Comptroller's Office  Policies and Procedures Manual
Effective: 01/01/2000	Revised: 01/11/2007

CMP 401-02:NAU Service Center Policy ***DRAFT***

To establish a comprehensive University policy that governs Service Centers to ensure compliance with applicable NAU, Board of Regents, State, and Federal regulations. Service centers are revenue producing enterprises that provide services/products primarily to University Departments.

All university service centers

TABLE OF CONTENTS

1. DEFINITIONS
2. ESTABLISHING A SERVICE CENTER

1. Criteria for establishing a Service Center/Specialized Service Facility
2. Documentation for establishing a Service Center/Specialized Service Facility
3. Type of Service Center

3. INAPPROPRIATE SERVICE CENTER ACTIVITIES

1. Competition with private enterprise; unrelated business
2. Harmful inefficiencies or internal competition

4. COST ACCOUNTING GUIDELINES

1. Accounting practices
2. Cost centers
3. Costs included in billing rates
4. Basis for direct charges
5. Separate billing rates
6. Capital usage factors
7. Internal Service Center overhead
8. Frequency of billing rate calculations
9. Break-even operation
10. Revenue or expenditure transfers
11. Exceptions

5. ADMINISTRATIVE GUIDELINES

1. Separate budgeting and accounting
2. Official financial records
3. Record keeping procedures and systems
4. Identification of equipment
5. Stock inventories
6. Schedule of billing rates
7. Billings to university departments
8. Billings to the public
9. Capital renewal and replacement accounts
10. Institutional overhead
11. Administrative service charges
12. Exceptions

I.  DEFINITIONS :  Back to top

Acquisition Cost: Cost of acquiring materials and supplies and capital assets, including taxes, freight, and installation costs to place the materials and/or assets into intended use (see COM 430-01 for definition of capitalized expenditures). Acquisition cost of equipment and buildings excludes the cost of land. 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).

Auxiliary Enterprise: A separately organized University unit or activity specifically established to sell services/products on a continuing basis to students, faculty, staff, and the general public primarily for personal use. These units may sell to NAU departments if revenues generated represent a minor percentage of total revenues. Auxiliary enterprises charge fees directly related to, although not necessarily equal to, the cost of the services/products.

Auxiliary enterprises differ from Service Centers in that Service Centers generally are subsidiary to a larger university unit (e.g., Transportation Services is a part of Capital Assets), provide support primarily to individuals and university units for institutional activities (e.g., instruction, research, etc.), and/or can not generate a profit from the sales of services/products.

Billing Rate: An amount established to charge for specific services/products. The billing rate may vary by types of customers and/or services/products, however, rates charged to Federal funds, either directly or indirectly, may not subsidize non-Federal users or rates in any way. The rate shall be determined by dividing the costs of a particular service/product by the billing unit. Billing rates may also include surcharges to non-university users in an effort to promote full costing and to comply with competition laws of the State of Arizona.

Billing Unit: The basis on which services/products are offered (e.g., hours, unit price, etc).

Break-even Period: A reasonable time-period over which cumulative revenue for a service/product equals cumulative expenses, exclusive of net revenues realized from providing business to non NAU customers (reference Section IV.E.3.).

Capital Usage Factor: The annual cost of capital equipment, buildings and building improvements. This includes depreciation, and lease/rental. NOTE: NAU utilizes straight line depreciation for capital equipment, buildings, and building improvements.

Carry-forward: The over or under-recovery of current operating costs resulting from billing rates that vary from actual cost (generally calculated on a fiscal year basis). Carry-forward is an allowable cost adjustment to subsequent year rate computations and promotes "break-even" within the break-even period. When determining account balances Service Centers must impute revenue as if it were collected at the normal rate (exclusive of discounts or surcharges) to avoid reflecting false deficits or surpluses. This is critical to avoid subsidies between users (e.g., the Federal government cannot subsidize non Federal users). The carry forward balance cannot be greater than 60 days worth of expenditures, excluding depreciation.

