university of minnesota internal/external sales rate development – advance internal/external sales

University of Minnesota

Internal/External Sales

Rate Development – Advance

Internal/External Sales

http://www.morris.umn.edu/

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•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.

Objectives for Rates

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•Productive Time for Salaries •Productive Time for Equipment•Capital Equipment•Capital Lease •Operating Lease•Partial Assignments

Agenda

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•Surplus & Deficit Balances •Prepaid Expenses•Discounted rates •After Hours rates•Assisted vs. Unassisted rates

Agenda (cont.)

• 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)

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Productive Time - 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

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Billable Hours Calculation - Salaries

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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.

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.

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Billable Hours Calculation - SalariesSalary& 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 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 campusPaid vacation (not available to work) (176) (22 days * 8 hours per day) est. vacation expectedPaid sick time (not available to work) (88) (11 days * 8 hours per day) est. sick expected

Total hours available to work 1728 216 working 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 hoursSalary & fringe 100,000$ Billable hours 1512Salary + Fringe/Billable Hours = Rate per hour 66.14$ Billable Hours (hours worked & invoiced) X 1512

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.

Details in determining hours

Salary & fringe cost recovered


• 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.

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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)

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Billable Hours - SalariesSalary& Fringe recovered using hours paid (2080) vs. hours available to actually work and invoice (billable hours)

Description

Rate based on Hours

Paid - Salary only

Rate based on

Hours Paid

Salary & Fringe


Hours- Salary only

Rate based on Billable Hours

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 - - (216) (216) (1 hour per day * working days)(training, breaks, administration, meetings etc.)Billable hours (estimated volume of work) 2,080 2080 1512 1512

Labor Rate = Salary & fringe/billable hoursSalary & fringe -$ 100,000$ -$ 100,000$ Salary only at .336 fringe rate 74,403$ 74,403$ Hours VarinanceDaysBillable hours 2080 2080 1512 1512 312 15% 39Rate per hour 35.77$ 48.08$ 49.21$ 66.14$ 208 10% 26Billable Hours (hours worked & invoiced) X 1512 X 1512 X 1512 X 1512 104 5% 13

100,000$ 100,000$ 100,000$ 100,000$ Salary & fringe cost recovered 54,085$ 72,692$ 74,403$ 100,000$

Amount not recovered (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.

Definition

Amount desired to recover

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)

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Productive Time Equipment

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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.

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.

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• 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.

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Billable Hours Calculation - EquipmentEquipment recovered using hours available to actually work and invoice (Billable Hours)Billable hours is unique to each individual - develop one schedule per personDescription Operator EquipmentFull year hours paid - Operator of Equipment 2080 2080 (52 weeks * 40 hours per week)100% appt.Paid holidays (not available to work) (88) (88) (11 days * 8 hours per day) FY14 by campusPaid vacation (not available to work) (176) (176) (22 days * 8 hours per day) est. vacation expectedPaid sick time (not available to work) (88) (88) (11 days * 8 hours per day) est. sick expected

Total hours available to work 1728 1728 216 working days

Any other non-billable hours (216) (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 1,512

Labor Rate = Salary & fringe/billable hoursSalary & fringe 100,000$ Equipment Depreciation 25,000$ Total 125,000$ Billable hours 1512 1512Salary + Fringe/Billable Hours = Rate per hour 66.14$

16.53$ Total Rate 82.67$ Billable Hours (hours worked & invoiced) X 1512 X 1512

100,000$ 25,000$ 125,000$ 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.




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)

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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

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Capital Equipment - Example


Useful Life

$100,000 = $20,000 per year

5 years

$20,000 = $13.22 per hour

1512 Hours

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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.


Useful Life

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Capital Equipment - Example


Useful Life

$105,000 = $21,000 per year

5 years

$21,000 = $13.88 per hour

1512 Hours

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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.

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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

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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

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Partial Assignments Hourly RatesSalary& Fringe recovered using (Billable Hours) 100% vs. 75% appt. Billable hours is unique to each individual - develop one schedule per person

Description


Hours 100%


Hours 75%Full year hours paid 2080 1560 (52 weeks * 40 hours per week) 100% appt.Paid holidays (not available to work) (88) (66) (11 days * 8 hours per day) FY15 est. by campusPaid vacation (not available to work) (176) (132) (22 days * 8 hours per day) est.vacation expectedPaid sick time (not available to work) (88) (66) (11 days * 8 hours per day) est. sick expected


Any other non-billable hours (216) (162) (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 1,134

