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Comprehensive Guide to Rate Development Policies & Practices

Explore the rate development process, internal sales guidelines, and examples for capital equipment, leases, and operating expenses. Understand surplus/deficits, depreciation, and cost recovery methods.

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Comprehensive Guide to Rate Development Policies & Practices

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  1. Internal/External Sales Rate Development Level III

  2. Session Objectives • Understand the rate development process • Determine what costs are allowed in the rate development • Rate development example

  3. Policy • The purpose of the internal sales guidelines are to: • Fully recover but not exceed costs • Recommend best business practices • Include all subsidies in rate development • Rates are established to breakeven • Based on total cost 3

  4. Agenda • Capital Equipment • Capital Lease • Operating Lease • Partial Assignments • Surplus and Deficits 4

  5. Agenda • Prepaid Expenses • Price Reductions • After Hours rates • Assisted vs. Unassisted rates • Carryforward Balance reconciliation • Rate Development Example 5

  6. Capital Equipment • Depreciation expense associated with capital equipment should be included in the rate development. • Annual depreciation is calculated in the Asset Management module and reported in the Asset Management Depreciation Schedule. • Total purchase price, installation and transportation expenses are included in the acquisition cost and are capitalized. 6

  7. CapitalEquipment- Example • Capitalized Expense = Annual Depreciation Expense • Useful Life • $100,000 = $20,000 per year • 5 years • $20,000 = $16.64 per hour additional cost recovery • 1202 billablehours 7

  8. CapitalLease • Depreciation associated with capital lease should be included in the rate development. • The cost is based on capitalized cost of the equipment, not the monthly lease payments. • Depreciation is calculated in the Asset Management module. • Total purchase price, installation, transportation, interest charges and fee expenses are included in the acquisition cost. 8

  9. CapitalLease-Example • Capitalized Lease = Annual Depreciation Expense • Useful Life • $105,000 = $21,000 per year • 5 years • $21,000 = $17.47 per hour additional cost recovery • 1202 billable hours 9

  10. OperatingLease • Expense associated with operating lease should be included in the rate development based on annual lease payments. • Total lease payments include the cost for use of the equipment, interest and fees and may include installation, transportation or maintenance expenses. 10

  11. OperatingLease-Example • Lease Expense = Annual Lease Expense • Term of Lease • $100,000 = $20,000 per year • 5 years • $20,000 = $16.64 per month additional cost recovery • 1202 billable hours 11

  12. PartialAssignment – Salary and Fringe Rates • 67% -100% appointments: • Fringe Rate: 34.2% Academic, 28.4% Non-Academic • Nonproductive time: prorated based on appointment • 7.7% Partial benefits, 17.7% for GA Health and 23.0% with UPlan Health • Nonproductive time: prorated based on appointment and reduced benefits 12

  13. PartialAssignmentsHourlyRates 13

  14. PartialAssignmentsHourlyRates 14

  15. Reconciled Surplus & Deficits Balances in Rates An acceptable operating variance: Reconciled Year-End Variance = Plus or minus 15% Revenue • Within 15% and due to variance in costs or volumes from original estimates • Rates are calculated to breakeven • Reconcile outstanding invoices, prepaid maintenance contracts, materials and supplies not consumed, material for resale, (items paid for but not matched to revenue recognized). 15

  16. Surplus & Deficits Balances in Rates An operating variance that requires adjustment: • Subtract unallowable costs, adjust salary expense based on actual usage, reconcile depreciation expense, and add revenue not recognized, subsidies not recorded, etc. 16

  17. Surplus & Deficits Balances in Rates If a surplus results from overcharging, customers will need to be refunded if greater than 15% It’s important to be able to separately identify External and Internal Sales and expenses & reconcile balance at year end 17

  18. Surplus & Deficits Balances in Rates A deficit balance may develop from: sales < expected costs > expected 18

  19. Rate Development • Determine the per-unit rate • Direct costs +/- reconciled surplus or deficit • Per unit rate = ------------------------------------------- • Estimated volume of work 19

  20. Prepaids Expenses paid but not used in current year because the value received for those resources are in the future beyond current fiscal year • Charged at the purchase price Example: $25,000 service agreement = $8,333 current year 3 years $16,667 for future years or $8,333 per year will be included in the rates for the next two fiscal years 20

  21. Prepaids • Maintenance contracts • Service contracts • Consulting or Professional Services • Insurance • Materials for resale, stores and supplies • Postage • Excess subsidies 21

  22. Price Reduction Price reduction is allowed if the increase in volumes decreases the actual per unit cost • The decrease in cost is directly related to the activity • All pricing is applied equally • One customer can’t pay for the price reduction of another Example: 100 units cost $1.00 per unit 1000 units cost $0.75 per unit 22

  23. Price Reduction • Charge labor, supplies and equipment on a hourly basis rather than by units. • If there is a benefit to processing more units the price reduction will be applied by fewer hours charged. • If activities have a different cost structure (set up time versus run time for equipment) develop a rate for each and charge accordingly. 23

  24. After Hours Rates can be different if the cost associated with the activity is different • The cost for after hours service is lower because staff assistance is not required or available • All support costs and non-productive time are applied over entire base • One customer can’t pay for the reduced cost of another (Net revenue is the same for the recharge center) 24

  25. After Hours Example: Regular Hours: $93,750 (includes operator, support and equipment) cost divided by 1202 hours equals $78.00 per hour After Hours: $35,000 (includes support and equipment exclude operator ) cost divided by 845 hours equals $41.42 per hour 25

  26. After Hours 26

  27. Assisted vs. Unassisted Rates can be different if the cost associated with the activity is different • All support costs and non-productive time are applied over entire base • One customer can’t pay for the reduced cost of another (net revenue is the same) 27

  28. Assisted vs. Unassisted Example: Assisted : $100,000 (includes support, operator and equipment) cost divided by 1202 hours equals $83.19 per hour Unassisted: $10,000 (includes support less operator and equipment) cost divided by 791 hours equals $36.35 per hour 28

  29. Unassisted Hours 29

  30. Carryforward Reconciliation See Internal Sales Activity Reconciliation Template. 30

  31. Resources Office of Internal Sales website http://controller.umn.edu/units/internal-external-sales/index.html This presentation is posted on the site. 31

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