Cost: Actual expenditures incurred for salaries & wages, employee related expense, operations, travel, capital usage and associated administrative service charges.

Cost Centers: Units of activity or areas of responsibility into which a Service Center is divided for accountability purposes, and to which costs are allocated or directly assigned (e.g., Lockshop, Electrical Shop within Capital Assets Services). Units should establish cost centers for similar services/products when the annual dollar volume becomes significant and the cost of providing particular services/products varies significantly from other services/products.

Current Depreciable Value: Acquisition cost of a capital asset less accumulated depreciation. Depreciation funds must be transferred to an equipment replacement account.

Current Operating Costs: Represents allowable salaries & wages, employee related expenses (ERE), operations, travel, internal Service Center overhead, capital usage factor (if applicable) and associated administrative service charges for the operation of a Service Center and intended to be recovered through the billing process. Current operating costs may include unallowable costs if billed to external users (e.g., advertising costs to attract external users).

Depreciable Life: The time period or units of activity over which the value of a capital asset is distributed (e.g., years, miles driven for vehicles, etc.) to determine annual depreciation.

Depreciation: The process of allocating the cost of a capital asset, net of residual or salvage value if applicable, over the estimated depreciable life. Normally only straight line depreciation will be recognized.

Imputed Revenue: The process of determining Service Center revenue without regard of billing rate discounts and/or surcharges (e.g., the normal billing rate of a Service Center is $10 per hour. A discount of 50 percent is provided to a customer who uses 10 hours of service. The actual revenue realized is $50 whereas the imputed revenue is $100). Departments must track any imputed revenue.

Institutional Indirect Costs: Costs related to specific support functions that are often budgeted as "academic support" or "institutional support," and are provided to departments on a non-billable basis. The three largest of these are general & administrative (institutional administration), operations & maintenance, and college/departmental administration. General & administrative costs include executive management, payroll, personnel, purchasing, etc. Operations & maintenance costs include routine building maintenance and custodial services, utilities, etc. Other institutional indirect cost categories are sponsored projects administration, student administration & services, library, building depreciation, equipment depreciation, and interest expense related to capital.

Interdepartment Purchase Orders (IDPO): IDPO’s are used by University departments when procuring services/products provided by a Service Center to be charged to another University account. This can be done on-line. (PO)

Internal Service Center Indirect Costs: Costs that can be readily and specifically identified with (and are charged to) the Service Center but not with a particular service/product provided (e.g., supervisory costs). Service center indirect costs must be allocated to each service/product in a logical manner beneficial of the relationship to the service/product.

Net Revenue: Receipts realized in excess of operating costs and scheduled capital usage recovery resulting from services/products provided to any non NAU customers (reference Section IV.E.3.). The use of net revenue is left to the discretion of the service center and/or operational unit to which the service center reports. Recommended uses include reduction of future billing rates or transfer to a capital replacement account provided the service center can demonstrate the net revenues resulted from services/products provided to non NAU customers.

Non NAU Customers: Non NAU customers represent individuals, groups, or organizations paying for service center services/products with funds other than state, local, and/or sponsored funds which are under the fiscal oversight of NAU with the following exception. To the extent possible, Sponsored agreements with "for profit" sponsors should be treated as non NAU customers so that NAU, as a state agency, is not subsidizing these organizations.

Non-Interdepartment Billing: An invoice for services/products provided by a Service Center but not charged to a University account (e.g., animal per diem charges for Mayo Clinic researchers??????).

Private Enterprise: External business enterprises.

Recharge Center: A form of Service Center (see Service Center below) whose activities are generally incidental to total departmental activity and no formal cost studies are performed (e.g., photocopying done on a department copier and recharged to the user).

Service Center: A university unit or activity whose primary customers are University departments generating greater than 50 percent of the unit's revenues. Interdepartmental billings are the predominant revenue source for a Service Center. Billings rates for Service Centers are designed to fully recover current operating costs.

