University of Minnesota

Internal/External Sales

Internal Sales Rate Development

Level I

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• Walk through a rate development example

• Understand the rate development process

• Determine what costs are allowed in the rate development

Learning Objectives

• Questions at anytime during the presentation

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Expected Outcome

Revenue – Expenses = $0 at the end of the Fiscals Year

• Revenue is the rate charged times the volume

• Rate is estimated expense/volume

• Expense is the cost to perform the activity

Note: any allowable variance is included in next year’s rate

Internal Sales EFS website:

http://www.finsys.umn.edu/sales/iso.html– Policies– Procedures– Presentations– Job Aids– Training Modules

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Internal Sales Rate Development Procedure and Website

The purpose of the internal sales rate guidelines is to:

• Comply with Federal regulations• Sold at rates that fully cover, but do not exceed costs • Subsidies are documented in the rate development. • All rates should be established to break even.

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Internal Sales Rate Policy

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• Reviewed and updated each year• Set to break even• Based on historical sales data• Consistent for all internal customers• Federal government receives the lowest rate• Subsidies must be documented

Principles for Internal Sales Rates

Steps to developing an Internal Sales rate:• Measurable unit • Expected level of activity• Annual estimated costs• Breakeven• Exclude unallowable costs• Direct vs. overhead costs• Activity per-unit rate• Reviewed and updated each year

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Internal Sales Rate Development

Measurable unit for goods and services• In terms of labor, machine time, or tangible product.

Examples: per labor hour, per machine hour, per copy, per gallon, per test, etc.

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Measurable Unit

For units measured in cost per hour, productive time (total time available for the service) should be used, and not total hours– Productive time (billable hours) is total time, less

non-billable time such as vacation, sick leave, holiday, breaks, equipment downtime, certification and training time.

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Productive Time

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Billable Hours TemplateSalary& 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 Rate based on Billable Hours Details in determining hours

Full year hours paid 2080(52 weeks * 40 hours per week) based on 100% appt.

Paid holidays (not available to work) (88)(11 days * 8 hours per day) FY14 est. by campus

Paid vacation (not available to work) (176)(22 days * 8 hours per day) est. vacation expected

Paid sick time (not available to work) (88)(11 days * 8 hours per day) est. sick expected

Total hours available to work 1728 216working days

Any other non-billable hours (216) (1 hour per day * working days)

(training, breaks, administration, meetings etc.) (30 minutes a day for breaks)

Billable hours (estimated volume of work) 1,512

Labor Rate = Salary & fringe/billable hours

Salary & fringe $ 100,000

Billable hours 1512

Salary + Fringe/Billable Hours = Rate per hour $ 66.14

Billable Hours (hours worked & invoiced) 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.

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Billable Hours Example

Salary& Fringe recovered using hours paid (2080) vs. hours available to actually work and invoice (billable hours)

DescriptionRate based on Hours

Paid - Salary onlyRate based on Hours Paid Salary & Fringe

Rate based on Billable Hours Definition

Full year hours paid 2080 2080 2080 (52 weeks * 40 hours per week)

Paid holidays (not available to work) - - (88) (11 days * 8 hours per day)

Paid vacation (not available to work) - - (176) (22 days * 8 hours per day)

Paid sick time (not available to work) - - (80) (10 days * 8 hours per day)

Total hours available to work 2080 2080 1736 217working days

Any other non-billable hours - - (217) (1 hour per day * working days)

(training, breaks, administration, meetings etc.)

Billable hours (estimated volume of work) 2,080 2080 1519

Labor Rate = Salary & fringe/billable hours

Salary & fringe $ - $ 100,000 $ 100,000  

Salary only at .336 fringe rate $ 74,403      

Billable hours 2080 2080 1519 

Rate per hour $ 35.77 $ 48.08 $ 65.83  

Billable Hours (hours worked & invoiced) X 1519 X 1519 X 1519  

Amount desired to recover $ 100,000 $ 100,000 $ 100,000

Salary & fringe cost recovered $ 54,336 $ 73,029 $ 100,000  

Amount not recovered $ (45,664) $ (26,971) $ -  

Note: In order to fully recover total labor cost on a annual basis the billable hours method should be used.

