Auxiliary and Recharge Service Centers
|POLICY TITLE:||Policy for Auxiliary and Recharge Service Centers at Carnegie Mellon University|
|DATE OF ISSUANCE:||This policy was approved by the President's Council on June 18, 1999.|
|ACCOUNTABLE DEPARTMENT/UNIT:||Office of the Vice President for Finance and Chief Financial Officer. Questions about policy content should be directed to Cost Analysis.|
|ABSTRACT:||This policy defines and differentiates between auxiliary and recharge service centers and delineates their appropriate financial accounting, financial reporting and budgeting requirements.|
OMB Circular No. A-21, "Cost Principles for Educational Institutions"
This policy provides a framework for the fiscal operations of Carnegie Mellon University's service centers that will ensure compliance with sound business practices, financial accounting and reporting principles and government regulations. It also provides guidelines for establishing and operating a cost center, determining appropriate billing rates and ensuring compliance with applicable federal regulations.
Carnegie Mellon University conducts business under rules and regulations of federal, state and local municipalities. Policies and practices must adhere to government regulatory costing principles, such as those contained in the Office of Management and Budget (OMB) Circular No. A-21, "Cost Principles for Educational Institutions," as well as internal university accounting policies and practices. As required by OMB Circular No. A-21, Carnegie Mellon University has incorporated the applicable federal Cost Accounting Standards (CAS) in this policy and disclosed the provisions of this policy in the university's required Disclosure Statement to the Office of Naval Research and the Defense Contract Audit Agency.
Reason for the Policy
Carnegie Mellon University, recognizing its responsibility to sponsors, regulators, the academic community and the public to ensure compliance with sound accounting principles and government regulations, has established the service center policy contained herein to provide consistent financial and operational practices among the applicable units and to ensure compliance with government regulations.
This policy applies to all auxiliary service centers and all recharge service centers (also referred to as internal cost recovery units). This policy defines and differentiates between auxiliary and recharge service centers and delineates their appropriate financial accounting, financial reporting and budgeting requirements in order to conduct business.
A service center is an operating unit whose primary purpose is to provide goods, services or group of services in support of the university's education and research mission. Service centers include auxiliary enterprises and recharge service centers (internal cost recovery units).
A service center has the following characteristics:
- It provides services or sells goods to students, faculty, staff and/or the public.
- The same service might be purchased from commercial sources but, for reasons of convenience, cost or control, it is provided more effectively within the university.
- It charges a fee related to, but not necessarily equal to, the cost of services or goods.
- It is managed as a self-supporting, break-even unit.
- An auxiliary service center's costs include direct operating expenses and all allocable general administrative expenses and facility-related costs. A recharge center's costs include all direct operating expenses.
- It is expected to fund working capital and capital maintenance and replacement requirements.
- It will accumulate adequate reserves to fund capital projects without drawing on the university's general reserves and/or operating budget.
Auxiliary Service Centers
Auxiliary service centers include: housing, dining, parking, all retail stores, vending, printing, copying, mailing, and telecommunications. Auxiliary service centers are expected to recover all allowable direct and indirect costs through an appropriate rate-setting process. Auxiliary service centers are unique accounting entities and, as such, are required to maintain a separate set of books and records, including separate balance sheets and statements of activities. These service centers are also required to accumulate a sufficient amount of excess revenue over expenses in order to independently fund and preserve the university's financial investment in such activities.
Recharge Service Centers
Recharge service centers are internal cost recovery operations accounted for as designated accounts expected to recover all allowable direct costs, including departmental costs, through the appropriate rate-setting process. Recharge centers are required to account separately for activities in unique account numbers; however, unlike auxiliary service centers, recharge centers do not maintain separate balance sheets.
This policy requires that:
- Auxiliary service centers will calculate billing rates annually that provide for recovery of all direct and indirect costs, including general university administrative overhead and facilities costs.
- Recharge service centers will calculate billing rates annually that provide for the recovery of all direct costs, including departmental administrative costs.
- Service centers may accumulate a surplus at the end of each fiscal year and will be required to justify the surplus through the budget, internal audit and external audit processes. The appropriate justification consists of capital reinvestment plans or adjustment of future rates downward to achieve break-even the following year. Service centers may offset losses on one service with surpluses from another similar service only if the customers using the services are basically the same.
