SERVICE CENTER PROCEDURES

REFERENCES: UTMB Service Center Policy

INTRODUCTION: 

Service centers at universities, also known as specialized service facilities, recharge centers, or internal service centers, operate as in-house enterprises that provide goods and services to individual users or other operating units. These centers function as nonprofit entities, funding operations with fees charged to users. The costs of providing goods and services are billed to users, including federally sponsored agreements, based on established billing rates and actual usage of services. The costs normally consist of direct and indirect costs of the service center and the allocable share of institutional indirect costs. 

Costs of activities of service centers are separate from and cannot be included in the general indirect cost rate of the institution. Federal regulations require billing rates to be based on actual costs designed to recover the aggregate cost of a good or service over a long-term period. Rates should be reviewed periodically for compliance with federal and state regulations and for consistency with the long-term plan.

BACKGROUND: 

OMB Circular A-21 

The OMB Circular A-21, "Cost Principles for Educational Institutions," provides universities with principles for determining direct and indirect costs applicable to research and other programs funded by federally sponsored agreements. The accounting practices of universities must support the accumulation of costs as required by the principles, and must provide adequate documentation to support costs charged to sponsored agreements. 

The OMB circular A-21, Section J44 on specialized service facilities, states that: 

"a. The costs of institutional services involving the use of highly complex or specialized facilities such as electronic computers, wind tunnels, and reactors are allowable, provided the charge for the service meets the conditions of (b) through (d)."

"b. The cost of each service normally shall consist of both its direct costs and its allocable share of facilities and administrative costs with deductions for appropriate income or Federal financing as described in Section C.5."

"c. The cost of such institutional services when material in amount will be charged directly to users, including sponsored agreements based on actual use of services and a schedule of rates that does not discriminate between federally and non-federally supported activities of the institution, including use by the institution for internal purposes. Charges for the use of specialized facilities should be designed to recover not more than the aggregate cost of the services over a long-term period agreed to by the institution and the cognizant Federal agency. Accordingly, it is not necessary that the rates charged for services be equal to the cost of providing those services during any one fiscal year as long as rates are reviewed periodically for consistency with the long-term plan and adjusted if necessary."

"d. Where the costs incurred for such institutional services are not material, they may be allocated as facilities and administrative costs. Such arrangements must be agreed to by the institution and the cognizant Federal agency."

"e. Where it is in the best interest of the Government and the institution to establish alternative costing arrangements, such arrangements must be worked out with the cognizant Federal agency." 

 

OMB Circular A-133 

The OMB Circular A-133, "Audits of Institutions of Higher Education and other Nonprofit Institutions," provides guidelines to independent auditors who perform organization wide financial and compliance audits of educational institutions. 

OMB Circular A-133 Compliance Supplement provides specific audit procedures for auditing billing rates for specialized service facilities. It states that: (1) rate bases should include all university users and be treated in a consistent manner; (2) billing rates should be adjusted to eliminate profits and unallowable costs; (3) the Federal Government should be refunded its fair share of any amounts which have been transferred out of the fund; (4) methods used to adjust for accumulated over/under recoveries should be distributed in reasonable proportion to the same users as were originally billed for the services which created the accumulation, and (5) cognizant negotiators, while responsible for such rate activities, may actually negotiate and publish the rates themselves, or merely negotiate the rate setting methodologies or resolve problems that arise. 

OMB Circular A-87 

OMB Circular A-87, "Cost Principles for State and Local Governments," also provides principles for determining costs applicable to federal programs that are operated by State and local governments. Circular A-87 provides detailed guidance on operating, accounting, and reporting on the activities of governmental internal service centers. 

