INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS (SNP) School Nutrition Association Annual National Conference Philadelphia, Pennsylvania July 20,

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1 INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS (SNP) School Nutrition Association Annual National Conference Philadelphia, Pennsylvania July 20, 2008

2 SNA 2006 INDIRECT COST STUDY What Are They? How Are They Determined? What Does the Program Pay?

3 SNA Study of Indirect Costs Many methods employed Are methods allowable? Are methods understood? 52% of Respondents were charged in vs. 10.6% in 1994* 17% of respondents report charged starting within the past 5 years. *USDA Cost Study

4 Are Methods Understood? Of respondents: 25% didn t t know method used 20% didn t t know when charges started 41% didn t t know method used to compensate for under/over charges

5 Are Methods Understood? Of respondents: 11% didn t t know how costs were recovered by district if not charged to the program. There was a lack of understanding what qualified as a indirect cost vs. an direct cost.

6 TOPICS TO COVER A-87 Federal Cost Principles Objectives Applicability to the SNP Basics Indirect Cost Methodology

7 OBJECTIVES OF THE FEDERAL COST PRINCIPLES OBJECTIVE 1: Cost Allocation OBJECTIVE 2: Cost Recovery

8 COST PRINCIPLES OBJECTIVE 1: COST ALLOCATION Costs charged to cost objectives (programs, etc.) that benefit from them. Shared costs charged to cost objectives commensurate with benefit received.

9 COST PRINCIPLES OBJECTIVE 2: COST RECOVERY If a cost is allocable to our program, from whom can we get the resources to pay it? Shifting deficit to another program NOT an option.

10 COST PRINCIPLES APPLICABILITY TO THE SNP TWO DIMENSIONS: EXTERNAL: Program Operator Incurs Program Costs; Seeks Recovery From Awarding (State) Agency. INTERNAL: Internal Service Provider (General Fund) Incurs Costs That Benefit Programs; Seeks Recovery From Program Offices.

11 COST PRINCIPLES APPLIC. TO THE SNP EXTERNAL DIMENSION (GENERAL MODEL): REIMBURSEMENT CLAIMED FOR PROGRAM COST Program Operator Prepares Claim for Reimbursement Program Operator Submits Claim to State Agency CLAIM: Direct Costs Indirect Costs Program Operator Credits State Reimbursement To Program $$$$$$ STATE CHECK State Reimbursement Check Issued State Agency Analyzes Claim; Approves COSTS For Reimbursement

12 COST PRINCIPLES APPLIC. TO THE SNP EXTERNAL DIMENSION (SNP MODEL): REIMBURSEMENT CLAIMED FOR MEALS SERVED SFA Prepares Claim for Reimbursement SFA Submits Claim to State Agency CLAIM: Paid, Free, & Reduced-Price Meals SFA Credits State Reimbursement To Nonprofit Food Service $$$$$$ STATE CHECK State Reimbursement Check Issued State Agency Analyzes Claim; Approves MEALS For Reimbursement

13 COST PRINCIPLES APPLIC. TO THE SNP INTERNAL DIMENSION: GENERAL FUND RECOVERS COSTS THAT BENEFITED NONPROFIT SCHOOL FOOD SERVICE General Fund Incurs Costs Benefiting Food Service G/F Pays Costs Payments to Employees, Contractors, Insurers, etc. General Fund Bills Food Service Billings Checks, Funds Transfers, Credits, etc. Food Service Pays Bills

14 COST PRINCIPLES APPLIC. TO THE SNP: SUMMARY EXTERNAL DIMENSION: SFA claims meals, not costs. Indirect cost methodology does not affect claiming NSLP/SBP reimbursement. INTERNAL DIMENSION: Food Service is SFA s portal for collecting NSLP/SBP reimbursement. G/F operates indirect cost activities; may recover costs by billing Food Service. Appropriateness of G/F billings may be an issue st Qtr 4th Qtr East West North

15 COST PRINCIPLES BASICS ALLOWABLE & UNALLOWABLE COSTS DIRECT & INDIRECT COSTS IDENTIFICATION OF INDIRECT COSTS AUTHORIZATION TO USE INDIRECT COST METHODOLOGY UNRESTRICTED & RESTRICTED RATES

16 COST PRINCIPLES BASICS ALLOWABLE & UNALLOWABLE COSTS ALLOWABLE COST can be reimbursed from Federal funds. To be ALLOWABLE, must conform to criteria in A-87, Attachments A and B. Costs that don t conform are UNALLOWABLE, hence cannot be reimbursed from Federal funds.

17 COST PRINCIPLES BASICS CRITERIA FOR ALLOWABLE COSTS There must be a BENEFIT TO THE GRANT- SUPPORTED ACTIVITY! A-87, Attachment A lists criteria for making this determination.

18 COST PRINCIPLES BASICS ALLOWABLE COSTS: CRITERIA FOR BENEFIT TO PROGRAM REASONABLE and NECESSARY for program purposes! Necessary to carry out the grant. Reasonable if a prudent person would incur the cost in like circumstances. Example: May be NECESSARY to provide attendees a meal in order to carry out a conference. Not REASONABLE to make that meal a multi-course gourmet repast!

