FUND BALANCE ACCEPTABLE FUND BALANCE... 5 ASSESSING THE CURRENT FUND BALANCE PROJECTING YEAR-END FUND BALANCE... 18

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1 CONTENTS I. INTRODUCTION... 1 PURPOSE... 1 CONTENTS AND ORGANIZATION... 1 GETTING STARTED... 2 II. MANAGING RECHARGE CENTERS USING FUND BALANCE... 3 INSTRUCTION & DEPARTMENTAL FUNCTION RECHARGE CENTERS AND PUBLIC SERVICE ACTIVITIES... 4 FUND BALANCE... 4 ACCEPTABLE FUND BALANCE... 5 ASSESSING THE CURRENT FUND BALANCE... 6 PROJECTING YEAR-END FUND BALANCE... 9 FLOW-THROUGH ACTIVITIES OCCASIONAL FLOW-THROUGH SALES IN RECHARGE CENTERS GENERAL SERVICE CENTERS AND SPECIALIZED SERVICE FACILITIES FUND BALANCE ACCEPTABLE FUND BALANCE ASSESSING THE CURRENT FUND BALANCE PROJECTING YEAR-END FUND BALANCE EXAMPLE: DETERMINATION AND ANALYSIS OF ACCEPTABLE FUND BALANCE EXAMPLE: FUND BALANCE PROJECTION FOR A GENERAL SERVICE CENTER III. SETTING RATES THE RATE CYCLE PROJECTING RATE YEAR EXPENDITURES STATEMENT OF INCOME AND EXPENSE REPORT RECHARGE CENTER STATEMENT OF INCOME AND EXPENSE WORKSHEET TEMPLATE PROJECTING FUND BALANCE CALCULATING THE RATE PER UNIT SALARY AND WAGE SCHEDULE SALARY AND WAGE SCHEDULE EXAMPLE # SALARY AND WAGE SCHEDULE EXAMPLE # RATE COMPUTATION METHODS ONE PRODUCT: ONE RATE WHEN IT S NOT THAT SIMPLE EXAMPLE OF SETTING AN EXTERNAL CUSTOMER RATE SPECIAL RATE-SETTING CONSIDERATIONS SUBSIDIES: CHARGING INTERNAL CUSTOMERS AT LESS THAN BREAK-EVEN CAPITAL EQUIPMENT i

2 USING MARKET RATES STOREROOM MARKUP CALCULATIONS (STOREROOM OPERATIONS ONLY) IV. SUBMITTING A RATE REQUEST (1) REQUEST FOR RATE APPROVAL MEMORANDUM (2) SUPPORTING FINANCIAL DOCUMENTATION a. PROJECTED STATEMENT OF INCOME AND EXPENSE b. RATE CALCULATION c. SALARY AND WAGE SCHEDULE V. PURCHASE AND DEPRECIATION OF CAPITAL EQUIPMENT (1) TRANSFER FUNDING FOR INITIAL PURCHASE OF EQUIPMENT (2) PURCHASE OF EQUIPMENT (3) ESTABLISH DEPRECIATION RECOVERY ACCOUNT (XXX DEPT-DEPR) (4) TRANSFER DEPRECIATION EXPENSE TO DEPRECIATION RECOVERY ACCOUNT (5) USE OF FUNDS IN DEPRECIATION RECOVERY ACCOUNT (6) EQUIPMENT SOLD INTERNALLY FROM ONE RECHARGE CENTER TO A DIFFERENT RECHARGE CENTER (7) FUNDS RECEIVED BY SELLING DEPARTMENT TRANSFERRED TO DEPRECIATION RECOVERY ACCOUNT EXAMPLE: INTER-DEPARTMENTAL SALE OF EQUIPMENT APPENDIX A - USEFUL DEFINITIONS APPENDIX B EXAMPLE: RATE REQUEST & SUPPORTING DOCUMENTATION EXAMPLE: REQUEST FOR RATE APPROVAL EXAMPLE: STATEMENT OF INCOME AND EXPENSE WORKSHEET, WITH PROJECTED FUND BALANCE SALARY AND WAGE SCHEDULE SUPPLIES & EXPENSES SCHEDULE DEPRECIATION SCHEDULE BREAK-EVEN RATE PER UNIT.80 RATES TO BE CHARGED DOCUMENT USED TO CAPTURE BILLING INFORMATION APPENDIX C MAPS IDENTIFICATION OF RECHARGE CENTER TYPE RATE SETTING CYCLE RATE APPROVAL ROUTING PROCESS ii

3 I. INTRODUCTION PURPOSE This Procedure Manual is designed as a complement to the Recharge Center Policy. The information, examples and guidelines in this manual offer a practical approach to responsible fiscal management of recharge centers. Management of recharge centers consists of an ongoing cycle of monitoring fund balance and adjusting rates. This cycle is illustrated on page 3. CONTENTS AND ORGANIZATION The manual has six sections: I. INTRODUCTION II. MANAGING RECHARGE CENTERS USING FUND BALANCE (guidelines for calculating and using fund balance effectively) III. SETTING RATES (how to determine appropriate rates) IV. SUBMITTING A RATE REQUEST (what should be included in the rate request packet; formats, etc.) V. PURCHASE AND DEPRECIATION OF CAPITAL EQUIPMENT (rule for acquiring, selling and depreciating capital equipment -- and how to recover depreciation as part of the rate) VI. APPENDICES A. USEFUL DEFINITIONS B. EXAMPLE: RATE REQUEST AND SUPPORTING DOCUMENTATION C. MAPS What is not included in this manual: Day-to-day operations, billing guidelines, and general information included on the Business@Purdue website, Correcting Documents Manual and the Accounting Services website. 1

4 GETTING STARTED First: Review the Rate Setting Cycle diagram on page 3. Each projected rate year is twelve months in length, and begins the first of any month, depending on what best meets the management need. This rate year could coincide with the fiscal year, the calendar year or any twelve-month period. A new rate year begins twelve months later or whenever a new rate is approved and implemented. Next: Develop an understanding of what type of recharge center you have, and how the Recharge Center Policy applies to that center. Use the IDENTIFICATION OF RECHARGE CENTER TYPE Map (page 85) to determine the appropriate center category and which portions of the Recharge Center Policy apply. Then: It will be helpful to become familiar with the Useful Definitions in Appendix A. Much of the information in this manual applies to all recharge centers. In some instances, procedures and rules are different for departmental function centers than for general service centers, etc. Sections that apply only to general service centers or storeroom operations, for example, are clearly labeled. 2

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6 II. MANAGING RECHARGE CENTERS USING FUND BALANCE INSTRUCTION & DEPARTMENTAL FUNCTION RECHARGE CENTERS AND PUBLIC SERVICE ACTIVITIES FUND BALANCE Fund balance represents the operation position of the recharge. Throughout the year, income and expenses are incurred, transfers in and out of the recharge are processed, and capital equipment purchases are made. Each of these activities affects the working capital balance of the recharge. Working capital consists of current assets (including cash) less current liabilities. The working capital balance is used as the fund balance because it gives a short-term measure of the financial health of the recharge. If current assets exceed current liabilities at any given point of time, fund balance of the recharge at that point in time is positive. If current liabilities exceed current assets at any given point of time, fund balance of the recharge at that point in time is negative. Federal requirements state that the cost of services may be billed to users. If we could anticipate exactly the cost of goods and services to be provided, we could set our rates so precisely that, for any period of time, revenues would exactly equal expenses. Conceptually the fund balance of the recharge center would always be zero. The current and projected fund balance of the operation must be included in future year rate calculations to ensure that, over time, the recharge account is operating on a break-even basis, and that users are being charged on the basis of total cost. Proper account management requires periodic calculation and assessment of fund balance. Managers must do a calculation to determine current fund balance at any time throughout the fiscal year. To calculate current fund balance, calculate working capital balance using cash, plus other current assets, less current liabilities. This fund balance represents the liquidity of the recharge if the recharge was to shut down today, it is the amount that the recharge center would have to discontinue operations. The working capital fund balance includes the amounts remaining to be collected from customers (accounts receivable), amounts remaining to be paid (accounts payable), plus existing cash that can be used in winding down operations (paying salaries of employees for the remaining period of recharge utilization, etc.). A departmental recharge center fund balance may not fall below -$5,000. A departmental recharge center fund balance may not exceed +$5,000 or 10 percent of revenue or two months of cash expenses, whichever amount is larger. Discretion in determining which tolerance level is appropriate for the center should always be used. 4

7 We usually think of this -$5,000 to + $5,000 or 10 percent of revenue or two months of cash expenses, whichever amount is larger range as our tolerance zone. Our goal is for each recharge center to recover costs of goods and services provided but, over time, to incur neither a profit nor a loss. In other words, if we decided to eliminate a particular recharge center at any point in time, after we closed all the income and expense at year-end, collected the receivables and paid the liabilities, the fund balance of the center would be zero (or very, very close to zero). Year-end fund balance should be projected frequently to assure that the balance will fall within the tolerance zone (between -$5,000 and the greater of +$5,000 or 10% of projected income for the year or two months of cash expenses). ACCEPTABLE FUND BALANCE DETERMINING THE TOLERANCE ZONE FOR: INSTRUCTION & DEPARTMENTAL FUNCTION RECHARGE CENTERS ORGANIZED ACTIVITIES & PUBLIC SERVICE ACTIVITIES A. Is projected income for the year less than $50,000? If so, is the projected fund balance at fiscal year-end between -$5,000 and +$5,000? If so, the balance is acceptable. We can think of the - $5,000 to +$5,000 range as the fund balance tolerance zone. B. If projected income for the year is greater than $50,000, we proceed to the next step of the test: Determining 10% of the sum of income for the year and determining two months of cash expenses (average expenses based on an entire year of data). The greater of these two amounts becomes the upper limit of the acceptable fund balance range. In this instance, the fund balance tolerance zone is either from -$5,000 to 10% of revenue OR from -$5,000 to two months of cash expenses. C. If a fund balance of 10% of income or two months of cash expenses is used, discretion should be used in determining that these balances are appropriate fund balances to be carried. For example, if income is significantly greater than expenses for the year, the recharge center may be overcharging. If this is the case, 10% of income would not a reasonable fund balance to use. MANAGEMENT ACTION: If the current month fund balance is not within the fund balance tolerance zone, we need to ask: 1. Does our financial position fit the pattern of prior years at this same time? 2. Is our financial position approximately what was projected at this time? 3. Are there unusual income or expense items this period? 4. Where will we be at year-end? Reminder: The goal is for each recharge center to cover costs of goods and services provided but, over time, to incur neither a profit nor a loss. In other words, if we decide to eliminate a particular recharge center at any point in time, after we close all the income and expense at year-end, collected the receivables and paid the liabilities, the fund balance of the center would be zero (or very, very close to zero) 5

