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Policy and Procedure ManualChapter 340, Rates, Recharges and Sales Activities Responsible Department: Office of Resource Management and Planning This section establishes a mechanism for defining, establishing, and closing recharge (self-supporting or service) activities and for developing, requesting, and implementing the rates for these activities. These policies and procedures provide for consistent operational practices among the various recharge activity units, to ensure compliance with both university accounting policies and government regulations, including the Office of Management and Budget (OMB) Circular A-21 and the 1995 Cost Accounting Standards (CAS) and to ensure equitable treatment of all clients regardless of funding source. Additional definitions for terms and acronyms used in this policy can be found at http://accounting.ucdavis.edu/refs/glossary.cfm?list=all. A. Direct Costs--costs that can be specifically identified with a recharge activity and that can be directly assigned to such activities relatively easily and accurately. All direct costs must conform to generally accepted accounting principles (GAAP). B. Recharge Activities--self-supporting activities that provide specific, ongoing, and repetitive goods or services to a number of campus units or projects, and recover the cost of providing these services from the unit served on a "fee basis." A. Recharge activities develop rates to consistently and equitably recover the full direct and when appropriate, indirect costs. Recharge units are expected to operate on a breakeven basis. Recharge activities should not be set up to provide goods or services that are readily available from outside sources. However, a recharge activity may be established if there are overriding economic, ethical or other institutional issues to support the need for the university to provide this service. B. Recharge rates must be approved by the dean, vice chancellor, vice provost, and by the campus rate group (if applicable), and clients must be properly notified before rates can be charged. All rates must be reviewed at least every three years. (See IV.A below.) C. To be a recharge activity, the proposed activity must meet all of the following criteria: 1. There is an on-going demand by more than one department or unit for the service or activity that cannot effectively be met by an alternative source or a non-university provider. 2. The service or activity is identifiable and can be quantified as a measurable unit. 3. Separate costs and budget can be clearly defined for the service or activity. D. The following activities are not considered recharge activities and therefore are not subject to this policy: 1. Normal and customary services of campus general administration, institutional support services or student services (e.g., central accounting and budgeting services) generally supported by core university or campus fund sources. 2. Activities that involve a one-time distribution or transfer of expense. Expenditure transfers are described in Business & Finance Bulletin A-47, Section V. 3. Charges for a service that cannot be readily calculated on a per-unit or per-hour basis, or where the service is not offered on a recurring basis to more than one client. See Section 340-21 for this type of charge. A. Review and Approval of Rate Proposals Recharge rate proposals are required for all recharge actions including new rates, changes to previously approved rates or termination of rates. Factors such as large surplus or deficit, significant rate increases or changes in business practice could trigger reviews outside the three-year cycle. The dean, vice chancellor or vice provost is responsible for reviewing and endorsing all rate actions. 1. Authority is delegated to the dean, vice chancellor or vice provost for approving, in writing and without central campus review, the following rate actions: a. New rates charged exclusively to non-university clients or changes to previously approved rates charged exclusively to non-university clients. b. Rate increases that do not exceed campus budget planning guidelines issued annually by the Office of Resource Management and Planning and do not involve a change to the pricing rationale. Rate changes must be based on a department's actual or anticipated costs regardless of the planning guidelines. c. Proposals to hold rates constant. d. Rate decreases. e. Rates that are subject to a specific external review process such as student housing rates that are subject to UC Office of the President (UCOP) and Regental review processes; hospital clinical research rates that are typically used in clinical trials or in research projects for both federal and non-federal clients that are based on the appropriate federal Medicare reimbursement rate; hospital clinical rates for patients that are subject to other Regental and external regulatory review; Mutant Mouse Regional Resource Center (MMRRC) rates that are administered by the national MMRRC program as defined by the terms of the National Institute of Health base grant for this program. The Office of Resource Management and Planning and the General Accounting Office must be notified of all rates approved directly by the dean, vice chancellor or vice provost. 2. Authority is delegated to the Assistant Vice Chancellor Budget Resource Management for approving rates reviewed and endorsed by the Campus Rate Group as follows: a. New rates charged to campus departments or federal contracts and grants. b. New rates or changes (increases or decreases) to existing rates for services that are mandated or for which the department or unit has a monopoly as a service provider to the campus. c. Rate proposals that do not meet criteria for dean and vice chancellor approval, including adjustments involving changes in pricing rationale and rate increases exceeding planning guidelines. 