Internal/External Sales Rate Development Level II

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

Policy The purpose of the internal sales guidelines are to: Comply with Federal regulations defined by Uniform Guidance Operate using best business practices Sell at rates that fully cover, but do not exceed costs Ensure subsidies are documented in the rate development Establish rates to break even

Requirements Rates reviewed each year Rates updated at least every 2 years Activity segregated by fund and CF2 Rates consistent for all internal customers Federal government receives the lowest rate Subsidies must be documented in rate development Reconciled carryforward balance should be included in next year's rates

Can you use the same rate as the previous fiscal year?

Answer Rates must be reviewed annually and updated at least every 2 years. 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 if costs go up and a surplus if costs go down.

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

Answer If expenses change, then the recharge center will not be fully paid for the actual expenses incurred in that year. Recharge center should set rates based on current actual cost. The buyer department responsible for receiving the services is responsible for the increase of expenses.

When do I calculate a rate based on task (standard) and when should I use an hourly rate?

Answer The accuracy of the rate development should be able to predict the actual outcome. If activity is not predictable based on task, then use an hourly rate. Changes in volume should reflect changes to expenses and the outcome should be the same (if all resources are dedicated).

How many rates should I have?

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

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

Answer Space/use cost is not allowable in internal sales rates. Space/use cost is allowed for external sales rates. For external sales rates to charge others for space usage, contact the Real Estate office.

Can I round values for estimates of expenses or on the rates?

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: $47.50 $50.00 $2.50 10,000 hours = $25,000 surplus Rounding will create unnecessary variances.

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

Answer Estimate the actual usage/time/materials for each activity. Do not allocate dollars based on an percentage of cost if the estimated value of the actual time required if based on the task not the dollar amount of the activity .

Answer Example: Pharmacy sells drugs at values from $100 to $10,000. Department allocates administrative costs based on an percentage of cost of the drug at 10%. $10,000 drug would sell for $11,000 ($1,000 for administrative costs) $100 drug would sell for $110 ($10 for administrative costs) The cost to sell the $10,000 drug would not be any more than the $100 drug yet the charge is greater. Administration cost was $50 for each drug regardless of the cost.

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

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 2.0%, gas price decrease by 50%, 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 actual cost to the department.

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

Answer All subsidies must be documented in rate development. In order to be competitive, a 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. Total rate does not change.

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

Answer A unit conducting internal sales activity may exclude depreciation expense. The department may pay for the equipment at the time of the purchase. Or, 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.

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

Answer A employee is paid $100,000 per year (salary and fringe) and will be available 1202 billable hours rather than 2080 paid hours: The difference in the rate is $83.19 per billable hour vs. $48.08 per paid hour. 1202 x $48.08 = $57,792 $ 42,207 or an 42% will not be recovered in the rate

Resources Internal Sales website http://finsys.umn.edu/sales/iso.htm External Sales website http://finsys.umn.edu/sales/eso.htm