Establishing Internal Sales Rates

Introduction

The purpose of these guidelines is to ensure that goods and services sold to other University departments are being sold at rates that comply with Federal A-21 regulations and Federal Cost Accounting Standards (CAS); and that they are sold at rates that fully cover, but do not exceed costs. All subsidies should be documented in the rate development. All rates should be established to breakeven. The intent of the policy is to accumulate all allowable and allocable costs within an identified, segregated set of accounts; to recognize subsidies to the operation; to provide a feasible means of operating a business within federal guidelines; and to establish rates based on total costs.

Develop the Internal Sales rate with the following principles in mind:

• Billing rates should be reviewed and updated each fiscal year.
• Rates charged to internal University customers must be set to break even.
• Rates must be consistent for all internal customers.
• The University is subject to periodic audit by the federal government to assure the federal government receives the lowest University, or internal, rate for similar goods and services purchased from the University.

Establish the Rate

1. Determine the measurable units for goods or services

   This measurable unit may be determined in terms of labor, machine time, or tangible product. Examples of a unit of measurement include: per labor hour, per machine hour, per copy, per gallon, per test, etc. For units measured in cost per hour or other measures of time, productive time and not total hours available should be used in the cost calculation. Productive time is the total time available, less non-billable time such as time for vacation, sick leave, holiday, breaks, equipment downtime, machine repairs, education/certification and meetings.

   A unit may not conduct internal sales if it cannot determine an actual usage in measurable units of output or other reasonable basis as approved by the Internal Sales Compliance Office.

2. Determine the annual output, or expected level of activity, for the service or product

   Estimate the expected volume (or level of activity) for the service or goods provided, by using past results or survey likely customers.

3. Determine annual estimated costs involved with running the recharge service

   All costs included in the internal sales rate development should: (1) be directly attributable to the functions of the internal sales activity and (2) be allowable under OMB A-21. Generally operating costs include:

   • Salaries and wages
   • Fringe benefits
   • Materials and supplies
   • Travel related to the operation of the internal sales
   • Depreciation associated with capital equipment
   • Equipment repair and maintenance
   • Communication charges
   • Sub-contractors and other outside services
   • Prior year surpluses or deficits and other required adjustments

   Salaries and wages include those of faculty and staff whom: provide the services; produce the goods or services; manage the internal sales activity; and provide other administration and support activities. Administrative staff directly supporting internal sales operations should be included in the rate calculation if such support represents 20% or more of that individual's time.

   NOTE: Expenses related to desktop computer support are considered to be administrative overhead expenses and are included in the F&A rate that is assessed on sponsored projects. Therefore, Recharge Centers providing administrative desktop computer support shall not be allowed to directly charge sponsored projects for their services. Recharge Centers that provide both routine desktop computer support and more scientific computer support must maintain the financial activity related to these service lines in separate Programs to ensure that desktop support expenses are not included in a rate that is charged to a sponsored project. If a service is being routinely provided to all users in the unit, including administrative support staff, then it likely doesn't qualify as scientific computer support.

   Materials and supplies include only the technical supplies, professional service, and special conferences related specifically to the internal sales activity. Office supplies are generally considered indirect and should not be included in the rate development. However, to the extent office supplies are consumed solely for the operation of the internal sales activity in deliverance of its goods and services, they may be budgeted and included as allowable costs.

   Travel, equipment service contracts, and other actual expenses incurred specially for the operation of the internal sales activity, should be treated as a cost and included in the calculation of the internal sales rates. To the extent that costs that are normally considered indirect costs are required and incurred solely for the operation of the internal sales activity in deliverance of its goods and services, they may be included as allowable costs. Theses costs should be clearly identified and documented as benefiting and controlled by the unit conducting internal sales activity.

   Depreciation associated with capital equipment may be included in the rate development. Depreciation expense will be calculated in the Asset Management module. Separate capital equipment and buildings & improvements chartfield strings should be established to account for capital related transactions, see the Establishing Internal Sales Capital Equipment Funds and Recording Depreciation administrative procedure.

   Donated or transferred equipment (that was acquired with non-federal sponsored funds) is considered to be the equivalent of a cash donation that is subsequently used to purchases equipment. When a unit conducting internal sales activity receives an equipment donation, it may be depreciated through the internal sales activity and included in the internal sales rate.