3. Rate proposals should contain the appropriate forms and documentation. (See http://www.ormp.ucdavis.edu/budget/proc/rate/index.html for information regarding proposals.) The review and approval by the Office of Resource Management and Planning and the Campus Rate Group requires a minimum of 60 days from the submission of the rate proposal by the dean, vice chancellor or vice provost. Retroactive rate approvals are generally not allowed. B. Rate Development 1. Recharge rates are the estimated total costs of providing the recharge activity, divided by the estimated number of units to be provided (see http://www.ormp.ucdavis.edu/budget/proc/rate/index.html). Generally rates are computed using estimated costs and number of units to be provided for a specified (usually future) fiscal year. a. Rates should be developed to achieve a break-even financial performance for the activity. b. Rates must cover the full direct cost of the operation. c. Rates must be reasonable. Rates are considered reasonable if the nature of the costs and the related goods or services acquired or applied to provide the self-supporting service reflect the action that a prudent organization would have taken under the circumstances prevailing at the time the decision was made to incur these costs. d. Rates must be charged consistently to all university clients and cannot discriminate for or against any university clients. The use of special rates, such as for high volume work or less demanding non-scientific applications of an activity is allowed, but must be equally available to all clients who meet the specified criteria. e. Rates may be subsidized, but the subsidy must be applied against the full direct costs of the rate and be consistently applied to all university clients. The full costs for the activity must be recorded in an identifiable account. f. Rates charged by campus vivaria for animal health care or animal husbandry services must comply with the National Institute of Health (NIH) "Cost Analysis and Rate Setting Manual for Animal Research Facilities" (the NCRR Manual - http://www.ncrr.nih.gov/newspub/CARS.pdf) and all campus rate policies. 2. Direct Costs Direct costs must be allowable, reasonable, identifiable, and reasonably allocable to providing the service or activity or administering the recharge activity, and consistently treated in like circumstances. a. Allowable Costs Costs that can be included in rate development are: 1) Salaries, wages and benefits of personnel directly related to providing the recharge activity, maintaining equipment used in the recharge activity, or directly administering the recharge activity. 2) Supply costs directly related to providing or directly administering the recharge activity. Examples include chemicals, glassware, duplicating, data processing, and professional certifications. 3) Maintenance, repair and non-capital alteration costs of the equipment used in the recharge activity. 4) Equipment depreciation (amortization) and depreciation of capitalized improvements excluding equipment purchased by federal funds or those claimed as cost sharing on a federal project. (See IV.3 below.) 5) Lease costs if the recharge activity uses non-University owned space. If only a portion of the leased space is used by the recharge activity, only the proportionate cost as determined by the percent of useable square feet may be included. Any building maintenance, janitorial or other operation and maintenance costs not covered by the lease costs may be included. b. Unallowable costs Costs never allowed include: 1) Acquisition costs of inventorial equipment purchases. 2) Total cost of capitalized renovations or leasehold improvements when already included in the University's Facilities & Administrative (F&A) Rate Proposal. 3) Operation and maintenance charges for use of space eligible for state operations, maintenance, and plant (OMP) support including building depreciation or utilities. Costs not allowed when charging federal funds (including federal flow-through funds) include: 1) Administrative costs not related to specifically administering the recharge activity or incidental direct administrative costs (annual individual effort less than 5%). 2) Advertising costs. 3) Bad debts. 4) Contingency or expansion reserves (i.e., reserve for improvement). 5) Entertainment. 6) Fines and penalties from violations of, or non-compliance with, any governmental laws or regulations. 7) Interest expense, including the Short Term Investment Pool (STIP). 8) Any cost already paid for by the federal government including depreciation for equipment purchased with federal funds. 9) Exceptional charges that did not occur through the normal course of business (e.g., costs related to non-recovery of recharge income due to the department not billing recharge clients in accord with the university recharge billing policies). In the event that the federal unallowable cost exclusions create a significant impact for the recharge activity, different rates (a "federal" rate and a "non-federal" rate) for the same service can be proposed to accommodate recovery of the non-allowable costs from non-federal clients. The federal rate must be the lowest rate charged. 3. Depreciation of Equipment All equipment used in a recharge activity must be properly recorded in the Capital Asset Management System (CAMS) module in DaFIS. This system is used for both financial reporting and governmental reporting purposes. (See IV.B.6, below.) a. Equipment should be depreciated using a straight line amortization with no salvage value. To determine the depreciation period, use the Useful Life Schedules issued by the Office of President. If there is a significant difference between the asset life reflected in these tables and the unit's experience of the useful life of this equipment, then the unit's experience of the asset life should be used to reflect the actual life of the asset. If the tables are not used, this should be noted in the rate forms with an explanation of why a different useful life was used. b. The depreciation expense should be included as a direct cost in the rate development and charged as an expense to the recharge activity. Depreciation must be charged in the fiscal year (and