Based in Minneapolis, Minnesota, the Hubert Memorial Foundation has $300 million

Question

Based in Minneapolis, Minnesota, the Hubert Memorial Foundation has $300 million in investments and contributes approximately 80 percent of the average annual return of $25 million to worthy causes. Individuals and groups requesting grants of $100,000 or more must make an in-person presentation of their request. These presentations generally involve three to five individuals and take an average of two hours each. The Executive Director of the Hubert Foundation is concerned with the cost of resources used to schedule and accommodate the 500 to 600 group presentations each year. She has asked you for suggestions about what kind of cost data to gather, and ways to classify the data to help her understand cause/effect relationships between costs and results. Required: Write a brief memo to the Executive Director giving her some basic information on cost classification and behavior.

Explanation / Answer

Cost can be viewed in many different ways. Fixed costs (depreciation, salaries) do not change because of activity, but are caused by time. Variable costs (some utilities, paper) are not time-related, but change with activity. Sunk costs (buildings, equipment) are not impacted by changes and activities and can be ignored in decisions about incremental activity. Differential costs happen because of incremental activity.

The majority of Hubert Foundation costs are fixed: interview rooms, presentation equipment, and salaries of Hubert Foundation administrators who hear and evaluate the presentations.

The marginal/differential costs can and should be identified, but are probably minor in comparison to the capacity costs needed to handle the large number of yearly presentations

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