This procedures manual provides a framework for the fiscal operations of university service centers to assist them in complying with sound accounting principles and government regulations. UAB is subject to a wide variety of federal regulations as a consequence of receiving a substantial amount of federal grant and contract revenue each year.
Although there may be wide variation in size, complexity, and type of services provided by service centers, they should all follow common administrative practices. This manual addresses those practices and provides examples of billing rate structures and the steps involved in developing such rates.
Service activities with annual expenditures of less than $100,000 are known as "recharge accounts" and are not subject to all of the procedures outlined in this manual. For example, they are not to recover equipment purchases or depreciation in their rates. However, if a Recharge Account wishes to include equipment depreciation in its rate, it may opt to be treated as a Minor Service Center by applying through its department head and Dean to the Controller's Office.
UAB has identified two classes of service centers — "major service centers" and "minor service centers," which are distinguished based upon the size of their annual operating budget. This manual addresses both. It does not, however, address Restricted Core Facilities, which are accounted for in the GA Module.
Please see the UAB Policy and Procedures Library for more information.
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Definitions
Services
Highly specialized, typical, or necessary functions provided by a unit to other units, principally within UAB. Often the services could not be purchased as effectively or efficiently from an entity external to the institution.
Service Center
An operating unit providing services or products to users for a fee. Service Centers are accounted for in Miscellaneous Unrestricted Accounts.
Major Service Centers
Service center operations that:
- have total annual expenditures exceeding $500,000; or
- have total annual expenditures between $350,000 and $500,000 and which provide at least ten percent of their services to federal grants and contracts.
Minor Service Centers
Service center operations that:
- have $100,000 or more in total annual expenditures; and
- are not classified as major service centers.
Internal Users
Units within UAB (including academic, administrative, and auxiliary areas) that purchase services from other UAB units.
External Users
Legally separate organizations or individuals purchasing services which are not billed to a UAB account number. External users include students, faculty, or staff, if they are purchasing services in a personal capacity. The affiliated foundations and hospitals (such as Health Services Foundation and Children's Hospital) are external entities. Also, agency accounts (UAB accounts with a balancing segment beginning with a 9) are treated as external.
Non-discriminatory Rates
All users are charged the same rate for the same level of services or products purchased in the same circumstances.
Capital Equipment
An item with a value over $5,000 and a useful life of more than one year.
Service Center Rate
The cost per unit of output used to recover the expenses of the service center.
Usage Base
The volume of work expected to be performed expressed in terms of units; such as labor hours, machine hours, CPU time, number of pounds or gallons, etc.
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Responsibility
Dean
Responsibility for service centers rests with the applicable Dean (or equivalent for non-academic units). The Dean (or equivalent) has the responsibility to:
- review and approve the establishment of each new service center prior to a new account request being submitted to the Executive Director of Accounting's Office;
- review and approve all service center rates within their unit. In the case of minor service centers, the Dean may choose to delegate the review and approval of rates to the applicable Department Head; and
- approve the rate calculation survey for each major service center prior to its submission to the Service Center Accountant in General Accounting.
Department Head
For those service centers that report through a Department Head to the Dean (or equivalent for non-academic units), the Department Head has the responsibility to:
- review and approve the establishment of each new service center prior to a new account request being submitted to the Dean's Office;
- review and approve both major and minor service center rates; and
- approve the rate calculation survey for each major service center prior to its submission to Dean (or equivalent).
Service Center Manager
The Dean/Department Head normally delegates responsibility for day-to-day operation to the Service Center Manager. The Service Center Manager is responsible for assuring that:
- billings are timely and adequately documented;
- the approved rate schedule is applied uniformly to all users;
- internal users are billed at nondiscriminatory rates;
- receivables are controlled and reconciled;
- the financial breakeven position is routinely reviewed and that rates are adjusted as appropriate;
- equipment for which depreciation costs are included in the rates are identified as service center equipment on the Equipment Accounting inventory;
- for major service centers, the schedule of rates is accurately prepared and submitted for review and approval on a timely basis; and
- for minor service centers, an annual schedule of rates is accurately prepared and available for audit upon request.
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Recovery Requirements
Rate Charges
Rates charged to internal users must be non-discriminatory, and all users must be billed for services received. Rates should not differentiate between users of the same services within the UAB community (which includes federal and non-federal sponsored projects). The use of special rates, such as for high volume work, for less demanding non-scientific applications, or for priority of delivery, are allowed; but they must be equally available to all users of that special service.
