Revision
Policy Number: 300-66
Policy Topic: Sales and Service Activities-Establishment and Budgetary Review
Responsible Officer: Associate Vice Chancellor-Resource Planning and Budget
Responsible Office: Resource Planning and Budget
Effective Date: 04/21/2015
Table of Contents
I. Policy Objective and Overview
II. Policy Implementation and Review Responsibility
III. Functional Definitions
A. Categories of Sales and Service Activities
B. Types of Activities
IV. Establishment of a New Sales and Service Activities or Major Re-Budgeting/Rate Restructuring
A. General Overview
B. Other Changes Having a Material Impact on Rates
C. Description of the Steps and Timeline in the Approval Process
V. Responsibility for Annual Budget Review Process
A. Organizational Level Annual Budget Review and Approval Process
B. Description of the Steps and Timeline in the Annual Organizational Level Budget Review and Approval Process for Established Sales and Service Activities
C. Committee on Sales and Service Activities (COSSA) Budgetary Reviews
D. Description of the Steps and Timeline in the Annual COSSA Budget Review and Approval Process
VI. Course Material Fees
VII. Budgetary Principles and Guidelines
A. Principles and Guidelines for Budget Construction and Review
B. Allowable Costs
C. Non-University Affiliate Facilities and Administrative Cost Recovery
D. Mark-Up Factors and Rates
E. Unallowable Costs
F. Surpluses and Deficits
G. Inventory Management
H. Subsidies
I. Asset Acquisitions
J. Outside Consumers and Campus Overhead Recover
VIII. References
Appendices
A. General Terms and Definitions
B. Table of Existing Sales and Service Activities
C. Table of Known Student Fees
D. Non-University Affiliate Facilities and Administrative Cost Rates
E. Determination of Non-University Affiliate Mark-Up Factors and Rate
I. Policy Objective and Overview
Sales and Service Activities are non-profit, campus business enterprises, whose functions are to provide quality services and goods at rates that are reasonable and equitable. These enterprises often have a measurable impact on the campus through their pricing and quality decisions, their charging practices, and their billing methods and cycles. While these Sales and Service Activities have the advantage of being campus based, they are simultaneously constrained by University of California (UC) system-wide and campus policy decisions, such as those related to employee classifications, union contract provisions, salary range adjustments, employee benefits, etc.
This policy is intended to encompass all budgetary and policy aspects of Sales and Service Activities, including the establishment of budgets, rates, cost allowability, reviewing cycles, and full-costing principles. This policy does not apply to Auxiliary Enterprises (e.g., Dining and Housing Services). However, in order to develop an understanding of the relationship between Sales and Service funds and other organizational, unit, or departmental resources, business and financial plans for other funding sources may be required.
Sales and Service Activities are non-profit, campus business enterprises, whose functions are to provide quality services and goods at rates that are reasonable and equitable. These enterprises often have a measurable impact on the campus through their pricing and quality decisions, their charging practices, and their billing methods and cycles. While these Sales and Service Activities have the advantage of being campus based, they are simultaneously constrained by University of California (UC) system-wide and campus policy decisions, such as those related to employee classifications, union contract provisions, salary range adjustments, employee benefits, etc.
This policy is intended to encompass all budgetary and policy aspects of Sales and Service Activities, including the establishment of budgets, rates, cost allowability, reviewing cycles, and full-costing principles. This policy does not apply to Auxiliary Enterprises (e.g., Dining and Housing Services). However, in order to develop an understanding of the relationship between Sales and Service funds and other organizational, unit, or departmental resources, business and financial plans for other funding sources may be required.
II. Policy Implementation and Review Responsibility
The Office of Resource Planning and Budget (RP&B), as part of its role as the campus budget office, is charged with the responsibility of applying this policy to ensure adequate campus oversight over all Sales and Service Activities. This responsibility includes implementing an annual budget and rate review process, making recommendations to resolve conflicts that may arise, and initiating and drafting formal policy and rate recommendations for approval by the Chancellor's Budget Committee. Policy and rate recommendations may include issues which are not formally addressed by this policy but are relevant to the operation of Sales and Service Activities. All questions and correspondence pertaining to this policy are to be directed to RP&B.
The Office of Resource Planning and Budget (RP&B), as part of its role as the campus budget office, is charged with the responsibility of applying this policy to ensure adequate campus oversight over all Sales and Service Activities. This responsibility includes implementing an annual budget and rate review process, making recommendations to resolve conflicts that may arise, and initiating and drafting formal policy and rate recommendations for approval by the Chancellor's Budget Committee. Policy and rate recommendations may include issues which are not formally addressed by this policy but are relevant to the operation of Sales and Service Activities. All questions and correspondence pertaining to this policy are to be directed to RP&B.
III. Functional Definitions
This section defines functional categories of Sales and Service Activities. Section A divides Sales and Service Activities into two distinct functional categories: Academic and Administrative. Section B divides these activities into eight types of goods or services provided.
