The Catholic University of America

Finance: Accounting
Service Center Policy

 

Approved by: Board of Trustees
History: Issued -- March 14, 2002
  Revised -- January 16, 2008
   
Related Policies: Capitalization and Depreciation: Grants and Contracts:
Additional References:  
Responsible Official:

Treasurer and Vice President for Finance and Administration tel. 202-319-5606

 

I. Introduction

Research and other operations of the university may operate facilities used to support a number of research or other programs. Under Office of Management and Budget Circular A-21, these may be defined as Specialized Service Facilities, or Service Centers. This policy provides guidance and procedures covering the financial operation of service centers and recharge units to insure their compliance with generally recognized accounting practices, applicable laws and regulations and appropriate sponsor requirements. Final determination of the classification of an operation as a service center shall be made by the Vice President for Finance and Administration and Treasurer or his/her designee.

This policy governs all university service centers and recharge units without exception.

 

 

II. Definitions

 

A. Applicable Credits: Transactions that offset or reduce costs, such as purchase discounts, rebates, allowances, refunds, etc. For purposes of charging service center costs to federally-sponsored programs, applicable credits also include any direct federal financing of service center assets or operations (eg: the direct funding of service center equipment by a federal program).

B. Billing Rate: Also known as a user fee or support fee, the actual rate charged to customers for a unit of goods or services. Billing rates should normally recover all costs associated with producing a good or service. The rate calculation generally follows the equation "total cost divided by some unit of measure, eg: total units produced, square footage, man hours expended, etc."

C. Break-even period: A reasonable, established period of time in which revenues are expected to match expenses

D. Carry-forward: The amount of surplus or deficit carried into a succeeding year. Carry-forward amounts are included as an adjustment to billing rates.

E. Cost center: An account ("Org" or "DeptID") established to hold expense and revenue for certain goods and services

F. Deficit: An account balance where total expenses exceed total revenues. Account balances should be monitored so that rates may be adjusted in order to avoid year-end deficits.

G. Depreciation: A system of allocating the net cost of an asset over a certain time frame, typically the expected life.

H. Direct Operating Costs: Costs that can be specifically identified with the cost of a good or service. These include salaries, wages, and fringe benefits of personnel who are involved in the production of the good or service as well as all purchased materials and supplies, depreciation, travel, etc.

I. Equipment: An item of tangible property having a useful life exceeding 2 years and an acquisition costs of $5,000 or more. Purchases under this amount are considered consumable supplies.

J. Internal Service Center Overhead: Costs that can be directly identified with a service center, but not with a particular good or service provided by the center. Salary and fringe benefits of the center's director or administrative staff may be examples of such costs.

K. Institutional Indirect Cost (F&A Cost): The costs of administrative and support functions of the university. Institutional F&A costs consist of general administration and general expenses, such as executive management, payroll, accounting, and personnel administration; operations and maintenance expenses, such as utilities, building maintenance and custodial services; building depreciation and interest associated with the financing of buildings; administrative and supporting services provided by academic departments; libraries; and special administrative services provided to sponsored projects.

L. Service Center: An organizational unit that performs specific technical or administrative services. There are three basic types of service centers: (a) recharge units, (b) specialized service facilities, and (c) service facilities.

1. Recharge Unit: A service center providing goods or services that do not represent the major purpose of the generating department. Annual activity is under $50,000 and can be characterized as a convenience to faculty, staff and students. Rates are based on direct cost only. An example of a recharge unit would be photocopying in the Library.

2. Specialized Service Facility: A service center providing highly complex services not usually available from outside vendors. Annual revenues exceed $1,000,000 and include service center and possibly institutional indirect cost. An example of a specialized services facility is the Vitreous State Laboratory.

3. Service Facility: All service facilities that do not fall into the above two categories. An example of a service facility is Telecommunications.

M. Unallowable costs: Costs that can not be charged directly or indirectly to federally-sponsored programs. These costs are specified in OMB Circular A-21, section J. Common examples include advertising, bad debts, charitable contributions, entertainment, fines and penalties, goods and services for personal use, interest (except interest related to purchase or construction of buildings and equipment), and selling and marketing expenses.

 

III. Establishment

New Service Centers and Recharge Units must be approved by the University Controller and University Budget Office. To request approval, the following information must be provided in writing:

  • A description of the services to be provided and their users;
  • A rationale for providing the services internally as opposed to utilizing an external provider;
  • A projection of costs and revenues;
  • Billing rate calculations and their comparison with the rates of external providers (where possible).

IV. Responsible Organization

The Dean or Department Chair is responsible for the operation of all service centers within their organizational structure. Responsibilities include the establishment of the center, day-to-day operations, rate calculations, billing calculations, record retention to include rate justification and all expense and billing records, and coverage of deficits in excess of 10%. The actual transactions to charge the users of center are done by the Controller's Office. It is the responsibility of the Dean or Department Chair to review billing rates and costs to ensure recovery of operating costs and adjustment of billing rates within the current year.

V. Rate Calculation

Billing rates are to be calculated annually at the start of each university fiscal year and submitted to the Office of the Controller. Billing rates are to be based on actual costs or estimated costs projections when actual costs are not available and will exclude unallowable costs. Rates should be designed to recover all direct operating costs.

Surpluses or deficits of cost recovery compared to costs from the previous year of + or - 10% may be included in the direct operating cost base for the subsequent year.

Rates are to be determined by dividing the actual or estimated direct operating cost projections by the estimated billing units. Billing units should represent the type of service provided. If a service center provides multiple services, separate billing rates should be established for each significant service whose costs and revenues can be segregated. Surpluses and deficits for each service should be carried forward as adjustments to the billing rate for that service in the following year. Surpluses from one service may be used to offset the deficit from another service only if the mix of users and level of services provided to each group of users is approximately the same.