UAB may wish to provide a service to a particular internal group of users at a lower rate (e.g. computer time for students as part of the instructional program) than other users. In those cases, the difference between the rate charged to the subsidized user group and the normal rate for the services used by that group should be billed to a subsidy account representing the appropriate direct cost activity (the instructional budget in the case of computer time for students).
Service centers are only required to apply non-discriminatory rates to internal users of the center's services. Rates charged to external users may be higher (but not lower) than those charged to internal users.
Billing Period
Each service center should adopt a standard billing cycle and follow it consistently. The billing cycle must be at least once per month. Most service centers bill monthly for the previous month's services, so the revenue recorded in one month represents the services performed in the previous month. A more frequent billing period could be adopted (e.g. weekly or daily), if desired. Also, a service center may choose to bill monthly but on a monthend cutoff other than the calendar monthend (e.g. the 20th to the 20th, or the 15th to the 15th).
Billing should not occur until after the service has been rendered. Prepayments are not allowed. Progress payments (partial payments based upon the portion of the work performed) are permitted and in some cases are required.
Service centers must account for their activities based upon UAB's fiscal year, which is October 1 through September 30. Service centers should handle yearend billings consistently each year to assure that 12 months of cost recovery are associated with 12 months of incurred cost. This also provides a more accurate breakeven calculation at fiscal yearend.
Breakeven Concept
Service centers rates are generally calculated based on projections of operating expenses and projected volumes of the services or products to be provided. The goal of the service center is to calculate a rate which will ensure that revenues reasonably offset expenses for a given fiscal year. For service centers, operating at breakeven means that there is no significant (greater than 10%) year-to-date profit or loss in any particular period and that there is no operating profit or loss at all (beyond that necessary to establish or maintain working capital reserves) over the long run.
In computing rates, if a service center ends a fiscal year with an actual operating surplus or deficit within the +\-10% breakeven range, that profit or loss must be factored into the following year's rate calculations. (See "Treatment of Over/Under-Recoveries" in the Rate Development tab below.)
When it appears that a service center is going to end the fiscal year with a surplus exceeding 10%, the amount in excess of 10% should be adjusted via a mid-year reduction in the rates. A mid-year reduction is not required when the excess surplus is due to the fact that the service center is establishing its working capital reserve level.
When it appears that a service center is going to end the fiscal year with a deficit exceeding 10%, the amount in excess of 10% should be funded by the applicable school via a mid-year subsidy.
Working Capital Reserves
All service centers need a reasonable amount of working capital to manage their cash flow. Therefore, each service center is permitted to establish and maintain through its charges a reasonable working capital reserve, which UAB has established to be 15% of its normal annual operating expenditures. In certain cases, the Director of Accounting may approve a working capital reserve level exceeding 15%.
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Establishing Service Center Accounts
All service centers must maintain a separate, Service Center account. This account is to be used solely for the purpose of accounting for the service center operations. Service center operating costs should be charged to this account, including equipment depreciation where applicable, but not equipment purchases and not A-21 unallowable costs.
Each service center that includes equipment depreciation in its rates will be assigned an Equipment Reserve account that will be used to record the other side of the funded depreciation charge. In order to properly identify the equipment, all service center equipment should be purchased from this related Equipment Reserve account. Transfers out of these reserves to other unrestricted accounts may be made to the extent that these funds are not needed for future service center equipment purchases. Such transfer requests must include a Service Center Equipment Reserve Request for Transfer when submitted to the service center accountant.
Requests for accounts for new service centers, as well as significant changes in existing service center accounts (such as adding a new product or service), should be approved by the applicable Dean and Department Head before being sent to the Executive Director of Accounting's Office. The service center account request must include the following information:
- description of the products or services to be provided;
- description of the users/customers/purchasers of these services or products; and
- explanation of how the service center rates were determined, including:
- detailed budget of the annual expenses for the service center;
- description of the unit of service (i.e. labor hours, machine hours or units or output) and an estimate of the level of activity (i.e. the number or volume of service units) expected for the budget period;
- rate calculation using the proposed budget amounts and the projected level of activity for the first year of operation. If a new service center is to be established in the middle of the year, the initial budget and breakeven period may be set for longer than twelve months;
- name, title, and phone number of the service center manager;
- name, title, and phone number of the service center's fiscal/business officer;
- signature of the service center manager;
- identification of the department to which this service center reports;
- signatures of the department chair and applicable dean; and
- justification for the new service center, including an explanation as to why other internal or external providers of this service are not being used in lieu of establishing a new service center operation.