This section defines functional categories of Sales and Service Activities. Section A divides Sales and Service Activities into two distinct functional categories: Academic and Administrative. Section B divides these activities into eight types of goods or services provided.
A. Categories of Sales and Service Activities
All Sales and Service Activities can be categorized according to their reporting structure.
All Sales and Service Activities can be categorized according to their reporting structure.
1. Academic: Academic Sales and Service Activities reporting to an academic organization via the department (e.g., Chemistry Shop reports to the Dean of the College of Natural and Agricultural Sciences via the Department of Chemistry).
2. Administrative: Activities that are under the purview of a central administrative department (e.g., Facilities Division reports to the Vice Chancellor–Finance and Business Operations). These include Service Enterprises, but, as noted in section two of this policy, not Auxiliary Enterprises.
B. Types of Activities
Sales and Service Activity can also be categorized by the type of goods or services provided. (Refer to Appendix B)
Sales and Service Activity can also be categorized by the type of goods or services provided. (Refer to Appendix B)
1. Campus Support Services: Activities that serve the entire campus and have a major campus-wide impact. They include: Telecommunications, Transportation Services, Mail Services, Printing and Reprographics, and the Storehouse.
2. Institutional and Academic Computing Services: Activities that provide computer time for faculty and student research and student instruction, as well as administrative services to departments and central campus units.
3. Labs/Tests/Assays: Activities that provide a mixture of services and tests for on-campus and off-campus customers and campus contracts and grants.
4. Library Services: Activities, under the jurisdiction of the University Library, covering a wide range of services (e.g., research and copying services).
5. Publications: Activities engaged in the regular publishing of journals, magazines, and books.
6. Sales/Services/Rentals: Activities that provide sales of goods, services, or rentals of goods or space, but do not have sufficient impact to fall with the Campus Support Services category.
7. Conferences and Seminars: Activities that exist for the sole purpose of sponsoring annual or one-time conferences and seminars.
8. Other: Activities that do not fall within any of the above categories.
IV. Establishment of New Sales and Service Activities or Major Re-Budgeting/Rate Restructuring
A. General Overview
All requests to establish a new Sales and Service Activity or for a Major Re-Budgeting/Rate Re-Structuring, as well as any other changes, regardless of the projected sales volume, must be forwarded through the appropriate Dean or Vice Chancellor (VC) to RP&B for review and approval.
B. Other Changes Having a Material Impact on Rates
To clarify, other changes having a material impact on rates and incremental to the annual budget review process should include an RP&B review and approval. This review and approval would be issued after RP&B has performed a rate impact study, examined for compliance with federal costing standards, and agreed to the prudence of the investment and/or change. The study would be used to augment the departmental decision-making process by applying an overall campus perspective.
Other changes that may require an RP&B review and approval include, but are not limited to, the following:
· Use of debt/lease financing for operational or asset purchase activity.
· Changes in chargeability factors, including billable hour modifications.
· Changes in the use of subsidies, such as General Funds.
· Investments in Property Plant and Equipment (PP&E) using other sources of funding
(e.g., PP&E investments in construction costs or trying to obtain a grant) that may
require Recharge relief, should the funding not be obtained in the future.
· Department reorganizations and/or changes in Full Time Equivalency (FTE)
assignments.
· Changes in the depreciable life of an asset.
Failing to have RP&B review and approve any request prior to execution could result in the organization being held responsible for funding the resulting disallowance or cost increase from an alternative fund source. For more on the principles and guidelines applied in the review of requests, refer to Section VII of this policy.
Blank request forms are available on the RP&B Policies and Procedures web page by clicking the Self-Supporting/Auxiliary Enterprises option on the Allocation Policies and Procedures tab, and then selecting the Sales & Service Fund Application line. At a minimum, all requests should include a budget proposal containing a detailed breakdown of proposed expenditures and income, as well as a concise narrative in support of the establishment of the new activity or the need for the Re-Budgeting/Rate Restructuring. This narrative must describe the service(s) to be provided, the need for the service(s), the proposed rate structure, the availability of internal or outside service providers and their rate structure if any, and the primary clients to be served.
C. Description of the Steps and Timeline in the Approval Process
Assuming July 1st is the effective date, the following outlines the steps and timeline for the approval process.
1. (JUL–FEB): The department or organization enters into a consultation process with RP&B to secure input on policies, materials, and guidelines to help facilitate the development of the budget proposal.
2. (JUL–FEB): The department or organization develops a proposal that includes:
a. Description of the nature of the activity/new service or the need for re-budgeting/rate
restructuring; and
b. Budget and rate schedule.
These are forwarded to the respective Vice Chancellor or Dean for review and approval.
3. (MAR): The respective Vice Chancellor or Dean reviews the proposal and documentation for accuracy and to ensure it meets organizational priorities. Once reviewed and approved by the respective Vice Chancellor or Dean, the proposal is forwarded to RP&B.