Annual output or expected level of activity– Estimate the expected volume / level of activity,

by using past results or survey likely customers

Annual estimated costs– Costs should be directly attributable to the

functions of the sales activity– Costs should be allowable

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Rate Development (cont.)

Direct costs include:– Salaries and fringe benefits of those providing the

service or directly supporting the activity – Materials and supplies– Depreciation on capital equipment– Equipment repair and maintenance (service contracts)– Prior year surpluses and deficits and other required

adjustments

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Direct Costs

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Exclude Unallowable Costs •advertising expenses except for employee and subject recruitment •alcoholic beverages •bad debts •entertainment costs •goods and services for personal use •interest, fund raising, and investment costs•Memberships not work related

See handout: Unallowable Internal Sales Costs

Unallowable Costs

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Exclude Unallowable Costs

The general premise for unallowable costs is that the federal government will not pay for certain costs that they believe are not directly related to the benefit of the research project.

Unallowable Costs

Determine the breakeven– The goal is to breakeven at the end of the year

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Per Unit Rate

Determine the per-unit rate

Direct costs +/- surplus or deficitPer unit rate =

-------------------------------------------

Estimated volume of work

Example:

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Per Unit Rate Example

Determine the per-unit rate

$100,000 -10,000 $100 = --------------------------

900

Cost of an activity is comprised of the allowable direct costs required for the performance of the activity

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What is Allowable?

•Must be reasonable- Necessary for the performance of the activity- Considering the interests of the institution- Does not violate institutional principles- Charge can be reasonably explained as necessary

to complete activity

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What is Allowable? (cont.)

•Must be allocable to the specified activity- Assigned percentage based on the benefits received- Incurred to advance the work of the activity- Costs cannot be shifted to other activities to cover

deficits

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What is Allowable? (cont.)

•Must be consistently applied- In estimating, accumulating and reporting

costs- With the institution’s cost accounting

practices- Allocating costs incurred for the same

purpose

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Internal Sales Rate TemplateTo use this spredsheet, please fill in the fields that are highlighted in YELLOW

What is the annual salary for consultant 1 (Civil Service)? 50,000$ 1754

Project A Project BApplicable to all

Projects What is the annual salary for consultant 2 (Faculty / P&A)? 80,000$ 1650

Number of Available Hours What is the annual salary for consultant 3 (Grad Assistant)? 16,500$ 1024

Civil Service Consultant 500 1000 254 Faculty / P&A 100 100 100Grad Assistant 512 512 0

+ Salaries

Civil Service Consultant (total time) 14,253 28,506 7,241 P&A Supervisor (total time) 4,848 4,848 4,848 Grad Assistant (total time) 8,250 8,250 - Use appropriate fringe rate for each job class

See website at: www.umn.edu/ohr/payroll + Fringe

Academic 4,832 9,664 2,455 33.9% * salary from above (FY11 Rates)Non-Academic 1,280 1,280 1,280 26.4% * salary from aboveGrad Assistant (total time) 1,386 1,386 - 16.8% * salary from above

+ Supplies (estimated) 2,500 - -

+ Equipment Use Costs (estimated) 4,000 - - Depreciation, maintenance, etcallocated based on total usage

+ Allocation of General Costs 6,604 9,574 (16,178) Applicable to all Services

= Total Service Costs 41,349 53,934

/ Number of Units (hours, tests, etc) 5,000 12,000

Total cost per unit 8.27 4.49

What are the available hours for these individuals ('billable hours,' exclusive of vacation and sick days, training time, and other non-related hours). SEE "BILLABLE HOURS" TAB FOR ASSISTANCE.

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Questions?

Office of Internal Sales websitehttp://finsys.umn.edu/sales/iso.html

This presentation is posted on the site.