19 COST PRINCIPLES BASICS ALLOWABLE COSTS: CRITERIA FOR BENEFIT TO PROGRAM NET OF APPLICABLE CREDITS DOCUMENTED CONFORM TO PROGRAM-SPECIFIC RULES ETC.

20 COST PRINCIPLES BASICS ALLOWABLE COSTS: CRITERIA FOR BENEFIT TO PROGRAM Satisfy all A-87 A criteria and your costs will fly! fly!

21 ALLOWABLE & UNALLOWABLE COSTS RULES FOR SPECIFIC ITEMS OF COST Found in A-87, Attachment B. Must be read in conjunction with Attachment A Criteria.

22 ALLOWABLE & UNALLOWABLE COSTS RULES FOR SPECIFIC COST ITEMS SOME ALLOWABLE COST ITEMS: Salaries & Benefits Travel Training & Staff Development Supplies Meetings & Conferences Printing & Publication

23 ALLOWABLE & UNALLOWABLE COSTS RULES FOR SPECIFIC COST ITEMS UNALLOWABLE COSTS AVOID! Alcoholic Beverages Contributions to Contingency Funds Entertainment General Government (Generally) Lobbying

24 DIRECT & INDIRECT COSTS DIRECT COST Incurred specifically for a cost objective. SNP examples include: Wages & Salaries of staff working in Non- Profit School Food Service. Supplies for use in operating Non-Profit School Food Service.

25 DIRECT & INDIRECT COSTS INDIRECT COSTS Administrative Overhead costs. Benefit multiple cost objectives. Assigned to cost objectives by allocation. Examples may include human services, payroll, purchasing, accounting, facilities mgt., etc.

26 DIRECT & INDIRECT COSTS Q: Which cost items are inherently indirect? A: Very few. Classification as direct or indirect normally depends on treatment in accounting system prescribed by State.

27 COST PRINCIPLES BASICS IDENTIFICATION OF INDIRECT COSTS Program operator claims indirect cost via shorthand methodology that requires: 1. Indirect Cost Rate,, and 2. Direct Cost Base

28 COST PRINCIPLES BASICS IDENTIFICATION OF INDIRECT COSTS 2 DIMENSIONS: DERIVING INDIRECT COST RATE & DIRECT COST BASE APPLYING RATE TO ACTUAL COSTS

29 COST PRINCIPLES BASICS IDENTIFICATION OF INDIRECT COSTS DERIVING INDIRECT COST RATE Divide INDIRECT COST POOL by DIRECT COST BASE Base includes both ALLOWABLE and UNALLOWABLE DIRECT COSTS

30 COST PRINCIPLES BASICS IDENTIFICATION OF INDIRECT COSTS DIRECT COST BASES OFTEN USED: Direct Wages & Salaries Modified Total Direct Costs (MTDC)

31 COST PRINCIPLES BASICS AUTHORIZATION TO USE INDIRECT COST METHODOLOGY PROGRAM OPERATOR MUST PREPARE INDIRECT COST RATE PROPOSAL (ICRP) A schedule documenting formulation of INDIRECT COST RATE.

32 COST PRINCIPLES BASICS AUTHORIZATION TO USE INDIRECT COST METHODOLOGY A-87 may require submission of ICRP to Federal Cognizant Agency. Speaks to program operator on behalf of all awarding agencies regarding cost allocation & recovery. Approves indirect cost methodology for use in all the program operator s Federal programs.

33 COST PRINCIPLES BASICS AUTHORIZATION TO USE INDIRECT COST METHODOLOGY STATE EDUCATIONAL AGENCY (SEA) IS COGNIZANT FOR LOCAL EDUCATIONAL AGENCIES (LEA). Directs LEA cost accounting & reporting. Collects LEA cost data. Assigns LEA indirect cost rates and direct cost bases.

34 COST PRINCIPLES BASICS UNRESTRICTED AND RESTRICTED RATES UNRESTRICTED RATES No government-wide ceiling. Devised to enable full cost recovery. RESTRICTED RATES Devised to comply with Supplement-not-Supplant legislation. Lower; preclude full cost recovery.

INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY RESTRICTED RATES Apply to certain educational programs. U.S. Educ. Dept. reg s prescribe a formula.

35 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY RESTRICTED RATES Apply to certain educational programs. U.S. Educ. Dept. reg s prescribe a formula. Generally consists of throwing out certain indirect costs, reclassifying them as direct. Remaining indirect costs conform to Supplement Supplement- not-supplant Supplant legislation.

36 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY 2 DIMENSIONS: Deriving the Indirect Cost Rate & Direct Cost Base Applying the Rate and Base to Allocate and Recover Cost

37 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY FIRST DIMENSION: DERIVING THE RATE & BASE Begin With SFA s Financial Reports.