4. (APR–MAY): RP&B reviews the proposal in terms of the Campus Sales and Service Activities: Establishment and Budgetary Review Policy.
5. (MAY): Department or Organization, upon receiving notification from RP&B of final approval, publishes rate schedule and prepares budgetary entries for processing by RP&B.
V. Responsibility for Annual Budget Review Process
A. Organizational Level Annual Budget Review and Approval Process
After establishment, the budgets, rates, subsidies, deficits, reserves, and compliance with policies for all Sales and Service Activities are reviewed annually at the organizational level. Upon completion of the review, appropriate adjustments must be entered into the Campus Budget and Financial System. A revised rate schedule must then be published no later than 30 days before its effective date.
For the vast majority of Sales & Service Activities, this review at the organizational level completes the annual review process. Submission of a budget proposal by the organization to RP&B is only required when there are significant changes in either the budget or rates. RP&B is specifically authorized, at its discretion, to review any and all Sales and Service Activities, particularly where the activity is deemed to pose a financial risk to the campus.
B. Description of the Steps and Timeline in the Annual Organizational Level Budget and Rate Review and Approval Process for Established Sales and Service Activities
Assuming July 1st is the effective date, the following outlines the sequence of events and time periods for the approval process.
1. (DEC–JAN): RP&B, in conjunction with the annual campus budget process, sends out budget parameters for the upcoming fiscal year, including proposed salary and price increase adjustments.
2. (FEB–MAR): The organization responsible for the oversight of each activity conducts an annual budget and rate review, develops a rate schedule, and prepares budgetary entries for processing.
Note: If the annual review process of an existing activity results in significant budget or rate changes (i.e., major re-budgeting or rate restructuring), or the addition of new services, then the process outlined under Section IV governs the process. RP&B should be consulted early in the process whenever it is determined that significant budget or rate changes may be required.
3. (No later than May 1st): RP&B reviews the budget request, rate schedules, and supporting documentation.
4. (MAY–JUN): The responsible organization enters the budget, publishes a rate schedule, and distributes it to its Customers.
C. Committee on Sales and Service Activities (COSSA) Budgetary Reviews
Activities that typically serve the entire campus and are major providers of the applicable service to the campus, whether mandatory (e.g., Telecommunications) or by user preference (e.g., Physical Plant), and have annual income in excess of $250,000 are subject to annual budgetary reviews by COSSA. The determination of the Sales & Service Activities requiring COSSA review IS made by RP&B on an annual basis.
1. Review Process
COSSA activities are intended to augment organizational and other budgetary review mechanisms by applying an overall campus perspective to the budgetary process. The budgets, rates, subsidies, deficits, reserves, and compliance with policy of the selected activities is reviewed annually by COSSA. Submission of budget proposals should be through the appropriate Vice Chancellor or Dean.
Upon completion of the COSSA review process, recommendations and supporting documentation will be forwarded to the Chancellor's Budget Committee for its review and action. COSSA will inform the respective Vice Chancellor or Dean of the decisions made by the committee. The activity must publish this information to, as appropriate, the campus or its customers the approved each rate schedule no later than 30 days before its effective date.
2. COSSA Membership
COSSA is composed of three standing members, four fixed-term staff members, and two fixed-term faculty members. Exact committee membership is set-forth below:
COSSA is composed of three standing members, four fixed-term staff members, and two fixed-term faculty members. Exact committee membership is set-forth below:
a. Standing Membership: The Associate Vice Chancellor-Resource Planning and Budget (Chair), the Associate Vice Chancellor-Financial Services, and the Director of Audit and Advisory Services comprise the standing members of COSSA.
b. Fixed-Term Staff Membership: Two staff members from administrative or service departments and two staff members from academic departments will be appointed on a rotating basis to serve two-year terms (i.e., one administrative and one academic staff member will be appointed each year). Appointments will be made by the Vice Chancellor-Finance & Business Operations upon the recommendation of the Associate Vice Chancellor-Resource Planning and Budget.
c. Fixed-Term Faculty Membership: Fixed-Term Faculty Membership: The Academic Senate will be given the opportunity to appoint two members, one of whom may be the Chair, from the Senate committee on Planning and Budget to serve staggered two-year terms.
d. Supporting Consultants: The Chief Financial & Administrative Officer (CFAO) from any organization, Financial & Administrative Officer (FAO) and/or department head from any department that has a sales and service activity undergoing COSSA review will be invited to attend any meeting in which the applicable budget proposal is being discussed. The role of the CFAO, department head, and FAO at the committee meetings is to improve the process by being able to respond to specific questions, acting as a conduit between the committee and the activity to secure additional information where necessary and to improve overall communication between the unit head, the department, and the committee. Other individuals may be requested to attend committee meetings when necessary to assist in the review process. The CFAO of an organization or FAO of a unit with activities subject to COSSA review is not precluded from appointment as one of the COSSA staff members.
e. Supporting Staff: Central budget and planning staff will support COSSA in conducting its reviews
D. Description of the Steps and Timeline in the Annual COSSA Budget Review and Approval Process
1. (DEC–JAN): RP&B issues a call letter identifying budget parameters and instructions to participating organizations, departments, and units.