Provisions of Circular A-87 state that internal service activities must be accounted for and reported in individual accounts in order to properly account for revenue, expenses, and fund balance. These regulations allow costs to be billed to users. If users are billed, Circular A-87 requires that the following information be submitted to the cognizant agency: (1) a brief description of each service offered; (2) a fund balance sheet, (3) a revenue/expenditure statement; (4) a listing of all transfers into and out of the fund, (5) a description of the procedures used to charge costs to users, including how billing rates are determined; (6) a schedule of current billing rates, and (7) a schedule comparing the full revenue generated by the service to the allowable cost of the service, with an explanation of how variances will be handled. The regulations also state that revenues should consist of all revenue generated by the service, including unbilled and uncollected revenue. If some users were not billed for the services or were not billed at the full rate, revenue associated with these users should be imputed.

Cost Accounting Standards (CAS) 

The Cost Accounting Standards Board of OMB requires institutions of higher education with total federal contracts in excess of certain thresholds to comply with four cost accounting standards. The four cost accounting standards are intended to establish; (1) consistency in estimating, accumulating, and reporting costs; (2) consistency in allocating costs; (3) identification of specific unallowable costs; and (4) consistency in the selection and use of a cost accounting period. 

The CAS regulation requires impacted institutions to complete a disclosure statement that describes in detail the educational institution and its cost accounting practices. One section of the disclosure statement requires disclosure of the institution’s cost accounting practices related to service centers. The service center information that must be provided in the disclosure statement is designed to determine if the institution is in compliance with all the federal regulations and requirements for service center accounting.

Service Centers are university facilities that provide specialized service to the UTMB community. These centers recover their operating expenses by charging fees at predetermined rates for the services provided. Service center rates must recover only actual expenses and not include any profit. Auxiliary Enterprises are not considered to be service centers and are not covered in these procedures.

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

Figure 1

2. TYPES OF SERVICE CENTERS

A. Major Service Centers

Service Centers that provide services to a wide customer base within the institutional community or which have annual expenses and billings of $500,000 or greater are referred to as

Major Service Centers. The billing rates for Major Service Centers will include all allowable direct operational expenses and certain allowable institutional indirect expenses specified by the Vice President for Business Affairs. Any unrecovered direct and/or indirect expenses for these centers will not be included in UTMB’s indirect cost calculation.

B. Intermediate Service Centers

Service Centers that provide services within the institutional community and which have annual expenses and billings of less than $500,000 but greater than $5,000 are referred to as Intermediate Service Centers. The billing rates for Intermediate Service Centers will include all allowable direct operational expenses and may include certain allowable institutional indirect expenses specified by the Vice President for Business Affairs. Any unrecovered direct and/or indirect expenses for these centers will not be included in UTMB’s indirect cost calculation if material in amount.

C. Minor Service Center

Service Centers that provide any services to federal contracts and grants, and/or have minimal annual billings and expenses less than $5,000 are referred to as Minor Service Centers. The billing rates for Minor Service Centers will include only allowable operating expenses. The unrecovered allowable indirect expenses may be included in UTMB’s indirect cost calculation.

3. GUIDELINES FOR ESTABLISHING,CHANGING OR MAINTAINING A SERVICE CENTER

A. Establishing or Changing a Service Center

Departments wanting to establish or change a service center can do so only with the approval of the Vice President of that particular department. An annual budget; proposed rate schedule; and rate methodology, with supporting worksheets, must be submitted with the request (Sample worksheets are attached for guidance). After approval by the appropriate Vice President, Accounting will review and assign an operating account number(s).

B. Maintaining a Service Center

Departments wanting to maintain a service center can do so by submitting an annual business plan for the service center by February 1^st of each year. The service center will not be funded, and therefore operations will cease if the annual business plan is NOT submitted prior to the budgeting cycle. An annual budget; proposed rate schedule; and rate methodology, with supporting worksheets, must be submitted with the request to Accounting (Sample worksheets are attached for guidance).

C. Procedures For Establishing/Changing a Service Center

The flowchart (Figure 2) below, should be used for guidance in understanding the review cycle that should be used for establishing or changing a service center. The following is a brief description of the processes shown.

(1) A department wishing to establish or change a service center must determine the purpose for the center and a method of accomplishing this purpose.

