University of Minnesota
Internal/External Sales
Rate Development – Advance
Internal/External Sales
Objectives for Rates
•
•
•
•
Fully recover but not exceed costs
Include all subsidies in rate development
Set to breakeven
Based on total cost
See Handout: “What would be included in an Internal
Sales Rate Development?” Checklist before submitting
rates.
2
Agenda
•
•
•
•
•
•
Productive Time for Salaries
Productive Time for Equipment
Capital Equipment
Capital Lease
Operating Lease
Partial Assignments
3
Agenda (cont.)
•
•
•
•
•
Surplus & Deficit Balances
Prepaid Expenses
Discounted rates
After Hours rates
Assisted vs. Unassisted rates
4
Productive Time - Salaries
• Productive time (billable hours) is total time,
less non-productive time such as vacation,
sick leave, holiday, breaks, equipment
downtime, certification and training time.
See handout: “Vacation and Leaves to consider
when calculating productive (billable hours)
5
Billable Hours Calculation - Salaries
• There are 40 hours in a work week or 52 weeks in a
year.
• 40 X 52 = 2,080 hours in a year
Example:
• Salary $74,403 per year
• Fringe for academic faculty (FY14) 33.6% or $25,597
• Total salary & fringe for the year $100,000
6
Billable Hours Calculation - Salaries
Inaccurate assumption/calculation:
• Total salary & fringe of $100,000 divided by 2,080
working hours in a year:
• $100,000 / 2,080 = $48.08 per hour
This is the per hour salary paid to an employee.
7
Billable Hours Calculation - Salaries
Employees don’t work all 2080 hours in a year.
Holidays, vacation leave, sick leave, other types of leave
Training, administrative or non-productive time, breaks
These activities can be billed to the customer and will not
be if the basis of the rate is 2080 hours.
8
Billable Hours Calculation - Salaries
Salary& Fringe recovered using hours available to actually work and invoice (Billable Hours)
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
2080
(88)
(176)
(88)
1728
Any other non-billable hours
(training, breaks, administration, meetings etc.)
Billable hours (estimated volume of work)
Labor Rate = Salary & fringe/billable hours
Salary & fringe
(216)
Details in determining hours
(52 weeks * 40 hours per week) based on 100% appt.
(11 days * 8 hours per day) FY14 est. by campus
(22 days * 8 hours per day) est. vacation expected
(11 days * 8 hours per day) est. sick expected
216 working days
(1 hour per day * working days)
(30 minutes a day for breaks)
1,512
$
100,000
Billable hours
Salary + Fringe/Billable Hours = Rate per hour
Billable Hours (hours worked & invoiced)
$
1512
66.14
X 1512
Salary & fringe cost recovered
$
100,000
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.
9
Billable Hours Calculation - Salaries
• The worker will only be available to work 1512
hours, not 2080
• The rate for 1512 hours is $66.14 per hour
• $48.08 vs. $66.14
• $48.08 X 1512 hours = $72,692
• Recover the actual cost of the salary and fringe
cost of $100,000
• At a rate of $48.08, there will be a deficit of
$27,308 at the end of the year. A 27%
unfavorable variance.
10
Billable Hours Calculation - Salaries
Why is this important?
If there are 5 people working in this ISO department
example, there would be a deficit of ($134,855) at
the end of the year because rate calculated does not
recover all of the costs. ($27,308 X 5 = $136,540)
11
Billable Hours - Salaries
Salary& Fringe recovered using hours paid (2080) vs. hours available to actually work and invoice (billable hours)
Rate
based on
Rate based Hours
Rate based
Rate
on Hours
Paid
on Billable based on
Paid Salary &
HoursBillable
Salary only Fringe
Salary only
Hours
Description
Definition
Full year hours paid
2080
2080
2080
2080 (52 weeks * 40 hours per week)
Paid holidays (not available to work)
(88)
(88) (11 days * 8 hours per day)
Paid vacation (not available to work)
(176)
(176) (22 days * 8 hours per day)
Paid sick time (not available to work)
(88)
(88) (10 days * 8 hours per day)
Total hours available to work
2080
2080
1728
1728
216 working days
Any other non-billable hours
(training, breaks, administration, meetings etc.)
