18.10 Service Center Policy

Owner:   Financial Management - Administration

General Policy Guidelines

1. Applicability: The following flowchart (Figure 1) provides guidance for determining whether the Service Center Policy applies.
   
   Figure 1

   



2. Types of Service Centers: There are three types of service centers: minor, intermediate and major. Service center "type" is determined by the categories of expense that will be incurred against a service center's auxiliary enterprise and related plant fund accounts. The following can be used to determine service center type:

    

   Expenses to be Incurred Against Service Center Accounts	Type of Service Center
   Salaries, Wages, ERE, Operations and/or Travel only. (No Equipment or Buildings and Improvements)	Minor
   Salaries, Wages, ERE, Operations, Travel and/or Equipment. (No Buildings and Improvements)	Intermediate
   Salaries, Wages, ERE, Operations, Travel, Equipment and/or Buildings and Improvements	Major

    

3. Permissible Goods/Services: Although Service Centers have broad discretion with respect to the types of goods/services to be provided, there are exceptions. Financial Management - Administration will provide assistance in determining the permissibility of specific goods/services. In general, Service Centers should not provide goods/services that meet any of the following conditions:
   1. The sale of the goods/services would violate Arizona Board of Regents Policy 1-105 regarding competition with private enterprise.
      NOTE: Where appropriate, or when in doubt, service centers should have outside party customers sign a statement that the particular goods/services are not available from commercial sources. These statements must be maintained in a permanent file available for public inspection.
   2. The sale of the goods/services would qualify as "unrelated business."
   3. Responsibility for the provision of the goods/services has been delegated to specific departments or Service Centers by University policy.
4. Contacts with Governmental Agencies: Financial Management - Administration will act as the liaison with all governmental agencies on matters governed by this policy. All contacts with governmental agencies should be coordinated through Financial Management - Administration.
5. Policy Exceptions: Service centers must comply with the Cost Accounting and Administrative Guidelines in this policy unless exceptions are specifically granted. Written requests must be submitted to Financial Management - Administration for review and approval. Unless otherwise specified, approved exceptions will be temporary in nature and will not relieve the service center of long-term responsibilities for complying with the Cost Accounting and Administrative Guidelines.