8 ASSESSING THE CURRENT FUND BALANCE FOR: INSTRUCTION & DEPARTMENTAL FUNCTION RECHARGE CENTERS ORGANIZED ACTIVITIES & PUBLIC SERVICE ACTIVITIES There are several ways to determine current fund balance: The necessary information can be calculated from figures derived from GR55 (Report Group Z100), or from using the recharge fund balance transaction code listed below. The most straight-forward approach is to: Run the transaction code GR55 (Report Group ZRCH) in SAP: The transaction code will provide the recharge s life-to-date fund balance status. It prompts you to enter your recharge center fund(s) use operating fund(s) only, the applicable fiscal year, and the from and to periods. Please be aware that if you are running the report to calculate fund balance, you must run the report from period 0. The report will provide you with the following fields: Cash the total of 101xxx G/L accounts CurrAsst = Other Current Assets current assets other than cash. This amount excludes capitalized assets and accumulated depreciation. Liab = Current Liabilities all 2-type G/L accounts Fund Bal = Fund Balance this is the calculation of fund balance, otherwise known as the working capital balance. The calculation of fund balance is: Cash + Other Current Assets + Liability = Fund Balance. TFB-10%Inc = Tolerable Fund Balance based on 10% of Income o Formula for Calculation of Tolerable Fund Balance based on 10% of Income is as follows: o Annual Inc column * 10% = Tolerable Fund Balance based on 10% of Income TFB-TwoMoExp - Tolerable Fund Balance based on two months of cash expenses o Formula for Calculation of Tolerable Fund Balance based on two months of cash expenses is as follows: o Annual Exp column Depr Exp column - PLA column = Total Cash Expenses * 2/12 * (-1) = Tolerable Fund balance based on two months of cash expenses. Annual Inc = Annual Income all 4-type G/L accounts excluding 49-type G/L accounts Annual Exp = Annual Expenses all 5-type G/L accounts excluding 59-type G/L accounts Tran In = Transfers In all 49-type G/L accounts Tran Out = Transfers Out all 59-type G/L accounts CptlAssts = Capital Assets all 155xxx type G/L accounts AccumDepr = Accumulated Depreciation all 156xxx type G/L accounts Depr Exp = Depreciation Expense all 557xxx type G/L accounts (this amount is already included in the Annual Exp column) PLA = Plant Assets Retired G/L (this amount is already included in the Annual Exp column) Rchg Subsidy = Recharge Subsidy G/L (this amount is already included in the Annual Inc column) 6

9 The following print screen is an example of a positive fund balance: Tolerable fund balance Upper LImits. Note: The greater of the limits should be used, unless doing so would allow for an unreasonable fund balance. Continued: This fund balance is within tolerance. We determine this by first looking at Annual Income for the center. For this recharge, Annual Income is $882,637, which is greater than $50,000. Since income is greater than $50,000, the tolerable fund balance for the recharge is the greater of the tolerable fund balance based on 10% of Annual Income (in this case $88,264) or the tolerable fund balance based on two months of cash expenses (in this case $67,799). Since $88,264 is the greater of those tolerable fund balances, it is the upper limit for fund balance in this recharge, which makes the tolerance zone for the recharge -$5,000 to $88,264. Because the fund balance of $30,726 is within that range, this fund balance is within tolerance. 7

10 It should also be noted that there is a pretty big discrepancy between Annual Income and Annual Expenses within this recharge. Because Annual Income is so much greater, we should be cautious using 10% of Net Income as a tolerable fund balance, because it appears that we are overcharging within this recharge, and we do not want that to increase our tolerable fund balance. If there is a justifiable reason for income being drastically higher than expense, then we are okay to use it as a fund balance. Examples of reasonable justifications would be that the recharge was billed a large expense that will be paid at the beginning of the following year, which will bring expenses in line with the income; or the approved copy of the rate request is allowing for the recharge to recover a deficit, and therefore income is greater than expenses for this period. If there is a situation like this in the recharge center, please be prepared to justify using the tolerable fund balance zone used in your review. The following print screen is an example of a negative fund balance: 8

11 Continued: The fund balance of this recharge is -$4,528. Although this fund balance is negative, it is still within tolerable fund balance range because it is within the -$5,000 to +$5,000 range. Fund balance should never go below -$5,000. WHAT TO DO WHEN DEPRECIATION IS RECOVERED AS PART OF THE RATE Depreciation is a non-cash expense used in accounting to try to match the expense of an asset to the income that the asset helps the recharge center earn. This means that depreciation expense will hit the recharge center s expense G/L accounts, but will not decrease cash each year (or increase current liabilities that you will have to pay in the future) like a normal expense would. So if you recover depreciation through your rate, you are essentially collecting income (cash or an account receivable that you will recover in the future) to cover an expense that you do not actually have to pay. Because we are not technically paying this amount, but we are recovering the cost, the income received to cover that cost will cause an increase in cash or accounts receivable (which are current assets) in our recharge center operating fund(s). Current assets are included in the working capital fund balance calculation, so this accumulation of cash or accounts receivable causes an increase in fund balance in the recharge operating fund(s). This will appear in an operating fund balance as a surplus, and can cause the recharge center to become out-of-tolerance. For this reason, cash equal to the amount of depreciation expense recovered through the rate must be transferred to a depreciation recovery account on a periodic basis (monthly/quarterly/annually). This allows for the funds to be separated and therefore easily identifiable when reviewing the recharge center operating fund balance, as well as the fund balance of the depreciation recovery account. Then when the equipment within the recharge center needs to be replaced, the funds for the purchase are readily available and easily identifiable without any further analysis of the recharge center operating fund(s). Examples of the entries made to purchase capital equipment and to transfer depreciation into the depreciation recovery account on a monthly/quarterly/annual basis are shown on page 57. 9

12 PROJECTING YEAR-END FUND BALANCE A quick look the total YTD income and expenses and net transfers can tell us if we are on track with the projections for this center. In this case, we d look at the Annual Inc (all 4-type accounts excluding 49xxxx Transfer In G/Ls) and Annual Exp (all 5-type G/L accounts less 59xxxx Transfer Out G/Ls) totals to see if they are approximately what was projected for this point in the year. We would also look at the Tran In (all 49xxxx G/Ls) and Tran Out (all 59xxxx G/Ls) columns, the capital purchases for the year, and the subsidies that have been processed, and determine if they are approximately what was projected for this time in the year. Are we expecting income and expenses and transfers in and transfers out to be about equal for the rest of the year? If not, will the expected difference bring us closer to or farther from our zero fund balance goal? Will we be making any capital purchases? 10

13 When Annual Income + Subsidies + Transfers In > Annual Expenses + Transfers Out + Capital Purchases, fund balance increases. When Annual Income + Subsidies + Transfers In < Annual Expenses + Transfers Out + Capital Purchases, fund balance decreases. 11

14 FLOW-THROUGH ACTIVITIES Certain goods or services, such as copy services and postage, are provided to the University community by transferring the exact, actual cost to the user. There is no mark-up involved and no rate calculations are conducted at the operating unit level to determine the cost of the good or service. The Recharge Center Policy states: Costs for these (flow-through) expenses will be incurred in the department s operating account and recharges will be treated as reduction of expense. To record expense recovery amounts associated with flow-through activities, simply credit the appropriate expense G/L account for the sale (i.e., postage, copy machine charges) on an intramural invoice voucher (when recovering from Purdue departments where there is an approved rate), a journal voucher (when recovering from Purdue departments where there is not an approved rate), or cash receipts voucher (when payment is received in cash or check). As a simple example ignoring the payables entry, let s assume that the Chemistry department needs a chemical that is only sold in increments of 5,000 gallons. So the chemistry department purchases 5,000 gallons of the chemical for $5,000. The entry for this purchase is as follows: DR CR G/L account Fund Cost Center Amount DR Chemicals (Chemistry) 5, CR Cash (Chemistry) 5, This entry increases the expense for chemicals within the chemistry department and decreases the cash within the chemistry department (because cash was used to purchase the chemicals). However, the chemistry department realizes that they only need 2,000 gallons of the chemical, and they would like to sell the remaining amount of chemical to recover the cost. The chemistry department decides to sell the remaining 3,000 gallons of the chemical to the biology department. That entry would look as follows: DR CR G/L account Fund Cost Center Amount DR Chemicals (Biology) 3, CR Chemicals (Chemistry) 3, This entry decreases the amount of the expense for chemicals within the chemistry department (crediting an expense G/L account represents a decrease in the expense), while increasing the amount of the expense for chemicals within the biology department (debiting an expense G/L account represents an increase in the expense). 12

