Internal/External Sales Rate Development Level III

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: 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

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

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

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

Capital Equipment - 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 billable hours 7

Capital Lease 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

Capital Lease - 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

Operating Lease 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

Operating Lease - 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

Partial Assignment – 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

Partial Assignments Hourly Rates 13

Partial Assignments Hourly Rates 14

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

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

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

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

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

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

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

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

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

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

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

After Hours 26

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

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

Unassisted Hours 29

Carryforward Reconciliation See Internal Sales Activity Reconciliation Template. 30

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