Labor Rate = Salary & fringe/billable hoursSalary & fringe 100,000$ 75,000$ Billable hours 1512 1134Salary + Fringe/Billable Hours = Rate per hour 66.14$ 66.14$ Billable Hours (hours worked & invoiced) X 1512 X 1512

100,000$ 75,000$




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Partial Assignments Hourly RatesSalary& 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


Hours 67%-


Hours 66% Full year hours paid 1539 1394 (52 weeks * 40 hours per week) 100% appt.Paid holidays (not available to work) (65) (59) (11 days * 8 hours per day) FY15 est. by campusPaid vacation (not available to work) (130) - (22 days * 8 hours per day) est.vacation expectedPaid sick time (not available to work) (65) - (11 days * 8 hours per day) est. sick expected


167Any other non-billable hours (160) (167) (1 hour per day * working days)(training, breaks, administration, meetings etc.) (30 minutes a day for breaks)Billable hours (estimated volume of work) 1,119 1,168

Labor Rate = Salary & fringe/billable hoursSalary & fringe 74,000$ 67,000$ Billable hours 1119 1168Salary + Fringe/Billable Hours = Rate per hour 66.14$ 57.37$ Billable Hours (hours worked & invoiced) X 1119 X 1050

74,000$ 67,000$




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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).

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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..

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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

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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

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Rate Development (cont.)

Determine the per-unit rate

Direct costs +/- allowable surplus or deficitPer unit rate =

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

Estimated volume of work

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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

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Prepaids• Maintenance Contracts• Service Contracts• Consulting or Professional Services• Insurance• Materials for Resale, Stores and Supplies• Postage• Subsidies applied in advance

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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

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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.

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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)

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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

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After HoursEquipment 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)

Description Operator Equipment Operator EquipmentFull year hours paid - Operator of Equipment 1560 1560 520 1040 (52 weeks * 40 hours per week)100% appt.Paid holidays (not available to work) (66) (53) (22) (35) (11 days * 8 hours per day) FY15 by campusPaid vacation (not available to work) (132) (106) (44) (70) (22 days * 8 hours per day) est. vac. expectedPaid sick time (not available to work) (66) (53) (22) (35) (11 days * 8 hours per day) est. sick expected

Total hours available to work 1,296 1349 432 899 162 54 working days

Any other non-billable hours (162) (162) (54) (54) (1 hour per day * working days)(training, breaks, administration, meetings etc.) (30 minutes a day for breaks)Billable hours (estimated volume of work) 1,134 1,187 378 845

Labor Rate = Salary & fringe/billable hoursSalary & fringe 75,000$ 25,000$ Equipment Depreciation 15,000$ 10,000$ Total 90,000$ 35,000$ 125,000$ Billable hours 1134 1187 378 845Salary + Fringe/Billable Hours = Rate per hour 66.14$ 66.14$

12.64$ 11.83$ Total Rate 78.77$ 77.97$ 78.49$ Billable Hours (hours worked & invoiced) X 1134 X 1187 X 392 X 845

75,000$ 15,000$ 90,000$ 25,000$ 10,000$ 35,000$ 125,000$ 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.


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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

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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)

Description Operator

Equipmen Operator

EquipmenFull year hours paid - Operator of Equipment 1820 1560 260 520 (52 weeks * 40 hours per week)100% appt.Paid holidays (not available to work) (77) (66) (11) (22) (11 days * 8 hours per day) FY15 campusPaid vacation (not available to work) (154) (132) (22) (44) (22 days * 8 hours per day) est. vac. Exp.Paid sick time (not available to work) (77) (66) (11) (22) (11 days * 8 hours per day) est. sick exp.

Total hours available to work 1,512 1296 216 432 189 27 working days

Any other non-billable hours (189) (189) (27) (27) (1 hour per day * working days)(training, breaks, administration, meetings etc.) (30 minutes a day for breaks)Billable hours (estimated volume of work) 1,323 1,107 189 405

Labor Rate = Salary & fringe/billable hoursSalary & fringe 87,500$ 12,500$ Equipment Depreciation 18,750$ 6,250$ Total 106,250$ 18,750$ 125,000$ Billable hours 1362 1102 189 405Salary + Fringe/Billable Hours = Rate per hour 64.24$ 66.14$

17.01$ 15.43$ Total Rate 81.26$ 81.57$ 81.26$ Billable Hours (hours worked & invoiced) X 1362 X 1102 X 189 X 405

87,500$ 18,750$ 106,250$ 12,500$ 6,250$ 18,750$ 125,000$ 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.


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Questions?

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

This presentation is posted on the site.

university of minnesota internal/external sales rate development – advance internal/external sales

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