The Research Foundation has provided templates under 'Related Links' that may be used for both the surplus/deficit analysis and the user rate calculation. The guidelines below provide an overview of how to develop the rate calculation and how to determine the price that can ultimately be charged to the users.
- Charges to users of products/services provided by service units must be based on a schedule of established rates (i.e. a published and distributed “price list”).
- A given rate must be based on actual/estimated costs (versus an amount derived from the market or a “historical” rate that cannot be documented) and charged based on actual usage.
- Rates cannot discriminate between internal users (i.e. one internal user cannot subsidize the cost of providing the same product/service to another internal user).
- A unit may “sell” its products/services to external users (individuals and/or organizations outside of the University), but such sales should be incidental. In this case, internal sponsored rates, plus the College’s F&A rate should be charged to external users.
- Over time, a unit which charges users should break even, or recover no more than the total cost of providing the good(s)/service(s). A unit may lose money on its operations, but it may not earn a profit. Any calculated surplus in excess of 60 days normal operating expenses must be deducted from future rates. Any calculated deficit should be added to future rates. Any carry forward amount will be reflected in a future year’s rate (i.e. a surplus generated in fiscal 2012 will be reflected in fiscal 2013 pricing).
Step by Step Process for Rate Calculation
Step 1: Identify Core Products/Services
A separate rate must be calculated for each distinct product/service offered to users. “Bundling” of certain products/services may be possible; however, the level of aggregation should be analyzed by the Business Office and RF.
- Develop a comprehensive listing of all products and services including a brief description of the products/services identified.
- Ensure that all new products/services to be offered are included on this list,
- Exclude products/services that will no longer be offered.
Step 2: Identify Rate Components
There are 3 types of rate components which must be estimated by the service center when developing a rate for goods or services.
- Direct Costs – costs readily identifiable and related directly to the good or service provided.
- Salaries, wages and fringe benefits of individuals associated with providing the good or service
- Determine who performs the key direct activities required to produce each product/service.
- If an individual spends time on activities related to more than 1 product/service, estimate the percentage of time spent on each product/service. An individual’s time is allocated to a product/service must = 100% of the time of that person dedicated to the facility to produce that product/service.
- If an individual spends time on activities outside of the unit, estimate the percentage of time spent in the unit (and then between products/services, if necessary). The time estimates should be consistent with the effort reporting documentation maintained by the College.
- For each individual, multiply time spent on each product/service by their projected salary (net of salary recovered through sponsored sources) and fringes.
- Supplies and materials (Non-Labor)
- Determine the non-labor (e.g. materials and supplies) costs necessary to perform the key direct activities.
- Based on projected (or historical) costs, estimate the non-labor costs for each product/service.
- For items that are kept in inventory, the estimated cost should reflect the unit cost of product/service sold and not the cost of purchasing the total inventory. The inventory valuation method (FIFO, LIFO, average cost, ) should be consistent between products/service.
- If certain materials/supplies are used in the provision of more than one product/service, determine the most equitable method for allocating the estimated cost between products/services based on a beneficial relationship. To the extent possible, use transaction-level detail to specifically and directly identify costs to a product/service. Document the basis for any allocation.
- Equipment repair and maintenance – follow rules for supplies and materials.
- Outside services– follow rules for supplies and materials.
- Capital equipment depreciation - The definition of capital equipment must be consistent with CUNY’s definition: items of equipment with an acquisition cost of $5,000 or more and a useful life of more than two years. The capital equipment cost to be included in any rate is the depreciation expense and any external interest cost associated with debt financing for that equipment. Current year purchase amounts may not be included. Similarly, principal payments on any debt and any internal interest costs may not be included. Costs associated with any federally funded equipment may not be included.
- Identify the direct capital equipment costs of providing each product/service.
- Work with your property manager to obtain a listing of all capital equipment identified to the unit in the University’s CUNY First system.
- On an item by item basis, identify the equipment to a product/service.
- Identify any missing items of capital equipment and work with property management to locate them in the CUNY First system. The property manager must notify the RF of any capital equipment items moved to Service Centers.