Actual costs and revenues should be reviewed at mid-year. Modest variances can be handled with billing rate adjustments. Significant variances may require rebates to users.

 

VI. Billings Calculation

Billings should be based on the services rendered. All users must be charged the same rates. Billings should be prepared in a timely manner. The Office of the Controller will develop the accounting to be used in recording billings for services rendered.

VII. Internal Service Center Overhead and Institutional Indirect Costs

Only service centers which meet the definition of a service facility or a specialized service facility may include, in the calculation of billing rate, the service center's share of internal service center overhead and its share of institutional indirect costs. Service centers which fit the definition of a recharge operations may not include overhead or institutional indirect costs.

VIII. Cost and Revenue Segregation and Allocation

Costs and revenues should be segregated into cost centers for each service that is provided. This may not be necessary in the case of recharge units where costs and revenues can be readily identified.

Depending on the type of service center, there may be as many as three categories of costs that need to be allocated: (1) costs that are directly related to providing the services or direct operating costs, (2) internal service center overhead, and (3) institutional indirect costs. In all three cases, the costs should be distributed to services on an equitable basis that reflects the relative benefit each service receives from the cost.

If an individual provides multiple services, their salary and fringe benefits could be equitably distributed on the basis of the amount of time they devote to each service. Service center overhead and institutional indirect costs could be equitably distributed on the basis of total direct operating costs associated with each service. The Office of the Controller is responsible for determining the amount of institutional indirect cost that is allocable to each service facility.

 

IX. Capitalized Equipment

Expenditures for capitalized equipment purchases should not be included in the costs used to establish service center billing rates. The depreciation costs of capitalized equipment should be used in the costs to determine service billing rates in order to generate funds to enable service centers to purchase equipment needed in the future. This is accomplished by setting aside the depreciation funds in an equipment replacement reserve account. When equipment is needed, and amount equal to its cost is transferred to a renewal and replacement plant fund account.

Per OMB Circular A-21, Section J.26, interest expense on equipment purchases is generally not allowable unless the equipment is valued at over $10,000 and a funding source external to the university is used. Any loan arrangements involving equipment are subject to approval by the cognizant federal agency and must be approved by the Office of the Controller.

Depreciation for donated equipment is calculated based on its fair market value. Equipment obtained from federal sources may not be depreciated. Contact the Office of the Controller for the most recent depreciation schedules and proper depreciation method. See also the University Finance Policy regarding Capitalization and Depreciation.

A list of equipment used in service centers must be provided to the Office of the Controller. This will insure that such equipment is not included in the depreciation portion of the university's indirect cost rates charged to federally sponsored programs.

X. Services Provided to Users External to the University

Service centers which provide services to external users may include institutional indirect costs in their billing rates even though such costs may not be a part of their rate for billing internal users. However, amounts charged to external users in excess of rates for internal users must be excluded from surpluses or deficits carried forward in the calculation of future rates.

Sales tax must also be charged to external users when applicable. Since revenue from external users may have unrelated business income tax implications, such arrangements should be approved in advance by the Office of the Controller.

XI. Major Surpluses

Except for transfers to the renewal and replacement plant fund account, it is generally not allowable to transfer funds to other university accounts from service center accounts. Surpluses are therefore handled as adjustments to user charges (billing rates).

XII. Inventory of Goods Held for Sale

If a service center sells products and has a significant amount of stock on hand, inventory records must be maintained. A formal inventory account is necessary if the value of the inventory exceeds $50,000 at any given point in time. A physical inventory should be taken annually and reconciled to the inventory account. Inventory valuations may be based on any generally recognized inventory valuation method, eg: first-in-first-out, last-in-first-out, average cost, etc.

XIII. Subsidized Service Centers

In some instances, the university, or a school or department, may elect to subsidize a service center either by charging billing rates lower than actual costs or by not making adjustments to future billing rates at year end for current deficits. Service center deficits caused by intentional subsidies cannot be carried forward as adjustments to future billing rates. Since subsidies can result in a loss of funds to the university, they should be provided only when there is sound programmatic rationale and with the approval of the Dean or Department Chair. The funding source for the subsidy must be identified to and approved by the University Budget Office. Any subsidies are to be identified as a separate item in the billing rate schedules provided to the Office of the Controller.

XIV. Unallowable Costs

OMB Circular A-21, which governs the operation of all service centers, prohibits the inclusion of unallowable costs in rate calculations. Unallowable expenses, which are detailed in Circular A-21, cannot be charged to federally sponsored programs. These costs must be charged to a separate service center organization or separate account within the service center organization. Unallowable Costs are discussed in University Finance Policy on Grants and Contracts.

XV. Long-Term Break-Even Agreements

Long-term break-even agreements may be established for service centers in unique situations where they require multiple years to recover or spread out their operating costs. This kind of situation might occur where initial capital outlays are large or when large volume fluctuations are expected. Such agreements are negotiated with the university's cognizant federal agency by the Office of the Controller.

XVI. Record Retention

Service centers must keep records of rate calculations, billings, costs and revenue, including all worksheets and detailed backup, for a period of three years and nine months from the end of the fiscal year in which this information was used.

XVII. Review Performed by the Office of the Controller

The Office of the Controller will oversee implementation of this policy. The Office of the Controller will be notified of the establishment of any new service centers and arrangements to provide services to outside parties.

The Office of the Controller and the Office of Internal Audit will make periodic reviews of the financial operations of service centers. These reviews will focus on the development of billing rates, the handling of surpluses and deficits, and the adequacy of the service center's record keeping procedures.