Billable hours (estimated volume of work)
2,080
-
(216)
(216)
2080
1512
1512
Labor Rate = Salary & fringe/billable hours
Salary & fringe
$
$ 100,000 $
Salary only at .336 fringe rate
$ 74,403
$
Billable hours
2080
2080
Rate per hour
$
35.77 $ 48.08 $
Billable Hours (hours worked & invoiced)
X 1512
X 1512
Amount desired to recover
Salary & fringe cost recovered
Amount not recovered
$ 100,000
74,403
1512
1512
49.21 $ 66.14
X 1512
X 1512
(1 hour per day * working days)
Hours
VarinanceDays
312
15%
39
208
10%
26
104
5%
13
$ 100,000 $ 100,000 $ 100,000 $ 100,000
$ 54,085 $ 72,692 $
74,403 $ 100,000
$ (45,915) $ (27,308) $ (25,597) $
-46%
-27%
-26%
0%
Note: In order to fully recover total labor cost on a annual basis the billable hours method should be used.
12
Productive Time Equipment
Productive time (billable hours) is total time, less
operator productive time, maintenance, repairs,
recalibration, replacement, storage, seasonality,
set-up time plus ability to run without operator
See Handout: “Equipment availability (downtime)
to consider when calculating productive time
(billable hours)
13
Billable Hours Calculation Equipment
Inaccurate assumption/calculation:
• Total annual depreciation of $10,000 divided by 2,080
working hours in a year:
• $10,000 / 2,080 = $4.80 per hour
This is the per hour depreciation based on total hours in a
work week.
14
Billable Hours Calculation Equipment
Employees don’t work and equipment operate all 2080
hours in a year due to the non-productive time of the
operator and equipment
These activities can be billed to the customer and will not
be if the basis of the rate is 2080 hours.
15
Billable Hours Calculation - Equipment
• The equipment will only be available to work
1512 hours, not 2080
• The rate for 1512 hours is $6.61 per hour
• $4.80 vs. $6.61
• $48.08 X 1512 hours = $7,269
• Recover the actual cost of the depreciation cost of
$10,000
• At a rate of $4.80, there will be a deficit of $2,736
at the end of the year. A 27% unfavorable
variance.
16
Billable Hours Calculation - Equipment
Equipment recovered using hours available to actually work and invoice (Billable Hours)
Billable hours is unique to each individual - develop one schedule per person
Operator
Description
Full year hours paid - Operator of Equipment
2080
Paid holidays (not available to work)
(88)
Paid vacation (not available to work)
(176)
Paid sick time (not available to work)
(88)
Total hours available to work
1728
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
$
Equipment
2080
(88)
(176)
(88)
1728
(216)
(216)
1,512
Salary & fringe cost recovered
100,000
$
1512
66.14
100,000
25,000
$
125,000
$
82.67
$
125,000
1512
X 1512
$
(1 hour per day * working days)
(30 minutes a day for breaks)
1,512
$
Total Rate
Billable Hours (hours worked & invoiced)
Details in determining hours
(52 weeks * 40 hours per week)100% appt.
(11 days * 8 hours per day) FY14 by campus
(22 days * 8 hours per day) est. vacation expected
(11 days * 8 hours per day) est. sick expected
216
working days
16.53
X 1512
$
25,000
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.
17
Billable Hours Calculation - Equipment
Why is this important?
If there are 5 machines working in this ISO
department example, there would be a deficit of
($13,684) at the end of the year because rate
calculated does not recover all of the costs. ($2,736
X 5 = $13,684)
18
Capital Equipment
•
Depreciation associated with capital equipment should
be included in the rate development.