2. (JAN–FEB): Organizations, departments, and units develop budget and rate proposals.
3. (FEB): The proposals are reviewed by the respective Vice Chancellors and Deans and revisions are made as deemed necessary before being submitted to COSSA.
4. (No later than March 1st): Budget and rates are submitted to COSSA.
5. (MAR–APR): COSSA conducts its review and prepares its recommendation.
6. (MAY): Activity proposals and COSSA recommendations are forwarded to the Chancellor's Budget Committee for review and approval.
7. (MAY): Organizations, departments, and units are notified of Budget Committee decisions.
8. (MAY): Organizations, departments, and units prepare budget for RP&B review.
9. (MAY–JUN): Organizations, departments, and units enter the budget, publish the approved rate schedules, and distribute them to customers.
VI. Course Material Fees
For information concerning course material fees, refer to UCR Policy Number 550-25: Course Materials and Services Fees (CMSF) Establishment and Budgetary Review.
VII. Budgetary Principles and Guidelines
A. Principles and Guidelines for Budget Construction and Review
The following principles and guidelines will be applied in the review of requests to establish a new Sales and Service Activity, and in the review of established Activities.
1. The Sales and Service Activity should relate to and enhance the mission of the University.
2. A demand should exist for the product or service on a regular and recurring basis, except in the case of single events, such as a conference.
3. The service should be unique or specialized in nature as opposed to those generally provided by central administrative and support services. For example, if Accounting sought the establishment of a new Sales and Service Activity, it must demonstrate that the proposed new service was somehow unique or specialized in comparison to the service that it provides as part of its core mission. If not, the charge would be an Administrative Cost Recovery (ACR) or a Special Service Agreement (SSA) and, as such, would be governed by the terms defined in the applicable sections of UCR Policy Number 300-02: Administrative Cost Recovery and Special Service Agreements for Central Administrative Services and Land Rent.
4. All reviews will consider the relationship of campus rates to off-campus rates for similar services or goods.
5. All reviews will consider the relationship of the activity and its rates to any existing on-campus operations currently providing similar services or goods.
6. The Sales and Service Activity is required to establish a budget, both permanent (if recurring) and temporary, that reflects its operations. This budget will be entered in the Budget/Financial System under a unique fund number.
7. An authorized faculty member or manager of the department must accept responsibility for the Sales and Service Activity and its budget.
8. The Department Chair or Director and, ultimately, the respective Vice Chancellor or Dean are responsible for the effectiveness of the services provided and the management of all funds involved, especially assuring that any deficits incurred are eliminated as rapidly as possible.
9. As a general rule, all costs incurred as a result of the provision of a service or good should be recharged to the customer. If the Sales and Service Activity is self-supporting, the principle of full cost recovery, recovery of all costs--both direct and indirect, should be followed. If the Activity is to be subsidized, subsidies must be identified and approved in advance. In either case, rates charged should be justified by and consistent with budgeted expenditures.
10.Charges will be related to the cost of goods or services furnished and must provide for the recovery of actual costs, including depreciation.
11.Costs not associated with the Sales and Service Activity may not be charged to Activity operations, unless specifically authorized by RP&B. For example, contract and grant overdrafts cannot be covered with Sales and Service Activity funds.
12.Identical goods and services must carry identical prices, unless there is a need for a dual-pricing structure (e.g., recharges to federal contract and grants). Also,
a. Charges should be based solely upon established and approved rates or prices.
b. All rates or prices must be uniformly applied to all users.
c. Separate rates or prices should be established for each class of goods or services provided.
13.At a minimum, Sales and Service Activities must review their rates annually and adjust them, if necessary, to eliminate surpluses or deficits. Whenever this requires a rate or price change, a plan should be submitted to RP&B indicating how the surplus or deficit will be reduced or eliminated.
14.All planned rate changes should be submitted, with supporting documentation, to RP&B before the effective date of change.
15.All resale inventories recorded at fiscal year-end should be reported in a consistent and accurate manner, based upon actual physical counts. Inventories for resale should be valued at the lower of cost or market.
16.Unless specifically exempted by RP&B, all Sales and Service Activities will follow an accrual accounting system that entails fiscal year-end recording of inventory, accruals, and deferrals as required.
17.Accruals and deferrals recorded at fiscal year-end should be substantiated with adequate documentation.