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Service Center Cost Components
Direct Service Personnel
The portion of the salaries and wages of all personnel directly related to the service center activities (such as lab technicians or machine operators) should be included in the rate calculation and charged to the service center's operating account. The salary that should be charged to the service center account is the percent effort that applies to that activity.
Direct Administrative Staff
The portion of the salaries and wages of administrative staff that is related to direct support provided to a service center should be charged to the service center's operating account and included in the rate calculation. This category should not include general administrative support (such as that incurred by the dean in reviewing proposed rate changes). It does include effort for the direct management of the service center operations (for example, the maintenance of the service center billing system).
Fringe Benefits
Fringe benefits will be allocated to services centers for all personnel directly charged to the service center operating account. These costs should be included in the rate calculation.
Allocation of Personnel Costs
For service centers providing multiple services or products, personnel costs should be allocated to specific functions or activities within the service center for purposes of billing rate calculations.
Indirect Costs
Service centers are assessed the 5% surcharge against external revenue known as Central Revenue Reallocation. Please see the Central Revenue Reallocation Percentages table.
At some point in the future, the institution may decide to assess each service center for some or all of its associated overhead costs. If that happens, the service center will include those overhead costs as part of their rates.
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Rate Development
Rate Computation
The following equation should be used to compute service center rates:
- Budgeted Expenses
- +/-Prior Year Under/Over Recoveries (within +/-10%)
Budgeted Level of Activity (Usage Base)
The resulting rate calculated using the budgeted activity is applied to the actual level of this activity when charging users.
For example: If allowable operating costs for a computer are approximately $100,000 a year and it has an estimated use or activity level of 1,500 hours during that year, the rate calculation would be - $100,000/1,500 hrs = $66.67 per hour. If a researcher uses the computer for four hours for a sponsored project, the charge should be four hours x $66.67 or $266.68.
Service center rates should be calculated for a fiscal year with adjustments made, as needed during the year, to accommodate changing circumstances and to assure annual breakeven within +/-10% of operating expenses. When a service center is established in mid-year, rates may be set for longer than 12 months so that the end of the first breakeven period coincides with a fiscal yearend.
Types of Usage Bases
Selection of an appropriate usage base is essential to ensure that users pay their appropriate share of the costs for the services rendered. Two methods are most commonly used to determine the usage base:
- consumption base — used when expenses are directly proportional to how much of a unit of measurement is consumed. For example, if labor and equipment usage costs can be accurately identified as being consumed on an hourly basis, the service center would base its charges on the number of hours of service provided.
- output base — used when the cost of the center is most accurately identified by the number of units produced per year.
Budgeting
For more on this topic, see the Budgeting section.
Projected Expenditures
Service centers are budgeted in the same way as other departmental expenditure accounts. Budgeting considerations should include anticipated changes in operating expenses, including salaries and wages.
Projected Revenues
Service centers revenue budgets should reflect estimated sales or usage levels and should attempt to match the budgeted level of expenses. Estimated sales or usage level considerations should include prior year performance and future needs of internal and external users.
Reviewing Rate Calculations
Major service centers must submit a budget and rate schedule (with supporting documentation) for the following fiscal year to the Service Center Accountant in General Accounting by August 31, even if the rates are not projected to change.
Minor service centers must also compute rates for the upcoming year by August 31. The information used in the rate development process should be maintained by the service center for review by Internal Audit, external auditors, and others as needed.
Treatment of Over/Under-Recoveries
Annual Rate Calculations
To the extent that a service center has an annual operating surplus or loss within the breakeven range of +\-10% as of the end of the prior fiscal year, that surplus or loss must be applied to the following year's calculation.
For example: The rates submitted for approval in August 2004 for FY 2004/05 would be based on FY 2004/05 projected usage and expenses and the actual FY 2002/03 yearend surplus or deficit.