- Service centers may carry forward deficits to the subsequent year with justification through the normal budget review process. In such instances, the deficits are expected to be covered via pricing in the next fiscal year. If such operating deficits cannot be recovered through future pricing, then they must be funded by the respective entity's educational and general budget in the fiscal year in which the unrecoverable deficit was incurred.
- Both auxiliary and recharge service centers will retain all documentation for rate setting and service charge outs that is adequate to support an audit in accordance with the university's financial records retention policy.
- Both auxiliary and recharge service centers will bill all external and internal users at the same prices unless there are justifiable differences in the nature of the service, in volume or in priority of delivery. Such changes must be documented in writing and forwarded to the assistant vice president for finance for coordination and approval, and be retained in accordance with the university's records retention policy.
- Capital costs (equipment greater than $5,000 and with an expected service life of two or more years) will be recorded in the auxiliary service center's balance sheet as a capitalized fixed asset. However, these costs must be recovered over the estimated useful life of the asset. Accordingly, depreciation expense will be recorded as an operating expense and recovered when developing billing rates.
- Purchases of equipment by service centers for either operations or inventory will be funded through annual surpluses generated from operations, replacement reserves from the recovery of accumulated depreciation, or internal loans. Users will be charged for depreciation through service center pricing; however, purchases of capital equipment will be made from accumulated reserves, surpluses and approved debt financing.
- Each service center must establish at least one account number specifically associated with it in which to record its revenues, expenses and recoveries. No service center activity should be charged to regular departmental account numbers. Similarly, if a service center has an activity for which it does not charge users, that activity must be accounted for via a separate account number associated only with that activity.
Users of Service Centers
Users of service centers are those existing within the university community, including those in academic, administrative and auxiliary areas, who purchase services to support their work at Carnegie Mellon University. Their work may also include federally sponsored projects.
Caution: Allowing the use of university facilities and services by parties not otherwise associated with Carnegie Mellon University may carry tax-related consequences. Questions related to such use of university facilities and services should be directed to the assistant vice president for finance.
Ultimate responsibility for the management of service centers rests with the dean, department head or equivalent under whose unit the service center operates. Normally this person will delegate day-to-day responsibility to the department administrator or service center director who monitors the operation.
The department administrator or service center director must ensure that:
- All direct and applicable departmental costs are recorded in the service center's account;
- Rates for the next fiscal year are established based on the prior year's actual financial statement for each center and must be finalized by March 31 in order to establish the price of the services for the next fiscal year for communication to users;
- At a minimum, billings must be made on a monthly basis and must be timely and accurate;
- The approved rate schedule is applied uniformly to all users;
- All users are billed at nondiscriminatory rates. (See the section on Recovery Requirements.)
Cost Analysis is assigned responsibility for the following:
- Overseeing the formation of service centers and establishment of their organization numbers (orgs) and object codes;
- Assisting service center directors with policy or procedural matters related to accounting operations;
- Assisting centers with the preparation of rate schedules and, where applicable, providing general administrative and facility-related overhead expense allocations;
- Reviewing the annual financial statements of the service center for compliance with this policy prior to preparing the applicable indirect cost proposal for the university;
- Coordinating the financial audits of the respective service center with all external and internal auditors.
Service centers should contact the Budget Office for assistance in establishing revenue, expense and capital budgets.
Within the context of the overall operating and capital budgeting processes, the Budget Office is responsible for reviewing and recommending approval of the budgets based on the annual rates to the Finance Committee of the Board of Trustees, reviewing revenue and expense reports, and reviewing the reasonableness of accumulated surpluses and the appropriateness of carrying forward annual operating deficits.
Internal Audit is responsible for including audits of a selection of service centers in its work plan to ensure compliance with this policy.
Establishing Service Center Accounts
Requests for new service center org numbers, as well as changes in existing org numbers, must be approved by the senior director, Sponsored Projects Accounting and Cost Analysis. This allows the proposed service center request to be reviewed for feasibility and ensures it will operate in accordance with federal cost principles and university policies.
