Cost accounting

INTRODUCTION

It was a typical February wintry day in New England.

Rehearsals for the upcoming play Kamala were in full swing

inside two rented rooms of a church in Belmont, Mass. The

actors were all present for the rehearsal despite a snow storm

warning for the morning. The heat from the passionate and

intense drama was riveting for the observers in the room,

making the wintry day a little more tolerable. But Jayanti

Bandyopadhyay, the actor portraying the lead female role

Sarita, had more on her mind than the powerful lines she

had to deliver in the play and the heat in the room. She was

concerned about the production’s budget for the four shows

planned for late March. By the afternoon, bright sunshine

made the threat of the snowstorm disappear, and Jayanti’s

memory drifted back to when the company made the

decision to produce Kamala. The Stage Ensemble Theater

Unit, Inc. (SETU) just completed a successful production

staging one of the Indian epics, The Ramayana, in the

latter part of 2016. The success meant the company had a

comfortable cash reserve, which emboldened Subrata Das,

the director, to consider producing Kamala, a play that had

special meaning for the company and for him and Jayanti.

It was SETU’s first production when the theater company

was founded in 2003, and Subrata and Jayanti had played

the leading male and female roles. The play was set in

contemporary times with a strong social justice message—

quite different from the historic epics that SETU had now

become famous for.

As a community theater company, SETU’s historic

epics with a large cast brought in more audience members

through personal connections and word of mouth. The

healthy cash balance from The Ramayana, and the relative

lower production costs of contemporary plays led Subrata

to believe he could take the risk to reproduce Kamala in

2017. With the March opening only a month away, Jayanti

knew she needed to get a clear picture of the budget and

worked on getting members of SETU to focus on marketing,

fundraising, and ticket sales so they would have a chance of

at least breaking even.

ABOUT SETU

Several theater enthusiasts founded SETU in 2003. As

a community theater company, SETU was staffed by all

volunteers, each contributing their expertise and time.

SETU’s founders decided to not charge membership fees for

the participants. They made sure that SETU was incorporated

from day one, because they wanted to avoid the “unlimited

liability” problem associated with partnerships. All of the

founders were professionals, such as college professors,

technology entrepreneurs, physicians, and corporate managers.

They also agreed to organize SETU as a not-for-profit,

because its mission was to bridge the culture gap between

India and the Western world through the medium of theater.

One of the founders, Jayanti, was an accounting professor

at a local university and utilized her accounting knowledge

to apply for section 501(c)(3) status and successfully

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ISSN 1940-204X

The Show Must Go On: Making the Numbers Work for a Not-for-Profit Theater Company

© 2 0 1 8 I M A

Jayanti Bandyopadhyay Bertolon School of Business Salem State University

Miranda Lam Bertolon School of Business Salem State University

Sanjay Kudrimoti Bertolon School of Business Salem State University

received approval for operating as a not-for-profit from the

Internal Revenue Service and the state of Massachusetts.

To keep paperwork manageable for volunteer staff, SETU

management decided to limit its annual gross receipts to be

less than $50,000 so that they could file the 990N tax form.1 By

2017, only two of the original founders, Jayanti and Subrata (a

successful tech entrepreneur), remained with the company.

The founders made a firm commitment to perform plays

from Indian history and current events in English so that

the plays would be accessible to a wide audience. Speaking

English was also more practical because India has a diverse

body of languages with more than 13 main languages and

hundreds of dialects. Therefore, India uses English as the

common language in the majority of business dealings.2

Because finding well-written plays with Indian themes in

English was not been an easy task, the director or others

often had to translate plays written in one of the Indian

languages into English. Their last play, The Ramayana, was

a well-known Indian epic, and the script was co-authored by

nine members. SETU had successfully operated for 15 years

and had built a good reputation in the Greater Boston area as

a theater company introducing Indian culture while giving

education and performance opportunities to passionate

theater lovers, experienced and novice alike.