15 GENERAL SERVICE CENTERS AND SPECIALIZED SERVICE FACILITIES FUND BALANCE Fund balance represents the operation position of the recharge. Throughout the year, income and expenses are incurred, transfers in and out of the recharge are processed, and capital equipment purchases are made. Each of these activities affects the working capital balance of the recharge. Working capital consists of current assets (including cash) less current liabilities. The working capital balance is used as the fund balance because it gives a short-term measure of the financial health of the recharge. If current assets exceed current liabilities at any given point of time, fund balance of the recharge at that point in time is positive. If current liabilities exceed current assets at any given point of time, fund balance of the recharge at that point in time is negative. Federal requirements state that the cost of services may be billed to users. If we could anticipate exactly the cost of goods and services to be provided, we could set our rates so precisely that, for any period of time, revenues would exactly equal expenses. Conceptually the fund balance of the recharge center would always be zero. The current and projected fund balance of the operation must be included in future year rate calculations to ensure that, over time, the recharge account is operating on a break-even basis, and that users are being charged on the basis of total cost. Proper account management requires periodic calculation and assessment of fund balance. Managers must do a calculation to determine current fund balance at any time throughout the fiscal year. To calculate current fund balance, calculate working capital balance using cash, plus other current assets, less current liabilities. This fund balance represents the liquidity of the recharge if the recharge was to shut down today, it is the amount that the recharge center would have to discontinue operations. The working capital fund balance includes the amounts remaining to be collected from customers (accounts receivable), amounts remaining to be paid (accounts payable), plus existing cash that can be used in winding down operations (paying salaries of employees for the remaining period of recharge utilization, etc). General service centers and specialized service facilities should maintain a fund balance equal to two months cash expenses. A fund balance tolerance of plus or minus 10% of the targeted amount (two months of cash expenses) will be observed for management purposes. Account management for general service centers and specialized service facilities focuses on determination and analysis of acceptable fund balance, using two months of cash expenses to determine the tolerance limits. 13

16 ACCEPTABLE FUND BALANCE FOR: GENERAL SERVICE CENTERS AND SPECIALIZED SERVICE FACILITIES A. DETERMINE TWO MONTHS OF CASH EXPENSES Note: Two months of cash expenses can easily be found by using the transaction code GR55 (Report Group ZRSC), which will return the target fund balance, as well as the tolerable upper and lower limits for fund balance based on two months of expenses. However, if you would like to see how this amount is calculated, please follow the steps below: 1. Add all expenses (except for depreciation and plant assets retired) for the current month and previous eleven months. These expenses consist of labor, fringe benefits, cost of sales, other department expenses, and administrative and general expenses. {At the end of the fiscal year, total annual expenses can be found by running the GR55 (Report Group ZRSC) transaction code. This number will be found under the Annual Exp column. This amount includes depreciation expense and plant assets retired, so in order to get the two months of cash expenses, subtract the amounts in the Depr Exp and PLA columns from the amount in the Annual Exp column. This amount will be your total annual cash expenses.} 2. Divide this figure by twelve and multiply by two to arrive at two months of cash expenses. {At the end of the fiscal year, two months of cash expenses can be found by running the GR55 (Report Group ZRSC) transaction code. This number will be found under the Target FB (Target Fund Balance) column on the second page of the report. If you are in the middle of a fiscal year and would like an estimate of what your tolerable fund balance should be, you can use the ZRSC report from the previous year for a reasonable estimate, provided that the activity within the recharge has not increased or decreased drastically within the year. B. DETERMINE THE UPPER AND LOWER LIMITS OF THE FUND BALANCE TOLERANCE ZONE (+10% AND -10%) BY MULTIPLYING THE TWO MONTHS OF CASH EXPENSES BY: 1. 90% (to arrive at the lower fund balance limit) this amount can also be found in the TFB- Lower column on the ZRSC Report and % (to arrive at the upper fund balance limit) this amount can also be found in the TFB- Upper column on the ZRSC Report MANAGEMENT ACTION: If the current month fund balance is not within the fund balance tolerance zone, we need to ask: 1. Does our financial position fit the pattern of prior years at this same time? 2. Is our financial position approximately what was projected at this time? 3. Are there unusual income or expense items this period? 4. Where will we be at year-end? 14

17 ASSESSING THE CURRENT FUND BALANCE FOR: GENERAL SERVICE CENTERS AND SPECIALIZED SERVICE FACILITIES There are several ways to determine current fund balance: The necessary information can be calculated from figures derived from GR55 (Report Group Z100), or from using the recharge fund balance transaction code listed below. The most straight-forward approach is to: Run the transaction code GR55 (Report Group ZRSC) in SAP: The transaction code will provide the recharge s life-to-date fund balance status. It prompts you to enter your recharge center fund, the applicable fiscal year and the from and to periods. Please make sure that if you are running the report to calculate fund balance, you must run the report from period 0. The report will provide you with the following fields: Cash the total of 101xxx G/L accounts CurrAsst = Other Current Assets current assets other than cash. This amount excludes capitalized assets and accumulated depreciation. Liab = Current Liabilities all 2-type G/L accounts Fund Bal = Fund Balance this is the calculation of fund balance, otherwise known as the working capital balance. The calculation of fund balance is: Cash + Other Current Assets + (-Liability) = Fund Balance. TFB-Lower = Lower limit of Tolerable Fund Balance based two months of cash expenses o Formula for Calculation of Tolerable Fund Balance based on 10% of Income is as follows: o Target FB column * 90% = Lower limit of Tolerable Fund Balance for General Service Center TFB-Upper - Upper limit of Tolerable Fund Balance based two months of cash expenses o Formula for Calculation of Tolerable Fund Balance based on two months of cash expenses is as follows: o Target FB column * 110% = Upper limit of Tolerable Fund Balance for General Service Center Annual Inc = Annual Income all 4-type G/L accounts excluding 49-type G/L accounts Annual Exp = Annual Expenses all 5-type G/L accounts excluding 59-type G/L accounts Target FB = Target Fund Balance Target Fund Balance based on two months of cash expenses o Formula for Calculation of Target Fund Balance based on two months of cash expenses is as follows: o Annual Exp column Depr Exp column - PLA column = Total Cash Expenses * 2/12 = Target Fund balance based on two months of cash expenses. Tran In = Transfers In all 49-type G/L accounts Tran Out = Transfers Out all 59-type G/L accounts CptlAssts = Capital Assets all 155xxx type G/L accounts AccumDepr = Accumulated Depreciation all 156xxx type G/L accounts 15

18 Depr Exp = Depreciation Expense all 557xxx type G/L accounts (this amount is already included in the Annual Exp column) PLA = Plant Assets Retired G/L (this amount is already included in the Annual Exp column) Rchg Subsidy = Recharge Subsidy G/L (this amount is already included in the Annual Inc column) The following print screen is an example of a positive fund balance: Tolerable fund balance zone. Continued: Let s determine the tolerable zone for fund balance in order to determine whether or not the center is within tolerance. The TFB-Lower column shows us that the lower limit of tolerable fund balance 16

19 is $51,684. The TFB-Upper column shows us that the upper limit of tolerable fund balance is $63,169. So the fund balance tolerance zone would be from $51,684 to $63,169. Fund balance is $54,847, which is within this tolerance zone. Therefore, this service center is within tolerance because it is within the fund balance tolerance zone. The following print screen is an example of a negative fund balance: Continued: Negative fund balances in General Service Centers are never within tolerance because in order to maintain a target fund balance of two months of cash expenses because this is the estimated 17

20 amount of expenses that would need to be paid if the recharge were to shut down a positive fund balance is required (since we cannot pay our debts with negative cash). WHAT TO DO WHEN DEPRECIATION IS RECOVERED AS PART OF THE RATE Depreciation is a non-cash expense used in accounting to try to match the expense of an asset to the income that the asset helps the recharge center earn. This means that depreciation expense will hit the recharge center s expense G/L accounts, but will not decrease cash each year (or increase current liabilities that you will have to pay in the future) like a normal expense would. So if you recover depreciation through your rate, you are essentially collecting income (cash or an account receivable that you will recover in the future) to cover an expense that you do not actually have to pay. Because we are not technically paying this amount, but we are recovering the cost, the income received to cover that cost will cause an increase in cash or accounts receivable (which are current assets) in our recharge center operating fund(s). Current assets are included in the working capital fund balance calculation, so this accumulation of cash or accounts receivable causes an increase in fund balance in the recharge operating fund(s). This will appear in an operating fund balance as a surplus, and can cause the recharge center to become out-of-tolerance. For this reason, cash equal to the amount of depreciation expense recovered through the rate must be transferred to a depreciation recovery account on a periodic basis (monthly/quarterly/annually). This allows for the funds to be separated and therefore easily identifiable when reviewing the recharge center operating fund balance, as well as the fund balance of the depreciation recovery account. Then when the equipment within the recharge center needs to be replaced, the funds for the purchase are readily available and easily identifiable without any further analysis of the recharge center operating fund(s). Examples of the entries made to purchase capital equipment and to transfer depreciation into the depreciation recovery account on a monthly/quarterly/annual basis are shown on page

21 PROJECTING YEAR-END FUND BALANCE A quick look the total YTD income and expenses and net transfers can tell us if we are on track with the projections for this center. In this case, we d look at the Annual Inc (all 4-type accounts excluding 49xxxx Transfer In G/Ls) and Annual Exp (all 5-type G/L accounts less 59xxxx Transfer Out G/Ls) totals to see if they are approximately what was projected for this point in the year. We would also look at the Tran In (all 49xxxx G/Ls) and Tran Out (all 59xxxx G/Ls) columns, the capital purchases for the year, and the subsidies that have been processed, and determine if they are approximately what was projected for this time in the year. Are we expecting income and expenses and transfers in and transfers out to be 19

22 about equal for the rest of the year? If not, will the expected difference bring us closer to or farther from our zero fund balance goal? Will we be making any capital equipment purchases? When Annual Income + Subsidies + Transfers In > Annual Expenses + Transfers Out + Capital Purchases, fund balance increases. When Annual Income + Subsidies + Transfers In < Annual Expenses + Transfers Out + Capital Purchases, fund balance decreases. 20