• Annual depreciation is calculated in the Asset
Management module and reported in the UMReport.
• Total purchase price, installation and transportation
expenses are included in the acquisition cost and are
capitalized.
Capitalized Expense = Annual Depreciation Expense
Useful Life
19
Capital Equipment - Example
Capitalized Expense = Annual Depreciation Expense
Useful Life
$100,000 = $20,000 per year
5 years
$20,000 = $13.22 per hour
1512 Hours
20
Capital Lease
• Depreciation associated with capital lease may be
included in the rate development is based on capitalized
cost of the equipment, not the monthly lease payments.
• Depreciation is calculated in the Asset Management
module.
• Total purchase price, installation, transportation, interest
charges and fee expenses are included in the acquisition
cost.
Capitalized Expense = Annual Depreciation Expense
Useful Life
21
Capital Equipment - Example
Capitalized Expense = Annual Depreciation Expense
Useful Life
$105,000 = $21,000 per year
5 years
$21,000 = $13.88 per hour
1512 Hours
22
Operating Lease
• Expense associated with operating lease may be
included in the rate development based on lease
payments as a basis for equipment usage.
• Total lease payments include a charge for use of the
equipment, interest and fees and may include
installation, transportation, maintenance expenses.
23
Operating Lease - Example
Lease Expense = Annual Lease Expense
Term of Lease
$100,000 = $20,000 per year
5 years
$20,000 = $13.22 per month
1512 Hours
24
Partial Assignment
67% -100% assignments:
Fringe Rate: 33.8% P&A, 26.3% CS,
Nonproductive time: prorated based on % worked
0% -67% assignments:
Fringe Rate: reduced rate 7.7% Partial, 16.6% for GA
Nonproductive time: reduced benefits & no time off paid
25
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)
Labor Rate = Salary & fringe/billable hours
Salary & fringe
$
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
(216)
(162)
1,512
100,000
1512
66.14
X 1512
100,000
Details in determining hours
(52 weeks * 40 hours per week) 100% appt.
(11 days * 8 hours per day) FY15 est. by campu
(22 days * 8 hours per day) est.vacation expecte
(11 days * 8 hours per day) est. sick expected
216 working days
(1 hour per day * working days)
(30 minutes a day for breaks)
1,134
$
75,000
$
1134
66.14
X 1512
$
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.
26
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)
1,119
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%
1394
(59)
1335
(160)
(167)
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
160 working days
167
(1 hour per day * working days)
(30 minutes a day for breaks)
1,168
$
67,000
1119
66.14
X 1119
$
1168
57.37
X 1050
74,000
$
67,000
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.
27rate is lower) will cause a deficit.
Note #3: Overestimated billable hours (hours higher and hourly
Excess Surplus & Deficits Balances in
Rates
A acceptable operating variance:
• Within 15% and due to variance in costs or
volumes from original estimates
• Rates are calculated to breakeven
• Reconcilable items like maintenance
contracts, tuition payments, materials and
supplies, material for resale, (items paid for
but not matched to revenue recognized).
28
Excess Surplus & Deficits Balances in
Rates
A operating variance that require adjustments:
• Subtract unallowable costs, adjust salary
expense based on actual usage, recorded
depreciation expense, and add revenue not
recognized, subsidies not recorded, etc..
29
Excess Surplus & Deficits Balances in
Rates
If a surplus results from overcharging
customers will need to be refunded
Therefore, it’s important to be able to separately
identify External and Internal Sales and
expenses & reconcile balance at year end
30
Excess Surplus & Deficits Balances in
Rates
A deficit balance may develop from:
– sales < expected
– costs > expected
If a deficit is due to expenses that are not
recoverable, a subsidy will be required
31
Rate Development (cont.)