THE MAKING OF KAMALA

The production to be staged at the end of March, Kamala,

was originally written in the Indian language Marathi by

a famous playwright, Vijay Tendulkar, in 1981 and then

translated into English by Priya Adarkar in 1997. The play

was inspired by a true story. Ashwin Sarin, a journalist for the

newspaper Indian Express bought a girl from a “rural flesh

market” and presented her at a press conference to expose

such a malaise in modern society. Moved by this news story,

Vijay skillfully created a play that exposed the dark side

of a male-dominated society. The main character, Jaisingh

Jadav, was also an investigative journalist, but Vijay wanted

him to be more complex, not a flawless hero. Vijay portrayed

Jaisingh’s behavior toward his wife Sarita as no better than

treating a woman like a slave. The story showed the parallels

of a poor village woman sold away in the slave trade and a so-

called happy housewife married to a self-serving journalist,

both finding themselves on the common platform of sexual

slavery in a male-dominated world.3 Vijay had visited

Boston in 2002. The cast and crew met him for a discussion

and contributed a sizeable amount to the playwright and

obtained his permission to stage the play in 2003, which was

SETU’s first production as a theater company.

PRE-PRODUCTION

The director, Subrata, had been in touch with Tanuja

Mohite, Vijay’s daughter, through email for obtaining

permission to stage the play again in 2017. Tanuja indicated

that the royalty fee would be Rupees or International

Normalized Ratio (INR) 2000 per show. Subrata agreed to

pay INR 12,000 in anticipation of six shows for the current

production. Given the exchange rates between the U.S.

Dollar and Indian Rupee between January and March 2017,

INR 12,000 plus bank fees for the money transfer would

total about US$200, which seemed reasonable as the royalty

fee.4 He decided to embed several music and dance pieces

in the script, because he wanted to create an added culture-

specific appeal, especially in line with the well-known

reputation of song- and dance-studded Bollywood movies.

Including the dancers, the play had a cast of 13 people and

approximately five people in the crew for stage management,

make-up, music, and light operation. Jayanti felt that

everyone was passionate about acting and being on stage, but

no one was thinking about the budget for the production.

She decided to pin down her longtime friend Subrata, the

director, in a phone conversation about the preparation of a

detailed budget. She asked him to allot at least 45 minutes

for this conversation.

Jayanti and Subrata were the two SETU members with

check-signing authority and electronic access to SETU’s

checking account at Citizens Bank. The account required

a minimum balance of $2,000 at all times to avoid check

writing fees. Both founders agreed that $2,000 was also a

good amount as the prudent reserve and should not be used

to cover expenses of future productions. As of February 1,

2017, the checking account had a balance of $9,525.32 from

previous production receipts over expenditures. Therefore,

$7,525.32 was available for future productions. Subrata felt

confident that, with SETU’s established reputation in the

Boston area, assuring a full house for each show should not

be difficult. The balance in the checking account might have

provided him with a false sense of security. Jayanti was more

cautious and took into account the fact that Kamala might

draw a smaller audience when searching for a venue.

After looking at various options, the Mosesian Center

for the Arts Black Box Theater in Watertown seemed best.

It was in close proximity to Subrata’s residence, as he would

have to go back and forth frequently during the days of

the performances. SETU negotiated a contract with the

Black Box Theater, and the key terms of the contract are

summarized in Exhibit 1. The Black Box Theater charged a

fixed fee of $1,000 for the use of the space for the weekend

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of March 31, April 1, and April 2 and for March 30 for setting

up the stage and a dress rehearsal. They also charged a

one-time set-up fee of $30 for the box office. Technical

support and lighting fees were $30 per hour with a minimum

four-hour charge. The sound technician charged $30 per

hour with a minimum four-hour charge. The stage manager

charged $60 per show. SETU was planning four shows over

the weekend, and each show run for 90 minutes. At the time

of planning, SETU would exceed the four-hour minimum

requirement. SETU’s certificate of liability insurance

annual coverage was valid until June 30, 2017, satisfying a

requirement for the contract with the Black Box Theater.

Unfortunately, the sound system did not suffice at the

theater, and additional equipment had to be rented. Subrata

had checked prices for sound system rentals and operating

fees. A local entrepreneur was willing to rent a sound system

for $300 in total. Past experience had taught Jayanti to be

cautious when budgeting for lighting and sound equipment,

so they allocated an additional $200 in the budget for

miscellaneous sound and lighting expenses.

