1. University of Minnesota Internal/External Sales Internal Sales Rate Development Level I

2. 22 Walk through a rate development example Understand the rate development process Determine what costs are allowed in the rate development Learning Objectives Questions at anytime during the presentation

3. 33 Expected Outcome Revenue – Expenses = $0 at the end of the Fiscals Year Revenue is the rate charged times the volume Rate is estimated expense/volume Expense is the cost to perform the activity Note: any allowable variance is included in next year’s rate

4. Internal Sales EFS website: http://www.finsys.umn.edu/sales/iso.html –Policies –Procedures –Presentations –Job Aids –Training Modules 4 Internal Sales Rate Development Procedure and Website

5. The purpose of the internal sales rate guidelines is to: Comply with Federal regulations Sold at rates that fully cover, but do not exceed costs Subsidies are documented in the rate development. All rates should be established to break even. 5 Internal Sales Rate Policy

6. 6 Reviewed and updated each year Set to break even Based on historical sales data Consistent for all internal customers Federal government receives the lowest rate Subsidies must be documented Principles for Internal Sales Rates

7. Steps to developing an Internal Sales rate: Measurable unit Expected level of activity Annual estimated costs Breakeven Exclude unallowable costs Direct vs. overhead costs Activity per-unit rate Reviewed and updated each year 7 Internal Sales Rate Development

8. Measurable unit for goods and services In terms of labor, machine time, or tangible product. Examples: per labor hour, per machine hour, per copy, per gallon, per test, etc. 8 Measurable Unit

9. For units measured in cost per hour, productive time (total time available for the service) should be used, and not total hours –Productive time (billable hours) is total time, less non-billable time such as vacation, sick leave, holiday, breaks, equipment downtime, certification and training time. 9 Productive Time

10. 10 Billable Hours Template Salary& Fringe recovered using hours available to actually work and invoice (Billable Hours) Billable hours is unique to each individual - develop one schedule per person DescriptionRate based on Billable Hours Details in determining hours Full year hours paid2080 (52 weeks * 40 hours per week) based on 100% appt. Paid holidays (not available to work) (88) (11 days * 8 hours per day) FY14 est. by campus Paid vacation (not available to work) (176) (22 days * 8 hours per day) est. vacation expected Paid sick time (not available to work) (88) (11 days * 8 hours per day) est. sick expected Total hours available to work1728216working days Any other non-billable hours (216)(1 hour per day * working days) (training, breaks, administration, meetings etc.)(30 minutes a day for breaks) Billable hours (estimated volume of work) 1,512 Labor Rate = Salary & fringe/billable hours Salary & fringe $ 100,000 Billable hours1512 Salary + Fringe/Billable Hours = Rate per hour $ 66.14 Billable Hours (hours worked & invoiced) X 1512 Salary & fringe cost recovered $ 100,000 Note #1: To fully recover total labor cost on a annual basis the billable hours method must be used. Note #2: Underestimated billable hours (hours lower and hourly rate is higher) will cause a surplus. Note #3: Overestimated billable hours (hours higher and hourly rate is lower) will cause a deficit.

11. 11 Billable Hours Example Salary& Fringe recovered using hours paid (2080) vs. hours available to actually work and invoice (billable hours) Description Rate based on Hours Paid - Salary only Rate based on Hours Paid Salary & Fringe Rate based on Billable Hours Definition Full year hours paid2080 (52 weeks * 40 hours per week) Paid holidays (not available to work) - - (88)(11 days * 8 hours per day) Paid vacation (not available to work) - - (176)(22 days * 8 hours per day) Paid sick time (not available to work) - - (80)(10 days * 8 hours per day) Total hours available to work2080 1736217working days Any other non-billable hours - - (217)(1 hour per day * working days) (training, breaks, administration, meetings etc.) Billable hours (estimated volume of work) 2,08020801519 Labor Rate = Salary & fringe/billable hours Salary & fringe $ - $ 100,000 Salary only at.336 fringe rate $ 74,403 Billable hours2080 1519 Rate per hour $ 35.77 $ 48.08 $ 65.83 Billable Hours (hours worked & invoiced) X 1519 Amount desired to recover $ 100,000 Salary & fringe cost recovered $ 54,336 $ 73,029 $ 100,000 Amount not recovered $ (45,664) $ (26,971) $ - Note: In order to fully recover total labor cost on a annual basis the billable hours method should be used.

12. Annual output or expected level of activity –Estimate the expected volume / level of activity, by using past results or survey likely customers Annual estimated costs –Costs should be directly attributable to the functions of the sales activity –Costs should be allowable 12 Rate Development (cont.)

13. Direct costs include: –Salaries and fringe benefits of those providing the service or directly supporting the activity –Materials and supplies –Depreciation on capital equipment –Equipment repair and maintenance (service contracts) –Prior year surpluses and deficits and other required adjustments 13 Direct Costs

14. 14 Exclude Unallowable Costs advertising expenses except for employee and subject recruitment alcoholic beverages bad debts entertainment costs goods and services for personal use interest, fund raising, and investment costs Memberships not work related See handout: Unallowable Internal Sales Costs Unallowable Costs

15. 15 Exclude Unallowable Costs The general premise for unallowable costs is that the federal government will not pay for certain costs that they believe are not directly related to the benefit of the research project. Unallowable Costs

16. Determine the breakeven –The goal is to breakeven at the end of the year 16 Per Unit Rate Determine the per-unit rate Direct costs +/- surplus or deficit Per unit rate = ------------------------------------------- Estimated volume of work

17. Example: 17 Per Unit Rate Example Determine the per-unit rate $100,000 -10,000 $100 = -------------------------- 900

18. Cost of an activity is comprised of the allowable direct costs required for the performance of the activity 18 What is Allowable? Must be reasonable -Necessary for the performance of the activity -Considering the interests of the institution -Does not violate institutional principles -Charge can be reasonably explained as necessary to complete activity

19. 19 What is Allowable? (cont.) Must be allocable to the specified activity -Assigned percentage based on the benefits received -Incurred to advance the work of the activity -Costs cannot be shifted to other activities to cover deficits

20. 20 What is Allowable? (cont.) Must be consistently applied - In estimating, accumulating and reporting costs - With the institution’s cost accounting practices - Allocating costs incurred for the same purpose

21. 21 Internal Sales Rate Template

22. 22 Questions? Office of Internal Sales website http://finsys.umn.edu/sales/iso.html This presentation is posted on the site.