of Motion Picture Association of America (MPAA)
companies otherwise known as American film companies.
     


Distributors of foreign films acquired from the major and/or independent film companies.

ü 
  



Distributors of locally produced films. One of the famous are Star Cinema, GMA Films, Viva Films and
many more.

Exhibitors
The exhibition circuits, on the other hand, provide quality theaters to the audience, run the film
according to schedules set by the distributors, provide additional in-house marketing, and seek
theatrical opportunities. In short, theaters act as a distribution channel of movies although they can still
perform promotional activities. Before, exhibition is controlled by two circuits: Greater Manila Theaters
Association (GMTA) and the Metro Manila Theaters Association (MMTA). These two booking
associations monopolized the exhibition industry. They controlled all exhibitions both for local and
foreign films. To be a member of the circuit, theatre owners had to pay a booking fee. But the
evolvement of bigger conglomerate of cinemas stunted the monopoly of the two associations. These
multiplexes proved to be effective in drawing movie audiences. Again, these malls drew more audiences
also because of the convenience and comfort it provides, like spacious guarded parking areas, groceries,
retail outlets, etc. Metro Manila theaters account for 18% of the total movie theaters and 34% of all
screens in the Philippines.

Rivalry among Existing Competitors

Filipino filmmakers tend to fall into five categories:
1) The first are the major companies: Star Cinema, GMA Films, Regal and Viva. Having hundreds of
millions of pesos in asset and capital, they bind the major movie stars with fat contracts and generous
advances. They produce all the box office or blockbuster hits. Their studios churn out 12 to 30 pictures a
year; they own several big theaters and have tie-ups with the largest theater circuits in Metro Manila,
assuring them of a massive chunk of the market.

2) The second are the strong independents. These people have been in the business for more than 15
years and are well established in the industry. They wield financial clout, and are able to depend solely
on their own funds. They are equipped with know-how and expertise, and each can produce two
to four big or average pictures a year. They can easily get good bookings or play dates from Metro
Manila to provincial theater clients.
3) The third category consists of wealthy individuals who finance a movie not necessarily to make a
profit, but for some special purpose, such as the promotion of political views or religious beliefs.
Another reason may be to please their artistic inclinations. Some of these people even hold degrees
in cinema arts, or have some knowledge of filmmaking. They usually come in for a one-shot deal; they
are attracted to movies because of the glamour, or are simply dilettantes.
4) The fourth category is often made up of people who could not enter any of the major film outfits, or
find employment outside the movie industry. They produce low-budget films of the rated R or X genre,
intended only for provincial and private showing. They rely on funds extracted from friends,
or cajoled from loan sharks and theater owners.
5) These are filmmakers whose main concern is to develop alternative cinema. Despite their limited
funds, they have chosen to repudiate the present trend of crass commercialism. They have broken away
from mainstream; they are not formally organized, nor are they members of any
cinema or guild.
Interpersonal and intergroup conflicts among the film industry players

The DAP 1991 study also identified that the relationship of theater owners and producers are
adversarial in terms of coming up with mutually beneficial business agreements relating to the films to
be exhibited in the theaters. The theater owners can select the kind of films for exhibition and most
often they choose films that would rake in money more than showing films that have socially relevant
messages. Likewise, the producers can dictate the content of the film, so much so that directors,
scriptwriters and other production crew members are sometimes compelled to follow their ideas. This
limits therefore what the directors can possibly do to contribute to the production of films which would
have socially relevant values.

