Procedure: 403.A-Calculating Rates for Revenue Producing Activities (RPA)

Rate Calculations and Accounting for Subsidies
July 1, 1991

Revenue Producing Activity Rate Calculations and Accounting For Subsidies

A Revenue Producing Activity (RPA) is an operation, other than a major auxiliary, that charges for products or services and operates on fund 101, 128, 133, 136 or 144. Departments with RPA operations are required to document the cost of providing goods and services, including only those costs paid by the RPA operation itself. Replacement cost of equipment may not be built into rates, although depreciation on non-federally funded equipment may be included on fund 128 RPA operations. Rate documentation must be submitted with all requests for approval of a new RPA request. Up-to-date documentation must also be kept on file for all existing RPA operations for five (5) years.

The policies which apply to rates charged to each of the following classes of customers are listed below.
Internal:
This classification includes UW-Madison departments only.
UW System Institutions and State Agencies:
UW System institutions include the Universities of Wisconsin-Eau Claire, Green Bay, LaCrosse, Milwaukee, Oshkosh, Parkside, Platteville, River Falls, Stevens Point, Stout, Superior, Whitewater, Centers, and Extension. State agencies only include agencies of the State of Wisconsin. Universities outside Wisconsin are included in the external category. Other governmental agencies such as municipalities, school districts and counties are also included in the external category. The State Vocational, Technical and Adult Education (VTAE) Board is a state agency, while the local VTAE schools are external.
External:
This category includes students, faculty staff, private organizations (including student organizations, non-profits, and alumni associations), governmental organizations other than UW System institutions and Wisconsin state agencies, and the general public. UW-Madison faculty staff and students paying for a product or service with UW departmental or grant funds are considered internal.

Sales to Internal Customers

Sales to UW-Madison departments (internal customers) must be priced at or below the selling unit's cost of providing the product or service. This policy is based on federal guidelines outlined in the Office of Management and Budget (OMB) Circular A-21. For this purpose, costs include all salaries, fringe benefits (except fund 101), supplies and services, capital and other expenses directly attributable to providing the product or service. Interest earned or charged on fund 128 RPA's are to be included as increases or decreases in costs. Not included are indirect costs, such as depreciation on buildings, utilities, and custodial services.

Sales to UW System Institutions and Wisconsin State Agencies

The 1982 Guidelines to Rate Calculations issued by Internal Audit allowed the charging of direct costs only on sales to these customers. A UW System General administrative Policy Paper, which is now obsolete, required institutions to charge each other full costs, including university overhead. Grants and contracts from Wisconsin state agencies do not include overhead with the exception of federal pass-through grants and contracts, which are charged 8-15% overhead.
Because of the conflicting policies, we surveyed divisions about rates charged to UW System institutions and Wisconsin state agencies. A majority of responses indicated no sales to these customers. We found a variety of rate structures for those with sales, but most did include University overhead. We also discussed the issue at the April 1991 UW System Controller's Conference, and found no other institutions include overhead in their rates. The controllers unanimously agreed that overhead should not be included in the rates on such sales.
Therefore, effective July 1st 1991, prices charged to UW System institutions and Wisconsin state agencies should be set at the selling unit's cost of providing the goods or service. University overhead should not be included.

Sales to External Customers

The UW System Policy on competition with Private Sector governs all sales of products or services to external customers--not just sales by RPA's.
The policy sets criteria for judging the appropriateness of activities which may potentially be competitive with private sector businesses. In general, an activity must be integral to the fulfillment of the institution's instructional, research, or public service missions. If not, the activity may be allowable only if one of the exceptions outlined in the policy applies.
Criteria for setting prices for the services are also outlined on the policy. In general, products or services sold to customers outside the UW System (excluding Wisconsin state agencies) must be priced to recover all of the University's indirect costs as estimated by the Universities Federal overhead rate. The policy does permit other pricing structures under limited circumstances.
When University overhead is included in the rates, the RPA is likely to accumulate a surplus. This surplus may be used to reduce rates to internal users, to expand the operation (e.g., by purchasing new equipment), and/or to create a reserve for operating contingencies of up to two month's cost of operation. As long as all costs of the operation itself are covered, surpluses may then be used at the discretion of the division. In accordance with UW System Financial Policy and Procedure Paper #43, large cash balances should not be allowed to accumulate.