The group was using a church for the weekly Sunday

rehearsals. Subrata informed Jayanti that the church did not

expect any payment but would appreciate a donation. If

the church would be used every Sunday for two months for

rehearsals, a $300 donation seemed appropriate to Subrata.

Jayanti reminded Subrata that while the amount seemed

reasonable, the classification could not be a donation,

because SETU is a not-for-profit organization. The amount

would be considered as rent to be paid.

The set for Kamala was modest compared with an

historic epic. It required a living room set for an upper-

middle class household of a journalist. Several of the cast

members agreed to lend their own furniture, wall hangings,

and other props for the play. If these items were to be rented,

a minimum cost of $200 would be incurred. One of the cast

members who owned a small stage decorating business took

charge of the stage decoration and volunteered her services,

which would cost at least $500 if SETU had to pay. Jayanti

looked into renting a van for hauling the furniture to and

from the venue. The cost of renting the van appeared to

be at least $500. In conversations with her sister, Jayanti

was very thankful that she was willing to volunteer to drive

her truck back and forth to haul the furniture, thus saving

the van rental cost. The costumes for this play were not as

elaborate or unique as in past productions. Jayanti found out

that make-up materials left over from past productions were

sufficient for this production, and any new materials would

be taken care of by each cast member.

PROMOTION AND MARKETING

Next, the discussion revolved around possible sources of

funds. Since SETU did not charge membership fees, the

major source of funds had always been from ticket sales.

Because the play was about a current social concern in

India, both Subrata and Jayanti realized that the majority of

the audience would most likely be from the Indian-origin

population in the Greater Boston area. Nonetheless, they

dreamed of having a full house including all ethnicities.

They knew that promotion would be needed to reach a

wider group. Several local e-news sources, such as India

New England News ($150 negotiated fee), The Foundations

TV ($150 negotiated fee), and Lokvani ($60 negotiated fee)

were options to consider. These e-news sources would host

weekly ads to promote Kamala for three months on their

pages. The Foundations TV would post clips of rehearsals

and interviews with cast members on its Facebook page.

India New England News agreed to publish an article about

the upcoming production during the week before the

performances. A total of $360 was the budget for these

sources. While Jayanti was getting concerned with the

perceived ever-increasing costs, she realized that marketing

and promotion would have to be an integral and crucial part

of this production.

A professional graphic artist among the SETU group

volunteered to create a theatrical poster for Kamala (see

Exhibit 2). Such creative work would have cost $500 at a

minimum if SETU had to pay for those services. Even with

donated artwork, the printing costs of posters and playbills

were estimated to total $150. While on the subject of

promotion and marketing, Subrata casually mentioned that

he was thinking about setting up accounts on more social

media outlets for SETU and expanding engagement on

SETU’s Facebook. The idea had instant appeal. Jayanti, the

ever-vigilant accountant, added, “I think this is a great idea,

but which social media outlet and how?” Subrata said that

SETU had a large number of connections with past patrons

on its Facebook page. These people could become part of

the network, and their friends would also be exposed to

SETU’s posts. This network of friends, patrons, and theater

enthusiasts could increase and sustain public interest in

SETU and its productions through social media. Plus, there

was no cost associated with it.

Subrata commissioned three of the cast members to be

continuously active on various social media outlets. All of

them were professionals with full-time jobs but agreed to

volunteer their service to market SETU’s production. Their

voluntary service for this production was estimated to be

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$300 if an outside consultant were to be hired, even for a not-

for-profit. Jayanti had always provided her accounting and

bookkeeping expertise for SETU on a voluntary basis. She

jokingly reminded Subrata that SETU was saving at least

$300 in bookkeeping costs even for simple bookkeeping.

