Internal/External Sales Rate
Development
Level III
Session Objectives
 Understand the rate development process
 Determine what costs are allowed in the rate
development
 Rate development example
Policy
The purpose of the internal sales guidelines are to:
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Fully recover but not exceed costs
Recommend best business practices
Include all subsidies in rate development
Rates are established to breakeven
Based on total cost
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Agenda
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Capital Equipment
Capital Lease
Operating Lease
Partial Assignments
Surplus and Deficits
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Agenda
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Prepaid Expenses
Discounted rates
After Hours rates
Assisted vs. Unassisted rates
Carryforward Balance reconciliation
Rate Development Example
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Capital Equipment
• Depreciation expense associated with capital equipment
should be included in the rate development.
• Annual depreciation is calculated in the Asset
Management module and reported in the Asset
Management Depreciation Schedule.
• Total purchase price, installation and transportation
expenses are included in the acquisition cost and are
capitalized.
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Capital Equipment - Example
Capitalized Expense = Annual Depreciation Expense
Useful Life
$100,000 = $20,000 per year
5 years
$20,000 = $16.64 per hour additional cost recovery
1202 billable hours
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Capital Lease
• Depreciation associated with capital lease should be
included in the rate development.
• The cost is based on capitalized cost of the equipment,
not the monthly lease payments.
• Depreciation is calculated in the Asset Management
module.
• Total purchase price, installation, transportation, interest
charges and fee expenses are included in the acquisition
cost.
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Capital Lease - Example
Capitalized Lease = Annual Depreciation Expense
Useful Life
$105,000 = $21,000 per year
5 years
$21,000 = $17.47 per hour additional cost recovery
1202 billable hours
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Operating Lease
• Expense associated with operating lease should be
included in the rate development based on annual lease
payments.
• Total lease payments include the cost for use of the
equipment, interest and fees and may include
installation, transportation or maintenance expenses.
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Operating Lease - Example
Lease Expense = Annual Lease Expense
Term of Lease
$100,000 = $20,000 per year
5 years
$20,000 = $16.64 per month additional cost recovery
1202 billable hours
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Partial Assignment – Salary and
Fringe Rates
67% -100% appointments:
Fringe Rate: 33.7% Academic, 27.4% Non-Academic
Nonproductive time: prorated based on appointment
0% -66% appointments:
Fringe Rate: reduced rate 7.9% Partial, 17.6% for GA
Health and 22.4% with UPlan Health
Nonproductive time: prorated based on appointment and
reduced benefits
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Partial Assignments Hourly Rates
Salary& Fringe recovered using (Billable Hours) 100% vs. 75% Appt.
Billable hours is unique to each individual - develop one schedule per person
Description
Full year hours paid
Paid holidays (not available to work)
Paid vacation (not available to work)
Paid sick time (not available to work)
Total hours available to work
Rate based
on Billable
Hours 100%
2080
(88)
(176)
(88)
1728
Any other non-billable hours
(training, breaks, administration, meetings etc.)
Billable hours (estimated volume of work)
1,202
Labor Rate = Salary & fringe/billable hours
Salary & fringe
$
100,000
Billable hours
Salary + Fringe/Billable Hours = Rate per hour
$
Billable Hours (hours worked & invoiced)
Salary & fringe cost recovered
$
Rate based
on Billable
Hours 75%
1560
(66)
(132)
(66)
1296
(526)
(395)
Details in determining hours
(52 weeks * 40 hours per week) 100% appt.
(11 days * 8 hours per day) FY15 est. by campus
(22 days * 8 hours per day) est.vacation expected
(11 days * 8 hours per day) est. sick expected
526 working days
(1 hour per day * working days)
(30 minutes a day for breaks)
902
$
75,000
1202
83.19
X 1202
$
901.5
83.19
X 901.5
100,000
$
75,000
Note #1: To fully recover total labor cost on a annual basis the billable hours method must be used.
Note #2: Underestimated billable hours (hours lower and hourly rate is higher) will cause a surplus.
Note #3: Overestimated billable hours (hours higher and hourly rate is lower) will cause a deficit.
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Partial Assignments Hourly Rates
Salary& Fringe recovered using (Billable Hours) 67%-74% vs. 66% or Less appt.