Specialized Service Facility: A service activity that provides unique services to a select group(s) rather than the general university (e.g., animal care facility, wind tunnel, electron microscopy) and has an annual operating budget of $1,000,000 or more. Billing rates for Specialized Service Facilities should include Service Center costs (see above) plus institutional overhead costs such as depreciation, operations and maintenance costs (e.g., utilities, custodial), and general university administrative costs (e.g., Purchasing, Payroll).

Subsidized Billing: A billing using a rate less than the full calculated rate per rate study computations. This occurs when a Service Center is not entirely self supporting (e.g., receives partial support through State appropriations). An intended loss cannot be carried forward when determining subsequent year’s rates (see Carry-forward above). Subsidized funds must be tracked on an annual basis.

Unallowable Costs: Costs that must be excluded from Service Center or Specialized Service Facility billing rates. The following represents examples of common unallowable costs( see Appendix A for a comprehensive list of unallowable costs):

• Advertising of services/products
• Alcoholic beverages
• Bad debts
• Entertainment (for example, amusement, social activities)
• Fines and penalties
• Goods or services not related to the Service Center

Unrelated Business: Any activity that is:

• A trade or business. A trade or a business is any activity that is carried on for the production of income from the sale of services/products. Also, there must be a "profit motive".
  AND

   

• Regularly carried on. Regularly occurring or seasonal activities normally qualify as regularly carried on," whereas intermittent, casual, or sporadic activities do not.
  AND

   

• Not "substantially related" to the University's tax exempt purpose (i.e., teaching and research). 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.]
  AND

   

• Not covered by specific IRS Code exceptions.  For example, an activity conducted primarily for the convenience of the University community.

Income or revenue from unrelated business may be subject to taxation under IRS Code Sections 511-513. Contact Financial Services (Comptroller) for assistance in determining what constitutes unrelated business income.

II.  ESTABLISHING A SERVICE CENTER:  Back to top

1. Criteria for establishing a Service Center. A Service Center should only be established after completing an internal marketplace analysis. This analysis should demonstrate that there is sufficient university demand for the proposed services/products to ensure long term economic operations, and one of the following:

1. The proposed services/products are not currently provided by existing Service Centers.
   OR

    

2. If similar services/products are currently available from an existing Service Center(s), then the proposed Service Center must be able to demonstrate it can provide the services/products to customers more efficiently or economically.

2. Documentation for establishing a Service Center/Specialized Service Facility. To establish a Service Center/Specialized Service Facility, submit the following to Financial Services (Comptroller) and Budget Planning & Management.

• A completed New Dept/Unit Application.
• Appropriate "marketplace analysis" documentation. Documentation should demonstrate that the criteria outlined in II.A. have been met. This analysis must be approved by the appropriate VP or designee.
• A proposed operating budget by cost center and summary of proposed cost accounting practices/standards, including statistical/financial record keeping, rate setting methodology, billing/charge-out practices, and initial billing rates.

A new Dept/Unit will be established upon review and approval of the above documentation by COM/ORSPA/FPA.

3. Type of Service Center. Unless documentation or circumstances indicate otherwise, a new Service Center will be considered a regular "Service Center" (not a "Specialized Service Facility") and will be subject to applicable billing rate guidelines. [NOTE: If circumstances change, a Service Center may request reclassification through the efforts of COM/ORSPA/FPA. The request may require submission of documentation similar to that used to establish a new Service Center].

III.  INAPPROPRIATE SERVICE CENTER ACTIVITIES:  Back to top

1. Competition with private enterprise; unrelated business.  Service centers:

1. must avoid providing services/products that violate Arizona Board of Regents policy regarding competition with private enterprise. In particular, Chapter I, section 1-105 of the Board of Regents policy manual and the Listing of Goods, Services and Facilities by Standard Industrial Classification. [Note: Where appropriate, or when in doubt, Service Centers should have outside party customers sign a statement that the particular services/products are not available from commercial sources.]. Questions concerning competition with private enterprise should be directed to the NAU Purchasing Director.
   AND

    

2. should avoid providing services/products that qualify as "unrelated business" under IRS Code Sections 511-513. Contact Financial Services (Comptroller) for assistance in determining what constitutes "unrelated business".

