Toliza Museum of Art

Current Expensing Structure

The Toliza Museum of Art is in the process of reviewing its performance from 2008 when it ran at a deficit in three well-received special exhibits. This deficit impacted the museum's finances as a whole, producing a deficit of almost $1 million rather than the budgeted surplus of just over $2.5 million, as seen in Exhibit 1. This is particularly concerning since the museum sold more admission tickets than anticipated, and also garnered $2 million more in admission fees than expected, as seen in Exhibit 2. While there was a decrease in the average price of each ticket, museum admissions saw an increase of 25% in the actual number of admissions sold as compared to the budgeted number. The increase in quantity of sales more than made up for the decreased price. However, part of the surplus/deficit issue is illuminated by Exhibit 3 which shows that the curatorial staff expenses also saw changes in both pricing and number of hours between what was budgeted and what was actually used. However, although the actual hourly rate was on average $1 less than budgeted, the number of actual hours used were severely increased by almost 30%. Due to this, the actual expenses for the curatorial staff were over $500k more than budgeted.

Options for Improving Profitability

Option 1: Change the Discounted Rate

Although budgeted expenses are vastly different than actual, we do have the option to simply bring in more money through admissions to offset the increased expenses. Discounted admissions are one third of the price of standard admission, but account for almost half the total admissions. Although increasing the price of discounted admissions will necessitate a decrease in users of that admission rate, Exhibit 4 shows that increasing the price to $10 will vastly improve the profitability of museum admissions, even with a decrease of 10% in discounted admission sales. However, this ability to bring in additional funds through adjusting admissions rates does not solve the mystery of the increase in expenses. That's where Activity Based Costing comes in.

Option 2: Use Activity Based Costing

For activity-based costing, we have direct costs allocated to regular and special exhibits, along with added allocations for curatorial and security activities which do not have direct cost comparatives (Exhibit 5). While there is not a direct cost associated with each exhibit type for curatorial and security activities, those expense pools can be calculated using the average hourly rate for each employee type and the actual hours used for each exhibit type. Exhibit 6 shows the expenses associated with each exhibit type for direct, curatorial, and security costs. With that, it's clear that the regular exhibits do have an increased expense as compared to special exhibits. However, the revenue brought in for each exhibit type, also in Exhibit 6, demonstrate that regular exhibits are operating at a profit of almost $2 million while the special exhibits are operating at a deficit of over $2.5 million.

Recommendation

Recommendations for making the museum more profitable are two-fold. To start with, I would recommend the museum adjust the price of discounted admission as the increase in revenue will more than offset the decrease in the number of admission tickets sold for that rate. That will provide a stop-gap solution, however the solution will be a temporary one unless the increase in expenses is accounted for. As such, my secondary recommendation would be to thoroughly analyze the profitability of special exhibits as compared to their expense to ensure increased profits are not negated by equally increased expenditures.

Exhibits

Exhibit 1: Actual vs. Budgeted Revenue and Expense Variance

Actual Budgeted Varience F/U
Revenue 30,779,500 € 29,060,000 € 1,719,500 € F
Expense 31,772,550 € 26,361,000 € 5,411,550 € U
Surplus/Defecit (993,050) € 2,699,000 € 3,692,050 € U

Exhibit 2: Museum Admission Revenue per Visitor

Actual Price Budgeted Price Quantity Varience F/U
Price 12.00 € 12.50 € 1,000,000 500,000 € U
Actual Quantity Budgeted Quantity Price Varience F/U
Quantity 1,000,000 800,000 12.00 € 2,400,000 € F
Actual Budgeted Varience F/U
Admissions Varience 12,000,000 € 10,000,000 € 2,000,000 € F

Exhibit 3: Curatorial Staff Expenses Per Hour

Actual Price Budgeted Price Quantity Varience F/U
Price 19.00 € 20.00 € 139,650 139,650 € F
Actual Quantity Budgeted Quantity Price Varience F/U
Quantity 139,650 104,000 19.00 € 677,350 € U
Actual Budgeted Varience F/U
Curatorial Staff Varience 2,653,350 € 2,080,000 € 573,350 € U

Exhibit 4: Prospective Changes to Discounted Admission Rates

Actual Price Budgeted Price Quantity Varience F/U
Price 13.61 € 12.50 € 970,000 1,075,000 € F
Actual Quantity Budgeted Quantity Price Varience F/U
Quantity 970,000 800,000 13.61 € 2,313,402 € F
Actual Budgeted Varience F/U
Admissions Varience 13,200,000 € 10,000,000 € 3,200,000 € F

Exhibit 5: Activity Cost Pool Amounts

Regular Exhibits Special Exhibits Curatorial Activities Security Activities Total
Executive Director & Fringe 122,500 € 105,000 € 70,000 € 52,500 € 350,000 €
Director of Development & Fringe 115,500 € 73,500 € 10,500 € 10,500 € 210,000 €
Head Curator & Fringe - € - € 175,000 € - € 175,000 €
Administrative Staff & Fringe 58,800 € 50,400 € 33,600 € 25,200 € 168,000 €
Curatorial Staff - € - € 2,653,350 € - € 2,653,350 €
Security Guards - € - € - € 3,304,100 € 3,304,100 €
Insurance 3,250,000 € 3,250,000 € - € - € 6,500,000 €
Maintenance 787,652 € 387,948 € - € - € 1,175,600 €
Utilities 2,618,250 € 2,618,250 € - € - € 5,236,500 €
Mortgage 8,040,000 € 3,960,000 € - € - € 12,000,000 €
Total 14,992,702 € 10,445,098 € 2,942,450 € 3,392,300 € 31,772,550 €

Exhibit 6: ABC for Regular and Special Exhibits

Regular Exhibits Special Exhibits
Directly Allocated Costs 18,483,489 € 12,998,326 €
Curatorial Activities - € - €
Security Activities - € - €
Total Costs 18,483,489 € 12,998,326 €
Revenue 20,385,250 € 10,394,250 €
Total Costs 18,483,489 € 12,998,326 €
Surplus/Deficit 1,901,761 € (2,604,076) €