month) of acquisition. If an asset's acquisition date and the date the equipment is placed in service are significantly different (period greater than 10% of the asset's useful life), contact the General Accounting Office for guidance on booking depreciation expense. c. Equipment depreciation for equipment purchased using a federal fund source or equipment that is identified as cost sharing to a federal project; and equipment depreciation costs for equipment that was previously allocated to a facilities and administrative indirect cost pool in the last Facilities and Administration rate proposal submitted to the federal government cannot be included as a direct cost in the recharge rate. d. Equipment replacement through the Replacement and Renewal Fund is accomplished by including depreciation costs in recharge rate development (see http://www.ormp.ucdavis.edu/budget/proc/rate/index.html, Section H, and IV.C below). 4. Purchase of Equipment (Acquisition) a. The acquisition cost of capital equipment used for a recharge activity cannot be included as a direct cost in the recharge rate. b. Federal guidelines do not allow the purchase (acquisition) cost of equipment to be charged directly to the recharge activity. Purchase costs of equipment must be funded from other sources including equipment reserves, gift funds, general funds, or other unrestricted fund sources. c. Interest associated with the purchase of such assets (e.g., interest component of a capital lease) is allowable when it satisfies the following criteria: 1) Interest must be paid to outside third party. 2) The equipment must have been acquired on May 8, 1996 or after. 3) For acquisitions prior to May 8, 1996, the purchase price of capitalized equipment must be $10,000 or greater. 5. Donated Equipment Donated equipment is considered to be the financial equivalent of a cash donation that is subsequently used to purchase equipment. When a recharge activity receives an equipment donation, the equipment may be depreciated as a direct cost of the recharge activity. The donated asset must be properly identified in CAMS as a recharge activity asset. 6. Capitalization Threshold Effective July 1, 2004, the equipment capitalization threshold was raised from $1,500 to $5,000. Any equipment received on or after July 1, 2004, costing less than $5,000 must be expensed in the year of acquisition. Recharge activity assets received prior to July 1, 2004 with an acquisition cost between $1,500 and $5,000 may continue to be included in recharge rates as depreciation until the asset has been fully depreciated. C. Reserves for Replacement and Renewal 1. The General Accounting Office will establish a reserve for replacement and renewal fund for equipment expenses associated with a recharge activity. The replacement and renewal reserve fund (76xxx) should be used to fund the future replacement of expended assets needed for the recharge activity. 2. A decommissioned recharge activity may use its equipment replacement reserve fund to offset any recharge activity operational deficit. Balances in the reserve fund beyond deficit coverage may be retained by the department with Office of Resource Management and Planning approval. D. Reserve for Improvement (RFI) 1. A Reserve for Improvement is established to set aside funds for planned future uses other than those in the reserve for replacement and renewal. Examples of the uses of an RFI include: a. Repayment of working capital loan. b. Purchase of additional equipment. c. Purchase of upgraded/enhanced equipment. d. Capital projects. e. Major maintenance and repairs (not annual). f. Renovations. 2. RFI costs are not allowable for federal clients and will be rebated by the General Accounting Office. Additional information is available in the UC Accounting Manual. E. Non-University Clients 1. Recharge activities shall not be provided to non-university clients except as follows: a. The recharge activity is related to the University's mission of teaching, research and public service (for example, the work will yield data to ongoing University research or will provide students with training in specialized techniques), and services to University clients will not be impaired as a result of the sale. b. The products and services are specialized or unique and are not reasonably available elsewhere. c. The products or services are primarily for the convenience of students, employees, or patients (e.g., bookstore, food service, computer store, student housing). 2. Non-university differential a. University policy requires non-university clients to pay at least full University costs, both direct and indirect. Recovery of indirect costs shall be accomplished by applying the non-university differential (NUD) rate to the direct cost-based recharge rate. All recharge activities are subject to the NUD except as follows: 1) Fees for professional services rendered by members of the faculty, including clinical activities directly associated with the academic mission. 2) Fees established by auxiliary or other service enterprises that already pay full University costs, both direct and indirect, for all goods and services received from the campus in support of the activity. 3) Market-based prices for research by-products, where locally prevailing commercial rates determine the price. (e.g., sale of agricultural by-products or surplus animals). 