Service Centers

1
Service Centers
2
Service Centers

• NCURA Region V
• Spring 2008 Meeting
• May 6th, 2008

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What is a Service Center?

• An operating unit providing services, or products
  to users principally within the University for a
  fee.

4
Am I a Service Center?

• The service or product may be a service center
  depending upon the following criteria
• University Policies and Procedures
• OMB Circular A-21
• Universities Cost Disclosure Statement (DS2)

5
Characteristics

• A measurable unit of output can be readily
  determined.
• Can you define what you are going to produce?
• The amount of product or Service can be measured
  easily and accurately.
• Can you measure usage?

6
Characteristics Continued

• Individual accounts can be billed for products or
  services based upon their actual usage
• Can you bill on a regular basis to recover costs?
• Monthly (Recommended)
• Quarterly

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Characteristics Continued

• And operation may not function as a service
  center if it cannot
• Determine an actual usage in measurable units of
  output, or
• If monthly (periodic) billing cannot be made

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Service Centers

• Federal Regulations

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Federal Regulations

• Service Center activities can result in charges,
  directly or indirectly, to federal grants and
  contracts at the University.
• Because the University receives Federal funds, it
  must comply with the following
• Office of Management and Budget (OMB) 2 CFR 220
  (Circular A-21)
• Cost Accounting Standards (CAS)
• Subsequent Regulatory or Statutory Requirements
  Audit Findings

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OMB Circular A-21

• Section J.47
• Recipients of federal funds are not to recover
  more than cost (no profit motive) and
• They are not to discriminate in the price of
  services charged to government users and non
  government users.

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Cost Accounting Standards (CAS)

• CAS Standards 501, 502, 505, 506
• These four standards pertain to
• Consistency in estimating, accumulating, and
  reporting costs
• Consistency in allocating costs incurred for the
  same purpose
• Treatment of unallowable costs
• The cost accounting period

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Service Centers

• Who are the Service Center users?

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Who are the Service Center Users?

• Internal Users existing under the University
  umbrella including academic, research,
  administrative and auxiliary areas which purchase
  services to support their work at the University.
• University Departments
• University Sponsored Programs

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Service Center Users Continued

• External Users organizations or individuals
  outside of the University umbrella.
• Industry
• Also includes any members of faculty, staff or
  students acting in a personal capacity.

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Service Centers

• Recovery Requirements

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Recovery Requirements

• Nondiscriminatory Rates
• All internal users will be charged at the same
  rate for the same level of services or products
  purchased in the same circumstances.
• External customers may be charged a higher rate
  than internal customers provided federal funds
  are not involved.
• Billing Period
• Services should not be billed until the service
  has been rendered.
• Must follow the University fiscal year.

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Recovery Requirements Continued

• Breakeven Concept
• No significant profit or loss as a result of
  charging users for the services provided in any
  particular period.
• Operating surplus or deficit must be factored
  into the following years rate calculation.
• Fund balance in the operating account less
  working capital is used to determine the surplus
  or deficit.

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Recovery Requirements Continued

• Working Capital
• Funds that are accumulated in excess of actual
  cost in order to fund future operating
  expenditures.
• Good business practices require working capital
  to manage cash flow.
• The Service Centers working capital should not
  exceed 60 days.
• Working capital is equivalent to 2 months of
  budgeted expenses.

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Recovery Requirements Continued

• Unallowable Costs
• May not be included in the rate calculation.
• Alcohol
• Entertainment
• Refer to section J of Circular A-21 for
  additional unallowable expenses.

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Service Centers

• Components of Service Center Rates (Budget)

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Components of Service Center Rates (Budget)

• All allowable costs of a Service Center will be
  used in establishing user rates, and will be
  budgeted in and expended through one operating
  account.
• The budget will be determined using the standard
  guidelines established by University policy and
  procedures and the Cost Accounting Standard
  guideline.

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Components of Service Center Rates (Budget)

• Generally Include
• Salaries and Wages
• Fringe Benefits
• Supplies and Materials
• Other Costs
• Repairs and Maintenance
• Equipment Depreciation
• Carry forward surpluses or deficits

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Salaries And Wages

• Base salary and fringe benefits of employees
  working in the Service Center.
• Administrative Staff - based on percentage of
  effort applied to Service Center activity versus
  other University activities.
• Must be direct involvement.
• Must be supported by position questionnaire.
• Include anticipated raises for employees in the
  upcoming year.

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Salaries Wages Continued

• If faculty salaries are to be included in user
  rates, they will need to be budgeted for and paid
  from the service center operating account.
• Must be supported through Time Effort reporting.

25
Supplies and Materials

• Supplies and materials costs necessary for the
  operation of the Service Center.
• Office supplies if used solely for the operation
  of the Service Center.
• Make sure that all supplies and materials are
  clearly identifiable to the Service Center.
• Avoid over-accumulation of inventory.

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Other Costs

• Must be directly allocable to the Service Center.
• Travel
• Rental and service contracts
• Special conferences related specifically to the
  Service Center
• Professional services
• Communications

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Equipment and Depreciation

• Capital equipment value equal to 5,000 and
  greater with a useful life more than two years.
• Depreciation expense (not acquisition cost)
  should be captured through the Service Center
  rate.
• Service Centers can also include depreciation on
  buildings and non-structural improvements in the
  Service Center rate.

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Equipment and Depreciation

• Reserve Account
• If the Service Center includes equipment
  depreciation in the rate, the asset is to be
  placed in a reserve account and any transactions
  associated with the asset (i.e. loan payment,
  depreciation recapture) must be recorded in this
  account.