2. Harmful inefficiencies or internal competition. Service centers should not provide services/products that:

1. Can be produced by another source (University or private enterprise) in a more economical, timely, or efficient manner, or
2. Will create harmful intra-University competition for scarce resources, or
3. Have low customer-demand and comparatively high operating costs.

IV.  COST ACCOUNTING GUIDELINES:  Back to top

1. 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 must not be changed merely for budgetary or administrative convenience.

    

2. Cost centers. Within a Service Center only similar types of services/products should be grouped together in a unique cost center.

    

3. Costs included in billing rates. Billing rates should only include costs that are:

    

1. Reasonable. Reasonable costs are those necessary for the operation of a Service Center or cost center and which are consistent with established University and/or Board of Regents, State, and Federal policy or regulations. This will usually include salaries & wages, employee related expenses, operations, travel, and associated administrative service charges. Capital depreciation, institutional overhead and surcharges may also be included in the billing rate if appropriate.
2. Consistently applied according to generally accepted accounting principles.
3. Properly allocable to services/products in accordance with relative benefits received or other equitable relationship. The following should be observed:

1. Properly allocable costs are those that:

1. Solely benefit the service/product.
2. Benefit the service/product and other services/products in proportions that can be reasonably approximated (for example, compressed gas).
3. Are necessary to the overall operation of the Service Center and are partly allocable to the service/product (for example, an allocation of Service Center overhead).

2. Any costs (or revenue) allocable to a service/product may not be shifted to other services/products if the shift will transfer the over or under-recovery of expenses (revenues) between services/products (see Section IV.J.) or the shift will circumvent restrictions imposed by law or policy.

4. Allowable. Unallowable costs (see definition for Unallowable Costs) cannot be included in billing rates charged to institutional funds. [Note: Service centers should not incur unallowable costs unless other sources of funds (for example, public customers) are available to cover them.].

4. Basis for direct charges. The costs of a service/product will be charged directly to customers based on:

1. Actual consumption or use of the service/product times the billing unit.
2. A schedule of billing rates that does not arbitrarily discriminate between the University's Federal and non-Federal supported activities (including use by the institution for internal purposes).
3. Actual costs less applicable credits. Examples of applicable credits include:

1. Purchase discounts, rebates, or allowances (including "educational discounts" where the arrangement is not clearly and specifically identified as a gift by the vendor),
2. Recoveries or indemnities on losses,
3. Adjustments for overpayments on erroneous charges

Projected current operating costs may be considered in lieu of actual costs to the extent they are based on known facts and not speculation. For example, the following year's approved operating budget would be acceptable.

5. Separate billing rates. In most situations separate billing rates must be developed for services/products that meet any of the following criteria (exceptions must be approved in advance by the Executive Vice President for Administration & Finance:

1. Costs associated with a particular service/product require substantially different levels of resources and are therefore significantly different than the costs of other services/products offered by that Service Center (e.g., Capital Assets, journeymen are more specialized than non-journeymen therefore increasing the level of service and the rate charged).
2. Are sold to Federal customers. When services/products are paid with Federal funds and the Service Center receives direct or indirect Federal support the Federal support must be netted from the billing rate (e.g., salaries & wages, operations, and/or travel paid directly by Federal sources or capital depreciation included in the billing rate associated with equipment/facilities acquired with Federal funds).
3. Are sold to non NAU customers. Non NAU customer rates are fully-developed billing rates which should recover all costs, including institutional overhead, capital depreciation, unallowable costs (see Section I., Unallowable Costs), and expenditures incurred by State/General Operating Funds. Non NAU customer rates will minimize the potential for competition (or unfair competition) with private enterprise and therefore may also include a reasonable surcharge resulting in net revenue being realized. Such net revenue, however, may be subject to unrelated business income tax (reference Section I, "Unrelated Business Income Tax").
4. Any other time a discount or surcharge is extended

