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System Status: 

Cost Treatment

In collaboration, BFS - Financial Analysis Office and BFS - General Accounting provide oversight and guidance to ensure that all Sales & Service Activities (SSA) comply with federal and UC policies, and recover costs to avoid impacts on other resources.

Cost Principles

  1. Allowable - A cost is allowable if it is reasonable and necessary for the operations of the activity and compliant with cost principles in the university and governmental policy and guidance. More information and examples of allowable and unallowable costs is located in the subsequent section.
  2. Allocable - A cost is allocable to a particular activity if the goods or services involved are able to be directly assigned to the activity based on the benefit provided.

 To determine if an expenditure is allocable, ask yourself the following questions:

  • Is it incurred solely to advance the work under the activity?
  • Does it benefit the SSA and other activities, and can it be distributed to all benefited activities using reasonable methods?
  • Does the basis for allocating the cost represent a reasonable estimation of the direct benefit provided to the activity?
  1. Reasonable & Necessary - A cost may be considered reasonable and necessary if the nature of the goods or services, and the price paid for the goods or services, reflects the action that a prudent person would have taken given the prevailing circumstances at the time the decision to incur the cost was made.

To determine if an expenditure is reasonable, ask yourself the following questions:

  • Is the cost a type generally recognized as necessary for the performance of the activity?
  • Does incurring this expenditure violate the restraints or requirements imposed by such factors as arm's-length bargaining, federal and state laws and regulations, or sponsored agreement terms and conditions?
  • Have the individuals incurring this cost acted with due prudence (discretion and good sense) in the circumstances? Have they considered their responsibilities to the institution, its employees, its students, the Federal Government, and the public at large?
  • Were the actions that were taken in respect to incurring the cost consistent with established institutional policies and practices applicable to the work of the institution, including sponsored agreements?
  1. Consistently Treated - All costs incurred for the same purpose, in like circumstances, must be treated uniformly either as Direct Costs or as Indirect (F&A) Costs. Since certain costs are normally treated as F&A costs these costs cannot be charged directly to federal awards unless the circumstances related to a particular project are clearly different from the normal operations of the unit. For questions related to Direct and Indirect Cost treatment, please contact the BFS - FAO.

Allowable Costs

As detailed in the previous section, costs are considered allowable in Recharge rates if they are reasonable and necessary, and compliant with institutional and governmental policy.

These include, but are not limited to:

  • Salaries and benefits of personnel directly related to the SSA; reflected in the percentage of effort dedicated to the operation and services/products being provided
  • Materials and supplies (consumables)
  • Equipment Depreciation
  • Non-capital equipment
  • Equipment service contracts
  • Maintenance and repairs
  • Travel
  • Communication fees, mailing, and other support costs
  • Prior year surpluses or deficits
  • Differential Income (External Users only)

Unallowable Costs

Certain costs, regardless of purpose are unallowable as a charge to federal awards. These costs cannot be recovered by including them in the Recharge rate charged to federal customers. 

Departments may explore other options for covering this cost, such as including a markup to external customers or using a portion of their departmental Differential Income recovery. For more information on options to cover unallowable costs, please contact BFS-FAO.

These include, but are not limited to: 

  • Administrative or clerical support with less than 5% effort related to the entire SSA
  • Advertising, marketing, and public relations (this includes travel for the purpose of these activities)
  • Alcoholic beverages
  • Alumni activities
  • Bad debt
  • Contingency reserves
  • Costs of goods and services for employees' personal use or the cost of providing services for free or a discounted rate
  • Entertainment costs
  • Equipment - Only Depreciation may be included (see Equipment)
  • Fines and penalties
  • Fundraising and investment costs
  • Internal Interest
  • Lobbying costs


Recharge rates shall not be developed in a manner that discriminates against any internal group of users. The same rate shall be charged for the same level of services or products purchased under the same circumstances. The use of special rates, such as for high volume work or less demanding applications, is allowed, but must be equally available to all users who meet the criteria.

UCSD and federal government does not prevent the department from charging External Users a higher rate than that charged to Internal Users. In fact, External User rates must include overhead cost recovery, also known as Differential Income.


Capital equipment used in support of the SSA must be included in the SSA proposal. However, capital equipment cannot be charged directly to the Recharge operation fund.

Instead, the equipment will be depreciated in accordance with UCSD Equipment Management policies and procedures. The Depreciation expense shall be included as a cost in the rate development and charged as an expense to the Recharge operation fund, unless the equipment is funded by the Federal government or is identified as cost sharing to a federal project.

Federally-funded equipment cannot be Depreciated or included in the costs basis for UC customers. SSAs may create a rate for non-UC users that includes the federal Depreciation component in the rate. Activities can then depreciate the federal equipment for non-UC users only. 

In certain circumstances, the equipment Depreciation may be excluded from the rate calculation as required by institutional policy. These rates can only be applied to the rate for UC customers. You will need to provide the rationale for the exception to policy as part of the proposal.  

Overhead Cost Recovery - Differential Income (DI)

The overhead cost recovery rate, also referred to as Differential Income, is the rate applied to all sales to non-UC users of activities in order to recover the Indirect Costs related to the activity.

For more information on overhead cost recovery, click here. 


The University may choose to subsidize the operation of a SSA using an allocation of discretionary or other allowable funds. In such circumstances, all costs attributed to the SSA, and the sources of funds to cover the subsidized expenses, must be clearly identified and factored into each of the developed rates. Subsidies must be applied in a manner that does not discriminate between Internal Users.

Unless approved by BFS-FAO, rates charged to non-university users may not to be subsidized.

Details of subsidized expenses must be reported in the SSA proposal. This is essential for proper treatment of the subsidies in the Facilities and Administrative (F&A) cost proposal.

Subsidized SSAs must report:

  • Amount of subsidy
  • Expenses being subsidized
  • Subsidy commitment period
  • Subsidizing fund and/or department
  • Subsidized user (if applicable)
    • For instance, the federal government may provide funds to subsidize services or products being provided to federal awards.

Record Retention

It is the responsibility of each originating department or unit to maintain records of the detail contained in all SSA transactions and to answer inquiries concerning those charges.

All SSAs must be documented and records maintained to support;

  • Proposals
  • Expenditures
  • Revenues
  • Billings and invoices
  • Cost adjustments
  • Cost transfers

Records should be kept at least three years from the date the final expenditures report was submitted.

Exceptions to Policies

Certain requests pertaining to Recharges require additional justification and approval no matter what the activity is.

They are:

  • Equipment Depreciation Exception - Request to exclude Depreciation from the rate development.
  • Differential Income Exception - Request to not recover the campus 11% Differential Income from some or all external customers.