23 EXAMPLE: DETERMINATION AND ANALYSIS OF ACCEPTABLE FUND BALANCE for General Service Centers and Specialized Service Facilities Note: Lower and upper limits can be found on the GR55 (Report Group ZRSC) in the TFB-Lower and TFB-Upper columns. This gives you the tolerable fund balance range for the General Service Center. However, if you would like to calculate the fund balance tolerance zone, it is calculated as follows: A. Determine two months of cash expenses 1. Calculate twelve months of cash expenses (exclude depreciation and plant assets retired, as these are noncash expenses). {Hint: This number can be calculated using the GR55 (Report Group ZRSC) using the Annual Exp column less the Depr Exp column less the PLA column.} $2,400, Divide result by twelve and multiply by two (or simply divide by six) to determine two months of cash expenses {Hint: This number is available on the second page of the GR55 (Report Group ZRSC) in the Target FB Column: $ 400,000 B. Determine the fund balance tolerance zone (using two months of cash expenses of $ 400,000) {Hint: These lower and upper limits can be found on the GR55 (Report Group ZRSC) in the TFB-Lower and TFB-Upper columns: LOWER LIMIT UPPER LIMIT $400,000 * 90% $400,00 * 110% $ 360,000 $ 440,000 C. Fund balance current month 1 1. Cash $ 350, Other Current Assets $ 200, Current Liabilities ($170,000) 4. = Fund balance current month $ 380,000 D. Is current month fund balance within the tolerance zone? (Yes!) E. Periodically (and whenever the current month fund balance is not within the fund balance tolerance zone), we should analyze our past, present, and projected financial position. 1 A fund balance, or working capital balance, may be obtained by running the transaction code GR55 (Report Group ZRSC). 21

24 EXAMPLE: FUND BALANCE PROJECTION FOR A GENERAL SERVICE CENTER Actual Budget Estimated A Total Income 2,884,927 2,906,600 3,388,753 B Total Operating Expenses 2,569,707 2,661,475 2,795,750 C Depreciation 415, , ,400 D NET INCOME (100,462) (195,800) 112,603 E Fund Balance July 1 693, , ,263 F Net Income (100,462) (195,800) 112,603 E plus F= G Fund Balance June , , ,866 DETERMINE FUND BALANCE TOLERANCE ZONE B divided by 6= H Target (two months expense) 428, , ,958 H X 90%= I Lower fund balance limit 385, , ,363 H X 110%= J Upper fund balance limit 471, , ,554 ANALYSIS Fund Balance (G) Lower (I) Target (H) Upper (J) Actual 385, , ,113 Outside of upper limit > 593, Budgeted 399, , ,937 Outside of lower limit > 397, Estimated 419, , ,554 Within tolerance zone > 509,866 22

25 III. SETTING RATES This section is a guide to determining recharge center rates for goods and services. The information is organized as follows: 1. The Rate Setting and Review Cycle Information (begins below) 2. Projecting Rate Year Expenditures (see page 24) 3. Projecting Fund Balance (see page 29) 4. Calculating the Rate per Unit (see page 38) THE RATE CYCLE Management of recharge centers consists of an ongoing cycle of monitoring fund balance and adjusting rates. This cycle is illustrated on page 3. Each projected rate year is twelve months in length, and begins the first of any month, depending on what best meets the management need. This rate year could coincide with the fiscal year, the calendar year or any twelve-month period. A new rate year begins twelve months later or whenever a new rate is approved and implemented. Fund balance is monitored monthly. Whenever it becomes clear that fund balance will be significantly out of tolerance at the close of the rate year, new rates are calculated and submitted for approval. When the new rate is approved and placed into use, the new rate year cycle has begun. ANNUAL RATE REVIEW Even if fund balance remains within tolerance month after month, a rate analysis should be conducted at least once a year. It is important to periodically validate the cost assumptions used in developing each rate. 23

26 PROJECTING RATE YEAR EXPENDITURES Historical financial information provides the logical starting point for projecting future performance. Use of historical data assures that infrequent expenses and business cycle variations are considered during the planning process. Projections should be tested for reasonableness against performance history. The Statement of Income and Expense worksheet is available as an EXCEL file on the costing website: -- Rate Submission Packet.xls When complete, the worksheet will have columns of income and expense information as follows: Complete Prior Fiscal Year (July 1- June 30) Current Fiscal Year (may be a partial year) July 1 through last month for which the old rate will be used Projected 12-Month Rate Year (beginning with the first month for which the new rate will be used) PREPARING THE STATEMENT OF INCOME AND EXPENSE WORKSHEET 1. GATHER HISTORICAL DATA INTO A FORMAT FOR ANALYSIS AND PROJECTION The required prior and current year information may be obtained from SAP by running the transaction code GR55 (Report Group Z100) The transaction code is set up to return balance sheet and income statement information by fiscal year (e.g. cash, other current assets, equipment and accumulated depreciation, liabilities, equity, income, expense, and transfers in or out). The output will be organized into the Statement of Income and Expense worksheet format. (see an example of the GR55 (Report Group Z100) output on page 26) 24

27 2. DETERMINE CURRENT YEAR INCOME AND EXPENSE To the current year-to-date information, add projected income and expenditures through the end of the last month for which the current rate will be used. For example: If the GR55 (Report Code Z100) is run at the end of September and the new rate is to be effective on November 1, it will be necessary to add estimated income and expense amounts for October to the current year report results. CAUTION: Use the preprinted worksheet template (page 28) to prompt thinking about possible expenditures and events which do not appear in the historical data! (For example, a center which has not recorded depreciation in the past may have depreciation in the projected rate year) 3. PROJECT THE RATE YEAR EXPENDITURES Business offices should submit the entire worksheet showing the prior, current and projected year columns, if this information is available. If the rate request is for a new rate, the projected rate year column is the only information required to be submitted with the rate request. CAUTION: Use the preprinted worksheet template (page 28) to prompt thinking about possible expenditures and events that do not appear in the historical data! (For example, a center that has not recorded depreciation in the past may have depreciation in the projected rate year) 25

28 STATEMENT OF INCOME AND EXPENSE REPORT (GR55 Report Group Z100) RECHARGE CENTER TOTAL POSTED TRANSACTIONS BY CATEGORY USE TO COMPLETE THE STATEMENT OF INCOME AND EXPENSE WORKSHEET FOR USE IN PREPARING RATE PROPOSALS GL Account Debit Credit Total Interfund Transfers Of Cash 1,276, ,517, , Pscd Clearing Account 320, , , * Cash & Cash Equivalents 1,596, ,520, , Pscd - Reconciliation Account 156, , , Other Equipment 244, , Accum. Depr - Equip -70, , * Non Cash Assets 401, , , ** Assets 1,997, ,733, , Vendor Payable - Recon 656, , , Vendor Payable - Gr/Ir 1,029, ,037, , ** Liabilities 1,686, ,707, , Year End Closing To Reclassify 728, , , Unallocated -96, , Fixed Asset Conversion Account -219, , Pscd Conversion Account 36, , ** Equity 764, , , Facilities Use Fees Testing Fees 12, , , External Customers , , ** Revenue 12, , , Federal Express Maint Contract - Other 75, , Laboratory Testing - Ext 3, , Repairs To Equipment 1, , Other Repair & Maint Minor Equipment - Scientific 39, Depreciation 39, Expense Minor Equipment - Computer Minor Equipment - Other Discounts Earned Depreciation Expense - Equipment 19, , Co Module Reconciliation - 1, Labor 1, ** Expense 687, , , Cap Assets Accum Depr All Assets Liability Annual Income (user will have to manually subtract any 49-type GLs in order to arrive at the Annual Income number on the ZRCH report) Annual Expense (user will have to manually subtract any 49-type GLs in order to arrive at the Annual Income number on 26

29 Other Specialized/Service Fees 4, , , Other Sales And Services 9, , , Recharge Subsidy Income -34, , ** Revenue 14, , , Recharge Subsidy Other Sales And Services -67, , From Current Unrestricted Funds -35, , ** Revenue -103, , Premium Charges - Self Insurance 7, , Reimbursement Of Expenses Depreciation Expense - Equipment 34, , To Current Unrestricted Funds 30, , ** Expense 119, , , Transfer In Transfer Out This is an example how to run your GR55 (Report Group Z100) in order to get the proper information. You will have to run two separate GR55 reports in order to get prior and current year income and expense numbers. The report will be limited on fund number(s) and applicable fiscal year. 27

30 STATEMENT OF INCOME AND EXPENSE WORKSHEET TEMPLATE: PURDUE UNIVERSITY Recharge Center Statement of Income and Expense Worksheet Prior Year 2008 Current Year Projected Rate Year EQUIPMENT BALANCES: Equipment (all 155xxx G/L accounts) 93, , , (For projections, use current balance + any planned purchases) Accumulated Depreciation (all 156xxx G/L accounts) 5, , , INCOME: 401XXX - 46XXXX Income from Operations 1,253, ,265, , Recharge Subsidy Income 856, ,003, , External Customers Other (List) Gain - Land/Bldg/Equip TOTAL INCOME 2,110, ,268, ,120, Less: Cost of Goods Sold (this section to be completed ONLY for storeroom operations) : 521XXX Gross profit on sales 2,110, ,268, ,120, LESS EXPENSES: Compensation Salary and Wages - - 1,619, S&W Admin/Prof S&W Faculty Graduate Staff Clerical Staff Service Staff Overtime XXX - 512XXX Other Comp, Fee Remits, Benefits Other (List) Total Compensation - - 1,619, Commodities 522XXX Maintenance and Other Supplies XXX Classroom, Lab and Scientific Supplies XXX Printing and Office Supplies Other (List) Laundry/Dry Cleaning Total Commodities Contractual Service & Travel 529XXX Freight and Demurrage XXX Telecommunications and Postage XXX Rentals and Maintenance Agreements XXX Consulting & Services XXX Travel Other (List) Total Contractual Service & Travel Other Expenses Capital Recharge/Recovery General Admin Charges Prem. Chgs - Comm. In Claims Pd. - Self Insurance Credit Card Fees Parking Expenses XXX Other Expenses Reimbursement of Expense Plant Assets Retired WIP Settlement Income Total Other Expenses Equipment (not including capital) 536XXX Minor Equipment 2,262, ,062, XXX Repairs to Equipment Other (List) Total Non-Capital Equipment 2,262, ,062, Depreciation Deprec. Expense - Equipment 4, , , Plant Assets Retired , Total Depreciation 4, , , TOTAL OPERATING EXPENSE 2,266, ,071, ,650, INCOME (LOSS) FROM OPERATIONS (156,439.72) 196, (529,731.08) Depreciation Recovery 5-91XXX Transfers Out (Depreciation Recovery ONLY) Total Depreciation Transfers + 491XXX Transfer In for Capital Purchases ( only) XXX - 493XXX Transfers In (other than for capital purchases) XXX - 593XXX Transfers Out (other than for depreciation) Cash Effects (will be populated automatically) + Add back depreciation (non cash expense) 4, , , Add back Plant Assets Retired (non cash expense) , Change in Assets (pulled from above) - (73,308.97) 21, Effect of plant assets retired - (0.00) (27,763.44) Total Capital (should net to $0.00) 4, (63,896.94) 24, NET CHANGE TO FUND BALANCE (152,035.14) 132, (505,162.74) ENDING FUND BALANCE OR PROJECTED ENDING FUND BALANCE (240,601.00) (107,610.81) (612,773.55) 28