Definitions

6. Acquisition Cost: The total value of resources expended and committed to bring equipment or buildings and improvements up to intended and useful condition. Total "capitalized costs"may include, but are not limited to, the cost of an item, freight, taxes, in-transit insurance, installation/modification costs, consultant services related to acquiring an item, the fair market value of University assets given in exchange, and the present value of liabilities incurred or assumed. For donated capital assets, acquisition cost is its fair market value at the time of the donation (plus any acquisition related expenses such as freight and installation).
7. Administrative Service Charges: A transaction or process whereby sales and service accounts are assessed for institutional support functions that indirectly benefit University activities. The largest institutional support categories are institutional administration and physical plant operations. Institutional administration includes functions like executive management, fund accounting, payroll, security, administrative computing, human resources, and procurement. Physical plant operations includes routine facility maintenance, routine custodial services, utilities, and other facilities-oriented services.
8. Applicable Credits: Receipts or negative expenditures that operate to offset or reduce costs. Examples of applicable credits include purchase discounts, rebates, or allowances (including "educational discounts" where the arrangement is not clearly and specifically identified as a gift by the vendor); recoveries or indemnities on losses; and adjustments for overpayments or erroneous charges.
9. Auxiliary Enterprise: A separately organized University unit or activity established to sell goods/services on a continuing basis. An auxiliary enterprise generally supports the instruction, research and public service activities of the University. Also, an auxiliary enterprise charges a fee directly related to, although not necessarily equal to, the cost of the goods/services.
   NOTE: Sales of by-products of instructional, research or public service activities are not classified as auxiliary enterprises.
10. Billing Rate: A "charge rate" that is developed for specific goods/services.
11. Break-even Period: A reasonable time-period in which cumulative revenues for a good/service should equal cumulative expenses.
12. Buildings and Improvements Depreciation:  A systematic and rational process for allocating the cost of buildings and improvements over the depreciable life.
13. Carry-Forward: The cumulative difference between the revenue generated by a good/service and the cost of providing the good/service.
14. Cost Centers: Groups of similar goods/services or activities.
15. Current Operating Costs: Salaries and wages, employee related expenses, operations and travel only.
16. Depreciable Life: The estimated time period or units of activity (for example, miles driven for vehicles) over which equipment will provide useful service.
17. Equipment Depreciation: A systematic and rational process of allocating the cost of equipment over the depreciable life.
18. Historical Cost: Actual costs incurred for salaries and wages, employee related expense, operations, travel, equipment and buildings and improvements.
19. Internal Billing (IB): A transaction or process whereby a University department account is charged for goods/services provided by other University departments or service centers.
20. Intermediate Service Center: A service center whose billing rates are designed to recover current operating costs and equipment depreciation. Intermediate service centers have separately identifiable operating resources and equipment.
21. Major Service Center: A service center whose billing rates are designed to recover current operating costs, equipment depreciation and buildings and improvements use allowance. Major service centers have separately identifiable operating resources, equipment and space.
22. Minor Service Center: A service center whose billing rates are designed to recover current operating costs only. Minor service centers have separately identifiable operating resources.
23. Non-Internal Billing (Non-IB): A transaction or process whereby the public is charged for goods/services provided by University departments or service centers.
24. OMB Circular A-21: Principles for Determining Costs Applicable to Grants, Contracts and Other Agreements With Educational Institutions. Published by the Office of Management and Budget (OMB), this circular establishes principles for determining costs applicable to Federal grants, contracts and other agreements with educational institutions.
25. Outside Parties: Individuals, groups or organizations that are not part of the University community. Outside parties acquire goods/services from University departments or service centers via non-interdepartmental billings.
26. Private Enterprise: External "for profit" business enterprises.
27. Public (or Public Customers): All individuals, groups or organizations that acquire goods/services from University departments or service centers via non-interdepartmental billings.
28. Salvage Value: An estimate of the amount that will be realized at sale or other disposition of an item of equipment at the end of its depreciable life.
29. Service Center: An auxiliary enterprise whose primary customers are University departments (that is, interdepartmental billings are the predominant revenue source).
30. University Community: University faculty, staff, students and departments, as well as invited guests.
    NOTE: The term "University community" does not include independent, affiliated organizations like the University of Arizona Foundation, The University of Arizona Health Network, Pima Community College, National Radio Astronomy Observatory, Smithsonian Observatory, Kitt Peak National Observatory or Veterans Administration Hospital.
31. University Departments: Budgetary/organizational units of the University. The financial activities of these units are maintained in UAccess Financials. University departments acquire goods/services from other University departments or service centers via interdepartmental billings.
32. Unrelated Business: Any activity that meets all of the conditions specified below is considered unrelated business.
    NOTE: Income or revenue from unrelated business is subject to taxation under Internal Revenue Code Sections 511-513.
    1. The activity qualifies as a trade or business. A trade or business is any activity that is carried on for the production of income from the sale of goods/services. Also, there must be a "profit motive."
    2. The activity is regularly carried on. Regularly occurring or seasonal activities normally qualify as "regularly carried on," whereas intermittent, casual or sporadic activities do not.
    3. The activity is not "substantially related" to the University's tax exempt purpose. Activities that contribute importantly to the accomplishment of the University's tax exempt purposes (other than by providing funds) qualify as related.
       NOTE: Public service by itself does not qualify as part of the University's tax exempt purpose.

        

    4. The activity is not covered by specific Internal Revenue Code exceptions. For example, an activity conducted primarily for the convenience of the University community is excepted under the Internal Revenue Code.

Cost Accounting Guidelines

General

33. Accounting Practices: A service center must consistently follow sound cost accounting practices/standards, including rate setting methodology and billing/charge-out practices. Cost accounting practices cannot be changed merely for budgetary or administrative convenience.
34. Cost Centers: A cost center should only be used to account for similar goods/services or activities. That is, separate cost centers should be established for different types of goods/services. The number of cost centers, however, should be held within practical limits, after taking into consideration the significance of the amounts involved and the relative benefits that might be gained.
35. Customer Billings: Service centers can only charge customers for goods/services actually provided to them. These charges must be based on cost justified billing rates. Other billing or charging strategies (for example, "what the market can bear") cannot be used.