   Prior year surpluses must be taken into consideration in the internal sales rate development because the federal regulations do not allow a surplus buildup. Any deficit resulting from the prior year's operations must be taken into consideration in the internal sales rate calculation, or subsidized by other non-federal fund.

4. Exclude unallowable costs:

   According to federal regulations (OMB Circular A-21), certain operating costs are specifically unallowable, such as bad debts, entertainment costs, and fines. Refer to Examples of Unallowable Costs as Designated by OMB Circular A-21 and ensure that all unallowable costs have been excluded.

5. Determine the appropriate classification of the activity and include or exclude overhead cost accordingly:

   There are two types of internal sales activity at the University, and the rate development process varies slightly for each type.

   Recharge Service: A Recharge Service is a good or service that provides support to the academic community for a fee. A unit engaged in providing one or more recharge service is known as a Recharge Center.

   Specialized Service Center: A specialized Service is a recharge service that typically requires the use of highly complex or specialized facilities or equipment. A unit that charges a fee for providing one or more specialized services and has an annual operating budget exceeding $1 million and generates significant charges to sponsored projects is considered a Specialized Service Center.

   If the internal sales activity is identified as a Recharge Center, then departmental administrative costs associated with running the center may be included in the rate.

   If the internal sales activity is determined to be a Specialized Service Center, then an allocable share of departmental administrative costs and facilities costs should be included in the rate development process.

   Departmental administrative costs include expenses such as supplies and an allocable share (generally greater than 20 percent) of administrative support staff salaries that is directly attributable to the good or service provided.

   General administrative costs may not be included in a recharge center rate. These costs include utilities, space costs and library costs, or other general administrative or facilities.

6. Determine the amount of any applicable user fee subsidy:

   In order to be competitive, a unit conducting internal sales activity may offset the rate with a subsidy from the department, college, or other source. This may be especially necessary for Specialized Service Centers, which should develop a fully burdened rate that includes an allocable share of overhead expenses. It is important to note that if a subsidy is needed to offset overhead costs, it should be done by first transferring the overhead costs to the internal sales accounting structure and then subsidizing the overhead costs through another transfer into the internal sales accounts. This methodology allows all parties involved to clearly understand the true costs of doing business.

7. Determine the internal sales activity per unit rate

   In its simplest form, or for a single recharge service, a recharge service rate is cost-based. This rate is calculated by dividing the total annual cost for providing the good or service (net of any subsidy) by the total expected level of activity for the budget year.

   Total annual cost for providing the good or service (net of subsidy) equals all costs directly associated with the recharge service, minus any subsidy, plus prior year under-recovery, or minus prior year over-recovery. Total level of activity is the total estimated volume of work to be performed in recharge service, expressed as labor or machine hours, CPU time, or units of products or services provided.

   Unit Rate =

   [Direct operating costs - subsidy +/- prior year under/over-recovery] [Estimated volume of work (labor hrs, machine hrs, units produced, etc.)]

   Distinctive Goods and Services

   Note: Separate billing rates should be developed for distinctive types of goods/services when both of the conditions below are met.

   • The sales volume of good/service is significant.
   • The cost of providing the good/service is substantially different from other goods/services.

   This will ensure that one group of users is not overcharged to help offset lower prices of others. Some services may make a surplus and other may incur losses. This is acceptable as long as one set of users is not subsidizing the losses of another group.

   If a unit offers more than one good or service, it may be necessary to assign or allocate allowable costs to the various goods or services offered. Each type of cost must be examined to determine its proper allocation, and the allocation process must be thoroughly documented in writing. Any costs that cannot be allocated in a justifiable manner should not be included as a cost in establishing a rate.

8. Submit new rate proposal to the Internal Sales Compliance Office

   Rates established for the recharge service or specialized service must be submitted to the Internal Sales Compliance Office on an annual basis, on or before budget information is due to the Budget Office. In accordance with the annual budget process instructions, units conducting internal sales activity will submit their budget information to the Budget Office. The Senior Vice President for Finance and Operations must approve any exceptions to the rate development process.