31 PROJECTING FUND BALANCE The Recharge Center Policy states: The fund balance of the operation must be included in future year rate calculations to ensure that the recharge account is operating on a break-even basis over time... Federal requirements state that the cost of services may be billed to users. If we could anticipate exactly the cost of goods and services to be provided, we could set our rates so precisely that, for any period of time, revenues would exactly equal expenses. Conceptually the fund balance of the recharge center would always be zero. To keep rates at a level where the recharge center operates at break-even over time, it is necessary to include any over or under recovery of fund balance in the rate. To assure that the proposed rates will position the fund balance within acceptable limits for the proposed rate year, the beginning fund balance, change to fund balance and ending fund balance should be submitted with the request for rate approval. HOW TO DETERMINE BEGINNING AND ENDING FUND BALANCE Step 1: Run the transaction code GR55 (Report Group ZRCH) in SAP for the prior year: The transaction code will provide the recharge s year-to-date fund balance status. It prompts you to enter your recharge center fund and the current fiscal year. The report will provide you with the fields Cash (all 101xxx type G/L accounts), CurrAssets (current assets other than cash), Liab (all 2-type G/L accounts), and Fund Bal (this is the calculation of fund balance or balance of working capital). The calculation of fund balance is: Cash + Other Current Assets + Liability = Fund Balance. Enter the ending fund balance for the previous year in the Statement of Income and Expense. Step 2: In order to determine the ending fund balance for the current year, we will need to run a GR55 (Report Group Z100) for the current fiscal year and input the information into the Statement of Income and Expense spreadsheet. The cells in this workbook should calculate our change in fund balance for the current year. Adding this to our ending fund balance from the previous year, we have our new fund balance. If we are calculating our current year fund balance on or after June 30 of the current year, this number should match the fund balance calculated on the GR55 (Report Group ZRCH) report. If we are calculating for the current year before June 30 of the current year, some of the expenses for the remainder of the year will be projected/estimated expenses, and therefore our ending fund balance may not match the number calculated using the GR55 (Report Group ZRCH) report. 29

32 Step 3: Enter information for the projected rate year (changes in capital equipment, income, expense, transfers in transfers out, etc.) A projected rate year fund balance will be calculated on the Statement of Income and Expense. Step 4: Set the target ending fund balance for the projected rate year. The ending fund balance for the current and projected rate year should be within the fund balance tolerance zone, and as close to zero as possible (see the fund balance definitions on page 68). Example: For the following example, we will assume that it is June 30, 2009, and we would like to set a rate effective July 1, Step 1: In order to determine the beginning fund balance of FY 2009, we will need to run a GR55 (Report Group ZRCH) for fiscal year Ending fund balance for FY 2008 will be beginning fund balance for FY

33 Ending fund balance for FY 2008 = beginning fund balance for FY Run report for previous fiscal year. Make sure you run the report with a From Period of 0 to ensure proper calculation of fund balance. Use operating funds only. 31

34 Enter this information into the Statement of Income and Expense under the prior year in the row for Ending Fund Balance where it states input FB value from ZRCH : Prior Year Current Year ENDING FUND BALANCE OR PROJECTED ENDING FUND BALANCE input FB value from ZRCH #VALUE! Check Figure N/A input FB value Discrepancy N/A #VALUE! Target Fund Balance for the Recharge ($0)* - - Over / (Under) Recovery** #VALUE! #VALUE! Prior Year Current Year ENDING FUND BALANCE OR PROJECTED ENDING FUND BALANCE 7, Check Figure N/A input FB value Discrepancy N/A #VALUE! Target Fund Balance for the Recharge ($0)* - - Over / (Under) Recovery** 7, We also want to determine if we have over or under recovered in the prior year. To determine if this has happened, we want to enter a target fund balance for the recharge. Since Annual Income for the recharge is less than $50,000, our tolerable fund balance zone is from -$5,000 to +$5,000. Therefore, in the column for Target Fund Balance for the Recharge, we would enter +$5,000 (since our ending fund balance is positive rather than negative). Prior Year Current Year ENDING FUND BALANCE OR PROJECTED ENDING FUND BALANCE 7, Check Figure N/A input FB value Discrepancy N/A #VALUE! Target Fund Balance for the Recharge ($0)* 5, Over recovery of $2,711 Over / (Under) Recovery** 2, As is shown with this example, we over recoverd by $2,711 in the prior year. At this point, the rate should have been revised to decrease the rates in order to bring our recharge within tolerance. 32

35 Step 2: In order to determine the ending fund balance for the current year of FY 2009, we will need to run a GR55 (Report Group Z100) for fiscal year 2009 and input the information into the Statement of Income and Expense spreadsheet. The cells in this workbook should calculate our change in fund balance for the current year, and our new fund balance. Run GR55 (Report Group Z100) as shown: Run for Current Year 2009 for this example. Because it is June 30,2009, report should be run through period 12. GR55 (Report Group Z100) output will appear as follows: Input the numbers from this report into the Statement of Income and Expense spreadsheet as follows: 33

36 Prior Year Current Year EQUIPMENT BALANCES: + Equipment (all 155xxx G/L accounts) - - (For projections, use current balance + any planned purchases) - Accumulated Depreciation (all 156xxx G/L accounts) - - Net Book Value of Equip - - INCOME: 401XXX - 46XXXX Income from Operations* 10, , *excluding G/Ls and Recharge Subsidy Income External Customers - - Other (List) Gain - Land/Bldg/Equip - - TOTAL INCOME 10, , Less: Cost of Goods Sold (this section to be completed ONLY for storeroom operations) : 521XXX Gross profit on sales 10, , LESS EXPENSES: Commodities 522XXX Maintenance and Other Supplies XXX Classroom, Lab and Scientific Supplies , XXX Printing and Office Supplies Other (List) Laundry/Dry Cleaning - - Total Commodities , Contractual Service & Travel 529XXX Freight and Demurrage XXX Telecommunications and Postage XXX Rentals and Maintenance Agreements XXX Consulting & Services XXX Travel - - Other (List) - - Total Contractual Service & Travel Equipment (not including capital) 536XXX Minor Equipment XXX Repairs to Equipment 13, Other (List) - - Total Non-Capital Equipment 14, Depreciation Deprec. Expense - Equipment Plant Assets Retired - - Total Depreciation - - TOTAL OPERATING EXPENSE 15, , INCOME (LOSS) FROM OPERATIONS (5,278.44) 6, NET CHANGE TO FUND BALANCE (5,278.44) 6, ENDING FUND BALANCE OR PROJECTED ENDING FUND BALANCE 7, , Check Figure N/A input FB value Discrepancy N/A #VALUE! Target Fund Balance for the Recharge ($0)* 5, Over / (Under) Recovery** 2, ,

37 As you can see, a new fund balance is calculated based on the numbers inputted into the spreadsheet. Since this is June 30, 2009, we can also use the GR55 (Report Group ZRCH) to determine that the fund balance calculated by the spreadsheet is correct. We will also input our tolerable fund balance to determine over or under recovery. Ending Fund Balance check figure Annual Income < $50,000 Therefore, tolerable fund balance range is from -$5,000 to + $5,000 We will input this information into our Statement of Income and Expense spreadsheet, and determine what our over or under recovery for the year has been: Prior Year Current Year ENDING FUND BALANCE OR PROJECTED ENDING FUND BALANCE 7, Check figure 14, Check Figure N/A 14, Discrepancy N/A - Target Fund Balance for the Recharge ($0)* 5, , Over / (Under) Recovery** 2, , Over recovery of $9,498 As is shown in this example, we over recovered by $9,498 in the current year. At this point, the rate should be revised to decrease the current rates in order to bring our recharge within tolerance. Step 3: Enter information for the projected rate year (projected increases or decreases in capital equipment, income, expense, transfers in transfers out, etc.) A projected rate year fund balance will be calculated on the Statement of Income and Expense. 35

38 EQUIPMENT BALANCES: + Equipment (all 155xxx G/L accounts) - - (For projections, use current balance + any planned purchases) - Accumulated Depreciation (all 156xxx G/L accounts) - - Net Book Value of Equip - - INCOME: Current Year Projected Rate Year XXX - 46XXXX Income from Operations* 8, , *excluding G/Ls and Recharge Subsidy Income External Customers - - Other (List) Gain - Land/Bldg/Equip - - TOTAL INCOME 8, , Less: Cost of Goods Sold (this section to be completed ONLY for storeroom operations) : 521XXX Gross profit on sales 8, , LESS EXPENSES: Commodities 522XXX Maintenance and Other Supplies XXX Classroom, Lab and Scientific Supplies 1, , XXX Printing and Office Supplies Other (List) Laundry/Dry Cleaning - - Total Commodities 1, , Contractual Service & Travel 529XXX Freight and Demurrage XXX Telecommunications and Postage XXX Rentals and Maintenance Agreements XXX Consulting & Services XXX Travel - - Other (List) - - Total Contractual Service & Travel Equipment (not including capital) 536XXX Minor Equipment XXX Repairs to Equipment - 13, Other (List) - - Total Non-Capital Equipment - 13, Depreciation Deprec. Expense - Equipment Plant Assets Retired - - Total Depreciation - - TOTAL OPERATING EXPENSE 2, , INCOME (LOSS) FROM OPERATIONS 6, (12,672.35) NET CHANGE TO FUND BALANCE 6, (12,672.35) ENDING FUND BALANCE OR PROJECTED ENDING FUND BALANCE 14, , Check Figure 14, N/A Discrepancy - N/A Target Fund Balance for the Recharge ($0)* 5, Over / (Under) Recovery** 9, ,