Market Potential/ Market Demand


The Filipino filmmaker has a great potential market awaiting him out there. One major reason
why he cannot recoup his investments is because he only focuses on local consumption -- first by
showing the film in the Metro Manila area then making the rounds in the provincial areas. If he goes
beyond and sees opportunities outside of the Philippines, then the Filipino film can easily generate big
revenues unimagined before.
Today, the internationally acclaimed local films are marketed in many parts of the globe like the
United States, Europe and Asia. The venues are the international film festivals where foreign distributors
can review our films and show them in their respective regions. One major region to reach is the Asia-
Pacific region since its culture is similar to us and their people can empathize with our storylines.
Vietnam, Indonesia, Malaysia, even Korea and Singapore are good potential markets for our
films. On the other hand, since there are Filipino migrates now all over the globe like Filipinos in the
West Coast of USA, Hong Kong, and Saudi Arabia, the local filmmaker can market their products in these
areas and recover their investments. What is critical, however, is the kind of film to be marketed to suit
the needs of these foreign moviegoers or Filipino moviegoers who are now based abroad.

Scope of the Industry


Throughout the 1980s, the Philippines ranked among the top ten film-producing countries in the
world, although the industry was beset with many problems and the number of films was down from
the 1971 peak of 251. In 1987, total production was 139, a drop from the 151 of the previous year. Forty
production companies were in operation.
The unstable nature of the country is reflected in the film industry. Numerous coup attempts,
civil strifes and a depleted economy have kept down investment in movies, while production costs and
taxes have spiralled. One handicap of many filmmakers is that shortage of money has not allowed for
updating equipment. Thus, 25-year old cameras, sound and light equipment, which one director said
belonged in the Smithsonian Institution, are used. The Philippines is unique in Asia for not having placed
a quota on foreign films. Since the 1960s, efforts to place quotas on imports have failed regularly in the
Philippine Congress.
The current trends in the cinema industry center on the entertainment and commercial aspects
of the movie. The viewing public prefers to watch films which will allow them, even for a while, to
escape from the harsh realities of their environment. They patronize stories which enable them to
identify themselves with the characters. Recently, the most favored type of pictures are action and
comedy.
There are numerous constraints and problems that the cinema industry faces which affect its
role as an effective medium for values formation. Among others, the following are considered as critical
to the implementation of the Cinema Program. These are 1) limited government support; 2) high cost of
production; 3) interpersonal and intergroup conflicts among cinema industry people; 4) dominance of
the big players in the industry; and 5) the cinema industry has also to deal with the ͞idiosyncratic͟
censorship of the Movie and Television Review and Classification Board (MTRCB). In the economic field,
the commercial cinema industry alone provides employment to more than 75,000 people. It also
generates more than P400 million pesos annually for the government in the form of taxes.

A Look at Technology in Filipino Filmmaking


As the millennium approaches, the local movie industry intensifies its interest in the realm of
the technical. The series of high-risk investments made recently by major studios point to a more
adventurous outlook. Filmmakers will want to believe that their producers have finally seen the light ʹ
that in order for Philippine cinema to be more globally competitive, the producer must put a more
serious eye on the art of movie photography.
In previous years, the best tools in the country͛s film trade seemed to be the exclusive property
of the advertising industry. The production value invested on TV commercials allowed the commercial
directors and cinematographers to be virtual masters of their domain, commanding a wide array of
state-of-the-art camera and lighting systems, and making the studio their playground for sampling the
new and the radical. In the meantime, most of their colleagues in the movie realm helplessly looked
on as the six to seven-figure fees of the megastars ate away at the camera department͛s budget, often
forcing them to use low-grade equipment.

Basic Equipments Used in Film Making

Cameras
- 
This lightweight companion camera for the Arriflex 535 system is incredibly quiet, making it ideal for live
sound production. Its arriglow viewfinder brightness control system has contrast adjustment capability.
It also has an electronic inching button and electronic footage counter alongside the mechanical one.

- 
A new MOS camera system replacing the popular Arri 35-3. The electronic shutter and the
programmable speed features enable the cinematographer to achieve extraordinary effects.


 
„


Another Live Sound Camera System recently available here is the Moviecam.
This camera owned by Filmex is often referred to as the true rival of Panavision in terms of simplicity
and ease of use. The moviecam is absolutely quiet and stable and is often outfitted with the best cooke
zoom and prime lenses.

