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A-59, Costing and Working Capital for Auxiliary and Service EnterprisesJuly 1, 1982
I. REFERENCES
Business and Finance Bulletin A-47, University Direct Costing
Procedures (to be revised in 1982)
Business and Finance Bulletin A-60, Short-Term Investment
Pool-Distribution of Income
Business and Finance Bulletin BUS-43, Materiel Management
Business and Finance Bulletin BUS-72, Establishment and Review of
Auxiliary Enterprises
Planning and Budget Manual Chapter 4010, Operating Budget Amendments
II. INTRODUCTION
The University operates a large number of auxiliary and service
enterprises which provide services to other departments or to outside
users. These units historically have charged users for their services,
and their charges have been set to cover most of their direct
costs and some of their indirect costs.
This bulletin prescribes the costs that are to be borne by these
enterprises and the related procedures for setting prices, obtaining
working capital, and making any necessary settlements with the Federal
government.
III. DEFINITIONS
The following terms are used in this bulletin:
A. Auxiliary Enterprises-Self-supporting activities which provide
non-instructional support in the form of goods and services to
students, faculty, and staff upon payment of a specific user charge
or fee for the goods and services provided (e.g., residence
halls, bookstores). The general public may be served only
incidentally.
B. Service Enterprises-Service departments which provide a specific
type of service to various institutional departments, rather than
to individuals, and which have operating costs supported by
recharges to the departments receiving the services (e.g.,
garages, storehouses).
C. Direct Costs-Readily identifiable costs associated with the
furnishing of goods and services by an enterprise.
D. Indirect Costs-Costs that cannot be readily identified with or
related to a specific enterprise. These costs are related to
the services generally provided without charge by central campus
units. For the purpose of this bulletin, indirect costs include
operation and maintenance of plant (OMP) and campus general
administrative services.
IV. REQUIREMENTS
All auxiliary and service enterprises shall be charged for all direct
costs involved in producing their goods and services. These costs
include salaries and benefits, supplies and expenses, and equipment
depreciation, except that depreciation expense will not be
charged in bond indentured auxiliary enterprises.
Also, all auxiliary enterprises shall be charged for all indirect
costs that are judged to benefit the activities. These costs include
those for OMP services such as janitorial, utility, and building
maintenance; and for central campus administrative services such as
materiel management, personnel, accounting, and environmental health
and safety.
V. PROCEDURES
The following procedures shall be established to implement the above
requirements:
A. Account/Fund Assignment-Each auxiliary and service enterprise shall
be assigned unique account and fund numbers in the appropriate
series.
B. Budget-A budget shall be established for each auxiliary and
service enterprise in accordance with Planning and Budget Manual
Chapter 4010, Operating Budget Amendments, Section VII.B.4.
C. Direct Costs-All direct costs shall be recorded in the accounts of
the enterprise. Direct costs include equipment depreciation
expense and any interest expense, except that depreciation expense
shall not be recorded for the bond indentured auxiliary enterprises.
D. Indirect Costs-Indirect costs shall be recorded in the accounts of
auxiliary enterprises as follows:
1. Operation and Maintenance of Plant. The campus Facilities
Department shall recharge auxiliary enterprises for all
services, using its standard procedures and rates.
2. Central Campus Administration. Each administrative office
which provides specifically identifiable and quantifiable
services to an auxiliary enterprise shall recharge for those
services. These recharges are to be calculated by deriving a
price per unit (e.g., per purchase order, per safety
inspection) and then applying that price to the number of
units of service provided.
The various revenue bond indentures governing administration
of indentured enterprises specifically prohibit charging them
with any share of general administrative expenses of the
University (i.e., charges made without regard to services
actually and directly provided to such enterprises).
Therefore, to document compliance with the indenture
covenants, supporting records must be kept (such as actual
time records, documents processed, or other tangible evidence)
of the specific central campus administration services
provided to each indentured auxiliary enterprise.
E. Prices-Prices are to be established at a level that will provide
revenue to cover all direct costs and, for auxiliary enterprises,
all indirect costs, after consideration of prior year losses or
excess income. Also, prices may be set at a level sufficient to
accumulate funds (net worth) required to meet working capital and
capital expansion needs. In establishing the pricing structure,
the enterprises should take into account any non-operating revenues
(subsidy appropriations) which may be available to cover costs.
For indentured auxiliary enterprises, prices must also cover
debt service and other bond indenture requirements.
All auxiliary and service enterprises shall publish a schedule of
rates and prices which shall be reviewed and approved by each
campus as part of its annual budget process.
F. Federal Settlement-Inclusion of interest as a direct cost will
result in the setting of prices above the level allowed by the
Federal government. The Federal government will not accept any
markup above cost, even if the purpose of that markup is to
accumulate funds for equipment replacement or addition or for
inventory expansion. Therefore, at the end of each fiscal year,
those enterprises which provided services to Federally funded
contract and grant activities shall prepare a statement of costs
that excludes any interest expenses. The difference between such
a statement of costs and the revenues actually generated is
considered excess pricing by the Federal government. The portion
of the differential which can be attributed to Federal contract
and grant activities shall be refunded to individual active
grants and contracts, or in lump sum to the U.S. Treasury.