4) Ticket sales to the general public. b. The departmental administration component of the NUD is returned to the department (recorded in the same account that records the income) and may be used at the discretion of the department for general administration costs, equipment purchases or other operating expenses. The balance of the NUD is retained by the central campus. c. Under some special circumstances, a recharge activity that does not have federal clients may be allowed to use a minimum NUD (no less than the general administration component of the NUD rate) if there is a clear demonstration that the sale of the product or service directly benefits the research mission and the application of the full NUD would have a detrimental effect on the recharge unit's ability to realize the research benefits. Authority to approve a minimum NUD is delegated to the Assistant Vice Chancellor Budget Resource Management with endorsement by the Campus Rate Group. d. NUD rates and procedures are available at http://www.ormp.ucdavis.edu/budget/brm/rate/index.html. 3. Mark-Up to Non-University Clients A recharge activity may charge a mark-up rate in excess of full direct and full NUD costs to one or more non-university clients. The surplus revenue generated by a mark-up should generally be transferred out of the recharge activity's operating fund to a reserve fund at least annually and may be used in any manner that supports the recharge activity and complies with other university policies. If the revenue generated by the mark-up is used to subsidize allowable costs, it may be retained and utilized within the recharge activity's operating fund. Contact General Accounting to setup accounting mechanisms to manage fund balances. 4. Sales tax is not assessed on recharge sales or services. Questions regarding sales tax should be directed to Accounting & Financial Services. F. Managing a Recharge Activity 1. Budgets All recharge activities must have a base budget that reflects the projected revenue and expense for the activity. The base budget must be revised at the end of each year to reflect the anticipated revenue and expenditures for the following year. At least twice a year, the current year budget for the activity should be reviewed and adjusted when necessary to reflect current year projected financial activity. 2. Billing Billing for recharge activities is required to comply with Section 340-20. 3. Deficits/Surplus A recharge unit shall not maintain a large deficit (a general ledger fund balance that is deficient by greater than 30 days operating expense generally calculated as a rolling 12-month average) or a large surplus (a general ledger fund balance that is positive by greater than 30 days operating expense generally calculated as a rolling 12-month average). An average balance can be recalculated if the balance is distorted due to seasonal fluctuations. a. The department is responsible throughout the year for reviewing activities, monitoring balances and taking actions to avoid deficits or surpluses exceeding current guidelines. Accounting & Financial Services or the Office of Resource Management and Planning will notify the dean, vice chancellor, or vice provost at year-end if the activity exceeded campus guidelines. The dean /vice chancellor/vice provost's office must work with the recharge activity to submit a plan to Accounting & Financial Services within three months of notification, to clear a large deficit or surplus. b. The plan must be reviewed and approved by the dean, vice chancellor or vice provost and should eliminate the surplus or deficit within three years. c. If the plan requires a rate change, a rate change proposal must be submitted consistent with the rate review policies described (see IV.A above). 4. Inventory If the recharge activity supplies a product (e.g. the goods purchased for "resale"), the recharge activity managers should contact the General Accounting Office for more information on the accounting requirements and responsibilities for this type of account. (See Section 350-60.) 5. General Fund Recharge Activities Recharge units that record financial activity to the general fund (19900) are a special type of recharge activity. New general fund recharge activities or significant changes to existing general fund recharge activities are generally not allowed. Existing general fund recharge activities are subject to all of the recharge activity policies and in addition must adhere to the following: a. All 19900 recharge units (regardless of volume) must have a permanent budget approved by the Office of Resource Management and Planning. b. Incremental funding provided to general fund recharge activities for employee benefits, merit, promotion or range adjustments will be withdrawn annually by the Office of Resource Management and Planning. c. Equipment depreciation is not allowed. 6. Decommissioning a Recharge Activity When a recharge activity ceases to operate, the unit must contact the General Accounting Office to discuss disposition of remaining balances. The Office of Resource Management and Planning must also be notified in writing of the change. G. Conflict Resolution and Policy Exceptions Conflicts between the recharge activity and its client(s) should be resolved by the department heads and the appropriate dean, vice chancellor or vice provost. The Office of Resource Management and Planning is available for consultation throughout the conflict resolution process. If the conflict remains unresolved, it will be forwarded for review to the Provost and Executive Vice Chancellor (PEVC) or the PEVC's designee. The PEVC may grant exceptions to policy or to specific provisions of policy when such exceptions can be fully justified. Exceptions to policy will be documented in writing. UC Davis specific information and materials can be found at the Office of Resource Management and Planning Web site (http://www.ormp.ucdavis.edu/budget/proc/rate/index.html). A. Office of the President Business and Finance Bulletins: 1. A-47, University Direct Costing Procedures. 2. A-56, Academic Support Unit Costing and Billing Guidelines. 3. A-59, Costing and Working Capital for Auxiliary and Service Enterprises. C. UCD Policy and Procedure Manual: 1. Section 330-05, Business Contracts. 2. Section 330-24, Budgeting for Employee Benefits. 3. Section 330-55, Departmental Cashiering Operations. 4. Section 340-09, Sales and Reimbursement of University Supplies and Services. 5. Section 340-20, Billing Procedures of Service Activities. 6. Section 340-21, Service Agreements between Campus Units. 7. Section 350-60, Management of Supply Inventories. D. OMB A-21, Cost Principles for Educational Institutions. Copyright © 2006 The Regents of the
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