Billable hours is unique to each individual - develop one schedule per person
Description
Full year hours paid
Paid holidays (not available to work)
Paid vacation (not available to work)
Paid sick time (not available to work)
Total hours available to work
Rate based
on Billable
Hours 67%1539
(65)
(130)
(65)
1279
Any other non-billable hours
(training, breaks, administration, meetings etc.)
Billable hours (estimated volume of work)
(389)
(346)
890
969
Labor Rate = Salary & fringe/billable hours
Salary & fringe
$
74,000
Billable hours
Salary + Fringe/Billable Hours = Rate per hour
$
Billable Hours (hours worked & invoiced)
Salary & fringe cost recovered
$
Rate based
on Billable
Hours 66%
1373
(58)
1315
$
66,000
890
83.14
X 890
$
969
68.13
X 1168
74,000
$
66,000
Details in determining hours
(52 weeks * 40 hours per week) 100% appt.
(11 days * 8 hours per day) FY15 est. by campus
(22 days * 8 hours per day) est.vacation expected
(11 days * 8 hours per day) est. sick expected
389 working days
164
(1 hour per day * working days)
(30 minutes a day for breaks)
Note #1: To fully recover total labor cost on a annual basis the billable hours method must be used.
Note #2: Underestimated billable hours (hours lower and hourly rate is higher) will cause a surplus.
Note #3: Overestimated billable hours (hours higher and hourly rate is lower) will cause a deficit.
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Reconciled Surplus & Deficits
Balances in Rates
An acceptable operating variance:
Reconciled Year-End Variance = Plus or minus 15%
Revenue
• Within 15% and due to variance in costs or volumes
from original estimates
• Rates are calculated to breakeven
• Reconcile outstanding invoices, prepaid
maintenance contracts, materials and supplies not
consumed, material for resale, (items paid for but
not matched to revenue recognized).
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Surplus & Deficits Balances in Rates
An operating variance that requires adjustment:
• Subtract unallowable costs, adjust salary
expense based on actual usage, reconcile
depreciation expense, and add revenue not
recognized, subsidies not recorded, etc.
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Surplus & Deficits Balances in Rates
If a surplus results from overcharging,
customers will need to be refunded if
greater than 15%
It’s important to be able to separately identify
External and Internal Sales and expenses &
reconcile balance at year end
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Surplus & Deficits Balances in Rates
A deficit balance may develop from:
sales < expected
costs > expected
If a deficit is due to expenses that are not
recoverable or not included in the rates, a
subsidy will be required
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Rate Development
Determine the per-unit rate
Direct costs +/- reconciled surplus or deficit
Per unit rate =
------------------------------------------Estimated volume of work
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Prepaids
Expenses paid but not used in current year because
the value received for those resources are in the future
beyond current fiscal year
• Charged at the purchase price
Example:
$25,000 service agreement = $8,333 current year
3 years
$16,667 for future years or $8,333 per year will be
included in the rates for the next two fiscal years
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Prepaids
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Maintenance Contracts
Service Contracts
Consulting or Professional Services
Insurance
Materials for Resale, Stores and Supplies
Postage
Subsidies applied in advance
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Discounting
Discounting is allowed if the increase in volumes
decreases the per unit cost
• The decrease in cost is directly related to the
activity
• All discounts are applied equally
• One customer can’t pay for the discount of another
Example:
100 units cost $1.00 per unit
1000 units cost $0.75 per unit
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Discounting
• Charge labor, supplies and equipment on a hourly
basis rather than by units.
• If there is a benefit to processing more units the
discount will be applied by fewer hours charged.
• If activities have a different cost structure (set up
time versus run time for equipment) develop a rate
for each and charge accordingly.
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After Hours
Rates can be different if the cost associated with the
activity is different
• The cost for after hours service is lower because
staff assistance is not required or available
• All support costs and non-productive time are
applied over entire base
• One customer can’t pay for the reduced cost of
another (Net revenue is the same for the recharge
center)
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After Hours
Example:
Regular Hours:
$93,750 (includes operator, support and equipment)
cost divided by 1202 hours equals $78.00 per hour
After Hours:
$35,000 (includes support and equipment exclude
operator ) cost divided by 845 hours equals $41.42
per hour
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After Hours
Equipment recovered using hours available to actually work and invoice (Billable Hours)
Billable hours is unique to each individual - develop one schedule per person (After Hours)
Operator
Description
1560
Full year hours paid - Operator of Equipment
(66)
Paid holidays (not available to work)
(132)
Paid vacation (not available to work)
(66)
Paid sick time (not available to work)
1,296
Total hours available to work
Equipment
1560
(53)
(106)
(53)
1349
Operator
Support
520
(22)
(44)
(22)
432
Equipment
1040
(35)
(70)
(35)
899
(94)
(94)
(54)
(54)
378
845
Any other non-billable hours
(training, breaks, administration, meetings etc.)