(2) The department must prepare a business plan for the service center. The business plan must include the following items:

• Purpose of the service center.
• Responsible person (Service Center Custodian) , title, address, and phone number.
• Brief description of each major service.
• Approximate number and mix of customers to be served as compared to prior operating period.
• Two year revenue and expense statement including equipment purchases, inventory purchases, and working capital.
• A schedule of the billing rates for each service.

• A description of how billing rates are determined.

• If there is an inventory in the account, a description of how inventory will be maintained and the method of pricing.
• Description of the billing mechanism.

Business plan documentation forms can be obtained from Accounting. Examples of these forms are attached to these procedures. Accounting, upon request, will consult with the department regarding completion of the business plan.

(3) The business plan must be reviewed and approved by the appropriate departmental officials.

(4) If approved at the department level, the documentation must be presented to the Department’s Vice President for review. During this review process, the Vice President will determine if there is any duplication of effort with another service center, if the plan complies with all Federal costing regulations, if the rates appear to be competitive with the surrounding market, and if all of the documentation has been submitted.

1. Upon approval, the Vice President will forward to Accounting for review and assignment of an appropriate operating account number(s).

Figure 2

 

 

D. Procedures For Maintaining

The flowchart (Figure 3) below, should be used for guidance in understanding the review cycle that should be used for maintaining a service center. The following is a brief description of the processes shown.

(1) The department must prepare a business plan for the service center. The business plan must include the following items:

• Purpose of the service center.
• Responsible person (Service Center Custodian) , title, address, and phone number.
• Brief description of each major service.
• Approximate number and mix of customers to be served as compared to prior operating period.
• Two year revenue and expense statement including equipment purchases, inventory purchases, and working capital.
• A schedule of the billing rates for each service.

• A description of how billing rates are determined.

• If there is an inventory in the account, a description of how inventory will be maintained and the method of pricing.
• Description of the billing mechanism.

Business plan documentation forms can be obtained from Accounting. Examples of these forms are attached to these procedures. Accounting, upon request, will consult with the department regarding completion of the business plan.

1. The business plan must be reviewed and approved by the appropriate departmental officials.
2. Upon approval at the department level, forward to Accounting for review for compliance with all Federal costing regulations; if the rates appear to be competitive with the surrounding market; and if all of the documentation has been submitted.

Figure 3

Each year it is the responsibility of the service center to update or change the documentation and proceed through these review steps for approval for the next fiscal year.

Costs charged to service center accounts are restricted to those direct and indirect costs incurred in connection with service center operations. These costs must be in accordance with the purpose for which the service center has been established.

Funds from other budgeted accounts must not be transferred to a service center account other than as payment for goods or services provided by the service center.

Billings from service center accounts will recover only those direct and indirect costs of service center operations. The aggregate amounts billed must equal the aggregate costs of service center operations within a maximum five year period. If approved, billing rates may be established at less than actual cost to be competitive with market rates. In these cases, the subsidy amount must be identified and funded by an unrestricted account. These amounts cannot be included in the indirect rate calculation.

Costs that are initially paid by Federal grants and contracts will not be included in service center costs and must be excluded from service center rate calculations.

For accounting purposes, the service center is an entity independent of other operations of the department responsible for the service center. Other operations of the department may receive services performed by the service center operation. When this is the case, the costs of these services must be billed to the funds budgeted for the other operations of the department, just as the costs of goods or services are billed to other departments.

For billing rate calculations, service centers will account for revenues and expenses on an accrual basis of accounting. Revenues and expenses will be matched to the appropriate fiscal accounting period for the determination of net surplus or net deficit for the service center operations. Service centers will determine costs annually using Fiscal Year end data. This is to be submitted as part of the annual business plan by February 1^st of each year. The service center will not be funded, and therefore operations will cease if the annual business plan is NOT submitted prior to the budgeting cycle. An annual budget; proposed rate schedule; and rate methodology, with supporting worksheets, must be submitted with the request (Sample worksheets are attached for guidance).