Even though ticket sales would likely always be the main

source of funds, Jayanti and Subrata agreed on one aspect:

SETU had to look for alternative sources to cover the expenses

necessary for a production like Kamala. They had good reason

to hope for sponsorships and advertising spaces for this play

since the story had universal appeal. During the past production

of the epic Ramayana, one cast member (a psychologist

by profession) helped raise $2,500 from her network. This

fundraising effort was the best one in SETU’s history, because

Ramayana was a well-known and well-loved story. Jayanti and

Subrata had hoped for $200 in cash sponsorship from the same

network for the smaller Kamala production.

In the past, at other theater venues, selling Indian snacks

such as samosas brought in extra funds. But new rules at the

Black Box Theater prohibited selling food items, because

the management had their own concession stand though

they allowed free promotional snack items for the audience.

Subrata and Jayanti decided to offer samosas to the audience

for free to enhance an Indian cultural experience. A cast

member was able to negotiate a fixed price of $275 with a

local Indian restaurant for providing samosas on all three days.

Traditionally, SETU had provided light sandwiches for the

cast and crew during performance days. Subrata’s wife Janique

had a very good relationship with the owner of Russo Farms

through her bakery delivery business. Russo Farms agreed to

donate $300 worth of sandwiches and vegetable platters for

the cast and crew for the performance weekend.

MAKING THE NUMBERS WORK

After the conversation with Subrata, Jayanti decided to

prepare the budget in a Microsoft Excel spreadsheet. She

wanted to estimate how many tickets were needed to cover

all of the known costs. They were planning to put on four

shows over the weekend—one on Friday evening, two on

Saturday, and one on Sunday afternoon. The Black Box

Theater could accommodate a maximum of 90 people

per show. While optimism reigned supreme, the reality

was that SETU had never had a full house for each show.

In the recent past, the epics have achieved 75% to 80%

occupancy. Due to the mature and difficult issues explored

in Kamala, SETU had expected occupancy to be as low as

50%. The ticket price was set at $25 for adults and $22 for

students and seniors. The price included a $2 facility fee

and a $3 box office fee per ticket to be paid to the Black Box

Theater for setup and commission (see Exhibit 1). These

prices appeared to be reasonable in comparison with similar

entertainment events in the Indian-origin community. See

Exhibit 3 for a summary of data used in estimating receipts.

Jayanti decided she would have to send an email to all

SETU members explaining the budget and why everyone’s

effort in selling the number of tickets necessary to cover

those costs was crucial. She knew that her task was difficult

because the majority of the actors and artists were not

necessarily thinking of the business side of the production,

especially because SETU was a not-for-profit.

From a financial perspective, keeping costs under control

was a key factor. In addition to detailing actual cash costs,

she thought members would also appreciate knowing the

contributed value of volunteers which helped keep costs low.

Knowing the minimum number of tickets needed to break

even would enable her to be proactive if ticket sales did not

meet projection. That information would also motivate each

member to promote the play on individual personal Facebook

pages and invite friends and families to attend. Fifteen years

of production experience also meant that Jayanti and Subrata

knew things might not always go as planned, from cost

overrun to show cancellations due to weather. Jayanti focused

on the spreadsheet and considered various scenarios.

CASE QUESTIONS:

1. Prepare a budgeted statement. Have two main sections

titled “Receipts” and “Expenditures.” Within the sections,

make sure to have subcategories so that actual receipts and

costs in the future could be compared with the budget.

Proper accounting format with currency should be used.

Fill in the budget column using information from the case.

Leave the actual column blank.

2. Using the budget prepared in Question 1:

a. Identify each cost as variable, fixed, or step in relation

to tickets sold. Hint: Determine the weighted average

ticket price and contribution margin from the sales mix

information (percentage of adult tickets vs. percentage

of student and senior tickets).

b. In the first case, assume that all funds are to come from

ticket sales only and that there are four shows in total.

Compute the breakeven point in number of tickets to

be sold and in U.S. dollars.

c. In the second case, assume the same in (b) but only

three shows in total. Compute the breakeven point in

number of tickets to be sold and in U.S. dollars.

