ADMINISTRATIVE PROCEDURE

Establishing External Sales Rates

Applying risk base factors to establishing external sales rates

Units conducting low risk sales activity on an infrequent base can use any reasonable method to calculate their external rate that recovers direct costs, and whenever possible recovers overhead.  Low risk, infrequent sales activity does not need to have a formal sales rate reviewed by the External Sales department in the Controller’s Office. Units conducting low risk sales activity on an infrequent base can use this procedure as a guide or can contact the External Sales department for assistance if they so choose. To determine if the sales activity is low, medium, or high risk, complete the on-line External Sales Risk Assessment.

Introduction

The purpose of these guidelines is to provide best business practice when establishing external sales rates.  External sales rates should take into account all direct and indirect costs of providing the goods and services as well as the competitive pricing of such items in the public market.  Pricing should always at minimum recover direct costs, and whenever possible recover overhead and profit to the extent the market allows.  Departments selling to both external customers and federal grants and contracts cannot unfairly charge federal grants and contracts.

Develop the Sales rate with the following principles in mind:

  • Rates charged to external customers should provide as much economic benefit to the University of Minnesota as possible
  • Billing rates should be reviewed and updated each fiscal year.
  • Rates charged to external, non-University customers should include overhead costs.
  • Rates charged to external customers should be greater than rates charged to internal customers or federal grants for the same activity.

Establish the Rate

NOTE: An external sales rate is determined by first calculating the internal sales rate, then adding any overhead, other unallowable costs for internal sales, and additional revenue to bring the price in line with the same or similar good or service in the public market.  By calculating the internal sales rates first, units identify amounts that would be charges to federal grants and contracts.

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 copy, per gallon, per test, etc. For units measured in cost per hour or other measures of time, productive time and not total hours available should be used in the cost calculation. Productive time is the total time available, less non-billable time such as time for vacation, sick leave, holiday, breaks, equipment downtime, machine repairs, education/certification and meetings. A unit should consult the Internal/External Sales Office for help in determining a measurable unit for good or service.

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:

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

Salaries and wages - Include those of faculty and staff who: provide the services; produce the goods or services; manage the sales activity; and provide other administration and support activities.

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

Travel, 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 will be calculated in the Asset Management module. 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.

Determine the amount of any subsidy:

An external sales activity should generally not be undertaken if it cannot be sustained as a self-supporting activity. In situations where University facilities would otherwise sit idle, incremental revenue may be desirable even if overhead expenses are not fully recovered. Many University facilities carry fixed overhead costs that will be incurred regardless of how a facility might be used with an external customer base. Note that if a subsidy is needed to offset overhead costs, best business practice would be to first transfer the overhead costs to the sales accounting structure and then subsidizing the overhead costs through another transfer into the sales accounts. This methodology provides transparency of the total cost of doing business.

Determine the sales activity per unit rate:

In its simplest form, a sales rate is cost-based. This rate is calculated by dividing the total annual cost for providing the good or service (net of any subsidy) by the total expected level of activity for the budget year. Total annual operating cost for providing the good or service equals all costs directly and indirectly associated with the sales operation, minus any subsidy. 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 - subsidy]
[Estimated volume of work (labor hrs, machine hrs, units produced, etc.)]

Distinctive Goods and Services

Note: Separate billing rates should be developed for distinctive types of goods or services when both of the conditions below are met:

  • The sales volume of the good or service is significant.
  • The cost of providing the good or service is substantially different from other goods or services.

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 always at minimum recover direct costs, and whenever possible recover overhead and  any additional revenue to the extent the market allows.  Departments selling to both external customers and federal grants  cannot     charge federal grants more than external customers.

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