The request for a service center org number must include the following:
- A description of users, and the goods or services to be provided;
- A detailed budget of projected annual expenses;
- A per-unit description of the work performed (i.e., labor hours, machine hours, or units of output) and an estimate of the amount of activity for the budget period;
- The rate calculation(s) 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 break-even period may be set for longer than twelve months;
- The name, title and phone number of the individual who has been delegated by the dean, department head or equivalent to be responsible for financial affairs of the service center; and
- The signature of the dean, department head or equivalent indicating acceptance of operating and financial responsibility for the service center.
A service center charge-out rate, used to recover expenses, is the total costs of the service center divided by the units of output. Total costs are determined by subtracting from the budget all expenses, plus or minus any under- or over-recovery from the previous year. The units of output are the volume of work expected to be performed, expressed in terms of units such as labor hours, machine hours, CPU time, etc.
The usage base, or activity level, is used to arrive at a billing rate that reasonably allocates service center costs to those receiving its benefits. An appropriate usage base is essential to ensure users pay only their share of the costs for the services rendered. Two methods are most commonly used to determine the usage base: consumption and output. These methods distribute costs based on a unit of measurement (e.g., hours, pounds or gallons). The basis selected should be consistently used.
Consumption base is used when expenses are directly proportional to how much a unit of measurement is consumed. For example, if usage costs are determined to be consumed on an hourly basis, the service center would base the charges on the number of hours of services provided.
Another basis of allocation may be a measure of the output of the service center. An output-based rate is calculated when the total cost of the service center is divided by the total anticipated number of units produced per year.
Service Center Cost Components
An appropriate portion of the salaries and benefits of all personnel directly related to the service center activities, including departmental administrators such as directors, professional/technical and clerical employees, must be directly charged to the service center's account number. Charging for such personnel through a fixed "administrative surcharge" is not appropriate.
Fringe benefits must be included in the rate calculation based on university fringe benefit rates agreed to by the federal government.
Supplies and Expenses
The cost of materials and supplies needed to operate the center should be included in the rate calculation. Preferred vendors should be utilized at all times; over-accumulation of inventory should be avoided.
Certain service centers will base their operations on inventory, or will maintain an inventory of parts and supplies used in providing the services or goods (e.g., retail stores). Such service centers must account for them as assets of the university and charge the cost of the inventory to expense based on usage or consumption. Other costs associated with the operation of service centers may include rental and service contracts, travel to conferences related specifically to the service center, professional services and interest on debt used to acquire capital assets.
These costs should be properly identified by an org/object code. Contact the senior director, Sponsored Project Accounting and Cost Analysis for any questions regarding the allowability of costs.
Federal regulations do not normally allow for the recovery of the purchase price or acquisition cost of a capital item through service center rates in the year acquired. It is appropriate, however, to recover such cost through depreciation over the item's useful life.
Caution: Depreciation of service center equipment purchased or paid for by the federal government, whether or not title has reverted to the university, cannot be included in the rate calculation.
Space and Maintenance
In order for auxiliary service centers to fully recover costs, the cost of operation and maintenance (O&M) of facilities must be included in the rate calculations. O&M principally consists of building depreciation, utilities, maintenance, housekeeping and security. Cost Analysis personnel will provide auxiliary service centers with this information annually by January 31.
Administrative and departmental overhead must also be included in the auxiliary service center rate calculations. Only departmental costs are included in the recharge center rate calculations.
Cost Analysis personnel will provide auxiliary service centers with this information annually.
Unallowable costs are defined in OMB Circular A-21 (Section J) and are expressly prohibited for inclusion in billings to university sponsored research and administrative operations by auxiliary and recharge service centers. However, service centers such as housing, dining, food, parking, retail stores and vending are permitted to recover unallowable costs through billings since these operations do not generally affect sponsored research direct or indirect costs. A detailed list of unallowable costs and related object codes is available on the Cost Analysis website.
Questions concerning unallowable costs should be directed to the senior director, Sponsored Projects Accounting and Cost Analysis.
Recharge Center Subsidies
In certain instances, schools or departments may decide for valid business reasons to subsidize a portion of a recharge center's expenses (i.e., financing of initial capital requirements or ensuring that quality goods or services are available when needed). Given that all of the recharge center's account must contain all of the applicable direct expenses, subsidies must be recorded in the recharge center's account as an income transfer. Subsidies do not apply to auxiliary service centers.