B. Allowable Costs
1. Direct Costs: Each Sales and Service Activity must include within its operating budget all of the identifiable direct costs related to its operation. These direct costs must be recovered via the Activity rates. Described below are direct costs that are likely to be incurred by a Sales and Service Activity:
a. Salaries and wages and related employee benefits, including vacation accrual and sick leave usage.
b. Supplies and materials.
c. Depreciation of equipment used in the unit, based on the original cost of the equipment only--not replacement cost. To be consistent with the Federal Indirect Cost Rate Proposal, depreciation should be calculated on a straight line basis with no salvage value, using the useful life in the Equipment Useful Life Schedule as issued by the University of California Office of the President (UCOP).
d. Lease costs of non-University owned space. Additionally, any costs for janitorial, building maintenance, and other operations and maintenance costs not covered by the lease should be recovered.
2. There may be some specific circumstances in which the accumulation of reserves for future year expenses, including capital expansion requirements, reserve contingencies, and interest costs may be considered appropriate and in the best interest of the campus community. The accumulation of reserves will be examined and approved by RP&B on a case-by-case basis. The following pricing implication will be taken into consideration:
a. These costs may be recovered by establishing rates or prices at a level in excess of the aforementioned direct costs only if
i. a dual pricing structure is established and utilized or
ii. an annual settlement is made to the federal government for the excess of the
aforementioned direct costs that were charged.
b. The refund is the responsibility of the Sales and Service Activity and is to be included in the rate and budget renewal proposal.
C. Non-University Affiliate Facilities & Administrative Cost Recovery (formerly Indirect Costs)
1. Facilities and Administrative (F&A) Costs: Costs that cannot be directly identified or related to a specific good or service but which represent expenses incurred to support the common or collective objectives of the Sales and Service Activity. These incurred costs may include, but are not limited to:
a. telephone,
b. office supplies,
c. building,
d. equipment,
e. operation and maintenance of plant, and
f. administrative salaries.
2. Recovery of Facilities and Administrative Costs for Sale of Goods and Services: Recovery of F&A costs will be accomplished by the application of the mark-up factor, based upon the current facilities and administrative costs rate negotiated with the federal government.
3. Disposition of Non-University Affiliate Facilities and Administrative Cost Recoveries: Non-University mark-up factors and rates revenues must be transferred to the Chancellor on an annual basis. Departments must ensure that their accounting methodology makes tracking of revenues possible.
D. Mark-Up Factors and Rates
Appendix D details the components of the Non-University affiliated Facilities and Administrative Cost Rates and designates the location and applicable usage of these components. All rates for sales to non-University affiliates must be marked-up by the rates reflected in Appendix D.
1. Components of the Non-University Mark-Up Factors and Rates
a. Federal Grants and Non-University Clients: Sales and Service Activities that charge on-campus federal grants and non-University customers must include all components of the non-University Mark-Up Factors and Rates identified in Appendix E to conform to the federal costing regulations requiring that non-federal customers not be charged less for the same services or products than federal customers.
b. Educational Institutions: Services that are provided to another educational institution require only the general administration component of the non-University Mark-Up Factors and Rates. Sales and Service Activities may add a component for department administration at their option.
c. Non-University Customers: Sales and Service Activities that have only non-University customers and do not charge contracts or grants must include all components of the non-University Mark-Up Factors and Rates, with the exception of the department administration component. Sales and Service Activities may add a component for department administration at their option.
d. Rate Markup Option: At their option, Sales and Service Activities may apply an additional mark-up to rates applying exclusively to non-University customers. Any income resulting from such a mark-up will be retained by the organization, unit, or department.
A summary table is provided in Appendix E: Determination of Non-University Affiliate Mark-Up Factors and Rates.
2. Rates
See Appendix D for Non-University Affiliated Facilities and Administrative Cost Rates.
3. Requests for Reduced Mark-Up Factors & Rates
Academic Sales and Service Activities, through their organization, may appeal to RP&B for consideration of a reduced non-University Mark-Up Factors and Rates. To receive a reduction, the Sales and Service activity must demonstrate that the provision of the service to non-University customers directly benefits its instructional or research program through generation of research data, collaborative research efforts, or instructional opportunities.
a. No reduction will be granted where goods being provided to both on-campus federal contracts and grants and non-University customers.
b. No reduction will be approved that is below the general administration amount.
4. Exceptions to the application of the Non-University Affiliate Mark-Up Factors and Rates
a. Auxiliary Enterprises.
b. Market-based prices, where locally prevailing commercial rates determine the price (e.g., Sale of Agricultural By-Products).
c. Fees for professional services rendered by members of the faculty, including clinical activities associated with the academic mission.
d. Ticket sales to the general public.
e. Sales of goods or services that are of primary benefit to the University or to its students, faculty, staff, or other affiliated entity (e.g., Reprographics Charges to Students for Course-Required Purchases.).
f. Publications: Activities engaging in the regular publishing of journals, magazines, and books.
All the aforementioned exceptions require the advanced approval of RP&B.
E. Unallowable Costs
1. Sales and Service Activities may not recover certain costs when charging federal funds, including federal flow through funds, unless specifically allowed in the award documents. Note that these costs may be recovered from non-federal customers through the application of a dual-rate structure, with the caveat that the federal rate must always be the lowest rate charged.