Rate Subsidies

Departments or divisions occasionally choose to subsidize all or part of the fees for a certain class of customers of the RPA. For example, graduate students in the department may be given free usage of a computer lab while faculty members are charged. Or, faculty members in the department are charged half price, while all other faculty members are charged full price. Or, users associated with a core grant are allowed free use of a facility, while all other users pay full price. This is referred to as a rate subsidy.
It is not acceptable to charge different rates for different internal customers. This would be a violation of federal OMB Circular A-21. An acceptable alternative which accomplishes the same objective is to charge the "subsidized" users the same rate as other users, but bill all or part of their charges (as individual charges or as a lump sum for a group) to the funding source providing the subsidy, such as gift or grant funds or 101 funds. If the RPA is on a fund 101 sub-department and a subsidy is also on 101 funds, it is not necessary to transfer the rate subsidies between the 101 sub-departments as long as the rate subsidy is documented in your records.
It is acceptable to use a similar mechanism to provide price breaks to certain classes of external customers. However, "rate subsidies" to external customers should not be provided if there is any chance the operation would be competing with private sector business unless any of the exceptions outlined in the UW System Policy on Competition with the Private Sector are met.
A core grant is a grant provided to support shared resources and facilities by a number of investigators who focus on common research problems. The core grant is integrated with a center's projects, although funded independently from them. If a core grant is involved, another method of providing rate subsidies may be acceptable, depending on the terms of the grant itself. It may be possible to charge a portion of the RPA's expenditures to the core grant and give core grant users a price break as if the expenditures paid by the grant were actually in lieu of their user fees. Careful records would need to be kept to prove that all users are, in effect, charged the same rate.

Operational Subsidies
In general, RPA's should be self-supporting. However, you may choose to subsidize an operation by paying a portion of its costs from another funding source. This is referred to as an operational subsidy.
There are two acceptable options for accounting for the subsidy:

  1. The preferred method of accounting for the subsidy is to deposit all revenue to the RPA funding, pay all costs related to the RPA itself from RPA funding, and transfer expenditures on a lump sum basis to the source of the subsidy. The expenditure transfer would be processed on a Non-salary Payment Transfer form.
    For example, assume you have a fund 128 copy operation with $10,000 in estimated expenditures, $5,000 of which will be charged to class code 3213 (repair and maintenance--copy machines). Because this is a start-up year and the operation has not yet built its customer base, you choose to subsidize the cost of copy machine maintenance from 101 funding. All expenditures should be paid from fund 128 and a Non-salary Payment Transfer form should be processed moving $5,000 in expenditures from fund 128 to fund 101, class code 3213.
  2. The other acceptable option is to pay a portion of the expenditures from the funding source providing the subsidy. The disadvantage of this option is that all expenditures related to the RPA are not recorded in the same place, so it may be difficult to easily determine the full cost of providing a product or service.


When charging UW-Madison customers, deduct the subsidized costs from estimated expenditures before performing rate calculations. Unless there are extenuating circumstances, rates charged to all other customers should include the full cost of providing the good or service-including subsidized costs. 101 fringe benefits are to be treated as a subsidized cost for this purpose. Overhead should be calculated on the sum of the RPA's costs and subsidized costs.
If the subsidy is paid by other than grant funds and any of the subsidized expenditures are included on rates, the portion of the revenue representing recovery of these expenses must be deposited to the funding source providing the subsidy, except the portion related to 101 fringe benefits.
On grants and contracts, this revenue is considered to be grant-related income. On federal grants and contracts, accounting for grant-related income is governed by OMB Circular A-110 and agency policies. To determine the proper accounting for grant-related income on a particular federal or non-federal grant or contract, contact the appropriate accountant at Research and Sponsored Programs.

 

Procedure: 403.A-Calculating Rates for Revenue Producing Activities (RPA)