There are two alternate ways to comply with Federal costing
regulations:
1. establish dual-pricing structures for Federal and non-Federal
activities; or
2. instruct Federally funded activities not to make use of
certain auxiliary or service enterprises.
G. Working Capital-Financing for current needs of auxiliary and
service enterprises such as inventories or accounts receivable,
and for capital needs such as equipment, structures, and
renovations is to be provided as follows:
1. Capital Needs. Funds for capital needs (above the amount made
available by depreciation) may be accumulated by setting
prices above costs in order to build reserves, or by borrowing
from University or commercial sources. When borrowing from
commercial sources, the campus shall first seek financing
through lease/purchase, installment purchase contracts, or
commercial bank loans to take advantage of the University's
ability to borrow on an interest tax-exempt basis. In
accordance with Business and Finance Bulletin BUS-43,
Materiel Management, Part 8, paragraph II.C.,
financing through these contracts shall first be cleared with
the Treasurer's Office to insure that the campus is receiving
a competitive, tax-exempt interest rate.
2. Current Needs. After determining the amount needed to finance
inventories and receivables, reserves shall be accumulated
and earmarked for this purpose. Borrowing from University
funds at market rates can be arranged when the financial plan
demonstrates debt service coverage feasibility.
At campus option, accumulated earnings may be transferred to
separate reserves to fund the above needs and to fund any refund
due to the Federal government.
H. Systemwide Financing-When commercial financing or campus internal
sources are not available, a campus may request financing from
Systemwide sources. The following procedures shall be used in
processing a campus request for Systemwide financing:
1. The campus shall submit its financing request to the
University Controller's Office by May 1 for the following
fiscal year.
2. The request shall be supported by a five-year financial
plan of the enterprise. The plan shall be in the format
shown on pages 6, 7, and 8.
3. The request shall be supported by an explanation of
the need for each financing request and the proposed
repayment schedule.
4. The request shall be reviewed by the offices of the
Assistant Vice President-Business Management, the
University Controller, and the Assistant Vice
President-Budget, Analysis, and Planning. Following
review by these offices, the Vice President-Financial
and Business Management shall approve or disapprove the
financing request.
5. The campus will be advised of the approval or
disapproval of the financing before the beginning of
the fiscal year. The campus shall submit to the
University Controller a request for release of approved
financing at the time the funds are required.
6. Interest on approved financing will be at the
Short-Term Investment Pool (STIP) rate of return of the
quarter in which the funds are released.
7. Repayment of the financing shall be made on a quarterly
basis: March 31, June 30, September 30, and December 31.
The initial payment shall be due at the end of
the full quarter following the release of the funds.
8. In most cases, repayment terms shall not exceed five
years.
I. Accounting Procedures for Systemwide Financing - Accounting
for approved financing is to be handled as follows:
1. To record advance to campus
Systemwide Financial Entries
Dr. Loan to Auxiliary and Service Enterprises
J-112891
Cr. Campus Financial Control
J-1195X0
Campus Financial Entries
Dr. Campus Financial Control
X-1195X0
Cr. Loan from Systemwide
X-115893-XXXXX (use fund number of enterprise)
2. To appropriate advance for expenditure
Campus Budgetary Entries
Dr. Expenditure Account-Unallocated
X-XXXXXX-XXXXX-8
Cr. Expenditure Account
X-XXXXXX-XXXXX-X
3. To record interest and principal payment of advance
Systemwide Financial Entries
Dr. Campus Financial Control
J-1195X0
Cr. Loan to Auxiliary and Service Enterprises
J-112891 (for principal payment)
Cr. Unexpended Balance-STIP
J-119850-67910-0/0833 (for interest payment)
Campus Financial Entries
Dr. Loan from Systemwide
X-115893-XXXXX (for principal payment)
Dr. Expenditure Account
X-XXXXXX-XXXXX-3/7200 (for interest payment)
Cr. Campus Financial Control
X-1195XO
4. To reclassify at year-end closing the interest charges as
funds balances transfer
Campus Financial Entries
Dr. Unexpended Balances-Auxiliary and Service Enterprises
X-119850-XXXXX-0/0833
Cr. Expenditure Account
X-XXXXXX-XXXXX-3/7200
J. Cash Management-Each quarter the average monthly cash balance
or cash deficit of auxiliary and service enterprises shall be
determined. Interest earned on cash balances or interest
charged on cash deficits of these enterprises shall be
distributed in accordance with Business and Finance Bulletin
A-60, Short-Term Investment Pool-Distribution of Income (to be
issued in 1982).
VI. REPORTING REQUIREMENT
The University's annual Indirect Cost Proposal submitted to the
Federal government must be adjusted to account properly for the
recharging of indirect costs. Campuses shall maintain a record, in
accordance with this bulletin, of all recharges of indirect costs to
auxiliary enterprises made in accordance with this bulletin. A report
of these recharges will be requested annually by the Vice
President-Financial and Business Management's Financial Analysis Office.
VII. RESPONSIBILITY
Chancellors shall be responsible for maintaining a record, in
accordance with this bulletin, of all recharges of indirect costs to
auxiliary enterprises made from operation and maintenance of plant and
from central campus administrative units.
SAMPLE FORMAT FOR FIVE-YEAR FINANCIAL PLAN--Schedule 1, Schedule 2, Schedule 3 and Debt Service Schedule
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