Service Center XYZ, Calculation of FY2005 Rates, With Prior Year Surplus Within +10%
FY 2003 Actual
- Total revenues: $230,000
- Total expenses: (220,000)
- Surplus: 10,000*
FY 2005 Budgeted
- Budgeted Expenses: $250,000
- Less PY Surplus: (10,000)
- Total Budgeted Expenses: 240,000
*Since the surplus is within 10%, it will be subtracted from the next year's budgeted expenses in the rate calculation. If the service center needed to build its working capital reserve of 15% ($220,000 x 15% = $33,000), the surplus could be used for that purpose and would not have to be subtracted in the rate calculation.
Service Center XYZ, Calculation of FY 2005 Rates, With Prior Year Deficit Within -10%
FY 2003 Actual
- Total revenues: $210,000
- Total expenses: (220,000)
- Deficit: 10,000
FY 2005 Budgeted
- Budgeted Expenses: $250,000
- Add PY Surplus: (10,000)
- Total Budgeted Expenses: 260,000
*Since the deficit is within 10%, it will be added to the next year's budgeted expenses in the rate calculation. If the service center is building its working capital reserve, an additional amount could be added to the next year's budgeted expenses to bring the fund balance up to the appropriate 15%.
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Monitoring Procedures
Mid-Year Review
If during mid-year review it appears that a service center is going to end a given fiscal year with an operating surplus exceeding 10%, the amount in excess of 10% should be adjusted via a mid-year reduction in the rates. In order to make the mid-year reduction, a partial year rate calculation will need to be prepared.
Service Center XYZ, Mid-Year Review of FY 2004, Excessive Surplus
FY 2004 Budgeted
- Total revenues: $500,000
- Total expenses: (500,000)
- Over recovery: 0
FY 2004 Projected
- Budgeted Expenses: $510,000
- Add PY Surplus: (460,000)
- Over recovery: 50,000
- Portion in excess of 10%: $4,000
If during mid-year review it appears that a service center is going to end a given fiscal year with an operating deficit exceeding 10%, the amount in excess of 10% should be adjusted via a mid-year increase in the rates. In order to make the mid-year increase, the amount in excess of 10% should be funded by the applicable school via a mid-year subsidy.
Service Center XYZ, Mid-Year Review of FY 2004, Excessive Deficit
FY 2004 Budgeted
- Total revenues: $500,000
- Total expenses: (500,000)
- Over recovery: 0
FY 2004 Projected
- Budgeted Expenses: $520,000
- Add PY Surplus: (600,000)
- Over recovery: (80,000)
- Portion in excess of 10%: ($20,000)
Pricing of Multiple Services
Service centers providing more than one service may make a surplus on some services and incur deficits on others, so long as the mix of users of the services are the same.
Mid-Year Review
Managers of service centers should evaluate their financial position and rates periodically throughout the year relative to breakeven and, if necessary, adjust rates accordingly. The review should also identify unallowable costs.
Yearend Rate Performance Review
At fiscal yearend, major service centers must submit a report of actual vs. budgeted results by object code for revenues, expenses, and units of service to the Service Center Accountant in General Accounting. The report should include an explanation of significant variances between budgeted and actual. Appendix V shows the format to be used for this Annual Yearend Performance Report. A copy of the Service Center's September 30 MASB account statement should be attached to the report.
Mid-Year Rate Changes
Service center rates should be adjusted when it is evident that a service center will not fall within the acceptable breakeven range using the calculated rate. Major service centers which need to adjust rates during a fiscal year must notify the Service Center Accountant in General Accounting for a review of the new rate proposal.
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Billing Procedures
Billings based upon measured and documented utilization are to be charged to UAB accounts via journal entries and external users billed via invoice. Billings must be at established service center rates with documentation of charges retained by the service center.
The invoices or journal entries must provide sufficient documentation of the charges to allow those documents to stand alone in the event of a review. To do this, the documentation should include the following:
- the service utilized (e.g., photocopying);
- units of service used (e.g. # of copies made); and
- charge per unit (e.g., $0.5/photocopy).
Advance billings or collections for services or products are not allowed. A service center's revenue should be based upon actual services rendered.
Billing External Users
External users should be charged rates which recover the direct costs of providing the service, including the 5% Central Administration surcharge. Sales tax must be collected from all external users who do not have tax exempt status. Service centers with external users, who are not tax exempt, should work with the Director of Accounting to determine the appropriate way to handle sales tax.
Marginal External Revenue
Service centers that charge external users a rate in excess of direct cost plus the 5% Central Administration surcharge will have additional revenue. This marginal external revenue can be used to provide part of the 15% working capital reserve, to subsidize internal users, or it can be transferred to the related Equipment Reserve account for the service center.
