1. University of Minnesota Internal/External Sales Rate Development – Advance Internal/External Sales

2. 22 Fully recover but not exceed costs Include all subsidies in rate development Set to breakeven Based on total cost See Handout: “What would be included in an Internal Sales Rate Development?” Checklist before submitting rates. Objectives for Rates

3. 33 Productive Time for Salaries Productive Time for Equipment Capital Equipment Capital Lease Operating Lease Partial Assignments Agenda

4. 44 Surplus & Deficit Balances Prepaid Expenses Discounted rates After Hours rates Assisted vs. Unassisted rates Agenda (cont.)

5. Productive time (billable hours) is total time, less non-productive time such as vacation, sick leave, holiday, breaks, equipment downtime, certification and training time. See handout: “Vacation and Leaves to consider when calculating productive (billable hours) 5 Productive Time - Salaries

6. There are 40 hours in a work week or 52 weeks in a year. 40 X 52 = 2,080 hours in a year Example: Salary $74,403 per year Fringe for academic faculty (FY14) 33.6% or $25,597 Total salary & fringe for the year $100,000 6 Billable Hours Calculation - Salaries

7. 7 Inaccurate assumption/calculation: Total salary & fringe of $100,000 divided by 2,080 working hours in a year: $100,000 / 2,080 = $48.08 per hour This is the per hour salary paid to an employee.

8. Employees don’t work all 2080 hours in a year. Holidays, vacation leave, sick leave, other types of leave Training, administrative or non-productive time, breaks These activities can be billed to the customer and will not be if the basis of the rate is 2080 hours. 8 Billable Hours Calculation - Salaries

9. 9

10. The worker will only be available to work 1512 hours, not 2080 The rate for 1512 hours is $66.14 per hour $48.08 vs. $66.14 $48.08 X 1512 hours = $72,692 Recover the actual cost of the salary and fringe cost of $100,000 At a rate of $48.08, there will be a deficit of $27,308 at the end of the year. A 27% unfavorable variance. 10

11. Billable Hours Calculation - Salaries Why is this important? If there are 5 people working in this ISO department example, there would be a deficit of ($134,855) at the end of the year because rate calculated does not recover all of the costs. ($27,308 X 5 = $136,540) 11

12. 12 Billable Hours - Salaries

13. Productive time (billable hours) is total time, less operator productive time, maintenance, repairs, recalibration, replacement, storage, seasonality, set-up time plus ability to run without operator See Handout: “Equipment availability (downtime) to consider when calculating productive time (billable hours) 13 Productive Time Equipment

14. 14 Billable Hours Calculation - Equipment Inaccurate assumption/calculation: Total annual depreciation of $10,000 divided by 2,080 working hours in a year: $10,000 / 2,080 = $4.80 per hour This is the per hour depreciation based on total hours in a work week.

15. Employees don’t work and equipment operate all 2080 hours in a year due to the non-productive time of the operator and equipment These activities can be billed to the customer and will not be if the basis of the rate is 2080 hours. 15 Billable Hours Calculation - Equipment

16. The equipment will only be available to work 1512 hours, not 2080 The rate for 1512 hours is $6.61 per hour $4.80 vs. $6.61 $48.08 X 1512 hours = $7,269 Recover the actual cost of the depreciation cost of $10,000 At a rate of $4.80, there will be a deficit of $2,736 at the end of the year. A 27% unfavorable variance. 16

17. 17 Billable Hours Calculation - Equipment

18. Why is this important? If there are 5 machines working in this ISO department example, there would be a deficit of ($13,684) at the end of the year because rate calculated does not recover all of the costs. ($2,736 X 5 = $13,684) 18

19. 19 Capital Equipment Depreciation associated with capital equipment should be included in the rate development. Annual depreciation is calculated in the Asset Management module and reported in the UMReport. Total purchase price, installation and transportation expenses are included in the acquisition cost and are capitalized. Capitalized Expense = Annual Depreciation Expense Useful Life

20. 20 Capital Equipment - Example Capitalized Expense = Annual Depreciation Expense Useful Life $100,000 = $20,000 per year 5 years $20,000 = $13.22 per hour 1512 Hours

21. 21 Capital Lease Depreciation associated with capital lease may be included in the rate development 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. Capitalized Expense = Annual Depreciation Expense Useful Life

22. 22 Capital Equipment - Example Capitalized Expense = Annual Depreciation Expense Useful Life $105,000 = $21,000 per year 5 years $21,000 = $13.88 per hour 1512 Hours

23. 23 Operating Lease Expense associated with operating lease may be included in the rate development based on lease payments as a basis for equipment usage. Total lease payments include a charge for use of the equipment, interest and fees and may include installation, transportation, maintenance expenses.

24. 24 Operating Lease - Example Lease Expense = Annual Lease Expense Term of Lease $100,000 = $20,000 per year 5 years $20,000 = $13.22 per month 1512 Hours

25. 25 Partial Assignment 67% -100% assignments: Fringe Rate: 33.8% P&A, 26.3% CS, Nonproductive time: prorated based on % worked 0% -67% assignments: Fringe Rate: reduced rate 7.7% Partial, 16.6% for GA Nonproductive time: reduced benefits & no time off paid

26. 26 Partial Assignments Hourly Rates

27. 27 Partial Assignments Hourly Rates

28. 28 Excess Surplus & Deficits Balances in Rates A acceptable operating variance: Within 15% and due to variance in costs or volumes from original estimates Rates are calculated to breakeven Reconcilable items like maintenance contracts, tuition payments, materials and supplies, material for resale, (items paid for but not matched to revenue recognized).

29. 29 Excess Surplus & Deficits Balances in Rates A operating variance that require adjustments: Subtract unallowable costs, adjust salary expense based on actual usage, recorded depreciation expense, and add revenue not recognized, subsidies not recorded, etc..

30. 30 Excess Surplus & Deficits Balances in Rates If a surplus results from overcharging customers will need to be refunded Therefore, it’s important to be able to separately identify External and Internal Sales and expenses & reconcile balance at year end

31. 31 Excess Surplus & Deficits Balances in Rates A deficit balance may develop from: –sales < expected –costs > expected If a deficit is due to expenses that are not recoverable, a subsidy will be required

32. 32 Rate Development (cont.) Determine the per-unit rate Direct costs +/- allowable surplus or deficit Per unit rate = ------------------------------------------- Estimated volume of work

33. 33 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

34. 34 Prepaids Maintenance Contracts Service Contracts Consulting or Professional Services Insurance Materials for Resale, Stores and Supplies Postage Subsidies applied in advance

35. 35 Discounting Discounting is allowed if the increase in volumes decreases the per unit cost The decrease in cost is directly related to the activity All discounts are applied equally One customer can’t pay for the discount of another Example: 100 units cost $1.00 per unit 1000 units cost $0.75 per unit

36. 36 Discounting Charge labor, supplies and equipment on a hourly basis vs. by units. If there is a benefit to processing more units the discount 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.

37. 37 After Hours 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 for the ISO)

38. 38 After Hours Example: $93,750 (includes operator, support and equipment) cost divided by 1522 hours equals $61.60 per hour $31,250 (includes support and equipment ) cost divided by 1000 hours equals $31.25 per hour

39. 39 After Hours

40. 40 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) Example: $100,000 (includes support and operator) cost divided by 1522 hours equals $65.70 per hour $40,000 (includes support less operator) cost divided by 1000 hours equals $40.00 per hour

41. 41 After Hours

42. 42 Questions? Office of Internal Sales website http://finsys.umn.edu/sales/iso.html This presentation is posted on the site.