6. Capital Depreciation. Billing rates cannot include the acquisition cost of capital expenditures. Instead, subject to limitations specified above, billing rates may include "capital depreciation" related to the use of Service Center equipment provided the asset(s) exist and are usable, used, and needed. Capital usage factors is computed based on depreciation methods for equipment. Capital usage factors for the lease/rental of equipment are determined based on the actual lease/rental amount. The following rules apply:

1. The computation of depreciation must be based on the acquisition cost of the capital assets involved. [Note: Consistent with section IV.E.2., billing rates for federal customers must exclude any portion of capital asset costs borne or donated by the Federal Government, as well as any portion of the cost prohibited from recovery by law or agreement.]

   1. The computation of depreciation for buildings & improvements will be based on a 40 year life. The amount of depreciation is limited to the portion of building space (i.e., net assignable square feet) that relates to the Service Center.
      
      
   2. The computation of depreciation for equipment will be based on the straight-line depreciation (contact Property Control for useful life information). No depreciation may be computed or charged on equipment that has outlived its useful life.

2. Capital asset records & inventories. Capital depreciation must be based on adequate property records: complete physical inventories must be taken at least every two years to ensure that the assets exist and are usable, used, and needed. Inventory is tracked in the Property Control database and coded specifically to the service center account

7. Internal Service Center overhead. Internal Service Center overhead usually should be financed by the Service Center's operating account(s) accounts and be included in billing rates for each service/product in a logical manner beneficial of the relationship to the service/product.
   
   
8. Frequency of billing rate calculations. Service centers should review billing rates annually (generally to coincide with the university's fiscal year) and adjust them as necessary to achieve a break-even condition. Proposed billing rate changes that cross vice presidential areas must be submitted for review to Budget Planning & Management.
   
   
9. Break-even operation. Service center billing rates should be designed to recover the aggregate cost of a service/product over a defined break-even period (after necessary reductions for current operating costs borne by non-operating accounts). The break-even period for most services/products should be one year although a longer break-even period may be established when necessary. Exceptions to this may occur when providing services/products to non NAU customers (reference Section IV.E.3.).

   Example, because of high "start-up costs", the cumulative cost of a new service/product may exceed cumulative revenue during the first year or two of availability. [Note: Revenue for a service/product does not have to equal the cost of providing the service/product during any one fiscal year, provided the applicable billing rates are reviewed periodically for consistency with the "break-even plan" and adjusted if necessary. In this respect, carry-forward adjustments to future year rates may be necessary to accomplish break-even.]

10. Revenue or expenditure transfers. Since revenue or expenditure transfers between cost centers and other accounts may impact billing rate computations (including break-even), such transfers generally are not allowable. Exceptions to this are capital depreciation and institutional overhead recoveries made through the billing rate which must be transferred to capital replacement and institutional overhead recovery accounts respectively in accordance with pre-approved schedules. Additionally, surplus revenue may not be transferred to general fund accounts. Exceptions to this are cases where the surplus represents net revenue resulting from a surcharge to non NAU customers. In such cases the net revenue may be transferred to a separate account provided the service center can demonstrate the net revenue resulted from services/products provided to non NAU customers (reference Section IV.E.3.).
    
    
11. Exceptions. Service centers may request specific exceptions to section IV guidelines. Written requests must be submitted to the Vice President for Administration & Finance for review and approval. Approved exceptions usually will be temporary in nature and will not relieve the Service Center of long-term responsibilities for complying with section IV guidelines.
    

V.  ADMINISTRATIVE GUIDELINES.  Back to top

1. Separate budgeting and accounting. Service Centers and Specialized Service Facilities must be separately budgeted and accounted for apart from non-Service Center activities (for example, teaching, research). In particular, this affects Service Centers that operate within academic, research, academic support, or institutional support departments. Such Service Centers often use operating resources funded by non-Service Center accounts (e.g., State/General Operating Funds, Indirect Cost Recovery Funds) to subsidize the cost of providing services/products to customers. Regardless, the following rules apply:

1. Consistent with section IV.B., separate accounting should be established for individual cost centers (e.g., separate Dept/Units, sub-Units and/or reporting categories).
2. The separate Service Center account(s) must contain only revenues and expenditures directly related to the provision of services/products to customers for that Service Center. Funds in these accounts cannot be expended for non-Service Center activities such as teaching or research.
3. Annual budgeting of all Service Center revenue and expenditures must conform with applicable University and Arizona Board of Regents budgeting procedures.

