SERVICE CENTER PROCEDURES RATE SETTING AND ACCOUNTING GUIDELINES Updated and effective November 1, 2016

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1 CONTROLLERS OFFICE 2400 Old Main Hill Logan, UT Phone: (435) Fax: (435) SERVICE CENTER PROCEDURES RATE SETTING AND ACCOUNTING GUIDELINES Updated and effective November 1, 2016 Service centers must follow sound cost accounting practices and standards, including rate setting methodology and billing practices. The guidelines below are intended to help service centers optimize productivity while adhering to the standards required by Federal, State, and University policy. Separate budgeting and accounting Service centers must be separately budgeted and accounted for apart from other activities (e.g. teaching, research). This affects service centers that operate within academic, research, academic support, or institutional support departments. Service centers often use operating resources funded by non service center funds (e.g. E&G Funds, Indirect Cost Recovery Funds) to subsidize the cost of providing services/products to customers. Regardless of source of subsidy, the following rules apply: 1. Separate accounting must be established for individual service centers. (e.g. separate Banner indexes, funds, orgs, and/or reporting categories). 2. The separate accounts must contain only revenues and expenditures directly related to the services/products of that center. Funds in these accounts cannot be expended for activities unrelated to service center operations such as teaching or research. 3. Subsidized expenses paid from non service accounts must be identifiable at time of review. Therefore, separate accounting of service center subsidies is required. A subsidized service center will utilize the following Service Center Subsidy revenue and expense account codes to bill subsidy account(s) for amount of required subsidy. Managing units must contact the Controller s 1 P age

2 office to establish procedures to properly account for service center subsidies Service Center Subsidy Revenue: Rolls up to Departmental Sales and Account type code 5R Sales and Service Service Center Subsidy Expense: Rolls up to Other Current Expense and Account type code 71 Current Expense Billing Rates Calculation frequency The Federal Government requires all service centers to calculate a new rate at least biennially (every other year). USU encourages service center managers to review break even status and cash balances periodically to determine if a more frequent rate calculation is necessary. Separate billing rates for multiple services/products Within a service center services/products with similar costs may be grouped together for the purposes of determining rates. However, centers should differentiate between products/services when the annual dollar volume becomes significant and the cost of providing particular services/products varies significantly from other services/products. Service centers selling multiple service/products with differing rates must track revenue and expenses for each service/product to ensure one service/product does not subsidize another. Costs included in billing rates must be: 1. Reasonable. Reasonable costs are those necessary for operation and which are consistent with established University and/or Board of Regents, State, and Federal policy or regulations. This will usually include salaries & wages, benefits, operations, and travel. Qualified depreciation may also be included in the billing rate. See Depreciation Section. 2 P age

3 2. Complete. All costs recorded in a service center index must be directly related to the operation of that service center. All expenditures directly related to the operation of the service center must be recorded in the service center index. 3. Allocable. Properly allocated to the service center s services/products based on actual or projected use or activity. One service/product should not substantially subsidize another within the service center. New centers or centers offering new services/products may allocate projected costs in lieu of actual costs. 4. Allowable. All costs must be allowable per federal government regulations. See Unallowable Costs list for example of common unallowable costs. Unallowable Costs may not be included in rates or charged directly to a service account. However, other sources of funds (e.g. revenue resulting from external sales premiums or departmental subsidy) may be used to pay for federally unallowable costs. No costs paid directly by Federal sources may be included in USU billing rate calculations (e.g. costs of a federally purchased equipment). Depreciation Internal billing rates cannot include the cost of capital expenditures or anticipated capital expenditures. Instead, subject to the limitations specified below, rates may include depreciation expense related to the use of existing service center equipment. The following rules apply: 1. The computation of depreciation must be based on the acquisition cost of the capital assets involved. Billing rates for federal customers must exclude any portion of capital asset costs borne or donated by the Federal Government, as well as any portion of the cost prohibited from recovery by law or agreement. Examples include equipment purchased with federal grants and equipment included in the 3 P age

4 university s indirect cost (F&A) rate calculation. All service center equipment must be coded accordingly in the Banner Fixed Asset module so it will not be included in future F&A calculations. 2. The computation of depreciation for equipment will be based on the straight line depreciation method. No depreciation may be computed or charged on equipment that has outlived its useful life. 3. Depreciation must be based on adequate property records: complete physical inventories must be taken at least every two years to ensure that the assets exist and are used and needed. Inventory is tracked in the Banner Fixed Asset module and coded specifically to the service center. A list of equipment assigned to a specific service center can be obtained from the Finance Portal on the Controller s Office website. 4. Cash funded depreciation will be established within the service center s general ledger to collect the depreciation portion of cash annually. Cash funded depreciation balances are not subject to the break even rule and are excluded from the 60 day working capital allowed calculation. Billing rates for different types of users The billing rate may vary by type of customer, however, rates charged to Federal funds, either directly or indirectly, may not subsidize other users. Rates are normally established for each user class listed below. A service center selling to external customers must contact the Controller s office to establish procedures to properly account for external sales. 1. Internal rates: Internal customers are customers paying with USUcontrolled funds. Internal rates may be set no higher than the unsubsidized billing rate. No customer may be charged a lower rate than a customer paying with a Federal sponsored account or Federal flow through. 2. External rates: Non USU customer rates must be set within the parameters described below to optimize recovery of all costs, 4 P age