Development of Billing Rates

36. Rate Study Cycle: Billing rates normally should be developed and updated at least once every two years.
37. Financial data: UAccess Financials is the official financial database for the University and must be the basis for all financial related information used in developing billing rates.
38. Basis year: Financial and statistical data used in developing billing rates should be based on a one year period. This period normally should be the University's fiscal year (July 1 to June 30).
39. Break-even operation: Billing rates should be designed to recover not more or less than the aggregate cost of a good/service over a defined break-even period. Financial Management - Administration will provide assistance in determining appropriate break-even methodology. The following rules apply:
    1. Surpluses/deficits on a good/service cannot be shifted to other goods/services.
    2. Break-even period: The break-even period for most goods/services normally should be one year. A longer break-even period may be established when necessary, however. For example, because of high "start-up costs," the cumulative cost of a new good/service may exceed cumulative revenue during the first few years of availability. Where the break-even period is longer than one year, revenue for a good/service does not have to equal the cost of providing the good/service during any one fiscal year, provided the applicable billing rates are reviewed periodically for consistency with the "break-even plan" and adjusted accordingly. In this respect, carry-forward adjustments to future year rates may be necessary to achieve break-even.
40. Transfers: Service centers should not transfer revenues, expenditures or fund balances (for example, cash) between cost centers since such transfers can distort billing rate calculations or alter the break-even plan.
41. Factors affecting allow ability of costs: Financial Management - Administration will provide assistance in determining the allow ability of costs. Billing rate calculations can only include those costs that satisfy all of the following conditions:
    1. Are reasonable: A reasonable cost reflects the action a prudent person would make under the circumstances in light of their stewardship responsibility to the University community, State of Arizona, Federal Government and the public. Major considerations involved in the determination of the reasonableness of a cost include:
       1. Whether the cost is generally recognized as necessary.
       2. The restraints or requirements imposed by such factors as arms-length bargaining and Federal/state laws and regulations.
       3. The extent to which the actions are consistent with established University and/or Board of Regents policy.
    2. Are consistently applied according to Generally Accepted Accounting Principles (GAAP).
    3. Are properly allocable to goods/services in accordance with relative benefits received or other equitable relationship. Costs allocable to a particular good/service cannot be shifted to other goods/services. A cost is allocable to a good/service if it is necessary to the provision of the goods/services and meets either of the following conditions:
       1. The cost solely benefits the good/service.
       2. The cost benefits the good/service and other goods/services or activities in proportions that can be reasonably approximated based on benefits derived, a traceable cause and effect relationship, or logic and reason where neither benefit nor cause and effect relationship is determinable.
    4. Are historically based (with appropriate adjustment for applicable credits).

       NOTE: In the case of current operating costs, projected costs may be considered in lieu of historical costs to the extent they are based on objective evidence (for example, approved changes to next year's operating budget) and not on speculation.

    5. Are not specifically unallowable: Generally, all operating costs that satisfy the previous conditions are allowable. According to OMB Circular A-21, however, there are costs that are specifically designated as unallowable. Examples of unallowable costs include:
       1. Bad debts.
       2. Contingency provisions or reserves to cover events which cannot be foretold with certainty as to time, intensity or assurance of their happening.
       3. Entertainment costs (for example, amusement or social activities).
       4. Fines and penalties resulting from violations of (or non-compliance with) Federal, state, or local laws and regulations.
       5. Interest payments to internal University sources.
42. Separate billing rates for distinctive goods/services: Separate billing rates must be developed for distinctive types of goods/services when both of the conditions below are met. Financial Management - Administration will provide assistance in determining the need for separate good/service billing rates.
    1. The sales volume of the good/service is significant.
    2. The cost of providing the good/service is substantially different from other goods/services.
43. Separate Billing Rates for University Department Customers: Separate good/service billing rates must be developed for University department customers. Financial Management - Administration will provide assistance in determining types of University department customer billing rates. The following rules apply:
    1. Current operating costs: For minor, intermediate and major service centers, good/service billing rates for University department customers should include a factor for related current operating costs incurred against a service center's auxiliary enterprise accounts. Current operating costs incurred against non-auxiliary enterprise accounts should not be included.
    2. Capital usage factors: Subject to the limitations below, good/service billing rates for University department customers may include factors for "capital usage" related to a service center's equipment and buildings and improvements. These factors are used in lieu of current period capital expenditures.
       1. Since minor service centers are not allowed to incur capital expenditures against their auxiliary enterprise accounts, good/service billing rates for University department customers cannot include capital usage factors.
       2. Intermediate service centers are allowed to incur capital expenditures for equipment (but not buildings and improvements) against a separate "capital reserve account." Therefore, good/service billing rates for University department customers may include a capital usage factor for equipment (but not buildings and improvements).
       3. Major service centers are allowed to incur capital expenditures for equipment and buildings and improvements against separate "capital reserve accounts." Therefore, good/service billing rates for University department customers may include capital usage factors for equipment and buildings and improvements.
    3. Administrative Service Charges: For minor, intermediate and major service centers, good/service billing rates for University department customers normally should not include a factor for Administrative Service Charges. In the event Administrative Service Charges are incurred against a service center's auxiliary enterprise accounts, however, billing rates may include a factor for these charges (but only to the extent they apply to University department customers). Financial Management - Administration will provide assistance in determining whether an Administrative Service Charge factor should apply.
44. Separate Billing Rates for Public Customers: Separate good/service billing rates must be developed for public customers. Public customer billing rates generally are designed to recover all costs. These rates will minimize the potential for competition (or unfair competition) with private enterprise. The following rules apply:
    1. Current operating costs: For minor, intermediate and major service centers, good/service billing rates for public customers should include a factor for all related current operating costs, whether incurred against a service center's auxiliary enterprise accounts or non-auxiliary enterprise accounts.
    2. Capital usage factors: For minor, intermediate and major service centers, good/service billing rates for public customers should include factors for "capital usage" related to a service center's equipment and buildings and improvements. These factors are used in lieu of current period capital expenditures. See paragraphs 46-47 for rules regarding the calculation of usage factors for equipment and buildings and improvements.
    3. Administrative Service Charges: For minor, intermediate and major service centers, good/service billing rates for public customers should include a factor for Administrative Service Charges. Financial Management - Operating Funds will provide assistance in determining an appropriate Administrative Service Charge factor for public customers.
45. Recoverability of Costs: The following chart graphically summarizes paragraphs 43-44.