Lenses
 

 




Most notable of high speed primes are the Zeiss T 1.3 super speed lenses. Available focal lengths are at
18mm, 25mm, 35mm, 50mm, 65mm, and 85mm. Each lens has multilayer coating on all glass to air
surfaces to optimize color saturation and purity. This guarantees uniform color correction and
interchangeability.

c 
 




The Arri-Zeiss variable primes system is the most advanced high performance lens system available
These lenses would allow filmmakers to work faster in conditions that offer little time to shoot,
like for instance the magic hour.

!
 

Swing Shift lens system is an innovation that allows the cinematographer to control the perspective and
depth of field within a shot. The system consists of the main bellows unit that allows movement of the
lens relative to the film and several different lenses mounted in special lens boards.

Special Tools

- c 

The kit is a system for controlling contrast in your film. It provides a continuously adjustable contrast
over the entire photometric range of the film without affecting its resolution. It flashes a controlled and
even amount of light to the shadowed area during exposure giving the operator the freedom to reduce
contrast while observing the results in the viewfinder.


„ 


The varying color temperatures of natural and artificial light sources pose a great problem for the
production that requires consistency in look and feel. The color meter deals with the shifting of color
temperatures. With corresponding color correction filters, this device allows the cinematographer to
control color temperature and introduce color corrections during filming.

"  #

Faster, wider latitude, better contrast and color saturation, sharper images and better grain structures
are what filmmakers look for in their film stocks.

c 
$%%„ &
 

This is the world͛s fastest color negative motion picture film made available recently. It has an exposure
index of 800 in tungsten light and 500 in daylight. It offers the speed and latitude you need and the color
reproduction that enables you to intercut seamlessly with other stocks.

c 


„ 
" 
A quantum leap forward in film technology, this new print film stock produce richer blacks, more
saturated colors and cleaner performance. Cinematographers strongly believe that the use of this stock
may eliminate the need for custom contrast and color enhancement processes in film laboratories.

Threat of Substitute Products
Even before a movie is released for in the market, pirated versions of films are already
distributed and could be found almost everywhere. One thing that attracts people to these ͞stolen͟
videos and discs is the cheap selling price for an almost the same quality as the original ones. These
pirated videos and discs are priced as low as PhP30 per VCD. Hence, making film pirates comprise almost
80% of the video market. Another substitute is the proliferation of movies edited for television and/or
movies made for television. This becomes an even greater problem once recently shown movies in
theaters are immediately aired on television. Hence, moviegoers would rather wait at their own living
rooms to watch their favorite films.

Threat of New Entrants

While it is true that there are less independent producers joining the bandwagon of filmmaking
due to a slump in the industry, there will always be risk takers who would produce films. Foreign new
players can always try the local market and succeed even with a limited budget since they have more
resources from abroad. What they can do is collaborate with a local film producer and do joint ventures.

Offered Services

Filmmaking in the Philippines is a total production from conceptualization of the story and
scripts translating them into a screenplay, actual production or shooting of the film, post ʹproduction,
and marketing and distributing the film to various exhibitors. Today, film stories are taken from winning
novels like Palanca award winners or from current crop of filmwriters. Competitions are even conducted
to get the best stories for film. A director is tapped to handle the shooting of the film and in the pre-
production stage gets involved with the producer in the hiring of the key technical crew like
cinematographer, sound man, lights man, and other members of the production staff. Together with the
producer, they identify the talents who will portray the various major and minor roles and even show
the scripts to major stars for review of their roles. In the actual shooting, the services of the make-
up/prosthetic artists and the props men are also taken into consideration for continuity and visual
impact. On the other hand, the post-production stage already includes animators if needed and various
technical engineers. Upon completion, the services of the PRO , the publicity writer, other
merchandisers, and the stars themselves are tapped to market and promote the film extensively. It is a
full-line of services particularly happening among major producers who may have their own technical
staff and contracted production houses. A number of them like Star Cinema and GMA Films have their
own television network to promote trailers that can reasonably catch the attention of potential
moviegoers. For independent producers, they sub-contract most of the services but see to it they get
good people so they can produce marketable films.


