University of Minnesota Internal/External Sales Advanced Internal Sales Rate Development

1. University of Minnesota Internal/External Sales Advanced Internal Sales Rate Development

2. Learning Objectives • Understand the rate development policy that applies to rates charged to other University units • Determine what is allowed and how to allocate of costs • Walk through a rate development example • What’s wrong with this rate development? • Answers to common questions and issues. • Questions at anytime during the presentation 2

3. Internal Sales Rate Policy 3 • The purpose of the internal sales rate 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) • Rates fully cover, but do not exceed costs. • All subsidies should be documented in the rate development. • All rates should be established to break even.

4. Billing rates reviewed and updated each year Set to break even Consistent for all internal customers Federal government receives the lowest University, or internal rate for similar goods and services purchased at the University Subsidies must be documented Principles for Internal Sales 4

5. Internal Sales Rate Development 5 Steps to developing an Internal Sales rate: • Measurable unit for goods and services • Annual output or expected level of activity • Annual estimated costs • Breakeven • Exclude unallowable costs • Appropriate classification and include or Exclude overhead costs • Activity per-unit rate • Reviewed, updated and submitted to Internal Sales each year

6. Measurable Unit 6 Measurable unit for goods and services • In terms of labor, machine time, tangible test, etc. (For example, per labor hour, per machine hour, per test, etc.) • For units measured in cost per hour, productive time (total time available for the service) should be used, and not total hours • Productive time is total time, less non-billable time such as vacation, sick leave, holiday, breaks, equipment downtime, certification and training time.

7. Billable Hours 7

8. Annual Output & Estimated Costs 8 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 • All costs should be directly attributable to the functions of the internal sales activity • All costs should be allowable under OMB Circular A-21

9. Operating Costs 9 Generally, operating costs include: • Salaries and fringe benefits of those providing the service • Materials and supplies • Depreciation associated with capital equipment • Equipment repair and maintenance • Prior year surpluses and deficits and other required adjustments

10. Unallowable Costs • Exclude Unallowable Costs (a few examples excerpted from http://www.policy.umn.edu/Policies/Research/COST_APPB.html ) • 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 • membership in any civic or community organization, country or social club 10

11. Per Unit Rate • Determine the per-unit rate • Direct operating costs +/- surplus or deficit • Per unit rate = ------------------------------------------------ • Estimated volume of work 11

12. Sample Rate Sheet Per Hour 12

13. Sample Rate Sheet Per Test 13

14. Question Can you use the same rate as the previous year fiscal year? 14

15. Answer No, rates are to be reviewed and updated at least annually. Billable hours, staff participation, fringe rates, equipment usage, cost of services, cost of materials ect. change every year. Volume changes every year. 15

16. Question I quoted a customer a rate in the previous fiscal year. Can I charge the quoted rate? 16

17. Answer If the ISO charges the same rate as last year then the subsidy must be provided for the difference. If this does not occur the ISO will have future customers pay for the difference and this is not allowed. Different customers will pay a different rate for the same services or product in the same year. 17

18. Question When do I calculate a rate (standard) based on multiple inputs and when should I use a hourly rate? 18

19. Answer The accuracy of the rate development should be able to predict the actual outcome. The percentage of time, supplies consumed and equipment usage should depend on the volume of the activity not changes in resources. Changes in volume should reflect changes to resources and the outcome should be the same. 19

20. Question How many rates should I have? 20

21. Answer Rates should be develop for each unique activity were different inputs are required to get a unique output. 21

22. Question What other things should be considered when putting together a rate development. 22

23. Answer Do not round. Estimates should be based on last years actuals or expected future expenses. Do not allocate dollars based on a percentage of cost, use a fixed value based on estimated hours. Do not use last years rates. Do not use a inflation index or some other index. 23

24. Rate Development Example 24

25. Rate Development Highlighted Issues 25

26. Questions? Office of Internal Sales website http://finsys.umn.edu/sales/iso.htm 26