 

Applicable expense credits and adjustments should be recorded to the service center accounts. These include receipts (not billings for services) or negative expenditures that act to offset or reduce costs. An expense object code should be used for these entries. (See definitions)

Because service centers provide services to Federal contracts and grants, they must comply with OMB Circular A-21 regarding allowable and unallowable costs.

A. Unallowable Costs

OMB Circular A-21 specifies costs that are allowable and unallowable charges to Federally sponsored projects. Unallowable costs include but are not limited to the following items:

• Full cost of equipment purchases (only depreciation expense is allowed)
• Advertising and public relations costs not associated with employee recruitment
• Alcoholic beverages
• Alumni Activities
• Bad debts or uncollected billings
• Defense and prosecution of criminal and civil proceedings, claims, appeals, and patent infringement
• Capital assets as direct charges (not including depreciation)
• Equipment or asset purchases with Federal funds
• Donations and contributions
• Entertainment costs
• Lobbying costs
• Fines and penalties
• Goods or services for personal use
• Housing and personal living expenses
• Internal interest
• Investment management costs
• Losses on sponsored agreements or contracts
• Non institutional memberships
• Memberships to country clubs, social or dining club or organizations
• Memberships to civic or community organizations
• Selling and marketing costs

Unallowable costs should not be charged to service center accounts.

 

B. Direct Costs

Service center direct costs are those costs that can be identified specifically with a particular service center unit or that can be directly assigned to such activities with relative ease and with a high degree of accuracy. (See definitions for specific types of direct costs.)

 

C. Indirect Costs

Indirect costs are those that are incurred for common or joint objectives and cannot be identified readily and specifically with a particular service center activity. There are two types of indirect costs: (1) service center indirect costs internal to its operations, and (2) UTMB institutional indirect costs. (See definitions)

 

D. Assets

A service center will frequently pay for capital equipment, materials and supplies, and other services that will be used over more than one fiscal period. When this is the case, these costs should be allocated to the period benefited when computing billing rates. Some of these type costs include, but are not limited to:

• Inventories

Service centers that purchase a high volume of materials and/or supplies, that will be spread over two or more fiscal year periods shall maintain inventories of these items. Purchases of inventory items not expected to be sold, or consumed during the year of purchase cannot be included in annual billing rates or treated as expenses to reduce the service center fund balance.

• Equipment

Service centers cannot include the total cost of capital equipment in billing rates. OMB Circular A-21 permits only recovery of the depreciation costs of capital equipment.

Capital equipment is defined as equipment purchases with a value greater that $1,000 and a useful life greater than one year. Service centers may include depreciation costs of capital equipment in their billing rates. Each service center must maintain an equipment depreciation schedule that depreciates equipment over its estimated useful life using straight line depreciation. The American Hospital Association (AHA) Guidelines are to be utilized in determining an assets useful life. Only actual historical costs can be depreciated. Replacement valuation of equipment is prohibited by the regulations.

• Working Capital

The service center may include in its fund balance no more than 60 days of working capital. This allows the service center to maintain enough cash to fund operation costs for 60 days. Therefore, the service center must not include in its annual billing rates the cost of more than 60 days working capital. (See definitions)

5. SERVICE CENTER RATE DETERMINATION 

Service centers recover their operating costs by charging their users predetermined rates for the services provided. Rates may recover only the actual allowable expenses of service center operations and not include any profit. Billing rates must be uniformly applied (the same price charged to all customers). Service center expense and rate computation documentation must be retained in accordance with the record retention requirements included in these procedures.

Service centers must present a schedule of billing rates and rate computation worksheets as part of the filing of the annual business plan which is due February 1^st of each year. (See 3B above) Billing rates will be reviewed annually and adjusted accordingly. Prior Fiscal Year financial data should be utilized (9/1/xx – 8/31/xx) when calculating the rate. Consideration should be given if significant changes have occurred since Fiscal Year end.