 


The MTRCB
The Movie and Television Review and Classification Board is a government arm in charge of
classifying film as Restricted, General Viewership, or Parental Guidance. Hence, in the act of classifying
films, it assumes the function of censoring films with scenes that are objectionable. It has instituted
guidelines both for movies and television to protect the interest of the greater majority who may
encounter films that may be rated X or not allowed for public viewing. In this regard, a number of
producers and
particularly directors object once their films are to be sanitized to conform to "decency" and "good
taste."

Taxation
At present, the movie industry shoulders about nine (9) different kinds of taxes, duties and fees,
to wit: (1) cultural tax; (2) amusement tax; (3) withholding tax; (4) municipal tax; '(value added tax; (6)
excise or specific tax on positive prints; (7) customs duties on films; (8) corporate income tax and (9) the
MTRCB screening fee. In view of this heavy burden, many doubt if the industry can survive in the 21st
century.
 The film industry is pays a lot of taxes. From the income on gross exhibition, a full one-third goes
to the government in amusement taxes. The motion picture industry pays one of the highest
amusement taxes in the ͞entertainment category͟ while being the cheapest form of entertainment. It
generates more than 400 million pesos in taxes for the government. About 450,000 people directly
benefit from the industry which includes people from the film production and distribution groups (that
is actors, actresses, directors, etc.), employees and workers in the theaters, and other related cinema
businesses. The dominance of foreign films could be traced back to the seventies, when foreign films
started to eat up the market share of locally produced films. In addition, the producer has to shell out
money for tariff and custom duties on unexposed cinematographic films. Presently, the government
charges 30% of amusement taxes, and additional P 0.25 per ticket for cultural tax. Aside from the fix tax
rate that the government is charging, it also charges a 10% Value-Added tax. Add to these review and
classification fees, inspection fees, license and permit charges, and you have the highest movie taxes in
the world today, adding up to a staggering 52%ʹ 55% on gross receipts alone.

Accounting Principles

The AICPA issued new accounting guidance for the film industry in June, 2002 Statement of
Position 00-2, - 

   
  )     "  replaced the requirements in FASB 53,
"

   

   
 
 )      
  
 " * Since FASB 53 was issued
nineteen years ago, the film industry has changed significantly: new media, such as video, cable, laser
discs and pay-per-view television, have contributed to its revenues and required concomitant changes in
accounting rules. Although FASB 53 was outdated and new standards for motion pictures were needed,
it already had a full agenda. So the board referred the project to the AICPA͛s AcSEC, which deals with
industry-specific items.
Among the changes from FASB 53 were:

1.Ê advertising expense for films will no longer be capitalized

2.Ê film studios will have a maximum of 10 years to amortize films
3.Ê abandoned projects and excess overhead must be shown as an expense

This Statement extracts the specialized accounting principles and practices from the AICPA
Industry Accounting Guide, - 

  
 
" + and AICPA Statement of Position 79-4,
- 

  
 
" + and establishes standards of financial accounting and reporting for
producers and distributors of motion picture films. Exhibition rights transferred under license
agreements for television program material shall be accounted for like sales by the licensor. The sale
shall be recognized by the licensor when the license period begins and certain specified conditions have
been met. Producers and distributors that license film exhibition rights to movie theaters generally shall
recognize revenue when the films are shown. This Statement also describes how producers and
distributors shall account for film costs and participation agreements.

Revenue Recognition Principles

The primary starting point for addressing revenue recognition matters (unless other specific
authoritative guidance exists) is US Securities and Exchange Commission Staff Accounting Bulletin (SAB)
No.104, ͞Revenue Recognition͟ (SAB 104).In the filmed entertainment industry, there is specific
authoritative guidance in SOP No.00-2, ͞Accounting by Producers or Distributors of Films͟ (SOP 00-2).

SOP 00-2 requires the recognition of revenue from a sale or licensing arrangement when the following
conditions are met.