Depreciation Factors

46. Equipment Depreciation Factor: For intermediate and major service centers, good/service billing rates may include a capital usage factor for equipment. This factor is calculated based on generally accepted depreciation practices. Financial Management - Administration will provide assistance in determining an appropriate equipment usage factor and methodology. The following rules apply:
    1. Includable equipment: Depreciation calculations can only include items of equipment that meet all of the following conditions:
       1. The equipment items exist and are usable, used and needed.
       2. The equipment items are identified separately from non-service center equipment.
       3. The equipment items have not outlived their depreciable life. Equipment items that have outlived their depreciable life are considered to be "fully depreciated."
       4. The equipment items are to be excluded from institutional overhead calculations (for example, the calculation of indirect cost rates for grants/contracts).
          NOTE: The cost of an equipment item can be recovered according to either prevailing institutional overhead practices (for example, indirect cost rates applicable to grants/contracts) or service center billing rates, but not both at the same time.
    2. Cost basis: Depreciation calculations must exclude any portion of acquisition costs borne or donated by Federal fund sources. Also, depreciation calculations must recognize salvage value or gains/losses on disposal of equipment. Salvage value should be estimated at 5% of acquisition cost unless a more realistic basis can be justified. The projected cost of replacement equipment cannot be used in depreciation calculations.
    3. Depreciation methodology: The "straight-line method" should be employed unless another method will more accurately reflect the pattern of equipment usage. Depreciation methodology cannot be changed unless approved by Capital Finance - Plant Fund Accounting.
    4. Depreciable life: The determination of depreciable life must take into consideration such factors as type of construction, nature of the equipment, technological developments or obsolescence, economic efficiencies, and renewal/replacement policies for the individual items or classes of capital assets.
       Depreciable life should not be confused with "physical life." The latter term refers to the total length of time an item of equipment is physically retained and used. For example, due to technological developments or obsolescence, an item of equipment might have a depreciable life of five years. The item might actually be kept and used periodically as a "backup," however, for an additional two years beyond the depreciable life.
47. Buildings and Improvements Depreciation Factor: For major service centers, good/service billing rates may include a capital usage factor for buildings and improvements. This factor is calculated based on generally accepted depreciation practices. Financial Management - Administration will provide assistance in determining an appropriate buildings and improvements depreciation factor and methodology. The following rules apply:
    1. Includable buildings and improvements: Depreciation calculations can only include buildings and improvements that meet both of the following conditions:
       1. The buildings and improvements exist and are usable, used and needed.
       2. The buildings and improvements applicable to the major service centers are excluded from institutional overhead calculations (for example, the calculation of indirect cost rates for grants/contracts).
    2. Cost Basis: Depreciation calculations must exclude any portion of acquisition cost borne or donated by Federal fund sources.
    3. Buildings depreciation: Depreciation calculations for buildings (including related improvements) are limited to that portion of building space (that is, net assignable square feet) which benefits or relates to a service center.
    4. Improvements depreciation: depreciation calculations for improvements that are not identifiable to a specific building (for example, telecommunications cabling and conduit) are limited to that portion of improvements which benefits or relates to a service center.

