Transcript Intermediate

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:
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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
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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.
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.
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. 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