ͻ Persuasive evidence of a sale or licensing arrangement with a customer exists.

ͻ The film is complete and, in accordance with the terms of the arrangement, has been delivered or is
available for immediate and unconditional delivery.

ͻ The license period of the arrangement has begun, and the customer can begin its exploitation,
exhibition, or sale.

ͻ The arrangement fee is fixed or determinable.

ͻ Collection of the arrangement fee is reasonably assured.

In addition, a common discussion point in assessing revenue recognition is how each party should
account for the reporting of revenues and costsͶcommonly called ͞gross͟ versus ͞net͟ accounting
which has been addressed in Emerging Issues Task Force (EITF) No.99-19, ͞Reporting Revenue Gross as a
Principal versus Net as an Agent͟ (EITF 99-19). The determination of gross versus net reporting is often
important due to the timing of recognition of revenues and related cost amortization and the timing of
recognition of advertising expense. Additionally, for companies that place value on such metrics as
operating margin, the timing of (or the need to recognize) advertising expense is a relevant
consideration in the structuring of transactions.

Ñ   


In this industry, there is a high risk venture for investors, with about one in every 15 films produced
breaking even financially. The film production revival relies on the availability of risk capital and
investment funds, which have been drying up during the global financial crisis. For decades, it has been
said that the film industry is recession-proof or, as it is referred to now, ͞recession-friendly.͟ During
these uncertain economic times, people are being very careful about how they spend their money and
tend to be attracted to lower-cost, closer-to-home entertainment activities. Movie exhibition was also
affected by the economic downturn. One major effect was the decline of construction of new theaters
following the boom of movie-palace building in the 1920s. As movie attendance began to decline
significantly in the early 1930s some theater owners also began to offer giveaway programs (like "dish
night") or games of chance (SCREENO, a variety of bingo, was the most popular), particularly on the
traditionally slow nights of Monday and Tuesday, to get more people back into the theaters. Theater
owners also sought to reduce costs by cutting staffͶhiring fewer ushers, for exampleͶor, in the bigger
urban theaters, by eliminating live shows that supplemented the movie program. Some theaters turned
to double features, thus boosting the demand for B movies by companies such as Monogram and
Republic.
 
   
The management dilemma is on how to set the firm͛s processing fees to a lower pricing scheme
without negatively affecting the firm͛s profitability.

  
 
How will the firm be able to maintain its market share despite of the threatening strategies of its
competitor without negatively affecting its profitability?




·
Ê ½      
   


   
 

! ½  
   "  
# $
 


!

-  The company͛s actual processing and printing costs includes direct materials, direct
labor and overhead costs. Direct materials costs include the cost of chemicals used for black and
white and color film processing. Direct labor costs include the wages paid to the personnel
directly engaged in the processing and printing process and all the labor costs that can be
assigned feasibly to the actual operations. These are the salaries paid to the process operators,
chemical mixers, timers, printers, filter arrangers, and projectionists. The overhead costs include
the indirect materials, salaries paid to other personnel that cannot be assigned feasibly to the
operations and other expenses such as insurance.
Knowing the actual processing and printing costs is necessary on pricing decisions. Cost
influences price setting decisions. Thus, firms who understand the cost of producing their
products/services set prices that make the product attracting to customers while maximizing
their operating income. Knowing these costs is essential not only for profit study but also for
pricing purposes.


Ê   
  $
    % $   
   "        %  &
$
 "  $
'


!