Administrative Guidelines

48. Budgeting and Accounting Requirements: Service center activities should be budgeted and accounted for apart from non-service center activities (for example, teaching or research). Applicable rules are detailed below. 
    
    Service centers that operate within academic, research, academic support or institutional support departments may be particularly affected by these requirements. Such service centers often use operating resources funded by non-auxiliary enterprise accounts (for example, State/General Operating Funds or Indirect Cost Recovery Funds) to provide goods/services to customers. 
    
    NOTE: The University may require rebudgeting or redistribution of applicable operating resources between the minor fund group accounts of a service center.
    1. UAccess Financials accounts should be established in each minor fund group that incurs current operating costs applicable to a service center.
    2. The separate service center accounts should contain only those operating resources directly related to the provision of goods/services to customers. Funds in these accounts cannot be expended for non-service center activities (for example, teaching or research).
    3. Service center revenues and expenditures should be recorded in appropriate accounts. That is, the accounts should be used in a manner that will result in a matching of revenues with expenditures.
    4. Annual budgeting of all service center revenues and expenditures must conform with applicable University and Arizona Board of Regents budgeting procedures.
    5. Separate accounts can be established for individual cost centers where practical.
49. Extended Record Keeping Requirements: Service centers must establish and maintain record keeping procedures and systems to capture all financial or statistical data that: is necessary for good internal control and service center management; is necessary for development and maintenance of good/service billing rates; and is not available in necessary detail or format from central databases (for example, UAccess Financials). Financial Management - Administration will provide assistance in determining the types of extended record keeping that are needed. Examples of extended records that must be maintained include:
    1. Financial records that track revenues, expenditures and surplus/deficit to specific goods/services within a cost center.
    2. Statistical records necessary for allocating costs or accumulating units of service available and used (for example, vehicle miles, central processing units or animal care days).
    3. Effort reporting records that identify employee work-time (in hours or percentage of time) to goods/services within a cost center.
    4. Background information that defines cost pools and terminology, describes allocation algorithms, and documents the basis for choosing particular allocation algorithms.
    5. Inventory systems to account for raw materials, work in process, finished goods and resale merchandise.
    6. For "major" or "intermediate" service centers, depreciation schedules showing annual depreciation for each piece of equipment.
50. Reconciliations: Non-UAccess Financials financial record keeping systems must be reconciled to UAccess Financials general and subsidiary ledgers on a regular basis. 
51. Equipment Records: Major and intermediate service center equipment must be identified separately from non-service center equipment in the University's property records system. 
52. Stock Inventories: Physical inventories of raw materials, work in process, finished goods and resale merchandise should be taken at fiscal year end (at minimum). Inventories must be valued using an inventory method established by the Financial Services Office - Operating Funds. 
53. Billing Rate Schedule: A schedule of current billing rates should be maintained and available on request. Also, advance notice of changes in billing rates should be provided to customers where feasible. This advance notice should be provided at least one month prior to implementation of rate changes. A longer advance notice period is desirable.
54. Customer Billings: Billings will be processed using established procedures. That is, IB procedures are used to bill University department customers and invoicing/billing procedures are used to bill public customers. The Financial Services Office - Operating Funds will provide assistance in determining appropriate billing procedures. 
55. Capital Reserve Accounts: Separate equipment and buildings and improvements "reserve accounts" should be established in UAccess Financials to account for a service center's capital related transactions. The following rules apply:
    1. Additions to these accounts will be accomplished by transferring cash from appropriate service center auxiliary enterprise accounts. The following rules should be observed:
       1. Transfers to the equipment reserve account should be based on the amount of revenue that pertains to the equipment depreciation factor in billing rates.
       2. For major service centers, transfers to the buildings and improvements reserve account should be based on the amount of revenue that pertains to the buildings and improvements depreciation factor in billing rates.
    2. Use of these accounts is restricted to capital expenditures that relate to and benefit a service center's activities. The following rules should be observed:
       1. The equipment reserve account is restricted to equipment expenditures.
       2. The buildings and improvements reserve account is restricted to buildings and improvements expenditures.
    3. All requests to establish capital reserve accounts or transfer cash to these accounts must be reviewed and approved in advance by Financial Management - Administration.
56. Capital Acquisition Financing Arrangements: Any such arrangements must be reviewed and approved by Procurement and Contracting Services, Capital Finance - Plant Fund Accounting, and others as established by University or Board of Regents policy.
57. Administrative Service Charges: Service centers are subject to Administrative Service Charges in accordance with prevailing policies and procedures. When these charges apply, they must be incurred against a service center's auxiliary enterprise accounts.