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d. In the third case, assume that SETU would receive

sponsorship funds (cash and in-kind donations) in

addition to ticket sales for four shows. Compute the

breakeven point in number of tickets to be sold and in

U.S. dollars.

e. In the fourth case, assume that SETU would receive

sponsorship funds (cash and in-kind donations) in

addition to ticket sales for three shows. Compute the

breakeven point in number of tickets to be sold and in

U.S. dollars.

f. Comment on the feasibility of the required number

of ticket sales computed from above, keeping in mind

the nature of the play, that it is staged by a community

theater organization, and the ethnicity aspect. Suggest

ways for SETU to achieve the necessary amount of

ticket sales.

3. A common practice in SETU was to ignore labor or

personal items contributed by members and loyal

supporters who typically did not ask for receipts from

the organization for tax purposes. We referred to these

contributions as hidden costs because they were not

included in the budget nor were they recorded in the

financial statements. However, in the scenario where

members or supporters did not have the expertise, these

functions would require paid services, and the items

would have to be purchased or rented.

a. Identify and provide the approximate value of human

resources and personal items that were contributed by

actors and patrons in the Kamala production.

b. Incorporate these hidden costs, and measure their

impact on the budgeted statement in Question 1 and

the breakeven numbers and U.S. dollars calculated in

Question 2.

c. Evaluate the importance of the hidden costs

mentioned in the case that were not explicit cash

outlays or when the donors did not require a receipt

for tax purposes.

4. Extra Question: In light of the added hidden costs

discussed previously, determine what ticket prices

Subrata and Jayanti would have to charge to break even

for this production if they had to pay for all donated

services and products, assuming they keep the same sales

mix and could reach (a) 50% capacity, (b) 65% capacity,

and (c) 80% capacity.

ENDNOTES

1 “Annual Electronic Filing Requirement for Small Exempt

Organizations—Form 990-N (e-Postcard),” Internal

Revenue Service (IRS), December 3, 2017, www.irs.gov/

charities-non-profits/annual-electronic-filing-requirement-

for-small-exempt-organizations-form-990-n-e-postcard,

Accessed December 13, 2017.

2 “The World Factbook,” The Central Intelligence Agency

(CIA), www.cia.gov/library/publications/the-world-factbook/

geos/in.html#People, Accessed May 5, 2017.

3 Sangita Sunil Dhimate, “Feminist Analysis of Vijay

Tendulkar’s Kamala,” International Journal of Multifaceted and

Multilingual Studies, 2016, http://ijmms.in/sites/ijms/index.

php/ijmms/article/view/366/361.

4 “Current and Historical Rate Tables,” XE Currency

Converter, www.xe.com/currencytables/, accessed March 31,

2017.

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ABOUT IMA® (INSTITUTE OF MANAGEMENT ACCOUNTANTS) IMA®, the association of accountants and financial professionals in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession. Globally, IMA supports the profession through research, the CMA® (Certified Management Accountant) program, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global network of more than 85,000 members in 140 countries and 300 professional and student chapters. Headquartered in Montvale, N.J., USA, IMA provides localized services through its four global regions: The Americas, Asia/Pacific, Europe, and Middle East/India. For more information about IMA, please visit www.imanet.org.

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Contract costs with Black Box

Hall rental per week, including practices and performance $1,000

One time ticket set up fee $30

Technical support and lighting (4 hours minimum) $30 per hour 1.5 hour per show*

Sound technician (4 hours minimum) $30 per hour 1.5 hour per show**

House management $60 per show

Facility fees $2 per ticket

Ticket convenience charges $3 per ticket

Exhibit 1 Summary of the Contract with Mosesian Center for the Arts Black Box Theater

*SETU would have to pay minimum of 4 hours ($120) even if SETU did not use 4 hours of technical support and lighting. **SETU would have to pay mimimum of 4 hours ($120) even if SETU did not use 4 hours of sound technician.

Exhibit 2 Theatrical Poster for Kamala Production

Ticket Sales Assumptions

Estimated number of shows 4

Price per ticket – adult $25 including $5 in fees

Price per ticket – student and senior $22 including $5 in fees

Estimated percentage of adult ticket 70%

Estimated percentage of student and senior ticket

30%

Maximum capacity 90 seats

Average occupancy per show 50%

Exhibit 3 Assumptions for Estimating Ticket Sales and Receipts