39 Step 4: Set the target ending fund balance for the projected rate year. The ending fund balance for the current and projected rate year should be within the fund balance tolerance zone, and as close to zero as possible. (see the fund balance definitions on page 68). Because our income is projected to be less than $50,000, the tolerable fund balance zone will be from -$5,000 to +$5,000. In this example, we can set our target fund balance to $0, $5,000, or $1,825 (since the projected ending fund balance is within the tolerance zone). For our purposes, I ll set the target fund balance at $1,825, and the recharge center is currently within tolerance, with no over or under recovery. Current Year Projected Rate Year No over or under recovery, therefore ENDING FUND BALANCE OR PROJECTED ENDING FUND BALANCE recharge is within 14, tolerance. 1, Check Figure 14, N/A Discrepancy - N/A Target Fund Balance for the Recharge ($0)* 5, , Over / (Under) Recovery** 9, DEPARTMENTAL RECHARGE CENTERS (for General Service Centers & Specialized Service Facilities, see below) Refer to the ACCEPTABLE FUND BALANCE: INSTRUCTION & DEPARTMENTAL FUNCTION RECHARGE CENTERS section which begins on page 5 to determine the target ending fund balance. GENERAL SERVICE CENTERS AND SPECIALIZED SERVICE FACILITIES Refer to the ACCEPTABLE FUND BALANCE section which begins on page 14 to determine the target ending fund balance. 37

40 CALCULATING THE RATE PER UNIT Salaries and wages are a key cost element of most rates. Begin the rate computation process with the salary and wage analysis. To determine true S&W costs, it is necessary to complete a Salary and Wage Schedule. The schedule identifies productive work hours, fringe benefits rates and per unit S&W costs. The Salary and Wage Schedule must be submitted with the rate request. SALARY AND WAGE SCHEDULE If the center will offer more than one good or service for sale, a decision must be made as to whether a single labor rate is appropriate, or a labor rate is needed for each type of good or service offered. See examples on pages 39 (single labor rate example) and 41 (different labor rates for each service offered). Caution: The fringe benefit rates used in the examples on pages 39 and 41 are from Attachment B* of the annual Budgeting Fringe Benefits for Sponsored Programs and Other Chargeable Accounts memorandum. These are the maximum budget rates. Please note: Attachment B rates may be used for fringe benefit calculations, there is no requirement to use the Attachment B rates. Business Office staff should use fringe benefit rates which best provide a reasonable estimate of future fringe benefit costs. When using rates other than from Attachment B, please explain (for example: Fringe benefit rates used are current actual rates, expressed as a percentage of S&W for each budgeted staff member.) * The memorandum is issued by the Comptroller and the Director, SPS, and is distributed to Regional Campus Vice Chancellors, Business Managers, Fiscal Directors of Housing and Food Services, and Physical Facilities. 38

41 SALARY AND WAGE SCHEDULE EXAMPLE #1 Sample Salary & Wage Schedule (showing a combined hourly labor rate) Labor Costs A B C D E F G H Name Position Code Cash Pay this Activity (C*D) Fringe Benefit $ this Activity (E*F) FTE Devoted to this Activity 09/10 Full Time Salary Fringe Benefit Rate* 39 Total S&W + FB This Activity (F+G) Staff Member A 8627S $19, % $9,500 $5,308 $14,808 Technician 0060A $26, % $6,500 $2,043 $8,543 Director 0006F $60, % $6,000 $2,003 $8,003 Totals $22,000 $9,354 $31,354 Productive Labor Hours Hourly Rate=H/N $31,354 = 682 I J K L M N Name Hours Available to this Activity Vacation Sick Leave Holiday s Other Non-prod. Hrs (e.g. administration, training) Total Productive Hours N=[I -(J+K+L+M)] Staff Member A 1, Technician Director Reconciliation of Hours Service # # hours per unit Total Hours per Year Polyclonal Antibody--Rabbits Additional Samples--Rabbits Additional Injections--Rabbits Polyclonal Antibody Mice Additional Samples Mice Euthanize Animals Ascites Serum Production ELISA Technical Assistance CELLMAX Bioreactor Fixed Costs Antibody Collection Glucose Assay

42 682 * Fringe Benefit Rates shown are derived from Attachment B of the annual memorandum from the Comptroller and Director, SPS 40

43 SALARY AND WAGE SCHEDULE EXAMPLE #2 sample salary and wage schedule (showing labor hours per unit and rates per hour for each staff member) Labor Costs A B C D E F G H Name Position Code FTE this Activity 09/10 Full Time Salary Fringe Benefit Rate* Cash Pay this Activity (C*D) 41 Fringe Benefit $ this Activity (E*F) Total S&W + FB This Activity (F+G) Staff Member A 8627S $19, % 9,500 5,308 14,808 Technician 0060A $26, % 6,500 2,043 8,543 Director 0006F $60, % 6,000 2,003 8,003 Totals 22,000 9,354 31,354 Productive Labor Hours Name I J K L Vacation Sick Leave Holidays M Other Nonprod. N Total O hrs Productive (e.g. admin, Hours trng) N=[I - Hours Available to this Activity Rate per Productive Hour (J+K+L+M)] Staff Member A 1, Technician Director Total 682 Reconciliation of Hours Service # services per year # hrs/unit of service Staff Member A # Tech hrs/unit of service # Director hrs/unit of service Total Labor Hours/Year Labor Cost per Unit (rounded) (Rates in O * hrs) Total Labor Cost per Service Polyclonal Antibody--Rabbits , Additional Samples--Rabbits , Additional Injections--Rabbits , Polyclonal Antibody Mice , Additional Samples Mice Euthanize Animals , Ascites Serum Production ELISA , Technical Assistance , CELLMAX Bioreactor Fixed Costs Antibody Collection

44 Glucose Assay Totals ,354 * Fringe Benefit Rates are derived from Attachment B of the annual memorandum from the Comptroller and Director, SPS 42

45 RATE COMPUTATION METHODS ONE PRODUCT: ONE RATE If the center sells only one good or service, divide the total cost to be recovered by the number of units to be sold to determine the proposed rate per unit: Rate per Unit Total costs to be Recovered $38,526 Units (hours, days, pieces, etc.) 255 = $151.08/unit WHEN IT S NOT THAT SIMPLE... Often, of course, it is not this simple -- more than one item is to be offered for sale, and the items differ in the materials cost, labor required, etc. Each rate must be determined by a calculation of the total costs to be recovered: 1. Determine how the product to be provided will be measured: Will it be measured by a period of time (hours/minutes), by volume (weight/board feet/gallons), by procedure (injection/test/analysis), etc.? 2. Calculate the break-even cost for providing a single unit of the product (for example, 1 hour of service) a) Determine the cost to produce one unit of product + Salaries and wages per unit + Supplies and expenses per unit + Depreciation per unit = Cost per Unit 43

46 b) Determine total cost for each product for the rate year + Cost per Unit x Quantity of Units for Rate Year = Cost of Products for Rate Year c) Determine total costs to be recovered by the recharge center (adjusted for under/over recovery of fund balance) If the fund balance is under recovered, add the under recovery of fund balance to the cost of products for rate year; if the fund balance is over recovered, subtract the over recovery of fund balance from the cost of products for rate year. + Cost of Products for Rate Year +/- Under/over recovery of fund balance from prior periods = Total Cost to be Recovered by Recharge Center Reminder: The Recharge Center Policy states: The fund balance of the operation must be included in future year rate calculations to ensure that the recharge account is operating on a break-even basis over time... Caution: If the recharge center provides more than one product, an allocation of under or over recovery among products will be necessary. d) Calculate break-even cost per unit (this is the rate for non-subsidized internal customers) Total Cost to be Recovered by Recharge Center = Break-Even Quantity of Units for Rate year Cost per Unit 3. Calculate a subsidized rate for internal customers (if the department is subsidizing -- see discussion of subsidies on page 46) + Break-Even Cost per Unit - Subsidy Rate per Unit 2 = Rate per Unit for Subsidized Internal Customers 4. Calculate an external customer rate (if the recharge center will serve external customers) 2 Rate charged to subsidy account for each unit. The subsidy may be processed continually throughout the fiscal year by charging the subsidy account on the monthly intramural invoice voucher, using a set rate per unit for each subsidized departmental transaction. Alternatively, the subsidy may be billed to the subsidizing account on a special intramural invoice voucher periodically or even just once a year. 44

47 The Recharge Center Policy states: Sales to unrelated (external) customers must be billed at a rate which includes the direct cost of the good or service plus a mark-up equivalent to the current University research indirect cost rate. a) Calculate the indirect cost recovery per unit + Break-Even cost per Unit x Current Approved University F&A Rate = F&A Recovery per Unit b) Calculate the external customer rate + Break-Even cost per Unit + F&A Recovery per Unit = External Customer Unit Rate The portion of external sales income attributable to indirect cost recovery must be deposited upon receipt to , G/L Commitment Item Caution: It is not acceptable to provide goods or services to external customers at internal rates. Internal and external customers are very specifically defined in the Recharge Center Policy. You may also find the definitions in Appendix A helpful. If you have questions about whether a customer is internal or external, please consult the Costing Office. EXAMPLE OF SETTING AN EXTERNAL CUSTOMER RATE The University-negotiated research indirect cost rate is 54% (as of July 1, 2010) of direct costs. Take the break-even rate of $151.08/unit Add the Indirect Cost Recovery (54% of $151.08) 81.58/unit External Rate $232.66/unit 45