To transfer this revenue to the Equipment Reserve account, the marginal external revenue has to be documented and justified as revenue generated from external users. This is accomplished using the following formula:
Example: Marginal External Revenue
External Rate Per Unit
$1.50
Cent. Admin. Surcharge Per Unit
- .08
Net External Revenue Per Unit
$1.42
Internal Rate Per Unit
- 1.00
Marginal External Revenue Per Unit
$0.42
Actual No. of External Units For The Year
x 1000
Total Marginal External Revenue
$420.00
Transfers to the Equipment Reserve account can be requested once a year after the fiscal year has closed. The transfer cannot reduce the operating account below its working capital reserve level.
Cash Controls
Service centers, which have cash external sales, should account for the cash the same as other sales to external users. However, such service centers should also establish guidelines for proper cash controls, which should, at a minimum, include:
- cash and checks should be deposited promptly (see UAB's cash receipts policy);
- segregation of duties for employees, such that any employee who has access to cash should not record cash transactions;
- set minimum and maximum cash balances that can be kept on hand; and
- provisions for daily reconciliation of cash receipts to deposits recorded in Oracle.
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Record Retention
All service center activity must be documented and records maintained to support expenditures, billings, and cost transfers. Additionally, the service center is responsible for the maintenance of records of all service center charges and for answering inquiries concerning those charges. Service center charges are subject to audit as long as the grants or contracts that they have charged remain subject to audit. Each service center must retain the following:
- work papers documenting rate calculation(s);
- justification of the selected utilization base;
- General Accounting or Dean/Department Head approval of rates; and
- records documenting and measuring use of the services or products.
Financial records and supporting documents pertinent to a service center's activity must be retained for at least seven years. If a litigation claim or audit is started before the expiration of this period, the records must be maintained until it is resolved or completed.
Service centers do not need to maintain duplicates of records officially on file in Accounting, Purchasing, Accounts Payable, etc. — for example, payment requests, invoices, monthly account statements, and purchase orders.
Supplies and Expenses
Materials and Supplies
The cost of materials and supplies needed to operate the service center should be included in the rate calculation.
Service Center Inventories
Commonly, a service center will base its operations on an inventory (e.g. a chemical stockroom), or will maintain an inventory of parts and supplies used in providing the service (e.g. a machine shop). If the service center's investment in inventory items exceeds UAB's inventory threshold ($100,000 at publication), it will need to account for the purchase of these items as assets which are expensed as used rather than at time of purchase.
Other Costs
Examples of other costs which may be charged to a service center are:
- rental and service contracts;
- special conferences or travel, if related specifically to the service center operations; and
- professional services.
These costs should be properly identified by object code. OMB Circular A-21 or the service center accountant in General Accounting can provide information regarding the allowability of costs.
Depreciation
Each month, a journal entry will be booked by the Service Center Accountant to charge the Service Center operating account for the funded depreciation expense. The offset to this charge will be the Service Center's Equipment Reserve account.
The annual depreciation must be calculated using the official useful lives provided by Equipment Accounting. The funding sources and useful life applicable to a specific item of existing equipment can be viewed in the Online Equipment Accounting System (EAS).
Since billing rates are normally based upon budgeted expenditures, service centers may have to estimate depreciation on future equipment purchases.
Depreciation reports may be generated in Oracle, under the Sunflower Custom Reports responsibility. Please contact Equipment Accounting at (205) 934-5144 if you have any questions regarding this report.
Federally Funded or Donated Equipment
Depreciation of equipment purchased by the federal government through cost sharing provided by UAB to a federal grant or contract cannot be included in user rates.
If the service center receives a piece of donated equipment, the fair market value of that equipment is to be used to calculate the amount of depreciation recoverable through the user fee. Service centers should contact Equipment Accounting for guidance on such issues.
Equipment Inventory
It is important that the government not be charged twice for a piece of equipment by its being included in both a service center user charge and the depreciation portion of the research indirect cost rate. To avoid this, service centers need to notify Equipment Accounting of all equipment items that are a component of its user fees. Equipment Accounting will flag the equipment in the Equipment Accounting System, so that it is not included in the indirect cost calculation.
Debt-funded Equipment
A service center can recover interest cost on debt financed capital equipment if the financing was provided by an independent external source and the equipment item's cost is over $25,000.