- Calculate the annual depreciation expense for each item, based on its estimated useful life and the straight-line method (dividing the depreciable cost [less any federal contribution] by the number of years of useful life). Work with the Business Office to identify any discrepancies between the useful life estimated for this calculation and the life assumed in the CUNY’s Office of the Controller’s calculation for financial statement purposes [for any given item, the depreciation expense should be consistent].
- A separate capital reserve line should be established which captures the revenues generated by the depreciation expense portion of each rate and from which equipment purchases are made.
- Work with CUNY’s Office of the Controller to obtain the annual interest expense associated with any debt financing for capital equipment with an acquisition cost of $10,000 or more. Include these amounts with the depreciation expense of the related equipment items.
Note: Direct costs do not include unallowable items under federal guidelines such as: entertainment expenses, bad debt, public relations, alcoholic beverages, and goods and services for personal use. Where applicable, any unallowable costs must also be identified and segregated for the calculation of indirect cost rates (see next bullet). See the list of Unallowable Costs outlined in the Uniform Guidance.
- Indirect Costs – for service centers greater than $1,000,000 the College must assess an F&A fee in the calculation of a user rate.
Per OMB’s Uniform Guidance, indirect costs are those that are incurred for common or joint objectives and cannot be identified readily and specifically to a product or service.
The F&A fee is determined by taking the calculated F&A rate times the aforesaid allowable direct costs. The F&A fee may not be waived. All indirect costs used in creating the service center’s F&A rate must be communicated to the RF so that they will be removed from the College’s calculated F&A rate. To calculate the F&A rate:
- Identify the unit-specific indirect (overhead) costs of providing each product/service
- Identify the key indirect activities required to produce each product/service
- Determine who performs the indirect activities and any non-labor costs necessary to perform the indirect activities
- For each item of labor and non-labor cost, determine the most equitable method for allocating the estimated cost between products/services based on a beneficial relationship. Document the basis for any allocation. In many cases, the non-labor costs may simply “follow” the associated labor cost. Possible bases include:
- Allocate the unit-specific indirect costs, using projected (or historical) costs, to each product/service based on the determined allocation statistic. Work with the RF to determine the amounts of indirect costs to be included in the rates.
All direct and indirect costs used in the calculation of User Rates should be identified to a CUNY First department/account code.
- Usage Base - Estimate of the number of products/services to be provided during the year. Usage will be the basis used to determine the rate per unit and the amount charged to users. The use basis must be relevant to the type of product/service being provided. Examples of use basis include man-hours, number of tests performed, items sold, machine hours, etc.
Step 3: Determining User Rates
Service center user rates are determined as follows:
Total Direct & Indirect Costs Usage Base
The result of this calculation is the rate to charge each product/service unit.
Rates may not include costs for future equipment or a build-up of funds for future use. If at the end of a fiscal year the center has an under or over recovery of costs the amount of the variance from breakeven will be incorporated into developing the next year’s rates. When establishing rates any subsidies received should be identified in the rate development process.
Step 4: Applying User Rates
Once rates are approved, the service center is required to notify all users through published User Rate lists made available to all potential users. The center must maintain records to support their billings to all users.
This documentation should consist of:
- the quantity of product ordered
- the quantity of products provided
- the total charge to the users by product type
- the name of the user/account number charged
Service centers should charge users at least monthly. Records must be retained for evidence of the application of uniform, consistent rate equity. The service center is responsible for the collection of all receivables. The Individual handling receivables may not also be responsible for cash receipts. Any receivables not collected are considered to be bad debt and are an unallowable cost to the center and should be absorbed by the Department’s or School’s recovery account as an unallowable expense.
Step 5: Verify the Accuracy of and Document the Rate Calculations
Verify the accuracy of the rate calculations:
- If historical (i.e., previous fiscal year) costs were used as the basis for the calculations, reconcile the total prior year College costs from CUNY First to expenditures recorded in the service center.
- If projected costs were used, reconcile the total costs to the budgets recorded in CUNY First. At a minimum, all costs that were charged/budgeted to the unit’s area should be included in the calculations, with the exception of any unallowable costs (which should be represented as reconciling items).
- Ensure that all cost inputs and formulas are correct.
- Document the Rate Calculations
- Ensure that all assumptions are documented.
- Describe the allocation base used.