48 SPECIAL RATE-SETTING CONSIDERATIONS SUBSIDIES: CHARGING INTERNAL CUSTOMERS AT LESS THAN BREAK-EVEN The Recharge Center Policy states: Departments may choose to charge internal users at less than the break-even rate by agreeing to subsidize the service center account... If there is intent to subsidize departmental users, that subsidy must be built into the projected Income, Expense and Fund Balance disclosed in the rate request. The rate to all internal users must reflect the full cost of the good or service. If internal users are subsidized, the rate (and accounts charged) is divided into two parts. For example, if the fully costed rate is $5.00, but subsidized internal users will pay only $3.00, $3.00 will be billed to the user s account and the remaining $2.00 will be billed to the subsidizing account. (See Processing Subsidy Transactions below; see an example of a subsidized rate in Appendix B.) The source of the subsidy funding must be clearly identified. All costs (including subsidized costs) should be charged to the recharge center. If the University agrees in advance (as part of the rate approval process) to subsidize related fringe benefit costs, salary and wage subsidy amounts may be charged to a general fund account established for the specific purpose of underwriting the recharge center. This is a very unusual exception to the Recharge Center Policy that is very rarely approved. PROCESSING SUBSIDY TRANSACTIONS Subsidies to Recharge Centers are to be processed on Intramural Invoice Vouchers. Debit the fund source using G/L account , Recharge Subsidy S&W; , Recharge Subsidy Fringes; or , Recharge Subsidy, and credit the recharge center account using G/L account , Recharge Subsidy Income. DO NOT use transfer G/L accounts (49XXXX or 59XXXX) The subsidy may be processed continually throughout the fiscal year by charging the subsidy account on the monthly intramural invoice voucher, using a set rate per unit for each subsidized departmental transaction. Alternatively, the subsidy may be billed to the subsidizing account on a special intramural invoice voucher periodically or even just once a year. Examples of each type of subsidy are as follows: A. Processing the subsidy as part of a lower rate per transaction (using the example above with the fully costed rate being $5.00, but subsidized internal users will pay only $3.00, providing for a subsidy of $2.00: 46

49 DR CR G/L account Fund Cost Center Amount DR PSCD 2202xxxx (recharge center) (Chemistry) 3.00 DR Rchg Subsidy (funding source) (Chemistry) 2.00 CR 4xxxxx Income 2202xxxx (recharge center) (Chemistry) 3.00 CR Rchg Subs Inc 2202xxxx (recharge center) (Chemistry) 2.00 B. Processing the subsidy in a lump sum on a periodic basis (monthly/quarterly/annually). In this case, the approved rate request would state that the department will subsidize the recharge for the amount for which it falls below tolerance. Other helpful information to provide in the rate request would be the amount that is expected to be subsidized, as well as the amount available for subsidy if needed. The way to process the periodic subsidy is as follows: DR CR G/L account Fund Cost Center Amount DR Rchg Subsidy (funding source) (Chemistry) 50, CR Rchg Subs Inc 2202xxxx (recharge center) (Chemistry) 50,

50 CAPITAL EQUIPMENT All capital equipment used by a recharge center must be purchased through the recharge account, unless the equipment is initially purchased on a sponsored program account. Initial funding for equipment must be transferred into the recharge account. The requirement that rates must be set at break-even means that it is not acceptable to set rates above break-even to accumulate funds in the recharge center account for the purchase of equipment. Including depreciation expense of equipment in the recharge in the calculation of the break-even rate is the only way capital equipment can be purchased utilizing funds collected through a recharge activity. In order to separate these funds from operating fund cash, a depreciation recovery fund should be set up. Cash equal to the amount of depreciation per period (month or year) should be transferred to the depreciation recovery fund. For a detailed explanation of recharge center capital acquisitions and depreciation, refer to PURCHASE AND DEPRECIATION OF CAPITAL EQUIPMENT, page 57. USING MARKET RATES FOR EXTERNAL CUSTOMERS In certain unique instances goods or services are to be sold to external users and actual costs cannot be determined; or charging at the University s cost would create unfair competition by underpricing local vendors. In such cases it is necessary to determine the market rate and use market rate as the price. Examples of items provided at market rates include meat lab products, veterinary services at the animal clinics, daycare at the nursery school, and University theatre tickets. The Recharge Center Policy states:...justification of the need to use market prices must be submitted with the request to establish the market rates, along with sufficient evidence of market research to validate the price requested. The market price of comparable goods or services must be determined and used as the basis for setting the Purdue rate. Disclose in the rate request both the researched market rate(s) and the justification for determining comparability. An example of the information provided to demonstrate the market rate research and to support the calculation of the recharge center proposed rate(s) is provided on page 49. Calculation of Market Rate is as follows: Internal Break-even Rate + Mark-up d Market Rate 48

51 EXAMPLE: MARKET RATE DOCUMENTATION UNIVERSITY THEATRE TICKETS PURDUE Current Proposed Academic Year Non-student $7.50 $9.00 Student Ticket $5.00 $6.00 Summer Season Non-student $7.50 $10.00 Student Ticket $5.00 $6.50 BIG TEN AVERAGE Academic Year Non-student Ticket $8.67 Student Ticket $6.67 Summer Season Non-student Ticket $8.33 Student Ticket $6.83 OTHER SELECTED SCHOOLS ILLINOIS Academic Year Non-student Ticket $ $10.00 Student Ticket $ $8.00 MICHIGAN Academic Year Non-student Ticket $ $10.00 Student Ticket $5.00 NORTHWESTERN Academic Year Non-student Ticket $ $10.00 Student Ticket $ $5.00 Summer Season Non-student Ticket $ $10.00 Student ticket $ $10.00 OHIO STATE Academic Year Non-student Ticket $ $10.00 Student Ticket $ $7.00 UNIVERSITY OF MIAMI Academic Year Non-student Ticket $ $12.00 Student Ticket $4.00 TEMPLE UNIVERSITY Academic Year Non-student Ticket $9.00 Student Ticket $7.00 RUTGERS UNIVERSITY Academic Year Non-student Ticket $10.00 Student Ticket $5.00 Summer Season Non-student Ticket $12.00 Student Ticket $12.00 WAYNE STATE UNIVERSITY Academic Year Non-student Ticket $ $14.00 Student Ticket $ $10.00 Summer Season Non-student Ticket $ $10.00 Student Ticket $ $10.00 OTHER LAFAYETTE ENTERTAINMENT TICKET PRICES Purdue Football Purdue Basketball $16.00 each $8.00 each Local Movies Adults Students $5.00 $

52 Convos (varies) Adult Student Lafayette Civic $ $20.00 $ $20.00 $9.00 each FESTIVAL TICKET PRICES Oregon $ $18.00 each Shakespeare Ind. Repertory $ $180.00/season 50

53 STOREROOM MARKUP CALCULATIONS (STOREROOM OPERATIONS ONLY) CALCULATION OF TOTAL OPERATING EXPENSE + estimated fiscal year operating expenses * $633,750 + annual equipment depreciation expense 4,375 -/+ (over) / under recovery of Fund Balance from acceptable amount 55,625 Total operating expense $693,750 OVER/UNDER RECOVERY OF FUND BALANCE*: Current fund balance = $ 50,000 Two months of cash expense allowability* = 105,625 Under recovery = $ 55,625 CALCULATION OF INTERNAL CUSTOMER MARKUP PERCENTAGE First we determine the markup percentage : Markup Percent = Total Operating Expense = $ 693,750 = 13.5% Estimated Cost of Goods Sold* $5,138,823 CALCULATION OF EXTERNAL CUSTOMER MARKUP PERCENTAGE If we will be selling goods or services to any external customers, we need to submit and get approval for both internal and external rates: The Recharge Center Policy states: Sales to unrelated (external) customers must be billed at a rate which includes the direct cost of the good or service plus a mark-up equivalent to the current University research indirect cost rate... The University negotiated overhead indirect cost rate is 54.0% of direct costs. Take the cost of goods sold $ Add the storeroom mark-up of 13.5% Internal rate $ Add the approved F&A recovery (54.0 % of $113.50) EXTERNAL RATE $ * Operating expense and cost of goods sold figures would be derived from financial statements (example, page 21); also see how to determine two months of cash expenses, page

54 IV. SUBMITTING A RATE REQUEST The goal of the rate approval process is for all questions to be answered and issues resolved before the rate request goes forward for formal approval. Business office staff are encouraged to use the Recharge Center Policy, this Procedure Manual, and the Costing Office staff as resources in preparing rate requests. It is very helpful to review the rate request draft with the Costing Office before securing the approval recommended signatures. Additionally, experienced rate request preparers (subject matter experts) are available for consultation within each organizational area -- consult with area supervisory staff for guidance. Of course, questions can and do arise during the rate review and approval process. In such cases, the reviewing area will work with the submitting business office staff to resolve any problems and secure timely approvals. A packet of materials must be prepared to support each request for rate approval. Included in the rate request packet are: 1. Request for Rate Approval Memorandum 2. Supporting Financial Documentation a) Projected Statement of Income and Expense, which includes the projected fund balance. b) Rate Calculation c) Salary and Wage Schedule An example of a complete rate request packet appears in Appendix B Rate approval routing process is specified on page 87. (1) REQUEST FOR RATE APPROVAL MEMORANDUM The Request for Rate Approval is the official rate document. This is the document that is archived in the official files maintained by the Senior Director of Business Managers and Central Files. The Request for Rate Approval originator is the Business Manager or Fiscal Director responsible for the fiscal administration of the recharge activity, and the memorandum is addressed to the Vice President for Business Services and Assistant Treasurer. 52

55 The link to the memorandum can be found on the costing website ( and is saved as RechargeTemplate.doc). The memorandum must specify: To: From: Through: Date: Subject: Request for Rate Approval for Department: Recharge Center Director: Location of Recharge Center: Previous Approval Date: (if applicable) Recharge Center Account Number: Depreciation Recovery: (yes or no; if yes, include depreciation recovery account number) Clients Internal/External customers: Accounting Procedures/Controls: Rate Effective Date: Depreciation Recovery: (yes or no; if yes, include depreciation recovery account number) Rates: (both present and proposed; or indicate if new activity) Explanation: (brief explanation of the activity) SIGNATURES (Please refer to the approval routing map on page 87 to determine necessary signatures.) Approval Recommended signature blocks: Dean or Fiscal Director and/or Department Head and/or Associate Comptroller Approval signature block: DISTRIBUTION Director of Business Managers and/or Comptroller The distribution of approved copies must be listed at the bottom of each Request for Rate Approval. The distribution is as follows: Original document: Routed through Costing, and archived in Central Files Copies: Originator of Request (if additional copies are needed, Originator must specify this on the rate request) A Request for Rate Approval Memorandum example appears on page

