1. Internal/External Sales Rate Development – Intermediate “Answers to Common Questions”

2. The guidelines are to ensure that goods and services sold to other University departments are: Comply with Federal A-21 regulations and Federal Cost Accounting Standards (CAS) Best business practices Using rates that fully cover, but do not exceed costs. Subsidies are documented in the rate development. Rates are established to break even. 2 Internal Sales Rate Policy

3. 3 Billing rates reviewed and updated each year Segregated set of accounts Consistent for all internal customers Federal government receives the lowest University internal rate for similar goods and services Subsidies must be included in your rate development Carryforward balance should be included in next year's rates Principles for Internal Sales

4. 4 Question Can you use the same rate as the previous fiscal year?

5. 5 Answer Rates are to be reviewed and updated at least annually. Billable hours, staff participation, restructuring, number of staff, staff turn-over, fringe rates, new equipment, equipment usage, maintenance, cost of services, cost of materials, volumes, surplus and deficit balance, etc.. change every year and at different levels. If rates are not adjusted there will be a deficit at year end if costs go up and a surplus if costs go down.

6. 6 Question I quoted an customer an rate in the previous fiscal year. Do I have to charge the quoted rate this year?

7. 7 Answer If expenses change, then the department will not be paid for the actual expenses incurred in that year. Department should set rates based the best estimate of actual cost for that year. If the expenses increase and the rate doesn’t change, a subsidy must be provided for the difference. The department responsible for receiving the services is responsible to put increase of expenses in grant.

8. 8 Question When do I calculate an rate based on multiple inputs and when should I use an hourly rate?

9. 9 Answer The accuracy of the rate development should be able to predict the actual outcome based on hour or per activity. If the resources are not consistent and predictable per unit then use a hourly rate. Changes in volume should reflect changes to resources and the outcome should be the same. If historical data are not consistent with previous rate development assumptions, update rate.

10. 10 Question How many rates should I have?

11. 11 Answer Rates should be developed for each unique activity where different inputs(resources) are required to get a unique output. Group similar inputs of salary, material, task into one rate.

12. 12 Question I will be developing rates for the use of an lab which will include salaries, materials, equipment and the lab space. How do I include the cost for the space?

13. 13 Answer Space/use of the area designated as the lab is not allowable for an internal sales recharge centers. For rates to charge others for space usage, contact the real estate office.

14. 14 Question Can I use rounding on values for estimates of resources or on the rates?

15. 15 Answer Use the best estimate available to determine the expected cost, usage and resulting rates. Any variance to the estimated values will result in an variance to the rate and the actual costs. Example: 10.5 hours * $48.5 = $509.25 vs. 11.0 hours * $50.0 = $550.00 or $40.75 per hour * 1000 hours = $40,750 surplus Rounding will create unnecessary variances.

16. 16 Question What is the best way to allocate costs that benefit all activities like general supervision, administrative time, supplies etc.?

17. 17 Answer Estimate the actual usage/time/materials for each activity. Do not allocate dollars based on an percentage of cost, use the estimated value of the actual time required to perform the activity. The pharmacy sells drugs at $1,000 and also at $100. If the department allocates administrative costs based on an percentage of cost at 10%. The $1000 drug would sell for $1,100 and the $100 drug would sell for $110. The cost to sell the $1,000 drug would not be any more than the $100 drug yet the charge is greater. The administration cost might be $50 for either drug.

18. 18 Question Can I increase my rates by an percentage like the inflation index?

19. 19 Answer Different costs in different categories will increase at different rates. Use the best information available at the time to estimate rates. Example: Salaries may increase by 2.5%, gas price decrease by (10%), supplies increase by 3% or software prices decrease by (5%). Indices reflect an average over many cost elements that may or may not reflect the cost to the department.

20. 20 Question My department would like to subsidize the rate by excluding costs from the rate calculation. Is this the appropriate way to subsidize the activity?

21. 21 Answer In order to be competitive, an unit conducting internal sales activity may offset with an subsidy. In order to provide transparency and provide accurate information about the rates, the appropriate method is to include all cost and to define the amount that will be subsidized.

22. 22 Question My department would like to subsidize the rate by excluding depreciation from the use of equipment. Is this the appropriate way to subsidize the internal sales activity?

23. 23 Answer A unit conducting internal sales activity may exclude equipment usage expense. The department must pay for the equipment at the time of the purchase rather than recover the value of the equipment over it’s useful life. The best method is to include all cost associated with equipment usage and define the amount of the subsidy.

24. 24 Question What is the result if I use hours paid vs. productive time (billable hours)?

25. 25 Answer If the worker is paid $100,000 (salary and fringe) and will only be available 1512 billable hours rather than 2080 paid hours: The difference in the rate is $66.14 per hour vs. $48.08 or $27,308 per year or $100,000 - $72,692 or an 27% unfavorable variance. The worker will only be available to work 1512 hours, not 2080.

26. 26 Question What is the best method to include the cost for tuition reimbursement for academic graduate and professional students that are not eligible for tuition fringe benefits (tuition paid in as salary)?

27. 27 Answer If the student is paid for work to be preform on an ISO in the form of tuition reimbursement rather than an hourly salary, then the dollars reimbursed are divided by the expected salary to determine the hours the employee must work in order to match cost with value. Example: an student receives $10,000 that was charged to the ISO for services. A student would be paid $20 an hour for the services. $10,000/20 = 500 hours. The student will need to work 500 hours in order to earn the reimbursement for tuition. The worker will only be available to work 1512 hours, not 2080.

28. 28 Advance Rate Development Topics December 11 th, 2014 Productive time for Salaries, Equipment Capital Equipment, Operating Lease Partial Assignments Hourly Rates Excess Surplus & Deficits Balances in Rates Prepaids: Maintenance, Insurance, Volume Estimates Special Rates: Discounting, After hours, Assisted vs. Unassisted

29. 29 Questions? Internal Sales website http://finsys.umn.edu/sales/iso.htm External Sales website http://finsys.umn.edu/sales/eso.htm