Since billing rates must be designed to recover only the cost of operations, the service center should break-even over time. Ideally this could be achieved each fiscal period. However, because annual break-even is difficult, OMB Circular A-21 allows break-even over a longer term period. UTMB service centers must break-even over a five year period.

A service center surplus or deficit balance cannot be transferred to another nonrelated account. The appropriate amount of the fund balance must be included in the next year’s annual billing rate computation in order to accomplish break-even operation within the 5 years. A fund balance amount equal to accumulated equipment depreciation and 60 days of working capital can be maintained without being included in next year’s annual billing rates.

Sometimes a department will be able to apply one billing rate to cover its activities. In other cases a number of billing rates will be required. The same basic steps are required to determine a rate. However, the complexity of the exercise may vary greatly.

The following steps should be used in rate computation:

• Identify the service or activity to be billed.
• Consider how the service can be measured.
• Determine a clear basis on which to charge for the service.
• Identify the costs of the service center.
• Compute a cost per unit of measure.

A. Billing Requirements

Service centers are responsible for initiating bills for the goods and services that they provide or sell to others.

All bills should:

• Be prepared on a timely basis (usually within 30 days),
• List the quantity and description of each item or service being billed,
• Provide the date of the transaction,
• Adequately describe the purpose for the billing.

Whenever possible, billing and collections should be completed within the same fiscal year as the sale. Billing cycles should be planned to maximize or optimize collection of billings made prior to the close of the fiscal period. If IDT’s are used, adequate lead time should be provided to allow approval and processing before the close of the fiscal period. Grant and contract accounts often expire on a different date than the UTMB fiscal year end. Thus, for such contracts and grants the previous two issues should be addressed relative to the expiration date.

Billings to other departments should be done in a manner acceptable to Accounting. These currently include, in order of preference:

• Automated entries for major service centers, (e.g., journal voucher entries)
• Interdepartmental transfers (IDT’s), and
• Other transfer requests

Service centers are established primarily to provide services to UTMB departments. However, in the limited circumstances where services are provided to outside entities billing for sales of goods or services must be consistent with policies or procedures established by UTMB. Whenever possible, service centers should obtain written authorization (a purchase order) from an outside customer before providing goods or services. When service centers provide goods or services to outside entities, a formal invoice must be prepared and presented to the customer, unless other arrangements have been made. The invoice documents should:

• Be prepared on a formal document, clearly identifying UTMB as the seller, and stating that it is an invoice,
• Describe the goods or services being billed, itemize the quantity and description of each item billed,
• Refer to the buyer’s purchase order number,
• Cite a due date,
• Provide the remittance address for payment,
• Provide other contact or correspondence information as necessary.

Service centers will establish a procedure to follow up billings to ensure collection of funds. Collections should normally be made before the end of the fiscal period.

Service centers billing procedures should be implemented on a consistent and routine basis. Typically, a monthly cycle should be followed to facilitate processing.

B. Billing Methods 

The preferred method of billing for major service centers is through an automated entry. This would involve creation of a computer billing file for transmission to Accounting. This file can be generated by the service center’s system, or created using various PC software tools. Service centers should contact Accounting to institute this billing method. In some cases, programming of the automated interfaces will be required.

Use of IDT’s is controlled by Accounting. Contact both Accounting and EDS training to learn the requirements for obtaining billing rights and training to use IDT’s.

Billing method(s) must be included in the application to establish a new service center and/or the annual service center review. New methods of billing should not be implemented until review and approval by the appropriate Vice President and Accounting. 

C. Accounting for Billings

Service Centers must retain records of billings issued and payments received. 

Payments received for goods and services provided by service centers must be deposited into a service center account. Also, sales credits and adjustments must be booked to the service center account. A revenue object code (e.g., 0703) should be used for these entries.