2. Unallowable costs include the following:
a. Administrative costs not related to the service.
b. Advertising for products/services.
c. Bad debts.
d. Contingency or expansion reserves.
e. Entertainment expenses.
f. Fines and penalties from violations of or non-compliance with any governmental laws or regulations.
g. Interest expense, including Short-Term Investment Pool (STIP) interest paid to external parties related to installment purchases of equipment is allowed if approved by the federal government before the actual acquisition of the equipment.
h. Any cost already paid for by the federal government either directly or through indirect cost recovery.
F. Surpluses and Deficits
1. Projected deficits or surpluses must be included as a separate line-item reduction from or addition to expenses in the subsequent fiscal year budget. In exceptional cases where deficit recovery could cause severe rate fluctuations, approval may be granted by RP&B to eliminate the deficit or surplus over a period of up to three fiscal years.
2. A Sales and Service Activity may set the rates that it charges to external customers to generate income above costs and Administrative Cost Recovery. Such surpluses may be used in any manner which supports the Activity, including using the surplus to subsidize the cost charged to campus customers, paying for unallowable costs, or purchasing equipment.
G. Inventory Management
The principles that follow apply to resale inventories:
1. The cost of maintaining an inventory must be recovered through a mark-up on the costs of goods sold and/or for services performed.
2. Inventories should be maintained at the minimum level necessary to meet customer needs. Items should only be placed in inventory where usage is repetitive and/or there is economic advantage which offsets the cost of storage, such as, interest or lost opportunity costs, space, labor, etc.
3. Stock selection must be monitored on a regular and continuing basis to ensure that use patterns qualify the item for continued stock and that obsolete or inactive items are being promptly removed from the inventory so as to minimize losses.
H. Subsidies
1. A Sales and Service Activity may be subsidized from other funding sources (e.g., through the allocation of General/Core Funds to the Activity).
2. Subsidies can be for any of the following purposes:
a. a general subsidy to the Activity to offset expenses;
b. to reduce the cost of providing specific goods or services; or
c. to pay for specific costs incurred by the activity.
Note that subsidies may not be applied to reduce the prices charged to select users in a discriminatory manner.
3. The amount, purpose, and fund source of each subsidy must be disclosed during the budget and rate review process. Subsidies should be identified as line-item reductions to the appropriate expenditure category and require the approval of RP&B, and in some cases, the approval of the Chancellor’s Budget Advisory Council.
I. Asset Acquisitions
1. An Auxiliary and Self-Supporting Enterprise (A&SSE) may wish to expand the size and reach of the services being offered. In doing so, the operation may or may not have sufficient capital to expand this capacity. Two examples, include:
a. ABC operation would like to implement new information technology to improve their handling of customer requests but have insufficient dollars in reserve.
b. XYZ operation would like to purchase additional equipment that it will in-turn lease to their customers, but also have insufficient reserves.
2. In cases of inadequate capital, a unit may wish to seek external financing or internal financing to complete the acquisition. However, in cases of sufficient capital, a unit has the ability to purchase as needed, but may wish to reestablish their reserve balances.
3. Given the potential of assets purchased to materially impact the financials of an A&SSE and thereby pricing, the A&SSE will need the approval of RP&B or the Executive Vice Chancellor and Provost (EVC&P) through the COSSA review process to include the asset costs or financing in rate base (i.e., Cost Pool Used to Establish Rates). Not obtaining this approval may result in the A&SSE needing to seek cost recovery from another funding source. Generally, an equipment or software acquisition should receive approval if it was a prudent purchase, one in which there is sufficient customer demand and the current customers will receive the benefit of the purchase (i.e., not for future customers).
4. The sections below will explain the different classification of assets and the cost recovery methods that could be employed.
a. Capital and Operating Assets
i. A capital asset is generally equipment or software costing over $5,000, having a useful life greater than one year, inventorial, and depreciated/amortized over a useful life. Each department is responsible for ensuring the equipment is assigned a property number in the Equipment Management Inventory System. If cost recovery for purchases of capital assets is an A&SSE objective refer to the sub-section on Cost Recovery Methods for Capital Equipment/Software provided below.
ii. An operating asset is equipment or software costing less than $5,000, is non-inventorial, and not subject to depreciation/amortization, but may still have a material impact on the financials of an A&SSE. If cost recovery is an A&SSE objective refer to the sub-section on Cost Recovery Methods for Operating Equipment / Software provided below.
iii. An asset costing $5,000 or more, but with a useful life less than one year, is not a capital asset and must be funded in the year consumed.
b. Cost Recovery Methods for Capital Equipment/Software
i. Cost recovery for capital equipment or software can be structured using an Asset Acquisition Fund (AAF) or a Renewal and Replacement (R&R) fund. In either case, a unit must request and receive approval from the R&PB before proceeding.
ii. The AAF should be used for amortizing an internal loan.
