Establishing External Sales Rates

Units conducting low risk sales activity on an infrequent basis can use any reasonable method to calculate their external rate that minimally recovers all direct costs, and indirect costs.  Low risk sales activity does not need to have a formal sales rate reviewed by the Internal/External Sales Office prior to conducting the activity. Units conducting low risk sales activity should use this procedure as a guide or contact the Internal/External Sales Office  for assistance.

Develop rates with the following principles in mind:

• Rates charged to external customers must provide as much economic benefit to the University of Minnesota as possible.
• Billing rates should be reviewed and updated each fiscal year to ensure rates are increased if there are increased costs. Revised rates should be provided to the customer 30 days prior to implementation of the revised rates. Best practice is to review and update the rates as close to the fiscal year end as possible.
• Rates charged to external, non-University customers should include overhead costs and be priced so as to not undercut prices found in the public market.
• Rates charged to external customers must be greater than rates charged to internal customers or federal grants for the same activity.

Establish the rate(s)

For units that conduct both internal and external sales, the external sales rate is determined by first calculating the internal sales rate, then adding any overhead costs, other unallowable costs for internal sales, and additional revenue to bring the price in line with the same or similar goods or services provided in the public market. By calculating the internal sales rates first, units identify amounts that would be the direct cost charged to federal grants. The intent of this process is to ensure the University is not undercutting prices found in the public marketplace.

For units that conduct only external sales, follow the process outlined below.

Determine the measurable units for goods or services

The measurable unit may be determined in terms of labor, machine time, or tangible product. Examples of a unit of measurement include: per labor hour, per machine hour, per gallon, per test, etc. For units measured in cost per hour or other measures of time, use productive time/billable hours, not total hours available. Productive (billable hours) time is the total time available, less non-billable time such as time for vacation, sick leave, holidays, breaks, equipment downtime, machine repairs, education/certification, administrative time, any other paid excused time, and meetings. A unit should consult the Internal/External Sales Office for help in determining a measurable unit for good or service. Use UM Form 1843 for rate development.

Determine the annual output, or expected level of activity, for the good or service

Estimate the expected volume (or level of activity) for the good or service provided by using past results or a survey of likely customers.

Determine annual estimated costs directly related to providing the goods or services

All costs included in the sales rate development should be directly attributable to the functions of the sales activity. Generally, operating costs include the items below.

• Salaries and wages (including general admin costs)
• Fringe benefits
• Materials and supplies
• Travel/mileage related to the operation of the external sales
• Consulting and professional services, subcontractors and other outside services
• Depreciation associated with capital equipment
• Non-capital equipment
• Rents and leases of equipment
• Equipment repair and maintenance
• Telecommunication charges
• Prior year deficits and other required adjustments
• Facility costs including: operations and maintenance, debt service, leases, utilities, library services, and building depreciation.

Include salaries of faculty and staff who provide the services, produce the goods or services, manage the sales activity, and provide other administration and support activities.

Include the technical supplies and office supplies related specifically to the sales activity.

Travel/mileage, equipment service contracts, and other actual expenses incurred specifically for the operation of the sales activity should be treated as costs and included in the calculation of the sales rates. Include professional services and special conferences.

Depreciation associated with capital equipment may be included in the rate development. Depreciation expense is calculated in the Asset Management module of EFS. Separate capital equipment and buildings & improvements chartfield strings should be established to account for capital related transactions, see Administrative Procedure: Capital Equipment Acquisition: Internal Sales Organizations.

Donated or transferred equipment is considered to be the equivalent of a cash donation that is subsequently used to purchase equipment. When a unit conducting sales activity receives an equipment donation, it may be depreciated through the sales activity and included in the sales rate. See Administrative Procedure: Non-Monetary Financial Transactions for details on accounting for donated equipment.

Determine the sales activity per unit rate

Calculate the rate by dividing the total annual cost for providing the good or service by the total expected level of activity for the budget year. Total annual operating cost for providing the good or service equals all direct and indirect costs associated with the sales operation. Total level of activity is the total estimated volume of work to be performed in the sales operation expressed as labor or machine hours, CPU time, or units of products or services provided.

Unit Rate = [Total operating costs]÷
[Estimated volume of work (labor hrs, machine hrs, units produced, etc.)]

Prepaid expenses

Included prepaid expenses in the rate as an expense and recorded at the time of use.

Distinctive Goods and Services

Separate billing rates should be developed for distinctive types of goods or services when all of the conditions below are met.

• The sales volume of the good or service is significant.
• The cost of providing goods or services is substantially different from other goods or services.
• The individuals and hours to provide the service are different.

If a unit offers more than one good or service, it may be necessary to assign or allocate costs to the various goods or services offered. Each type of cost must be examined to determine its proper allocation, and the allocation process should be documented in writing.

Determine the competitive price in the public market

The rates for the goods or services should at minimum recover direct costs, and whenever possible recover overhead and any additional revenue to the extent the market allows. Units selling to both external customers and federal grants cannot charge federal grants more than external customers.

Rate Development Worksheets

• UM 1843 - Internal/External Sales Rate Development Template