5 including institutional overhead, depreciation, unallowable costs, and subsidies. These rates may also include reasonable external sales premiums in an effort to maximize revenue and to comply with competition laws of the State. Net income resulting from such premiums may be subject to unrelated business income tax (UBIT). Notify the Controller s office if an external sales premium is charged to outside customers. Non Profits: Non profit customers and USU students paying for services related to a university supervised research project with non USU funds are to be billed at a rate no less than the internal rate plus University overhead rate. This is equivalent to the total cost (direct + overhead) charged to federal sponsors. For Profits: For profit rates must be set to optimize revenue and minimize center subsidy. If similar products or services are available commercially, rates must minimize competition with private enterprise and include an external premium. Generally, for profit customers are to be billed at a rate no less than the Minimum For Profit Billing Rate. Service centers can add additional external premium if the market will bear the increased price. Discounts/Fee Waivers Minimum For Profit Billing Rate formula: + Unsubsidized Internal rate + Unallowable costs + University Overhead + External premium to minimize competition. = Minimum For Profit Billing Rate A single rate must be set for all internal users of a given product or service. However, with the approval of the unit(s) providing subsidy, specific users or groups of users may be charged at less than the listed rate if sufficient subsidy is available to compensate for the reduction. The 5 P age

6 reduced charges must be tracked and billed as institutional subsidy. Billing customers The costs of a service/product will be charged directly to customers based on: 1. Actual consumption or use of the service/product times the billing unit. 2. A posted schedule of approved billing rates. Invoices to customers should indicate dates, rates, hours, materials, etc. of service/product provided. Fund Transfers To/From Service Accounts Since fund transfers to/from service centers may impact billing rate computations (including break even), such transfers generally are not allowable. Exceptions to this are: 1. An amount less than or equal to the center s cash funded depreciation may be transferred from the service account to a non service account with approval from the Department Head, College Dean, and appropriate Vice President s office. 2. Net income resulting from external sales premiums may be transferred from the service account to a non service account provided the service center can demonstrate the net revenue resulted from services/products provided to external customers. 3. Transfers in of institutional subsidy to eliminate service center deficits. Break even operation Overtime, billing rates must be set so there is no overcharge to federal projects. This is accomplished by properly allocating costs to services/products, 6 P age

7 monitoring for break even operation, and carrying forward break even over/under amounts into future year rates. The recommended break even period for most services/products is one year although a longer break even period may be established when necessary to accommodate expenses that are not incurred annually. Break even carry forward amount formula: + Collected revenue + Subsidy Operating expenses on service index Revenue resulting from external sales premiums = Break even over/under Working Capital Allowed/Cash Reserve Limit The Federal Government allows service centers to maintain a service account carryforward balance (cash reserve) no greater than the 60 day equivalent of the center s total annual cash expenditures, including subsidized expenses. Subsidies and/or service rates must be adjusted as necessary to maintain carry forward balances within allowable limits. Qualified transfers out as described above, may also be used to reduce the balance. Working Capital formula: + Current Assets Current Liabilities Cash Funded Depreciation = Working Capital Cash Funded Depreciation Service center billing rates are set to recover all allowable expenditures including depreciation. Depreciation is a non cash expense, therefore the amount of cash collected to cover depreciation expense is transferred from the general ledger cash account to cash funded depreciation account Cash funded depreciation is primarily used to replace service center capital equipment, but can be used for other purposes if approved by the service center s college and 7 P age

8 department administration. Following are the circumstance in which cash funded depreciation can be released into cash or transferred out of the service center. 1. Cash funded depreciation must be released when a service center purchases capital equipment with its own cash funds. It does not have to be released if other funds purchase capital equipment and transfer the equipment to the service center. 2. Cash funded depreciation may be released to subsidize a cash deficit that cannot be recovered through billing rates if approved by the college and department administration. 3. Cash funded depreciation may be transferred out of the service center account if approved by the college and department administration. Account Deficits Service center operations should maintain a positive cash balance. Any service center in a negative cash position which exceeds the established threshold will be asked to submit a business plan detailing how the center will resolve its negative cash (i.e. calculate new rates, reducing expenses, subsidy from department/college, etc) at fiscal year end. This plan must be approved by the Department Head, College Dean, and appropriate Vice President s office. Document Retention Service centers are required to follow USU document retention policies and retain all documents to support rate calculations, operation expenses, and customer billings for 5 years or longer if retention practices are suspended due to audit. See Controller s Office website for current document retention dates. Exceptions Service Centers may request specific exceptions to cost accounting standards. Written requests must be submitted to Controller s office and approved by the Vice President for Research or Vice President for Business & Finance offices. 8 P age