Determine the per-unit rate
Direct costs +/- allowable surplus or deficit
Per unit rate =
------------------------------------------Estimated volume of work
32
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
33
Prepaids
•
•
•
•
•
•
•
Maintenance Contracts
Service Contracts
Consulting or Professional Services
Insurance
Materials for Resale, Stores and Supplies
Postage
Subsidies applied in advance
34
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
35
Discounting
• Charge labor, supplies and equipment on a hourly
basis vs. by units. If there is a benefit to processing
more units the discount will be applied by fewer
hours charged.
• If activities have a different cost structure (set up
time versus run time for equipment) develop a rate
for each and charge accordingly.
36
After Hours
Rates can be different if the cost associated with the
activity is different
• All support costs and non-productive time are
applied over entire base
• One customer can’t pay for the reduced cost of
another (Net revenue is the same for the ISO)
37
After Hours
Example:
$93,750 (includes operator, support and equipment)
cost divided by 1522 hours equals $61.60 per hour
$31,250 (includes support and equipment ) cost
divided by 1000 hours equals $31.25 per hour
38
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
Full year hours paid - Operator of Equipment
1560
Paid holidays (not available to work)
(66)
Paid vacation (not available to work)
(132)
Paid sick time (not available to work)
(66)
Total hours available to work
1,296
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$
Equipment
1560
(53)
(106)
(53)
1349
Operator
520
(22)
(44)
(22)
432
Equipment
1040
(35)
(70)
(35)
899
(162)
(54)
(54)
378
845
(162)
1,134
1,187
75,000
$
$
Salary & fringe cost recovered
$
$
$
Total Rate
Billable Hours (hours worked & invoiced)
15,000
1187
10,000
378
66.14
12.64
$
$
75,000
$
X 1187
X 392
15,000 $ 90,000 $
25,000
$ 125,000
$
77.97
$ 78.49
$ 35,000
$ 125,000
11.83
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.
39
$ 35,000
845
$ 78.77
X 1134
(1 hour per day * working days)
(30 minutes a day for breaks)
25,000
$ 90,000
1134
66.14
(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
162
54 working days
Assisted vs. Unassisted
Rates can be different if the cost associated with the
activity is different
• All support costs and non-productive time are
applied over entire base
• One customer can’t pay for the reduced cost of
another (net revenue is the same)
Example:
$100,000 (includes support and operator) cost divided
by 1522 hours equals $65.70 per hour
$40,000 (includes support less operator) cost divided
by 1000 hours equals $40.00
per hour
40
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 - (Assisted vs. Unassisted)
Operator
Description
Full year hours paid - Operator of Equipment
1820
Paid holidays (not available to work)
(77)
Paid vacation (not available to work)
(154)
Paid sick time (not available to work)
(77)
Total hours available to work
1,512
Equipmen
1560
(66)
(132)
(66)
1296
Operator
260
(11)
(22)
(11)
216
Equipmen
520
(22)
(44)
(22)
432
Any other non-billable hours
(189)
(training, breaks, administration, meetings etc.)
Billable hours (estimated volume of work)
1,323
(189)
(27)
(27)
189
405
Labor Rate = Salary & fringe/billable hours
Salary & fringe
$ 87,500
Equipment Depreciation
Total
Billable hours
1362
Salary + Fringe/Billable Hours = Rate per hour
$ 64.24
1,107
Salary & fringe cost recovered
(1 hour per day * working days)
(30 minutes a day for breaks)
$ 12,500
$ 18,750
$
6,250
$ 106,250
1102
$
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.
189
27 working days
189
$ 66.14
17.01
X 1102
$ 87,500
$ 18,750
$ 125,000
$ 81.57
$
$18,750
$ 125,000
405
$ 15.43
$
X 1362
$18,750
81.26
X 189
$ 106,250
$ 12,500
X 405
$
6,250
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.
41
81.26
Questions?
Office of Internal Sales website
http://finsys.umn.edu/sales/iso.html
This presentation is posted on the site.
42