Billable hours (estimated volume of work)
Labor Rate = Salary & fringe/billable hours
$
Salary & fringe
Equipment Depreciation
Total
Billable hours
Salary + Fringe/Billable Hours = Rate per hour$
1,255
1,202
$
78,750
$
$
$
10,000
X 1202
$
78,750
$
41.42
$ 68.77
$ 35,000
$ 128,750
$
X 1202
X 845
15,000 $ 93,750 $
25,000
X 845
$
10,000
Note #1: To fully recover total labor & depreciation cost on a annual basis the billable hours method must be used.
Note #2: Underestimated billable hours (hours lower and hourly rate is higher) will cause a surplus.
Note #3: Overestimated billable hours (hours higher and hourly rate is lower) will cause a deficit.
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$ 128,750
11.83
$
12.48
$ 35,000
845
845
29.59
$ 78.00
Total Rate
Billable Hours (hours worked & invoiced)
Salary & fringe cost recovered
$
15,000
1202
(1 hour per day * working days)
(30 minutes a day for breaks)
25,000
$ 93,750
1202
65.52
(52 weeks * 40 hours per week)100% appt.
(11 days * 8 hours per day) FY15 by campus
(22 days * 8 hours per day) est. vac. expected
(11 days * 8 hours per day) est. sick expected
54 working days
94
Assisted vs. Unassisted
Rates can be different if the cost associated with the
activity is different
• All support costs and non-productive time are
applied over entire base
• One customer can’t pay for the reduced cost of
another (net revenue is the same)
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Assisted vs. Unassisted
Example:
Assisted :
$100,000 (includes support, operator and equipment)
cost divided by 1202 hours equals $83.19 per hour
Unassisted:
$10,000 (includes support less operator and
equipment) cost divided by 791 hours equals $36.35
per hour
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Unassisted Hours
Equipment recovered using hours available to actually work and invoice (Billable Hours)
Billable hours is unique to each individual - develop one schedule per person - (Assisted vs. Unassisted)
Operator Equipmen
171
182
(8)
(8)
(17)
(15)
(8)
(8)
138
151
Operator
Description
1820
Full year hours paid - Operator of Equipment
(77)
Paid holidays (not available to work)
(154)
Paid vacation (not available to work)
(77)
Paid sick time (not available to work)
1,512
Total hours available to work
Equipmen
1365
(66)
(132)
(66)
1101
(310)
Any other non-billable hours
(training, breaks, administration, meetings etc.)
1,202
Billable hours (estimated volume of work)
(310)
(31)
(39)
791
120
99
Labor Rate = Salary & fringe/billable hours
$ 100,000
Salary & fringe
Equipment Depreciation
Total
1202
Billable hours
Salary + Fringe/Billable Hours = Rate per hour$ 83.19
Salary & fringe cost recovered
$
$ 18,750
2,344
$ 118,750
$ 100,000
$12,344
$ 131,094
$ 36.35
$
$12,344
$ 131,094
99
791
$ 12.64
791
$ 23.70
23.70
$ 106.90
X 1202
(1 hour per day * working days)
(30 minutes a day for breaks)
$ 10,000
$
Total Rate
Billable Hours (hours worked & invoiced)
(52 weeks * 40 hours per week)100% appt.
(11 days * 8 hours per day) FY15 campus
(22 days * 8 hours per day) est. vac. Exp.
(11 days * 8 hours per day) est. sick exp.
18.9 working days
189
X 791
X 791
$ 18,750 $ 118,750 $ 10,000
$ 99.00
$
2,344
Note #1: To fully recover total labor & depreciation cost on a annual basis the billable hours method must be used.
Note #2: Underestimated billable hours (hours lower and hourly rate is higher) will cause a surplus.
Note #3: Overestimated billable hours (hours higher and hourly rate is lower) will cause a deficit.
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89.18
Carryforward Reconciliation
See Internal Sales Activity Reconciliation Template.
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Resources
Office of Internal Sales website
http://finsys.umn.edu/sales/iso.html
This presentation is posted on the site.
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