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Service Centers

• Rate Development

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Rate Development

• The use of market prices to establish billing
  rates for internal customers is not appropriate
  in that the market prices usually include a
  profit.
• It may, however, be appropriate for external,
  non-federally funded customers.

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Rate Development

• The difference between the internal rate and
  external rate (profit) must be accounted for
  separately by the Service Center.
• The profit is not to be used as working capital
  or to offset future rates, but is to be used to
  replenish equipment. (Reserve Account)

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Rate Development

• Service Centers that provide multiple services
  may not subsidize the cost of one service by
  charging excessive rates on another service.

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Rate Development

• Define Good or Service to Sell
• Motor Pool Vehicle rentals
• Tick Rearing Ticks
• Microbiology Slides
• Determine Customers
• Internal
• External
• Need to estimate number of customers

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Rate Development Continued

• Service Center Rate cost per unit of output to
  recover expenses.
• Budgeted Expenses /- Prior Year Under/Over
  Recoveries
• Budgeted Level of Activity (Usage Base)

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Rate Development Continued

• Usage base is the volume of work expected to be
  performed as expressed in units.
• Labor hours
• Machine hours
• CPU time

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Rate Development Continued

• Example
• Computer costs 100,000 each year to operate.
• Estimated use of 1,500 hours during the year.
• Usage Rate 100,000/1,500 hrs 66.67 per hour.
• Individual uses the computer for four hours
• User charge 4 x 66.67 266.68

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Rate Development Continued

• Most common methods of Usage Base
• Consumption
• Output

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Rate Development Continued

• Consumption
• Expenses are directly proportional to the amount
  consumed.
• Example Hourly Rate

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Rate Development Continued

• Developing an Hourly Rate
• When charging on an hourly basis, the total
  maximum hours available for a full time employee
  is 2080 per year. This would be the starting
  point and adjusted downward for vacation, sick
  leave, etc

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Rate Development Continued

• Example
• Maximum hours available 2,080
• Less Holidays ( 96)
• Less Vacation Sick ( 144)
• Available Hours 1,840

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Rate Development Continued

• Consumption Approach Example
• Machine Shop has annual expenses of 310,000
• of Machinists 31,840 5,520 Total Billable
  Hours
• Consumption Rate 310,000/5,520 56.16 per
  hour.

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Rate Development Continued

• Output
• Total annual expense of the Service Center is
  divided by the total anticipated number of units
  produced per year (e.g. pages printed)

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Rate Development Continued

• Output Approach Example
• Widget Service Center has annual expenses of
  310,000
• Estimated Output 1,000,000 Widgets
• Output Rate 310,000/1,000,000 .31 per
  widget.

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Rate Development Continued

• Review example in supplemental handout.

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Service Centers

• Other Rate Considerations

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Other Rate Considerations

• Service Centers are not required to include all
  costs in the rate, if doing so would create a
  rate that is not reasonable.
• Subsidized by a departmental account
• Any departmental subsidies need to be identified
  as unallowable costs for FA rate calculation
  purposes.

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Service Centers

• Billing Procedures

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Billing Procedures

• Billings
• Should be charged to University accounts via
  University policy. (i.e. CVI)
• External users billed via invoice.
• Must be based upon measured and documented
  utilization which is properly authorized for the
  account charged.

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Billing Procedures Continued

• Invoice
• Must be able to stand alone
• Uninformed person should be able to determine the
  following
• Purpose of the charge (e.g. photocopying)
• How many units (e.g. hours, number of items)
• Amount charged per unit (e.g. .05 per photocopy)

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Billing Procedures Continued

• Billing External Users
• External customer must be asked if service is
  available through the private sector.
• Done to ensure the University is not in
  competition with the private sector. (Tax
  implications)
• Charged full direct costs of the Service Center
  operation.
• Never charged less than the federal government
  and internal users.

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Service Centers

• Potential Pitfalls

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Potential Pitfalls

• Over the years, a pattern of audit findings at
  Universities has emerged that highlights
  potential accounting problems encountered by
  Service Centers.
• These problems pose the risk of financial loss to
  both the individual departments and the
  University.

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Potential Pitfalls Continued

• Inadequate Rate Documentation
• Results from user rates being set arbitrarily
  without regard to the actual cost of providing
  the goods or service.
• User rates must be supported by cost calculations
  based on historical costs and service levels.
• An adjustment for known or anticipated changes in
  service levels or services should be clearly
  documented.
• Estimated rates may only be used in the first
  year of operation.

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Potential Pitfalls Continued

• Failing to Maintain Current Equipment
  Depreciation Schedules.

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Potential Pitfalls Continued

• Failing to Separately Identify Expenses Included
  in the User Rate from Departmental Expenses.
• If you cant demonstrate that the cost was
  incurred, you cant include it in the user rate.
• Also, if you include costs in the user rates, you
  must be able to show that they were paid by the
  Service Center and not included in one of the
  Universities indirect cost pools or from other
  Federal funds.

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Potential Pitfalls Continued

• Failing to Document Clearly the Goods/Services
  Provided
• User invoices that do not carry sufficient detail
  to identify the service provided are subject to
  disallowance.
• It is very important that the customer gets a
  detailed invoice for services provided.

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Potential Pitfalls Continued

• Failing to Identify the Users Source of Funds at
  the Point of Purchase.
• It is important from an auditing standpoint that
  the customer clearly identify what project(s) are
  to be charged at the time of purchase.

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Service Centers

• Questions

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Thank You

• Jeffrey Walters
• 401 Whitehurst
• 405-744-8841
• jeff.walters_at_okstate.edu