-  Fixed wage policy is more favorable for the firm to implement.
a.Ê Based on the computed normal volume of work for the past two years which is the average
number of feet of films processed for 24 months, there are more months having higher than the
normal volume of works processed than those months having below the normal volume. Putting
the fixed and the variable rate equal at normal volume then the variable rate tends to be more
costly when there are more months having volume above normal.
b.Ê In classifying costs, these costs can be classified as fixed, variable, or semi-variable costs. A fixed
cost is defined as one that does not change in total as business activity increases or decreases.
Variable cost is the cost that increases in total proportionately with an increase in activity and
 decreases proportionately with a decrease in activity. And semi-variable cost display both fixed
and variable characteristics. As based on the trend of the volume of work of the firm, then it can
be concluded that it is more favorable for the firm to implement a fixed wage policy since there
is more than insignificant increase in the volume of films processed for the past two years.
c.Ê Using cost behavior analysis, then it is more favorable to implement a fixed wage policy. Since
the basis for the variable wage policy would be the volume of work processed and the fixed
wage policy will always remain constant regardless of the volume of work processed, then it is
clear that the variable policy will be more costly if the volume of work processed will be
increasing and the fixed policy will be more favorable since more volume of work will be able to
absorb the labor costs. When the basis for the variable rate is having a trend that tends to be
increasing, then variable rate would be more costly. Fixed rate policy would be cheaper since
the salaries paid would be constant even though the volume of firms processed is increasing.
Thus, the fixed rate is less costly and more favorable.

ü
Ê ½ 
       "  

!


 -  The overhead costs must be allocated based on the normal running time of the
processors. Those overhead costs that are specifically attributable to the specific department is
allocated to the specific department.
 
a.Ê Selection of overhead allocation base is important if a cost system is to provide meaningful cost
data. The primary objective in selecting a base is to ensure the application of overhead in a
reasonable proportion to the indirect factory resources used by the jobs, products, or work
performed. Ordinarily the base should be closely related to functions represented by the
overhead cost being applied. If overhead is mostly labor oriented, dominated by costs such as
supervision and fringe benefits, then the proper base is direct labor cost or direct labor hours. If
overhead items are predominantly technology oriented resulting from the ownership and
operation of machinery, then a machine-hour based is most appropriate. Since the firm͛s
operation is predominantly technology oriented resulting from the use of machines (processors)
in the processing of films, then the normal running time of the processors will be the most
appropriate allocation base.
b.Ê The practice of the company͛s accountants to allocate most overhead items according to the
department͛s contribution to revenue may have the potential to result to cost distortion. Using
activity-based costing in identifying the appropriate cost drivers, it would be more appropriate
to identify these cost drivers to correctly allocate costs. Since it is clear that the firm͛s operation
is more on the use of the processors, then it is appropriate to use the normal running time in
the allocation of overhead. Normal running time is the number of feet of films processed per
minute (ft./min.).
c.Ê If a cost is traceable to departments in which it originates, is referred to as direct departmental
cost. Those overhead costs that are specifically attributable to specific departments such as
insurance shall be allocated to the department incurring those costs. Since the traceability of
 these costs can be identified to a specific department then these costs shall be allocated to that
department.

*
Ê x$$ 

"



 
   

 
!

-  The firm should price its services to a lower rate than what the competitor is offering.
a.Ê The competitor of the firm offers a 5% lower rate. Since the company wishes to maintain a
market share in the industry, the company should offer a price much lower than its
competitor. The quality of the service rendered by these two firms doesn͛t have much of a
great difference; therefore, price would be great factor in attracting more clients. The
revenue lost in the decrease in price would eventually be cover up by a larger volume of
sales.
b.Ê How companies price a product or a service ultimately depends in the demand and supply
for it. Three influences on demand and supply are customers, competitors, and costs.
Customers influence price through their effect on the demand for product or service based
on factors such as the features of a product and its quality. On the other hand companies
must always be aware of the actions of their competitors. Alternative or substitute products
of competitors can affect demand and force a company to lower its prices. Thus, in this
situation of competition, the firm must set its pricing scheme of its services lower than the
competitor.
c.Ê Market based pricing strategy is an appropriate strategy for firms in making long run pricing
decision. The market based approach to pricing starts by management asking, Given what
our customers want and how our competitors will react to what we do, what price should
we charge? Companies operating in competitive market used the market based approach.
Thus the firm must set its pricing of its services lower than its competitor.