2. Official financial records. Advantage is the official financial database for the University and must be the basis of all financial related information that affects billing rate computations. Non-Advantage financial record keeping systems must be reconciled to Advantage on a regular basis.
   
   
3. Record keeping procedures and systems (e.g., subsidiary records) must be established and maintained by Service Centers to capture all financial or statistical data that is:
   
   

1. Necessary for good internal control and Service Center management.
2. Necessary for development and maintenance of service/product billing rates.
3. Not available in necessary detail or format from central university databases such as Advantage.

Examples of subsidiary record keeping include:

• Financial records that capture revenue (both actual and imputed), expenditures, and fund balances (no more than 60 days worth of expenditures) to services/products within cost center.

• Statistical records that capture units of service available and consumed (for example, vehicle miles, central processing units, animal care days).

• Effort reporting records that capture employee work-time (in hours or percentage of time) to services/products within cost center.

• Inventory systems to account for raw materials, work in process, finished goods, and resale merchandise.

• Depreciation schedules showing annual depreciation for each piece of equipment.

4. Identification of equipment. Service center equipment must be identified separately from non-Service Center equipment via the University's Property Control System. The Service Center Dept/Unit must be assigned to the Service Center equipment in the Property Control System to distinguish it. The Service Center should contact Property Control for assistance in establishing and maintaining this inventory.
   
   
5. Stock inventories. Physical inventories of raw materials, work in process, finished goods, and re-sale merchandise, when material in value ($25,000 or more) must be taken at fiscal year end. Inventories must be valued using an inventory method approved by Financial Services (Comptroller).
   
   
6. Schedule of billing rates. Service centers must maintain a schedule of current billing rates and make them available upon request.
   
   
7. Billings to university departments are done through the interdepartment purchase order (PO). Such billings will be recorded to an appropriate PO revenue source code in Service Center accounts, and to appropriate operations or capital object codes in customer accounts.
   
   
8. Billings to the public are done through established invoicing/billing procedures (see COM 306).
   
   
9. Equipment Replacement Accounts. Separate Advantage Dept/Units must be established to account for all capital related additions and expenditures being recovered by Service Centers and Specialized Service Facilities. Additions to these accounts will be made by cash transfers from appropriate Service Center revenue accounts. Such transfers will be based on the amount of revenue (i.e., cost recovery) that logically relates to capital depreciation in billing rates (i.e., based on an analysis of billing rate components). Although funded-capital accounts will belong to Service Centers, they must be used solely for Service Center related capital acquisitions. Contact Financial Services (Comptroller) for assistance in establishing capital replacements accounts or transferring funded-capital funds and depreciation amounts.
   
   
10. Institutional overhead recovered according to section IV.G. will be transferred to appropriate local funds accounts on a periodic basis, but no less frequently than once a year.
    
    
11. Administrative service charges (ASC) Service centers are subject to ASC in accordance with prevailing policies and procedures. When these charges apply they must be incurred against a Service Center's operating account(s).
    
    
12. Financial Services (Comptroller) prepares a year end report on Service Center fund balances in order to identify units with excess fund balances. An excessive fund balance is defined as a balance greater than 60 days of total annual expenditures, exclusive of depreciation. This report is distributed to the Vice Presidents/Vice Provosts who have responsibility for the Service Centers.
    
    
13. Exceptions. Service Centers may request specific exceptions to section V guidelines. Such exceptions must be submitted in writing to the Executive Vice President for Administration & Finance for review and approval. Approved exceptions usually will be temporary in nature and will not relieve the Service Center of long-term responsibilities for complying with section V. guidelines.