Appropriate accounting entries should be booked for every sale made and each payment received. Service centers can maintain internal billing and/or accounts receivable systems. Procedures should be established to ensure follow-up and collection of outstanding accounts receivable. As with billing procedures, the collection procedures should be implemented on a consistent and routine basis. Again, a monthly cycle is recommended.

In some cases, accounts receivable should be recorded to the UTMB general ledger at the end of the fiscal year.

When sales are made to outside entities, the service center should investigate the need to charge sales tax. If applicable, arrangements should be made to collect and remit the tax (contact Workforce Compensation and Reporting for more information).

When payments to a service center result in cash or checks being collected by center personnel, appropriate training and internal control procedures should be established to ensure proper accounting to safeguard UTMB assets. Contact Accounting for more information.

Audit services can assist with several of the above requirements.

Each service center must retain sufficient records to document and answer inquiries regarding service center costs and cost transfers, billing rate calculations, utilization of services, and billed charges. These records must be retained for fiscal year end plus seven years (FE+7) unless an audit or litigation claim is started before expiration of this period.

Each service center’s Record Retention Schedule must be consistent with these requirements.

 

DEFINITIONS

ALLOWABLE COSTS - A cost that is reasonable, allocable, treated consistently, and is in conformance with OMB Circular A-21 and particular contract or grants restrictions.

APPLICABLE CREDITS - Applicable credits are receipts or negative expenditures that act to offset or reduce costs. Examples of applicable credits include rebates, purchase discounts, allowances (where the agreement is not clearly and specifically identified as a gift by the vendor), recoveries or indemnities on losses, and adjustments for overpayments or erroneous charges.

BILLING RATE - A billing rate is a rate charged for goods and/or services that is developed from actual costs and use of services.

BREAK-EVEN PERIOD - A reasonable time-period in which aggregate revenues should equal aggregate expenses. UTMB policy has defined this reasonable time-period as five years.

DEPRECIABLE USEFUL LIFE - The estimated time period over which equipment will provide useful service. SEE American Hospital Association (AHA) Guidelines for determination of an assets useful life.

DIRECT COSTS - Service center direct costs are those costs that can be identified specifically with a particular service center unit or that can be directly assigned to such activities with relative ease and with a high degree of accuracy. These costs normally include service center costs relating to but not limited to salaries and wages, fringe benefits, other operating expenses, supplies and materials, equipment repairs, travel, and equipment depreciation.

EQUIPMENT DEPRECIATION - A systematic and rational process of allocating the cost of equipment over the depreciable life.

EXPENSE CODES - Object codes in the Financial Reporting System (FRS) that identify types of expense.

HISTORICAL COSTS - Actual costs incurred for salaries and wages, employee related expense, operations, travel, equipment, and buildings and improvements.

INDIRECT COSTS - Indirect costs are those that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular service center activity. UTMB institutional indirect costs consist of University general administration and general expenses, University operation and maintenance of plant expenses, housekeeping expenses, library expenses, student administration and services, building and improvement depreciation.

INTERDEPARTMENTAL TRANSFERS (IDT) - A transaction or process whereby a University department account is charged for goods and/or services provided by other University departments or service centers.

REASONABLE COSTS - Costs are considered reasonable if the nature of the goods or services acquired and the amount involved reflect the action that a prudent person would have taken under the circumstances prevailing at the time the decision to incur the cost was made.

REVENUE CODES - Object codes in the Financial Reporting System (FRS) that identify types of revenue.

UNALLOWABLE COSTS - Costs that are specifically addressed as unallowable costs in Section J of OMB Circular A21. Although there may be no question that these costs are necessary for the institution, the unallowability is by regulation.

WORKING CAPITAL -  Working capital for the purposes of this policy is the fund balance in the service center revolving account related to operating expenses (does not include accumulated equipment expense). When the fund balance carries a credit balance (negative), the account has working capital. The service center may maintain enough fund balance to fund their operations for not more than 60 days. This includes salaries and wages, fringe benefits, and maintenance and operation costs.

Last Revised: July 27, 2007

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