iii. An R&R should be used to accumulated funds in excess of break-even to procure the purchase; normally the accumulation would be in advance of the purchase and must correspond to and actual asset purchase/acquisition planned for the future. The purchase plan and portion of the rate in excess of break-even must be explicitly outlined in the unit budget plan.
iv. Below is a list of options that an A&SSE may use to recover the cost of purchased capital equipment or software:
a) If the capital equipment or software will be purchased using A&SSE resources and the unit wishes to recover these costs through rates then it should contact RP&B for assistance, structuring the recovery through an asset acquisition fund.
b) If the capital equipment or software will be purchased (or fabricated) using internal financing, the purchase needs to be recorded in an Asset Acquisition Fund (AAF). To obtain an AAF, the A&SSE should contact RP&B. Repayment is defined in the terms of the loan. In the case of transfers, (i.e., Principal Repayments), repayment needs to be made out of A&SSE operating funds and into the AAF until the loan is retired. The transfer will occur at fiscal year-end based on a request submitted by the unit to the Accounting Office, supported by documentation of the inventorial assets in the Equipment Management Inventory System. The documentation to be submitted must include property tag number, original cost, useful life and funding source of the acquisition.
c) If the equipment or software will be purchased using external financing then third party debt service, including principal and interest, should be paid out of the A&SSE operating funds until the debt is retired. In some cases, rates and/or operating costs may need to be adjusted to accommodate this new liability.
v. Interest (i.e., STIP) on internally financed capital equipment or software is unallowable under the applicable terms of OMB Circular A-21, Cost Principles of Educational Institutions. In these cases, an A&SSE can either establish a dual rate structure or process a year-end rebate to the federal government. However, interest on externally financed assets is allowable given specified conditions found in Item 26 (Interest) of the aforementioned government publication (e.g., A lease-purchase analysis maybe required in advance of the acquisition in order to qualify for interest recovery from federal customers). In any case, units are encouraged to contact RP&B for assistance in complying with federal costing guidelines and in performing the lease-purchase analysis.
c. Cost Recovery Methods for Operating Equipment/Software
If operating equipment or software will be purchased using A&SSE resources and the unit wishes to recover these costs through rates then it should contact RP&B for assistance structuring the recovery.Transfers (i.e., principal repayments) need to be made out of an A&SSE operating activity code into a separately established activity code set up to cover operating equipment or software expenses.
5. Reestablishing Reserve Balances
If an A&SSE has adequate reserve balances to purchase equipment or software, usually due to temporary or permanent cost improvements, the unit may choose to do so. However, any reestablishment of the reserve balance is permissible so long it does not violate federal costing guidelines governing reserves. This equity is not to be confused with R&R, as this option is used to accumulate funds for a specified future investment. Rather, this equity is a result of net operating gains generated over a historical period and has reached a level that would allow the unit to reinvest in itself while mitigating rate impact. Federal rebates may be required under certain circumstances. Again, units are encouraged to contact RP&B for assistance in reestablishing reserve balances.
Reserve balances have the benefit of stabilizing pricing by offsetting a net operating loss or by allowing for reinvestment with little to no financing. Thus its use should be rate neutral as the A&SSE is limited to drawing-down only its accumulated earnings (positive carry-forwards). RPB will review these accumulations and uses annually on the basis of fiscal prudence and policy compliance.
J. Outside Consumers and Campus Overhead Recovery
1. In general and as stated on page three of Business Finance Bulletin A-56, Academic Support Unit Costing and Billing Guidelines, "It is the University's policy not to sell goods or services to outside consumers except where such goods or services are unique or such sales would not be in competition with commercial sources." When services or goods are provided the charge must recover the full cost of providing that good or service, including both direct and indirect costs. Indirect cost rates must include an amount to recover campus overhead costs (i.e., Cost of Campus Central Administrative and Support Services). The means through which the campus will recover these costs are through the application of Administrative Cost Recovery (ACR). For more information, refer to UCR Policy Number 300-02: Administrative Cost Recovery and Special Service Agreements for Central Administrative Services and Land Rent.
2. Unrelated Business Income: External revenue generated by a Sales and Service Activity that is not substantially related to the tax-exempt functions of the University is considered to be unrelated business income and is subject to federal income taxation. Activities which generate more than five percent of their revenue from external sources must complete an Unrelated Business Income Tax (UBIT) Non-Financial Questionnaire in accordance with the procedures established by the Accounting Office.
3. Sales Tax: Applicable sales tax must be charged and collected on sales made to external customers or individuals in accordance with the procedures established by the Accounting Office
VIII. References
A. Federal
B. UC Business and Finance Bulletins
C. UC Accounting Manuals
D. UCR Policies and Procedures
1. UCR Policy Number 300-02: Administrative Cost Recovery and Special Service Agreements for Central Administrative Services and Land Rent
2. UCR Policy Number 550-25: Course Materials and Services Fees (CMSF) Establishment and Budgetary Review
Appendices
Appendix A: General Terms and Definitions
1. Asset Acquisition Fund (AAF): AAF is the fund that used to record an internal loan or depreciable asset.
2. Auxiliary and Self Supporting Enterprise (A&SSE): An A&SSE is a business that has to recover the cost of operations through rates charged to University-affiliated customers.