Service center activities can result in either direct or indirect charges to federal grants and contracts. To receive these federal funds, the university must comply with the U.S. Government's Office of Management and Budget (OMB) Circular A-21, "Cost Principles for Educational Institutions," which addresses questions of service center pricing. The principles set forth in A-21 are designed to provide recognition of the full, allocated cost of federally sponsored projects under generally accepted accounting principles.
Two key concepts are dealt with specifically in section J.44 of A-21: 1) recipients of federal funds are not to recover more than cost; and 2) they are not to discriminate in the price charged to governmental users from non-governmental users. The rules set forth in A-21 allow that break-even recovery may be achieved over a long-term basis if agreed to by the university and its cognizant government agency. A-21 also provides for mutual agreement on "alternative costing arrangements."
The government monitors Carnegie Mellon University's compliance with these regulations through the Department of Defense (DOD), its auditors and its negotiators from the Office of Naval Research (ONR). Examples of compliance issues with respect to service centers may include rate-setting methodology, treatment of unallowable costs, and replacement of equipment and use of reserves. To minimize exposure from noncompliance, service centers must comply with these policies and procedures. The university's exposure from noncompliance could involve repayment to the government and could affect future award applications.
Recovery Requirements for Regulatory Compliance
Rates established by service centers must be nondiscriminatory and all users must be billed for services received. Nondiscriminatory means that all users are charged the same rate for the same level of goods or services purchased under similar circumstances. Therefore, rates should not be different for different users within the university community nor for federal and non-federal sponsors. The use of special rates, such as for high-volume work and for less demanding, non-scientific applications, is allowed but such rates must be equally available to all users.
Service centers should handle year-end billings consistently from year to year to assure that twelve months of cost recovery are associated with twelve months of incurred cost.
Capital equipment costs will be charged directly to service center's org. However, the depreciation of capital equipment (not the acquisition cost) is included in the service center rate calculations and in determining net surplus or deficit from operations. Capital equipment is generally defined as an item costing $5,000 or more with an expected useful life of two years or more. Equipment with a lesser value is treated as an expense in calculating billing rates.
Most service centers operate on a fiscal year basis, with rates based on budgeted projections of operating expenses and projected levels of activity or demand for its goods or services. Generally, the financial goal of a service center is to establish rates that will ensure that revenues reasonably offset expenses over the long term. Operating at break-even means there is no significant profit or loss resulting from charging users for goods or services in any particular period, and no profit or loss over the long run. This allows service centers to carry financial surpluses and recoverable deficits forward to the following year.
Treatment of Over/Under Recoveries
Although service centers target a break-even state through the capital planning budget process and rate setting, expenses may not exactly match revenues. Under or over recoveries must be calculated based on actual revenues and expenses.
If a service center rate produces a profit or loss, the loss must be added to or the profit subtracted from the following fiscal year's budget when developing the user rate(s), so the operation will break even over time. This will not be necessary for surpluses if the service center can demonstrate that the surpluses are required for future capital replacement.
If a recharge service center produces a profit, the profit will be carried over to subsequent fiscal years.
Losses may be carried forward only if recoverable through future pricing; otherwise, losses or deficits not recoverable through future pricing must be funded by the respective operating entity's educational and general budget. For example, a recharge center's current fiscal year direct costs are $50,000, billings to customers are $30,000, and the subsidy from the school's education and general budget is $15,000. The deficit of $5,000 must also be funded by the school's education and general operating budget if it is not recoverable in subsequent years' billings to customers.
Request for Rate Change During the Year
Service center managers should evaluate their financial position and rates periodically throughout the year to assess their position with respect to break-even and, if necessary, adjust rates accordingly. The review should also try to ensure cost types are clearly identified by account code, especially unallowable costs.
Service center rates should only be adjusted when it is evident that a service center will not fall within break-even range using the calculated rate. In such cases, centers must submit the new rate to Cost Analysis for review and approval by the provost and chief financial officer prior to implementing a rate change.
Pricing of Multiple Services
A service center providing more than one service may sometimes make a surplus on some services and take a loss on others. Combining the results of various services is acceptable only if the mix of users of each service is the same, so that higher prices charged to one set of users are subsidizing only those losses charged to approximately the same group of users.