56 (2) SUPPORTING FINANCIAL DOCUMENTATION Include the following documentation with each Request for Rate Approval: a. PROJECTED STATEMENT OF INCOME AND EXPENSE INCLUDES THE PROJECTED FUND BALANCE A Statement of Income and Expense must be submitted for the previous, current, and projected rate year 3. If the Statement of Income and Expense is for a new rate request, the projected rate year would be the only year required, as there would be no data for previous or current years. The Statement of Income and Expense will include beginning and ending estimated fund balance information, which must be also be submitted for the projected rate year. The Recharge Center Policy states: The fund balance of the operation must be included in future year rate calculations to ensure that the recharge account is operating on a break-even basis over time... Federal requirements state that the cost of services may be billed to users. If we could anticipate exactly the cost of goods and services to be provided, we could set our rates so precisely that, for any period of time, revenues would exactly equal expenses. Conceptually the fund balance of the recharge center would always be zero. To keep rates at a level where the recharge center operates at break-even over time, it is necessary to include any over or under recovery of fund balance in the rate calculation (see discussion on page 29). To assure that the proposed rates will position the fund balance within acceptable limits, the beginning fund balance, change to fund balance and projected ending fund balance are submitted with the request for rate approval. A Statement of Income and Expense worksheet example appears on page Rate requests are approved for one year, after which an evaluation should be made concerning the appropriateness of continuing the activity, and the need for any rate adjustments. The projected rate-year is the year for which the rate approval is requested. 54

57 b. RATE CALCULATION Each rate must be determined by a calculation of the total costs to be recovered: 1. Determine how the product to be provided will be measured: Will it be measured by a period of time (hours/minutes), by volume (weight/board feet/gallons), by procedure (injection/test/analysis), etc.? 2. Calculate the break-even cost for providing a single unit of the product (for example, 1 hour of service) a) Determine the cost to produce one unit of product + Salaries and wages per unit + Supplies and expenses per unit + Depreciation per unit = Cost per Unit b) Determine total cost for each product for the rate year + Cost per Unit x Quantity of Units for Rate Year = Cost of Products for Rate Year c) Determine total costs to be recovered by the recharge center (adjusted for under/over recovery of fund balance) Reminder: The Recharge Center Policy states: The fund balance of the operation must be included in future year rate calculations to ensure that the recharge account is operating on a break-even basis over time... If the fund balance is under recovered, add the under recovery of fund balance to the cost of products for rate year; if the fund balance is over recovered, subtract the over recovery of fund balance from the cost of products for rate year. + Cost of Products for Rate Year +/- Under/over recovery of fund balance from prior periods = Total Cost to be Recovered by Recharge Center Caution: If the recharge center provides more than one product, an allocation of under or over recovery among products will be necessary. 55

58 d) Calculate break-even cost per unit (this is the rate for non-subsidized internal customers) Total Cost to be Recovered by Recharge Center = Break-Even Quantity of Units for Rate year Cost per Unit 3. Calculate a subsidized rate for internal customers (if the department is subsidizing) + Break-Even Cost per Unit - Subsidy Rate per Unit 4 = Rate per Unit for Subsidized Internal Customers 4. Calculate an external customer rate (if the recharge center will serve external customers) a) Calculate the indirect cost recovery per unit + Break-Even cost per Unit x Current University Research Indirect Cost Rate = Indirect Cost Recovery per Unit b) Calculate the external customer rate + Break-Even cost per Unit + Indirect Cost Recovery per Unit = External Customer Unit Rate A rate calculation example appears in Appendix B. c. SALARY AND WAGE SCHEDULE When salaries and wages are included in the rate a Salary and Wage Schedule is submitted as part of the Rate Request packet. (See pages 39 and 41 for examples of salary and wage schedules; a rate request packet including a salary and wage schedule appears in Appendix B.) 4 Rate charged to subsidy account for each unit. The subsidy may be processed continually throughout the fiscal year by charging the subsidy account on the monthly intramural invoice voucher, using a set rate per unit for each subsidized departmental transaction. Alternatively, the subsidy may be billed to the subsidizing account on a special intramural invoice voucher in a lump sum periodically or even just once a year. 56

59 V. PURCHASE AND DEPRECIATION OF CAPITAL EQUIPMENT All capital equipment used by the recharge center must be purchased through the recharge account, unless the equipment was initially purchased on a sponsored program account. 5 Steps (1) through (2) 6 Steps (3) through (5) apply to all recharge accounts. apply only to those accounts for which the cost of capital purchased will be recovered through a recharge rate. Legend FUND-COST CENTER (RCHG): FUND-COST CENTER (DEPR REC): FUND-COST CENTER (OTHER): recharge account depreciation recovery account departmental account other than the recharge account or the depreciation recovery account (this account will provide funding for the capital equipment when necessary) (1) TRANSFER FUNDING FOR INITIAL PURCHASE OF EQUIPMENT The department will provide funding for the initial purchase of equipment from an account other than the recharge account. Departments will prepare a journal voucher to transfer funds (equal to the cost of the equipment) to the recharge account. DR FUND-COST CENTER (OTHER) 49XXXX X.XX CR FUND-COST CENTER (RCHG) 49XXXX X.XX This entry transfers funds from the funding source into the recharge. (2) PURCHASE OF EQUIPMENT 6 Journal entries for purchase of equipment will be created by Property Accounting. The equipment purchase will be processed against the recharge account and will appear as follows in the FI ledger (hitting G/L accounts for equipment and cash): DR FUND-COST CENTER (RCHG) 155xxx X.XX CR FUND-COST CENTER (RCHG) 101xxx X.XX Steps (1) and (2) offset each other in the recharge operating fund and the fund balance will not change. Please be aware that the capital equipment purchase will appear as an expense on the capital equipment G/L account in the FM ledger (G/L accounts in the 537xxx range). DR FUND-COST CENTER (RCHG) 537xxx X.XX 5 This rule applies to all equipment purchased with departmental funds. For purchases with sponsored program funds, please call the Costing office for guidance. 6 Use Step 2 when purchasing equipment from outside vendors. For purchases from any Purdue University department, use Steps 6 and 7. 57

60 (3) ESTABLISH DEPRECIATION RECOVERY ACCOUNT The department must establish a separate depreciation recovery account for equipment used for recharge activities (unless initially purchased on a sponsored program account. The department will complete a fund request form to establish the new depreciation recovery fund. The fund should be titled DeprRec- XXXXXXXX, where XXXXXXXX represents the recharge operating fund that purchased the equipment. This convention for assigning a title to the account will provide a simple mechanism to associate the recharge account to the related depreciation recovery account. (4) TRANSFER DEPRECIATION EXPENSE TO DEPRECIATION RECOVERY ACCOUNT Depreciation expense is recorded monthly with automated entries created by the Property Accounting system in the recharge operating fund, and should be transferred on a periodic (monthly/quarterly/annual) basis. In order to determine the amount of depreciation you have for the period, you can run the transaction code GR55 (Report Group ZRCH) for the period of depreciation you need to transfer (for annual depreciation, it would be From Period 0 to Period 12; for monthly depreciation, the report should be run for just the one period for which you are trying to transfer depreciation). The following entry is done to transfer cash equal to the depreciation expense for the period from the operating recharge fund into the depreciation recovery fund: DR FUND-COST CENTER (RCHG) 49XXXX X.XX CR FUND-COST CENTER (DEPR REC) 49XXXX X.XX The fund balance of the operating recharge account will be reduced by an amount equal to depreciation. The depreciation recovery account will accumulate funds to be used for a subsequent purchase. If funds are not transferred from the recharge operating fund(s) to the depreciation recovery fund(s), the depreciation expense will build the cash balance in your recharge center operating fund(s). This cash balance will appear as a surplus and can cause the recharge center to become out-of-tolerance. Transferring the cash built from depreciation expense in the recharge center from the operating fund(s) to the depreciation recovery fund(s) is the easiest way to identify the funds available for the purchase of new equipment, because the cash is readily available for the recharge center to purchase equipment without any further analysis of the operating fund balance. It also prevents the purchase of capital equipment within the recharge from being questionable from a central office or auditor s point of view. Depreciation can be transferred on a monthly/quarterly/annual basis. Below is an example of how you can run your GR55 (Report Group ZRCH) for one period in order to get the depreciation that should be transferred on a monthly basis. Let s say that we want to determine the depreciation in an account for January (period 7): 58

61 Run your GR55-ZRCH with a From Period of January (7) and a To Period of January (7). This makes it easy to determine how much depreciation expense should be moved to your recovery account on a monthly basis. Use the page right button to see the depreciation column, and the output will return as follows: Use Page Right button Depreciation Expense for Period 7. So the entry to transfer January s depreciation to the recovery account would look as follows: DR FUND-COST CENTER (RCHG) 49XXXX 9,177 CR FUND-COST CENTER (DEPR REC) 49XXXX 9,177 Please be aware deprecation will not post until the last day of the month, so the entry to transfer depreciation expense into the recovery account for January will have to be done in February. If you wanted to transfer depreciation on an annual basis rather than a monthly basis (which is more practical for most of the smaller recharges), you would simply run your ZRCH for Period 0 through Period 12, as shown below: 59

62 Run your GR55-ZRCH with a From Period of 0 and a To Period of 12. Use Page Right button Annual depreciation Expense (From Period 0 to Period 12) The entry to transfer the entire year s depreciation to the recovery account would look as follows: DR FUND-COST CENTER (RCHG) 49XXXX 95,783 CR FUND-COST CENTER (DEPR REC) 49XXXX 95,783 GENERAL SERVICE CENTERS AND DEPRECIATION Instructions for running the GR55 (Report Group ZRSC) transaction code will be the same as if running the GR55 (Report Group ZRCH) transaction code, and the journal entries required will also be the same. 60