3. Academic Department: Any department of instruction and/or research, including Organized Research Units.
4. Academic Support Unit: Any Sales and Service Activity organized within an academic department to provide, and charge for, goods and/or services primarily to that and other departments on the campus.
5. Activity: refers to Sales and Service Activities
6. Auxiliary Enterprises: Self-Supporting activities that provide goods or services to students, faculty, staff, and visitors (as individuals) upon payment of a specific fee for the goods or services provided (e.g., Residence Halls). The general public may be served only incidentally. This policy excludes these Enterprises.
7. Budget: A budget is the financial expression of the operating plans of a sales and service activity which sets forth its functional goals for a specified period of time. It should identify the sources of funding (e.g., Recharge, Revenue, or Subsidy). When approved, budgets should be entered into the Permanent Operating Budget System for all recurring activities. This entry into the Budget System is in contrast to temporary appropriation adjustments entered into the General Ledger System.
8. Administrative Cost Recovery (ACR): The UCR mechanism for recovering the cost of central administrative and support services at the institutional level. ACR is based on the relative demand of the activity on core services.
9. Capital Equipment: Non-expendable, tangible personal property having a useful life of greater than one year and an acquisition value of $5,000 or more. The method of cost recovery is usually through depreciation.
10.COSSA: Committee On Sales and Service Activities
11.Direct Costs: Readily identifiable costs, such as salaries and supplies, specifically associated with the furnishing of goods and services by a Sales and Service Activity. OMB Circular A-21 defines direct costs for the purposes of accounting for federal funds.
12.Facilities and Administrative Costs (formerly Indirect Costs): Costs that cannot be directly identified or related to a specific good or service but represent costs incurred to support the Sales and Service Activity. OMB Circular A-21 defines indirect costs for the purposes of accounting for Federal funds.
13.Financed Equipment: When an A&SSE purchases capital equipment or operating equipment using borrowed money. The source could be from an internal loan (authorized deficit) or an external lender. Interest related to internal loans, no matter how stated, may not be charged to contracts and grant customers.
14.Income: Recharges and revenue
Indirect Costs: See Facilities and Administrative Costs
Non-University: Organizations not departments of or directly affiliated with the University of California; and individuals acting on their own behalf, regardless of affiliation.
Non-University Mark-Up Factors and Rates: Means of recovering full University costs, both direct and indirect from Non-University customers based on the Federal indirect cost recovery rates.
Indirect Costs: See Facilities and Administrative Costs
Non-University: Organizations not departments of or directly affiliated with the University of California; and individuals acting on their own behalf, regardless of affiliation.
Non-University Mark-Up Factors and Rates: Means of recovering full University costs, both direct and indirect from Non-University customers based on the Federal indirect cost recovery rates.
15.Operating Equipment: Tangible personal property having an acquisition value of less than $5,000 regardless of useful life. Also includes equipment having a value over $5,000 but a useful life of less than one year. The method of cost recovery is usually through recording it as a period expense unless it was financed equipment or software.
16.Organization: The highest level of the UCR Campus "Organizational Structure." Organizations typically are headed by Academic Deans and Vice Chancellors.
17.Rate: The unit price(s) for the goods or hourly charge for services furnished, based on an established standard pricing method.
Recharges: The assessment and collection of a charge by one University entity for goods or services furnished to another University entity.
Recharges: The assessment and collection of a charge by one University entity for goods or services furnished to another University entity.
18.Revenue: Money generated from sources other than recharges to University departments, generally referred to as external income.
19.Sales and Service Activities: Activities which provide specific services or goods for sale to campus and non-campus customers, have been clearly identified and given a University fund number, and collect revenue and/or record recharges to cover costs. Services might be purchased from commercial sources, but, for reasons of convenience, cost, or control, are more effectively provided through an on-campus unit.
20.Self-Supporting Unit: Refer to Sales and Service Activities
21.Service Enterprises: Service departments which provide a specific type of service to campus departments rather than individuals and which have operating costs supported by recharges to the departments receiving the services.
22.Unit Costs: The cost of producing one unit of product or services. To determine what should be included in the Unit Cost, please refer to “Costing Equipment” on page three of Accounting Manual P-415-2 Costing and Reconciling Inventorial Equipment Acquisitions.
Appendix B: Table of Existing Sales and Service Activities
Contact the Office of Resources Planning and Budget for an up-to-date table.
Appendix C: Table of Known Student Fees
Contact the Office of Resources Planning and Budget for an up-to-date table.
APPENDIX E: Determination of Non-University Mark-Up Factors and Rates
Note: A pdf copy of this document in its proper format with current links is available by contacting tim.willette@ucr.edu.