38 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY STEP 1: 1 Identify Expenditures From SFA Financial Reports. NEW SCHOOL DISTRICT NCES EXPENDITURES BY FUNCTION FUNCTION CODE NCES ACCOUNT TITLE EXPENDITURES 1000 Instruction $900, Student Services 75, Curriculum Development 30, Instructional Staff Training 20, Office of the Superintendent 40, Fiscal Services 10, Procurement 10, Public Relations 10, Personnel (Human Resources) 15, Plant Operation & Maintenance 125, Student Transportation 165, Food Services 100, Total $1,500,000

39 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY STEP 2 NEW SCHOOL DISTRICT INDIRECT COST RATE PROPOSAL ADJUSTMENTS FOR EXCLUDED COSTS NCES FUNCTION EXPENDITURES ADJUSTED CODE BY FUNCTION TOTAL COST EXCLUDED TOTAL COST STEP 2: Eliminate Excluded Costs From the Calculations Instruction $900,000 $100,000 (a) $800, Student Services 75,000 75, Curriculum Development 30,000 30, Instructional Staff Training 20,000 20, Superintendent s Office 40,000 40, Fiscal Services 10,000 10, Procurement 10,000 10, Public Relations 10,000 10, Personnel (Human Resources) 15,000 15, Plant Operation & Maintenance 125, , Student Transportation 165,000 90,000 (b) 75, Food Services 100,000 90,000 (c) 10, Total $1,500,000 $280,000 $1,220,000 (a) $100,000 out of $125,000 in contracted professional and technical services. (b) $90,000 capital expenditure for school buses. (c) $15,000 capital expenditure for food service equipment; $75,000 in food costs.

40 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY Step 3: Classify Costs as Direct or Indirect. NEW SCHOOL DISTRICT INDIRECT COST RATE PROPOSAL CLASSIFICATION OF COSTS: DIRECT OR INDIRECT NCES FUNCTION EXPENDITURES CODE BY FUNCTION DIRECT INDIRECT TOTAL 1000 Instruction $800,000 $800, Student Services 75,000 75, Curriculum Development 30,000 30, Instruct. Staff Tng. 20,000 20, Superintendent s Office $40,000 $40, Fiscal Services 10,000 10, Procurement 10,000 10, Public Relations 10,000 10, Personnel (Hum. Res.) 15,000 15, Plant Operation & Maint. 125, , Student Transportation 75,000 75, Food Services 10,000 10, TOTALS $1,010,000 $210,000 $1,220,000

41 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY Step 4: 4 Eliminate Unallowable Costs From Indirect Cost Pool. NEW SCHOOL DISTRICT INDIRECT COST RATE PROPOSAL INDIRECT EXPENDITURES INDIRECT UNALLOW- COST DIRECT BY FUNCTION COSTS ABLE POOL COSTS Instruction $800,000 Student Services 75,000 Curriculum Development 30,000 Instruct. Staff Training 20,000 Superintendent s Office 40,000 (8,000) (a) 32,000 8,000 (c) Fiscal Services 10,000 10,000 Procurement 10,000 10,000 Public Relations 10,000 (2,000) (b) 8,000 2,000 (c) Personnel (Hum. Res.) 15,000 15,000 Plant Operation & Maint. 125, ,000 Student Transportation 75,000 Food Services 10, TOTALS $210,000 (10,000) $200,000 $1,020,000 (a) Cost of Superintendent s travel for purposes that did not benefit Federal programs. (b) Public relations cost that promoted SFA as a whole rather than its Federal programs. (c) Unallowable indirect costs go to direct cost base.

42 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY Step 5: Compute the Unrestricted Rate: Indirect Cost Pool = $200,000 Direct Cost Base (MTDC) $1,020,000 = or % of MTDC

43 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY SECOND DIMENSION: APPLYING THE RATE TO CLAIM INDIRECT COST Apply unrestricted rate to program s actual MTDC each period. Do SFAs do that in the SNP?

44 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY IDENTIFYING & CLAIMING INDIRECT COST Step 1: Obtain actual MDTC for claiming period by eliminating excluded items. Total September Food Service Cost $14,000 Less September Food Cost (11,000) Amount Avail. for Direct & Indirect Costs... $3,000

45 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY IDENTIFYING & CLAIMING INDIRECT COST Step 2: Determine amount available to be assessed indirect costs. Total Available / (1 + Indirect Cost Rate) = $3,000 / = $2,508 to be assessed for indirect costs

46 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY IDENTIFYING & CLAIMING INDIRECT COST Step 3: Compute indirect cost dollar amount. Amount to be assessed * Indirect Cost Rate = $2,508 * = $492 to be claimed as indirect costs

47 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY Rates not used in the SNP; SFA claims meals, not costs! Rates relevant from standpoint of General Fund billing the food service for indirect costs.

48 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY General Funds have billed for the following as indirect cost: Food service s entire profit Percentage of Federal reimbursement Percentage of food service revenue Custodians wages Whatever they need to make up the G/F s deficit.

49 INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY SFA Food Service Directors need not be experts in indirect cost calculation, BUT They do need to know whether and how the G/F charges food service for indirect costs.

50 SUMMARY & RECAP Objectives of Federal Cost Principles Cost Principles Applicability to the SNP Cost Principles Basics Indirect Cost Methodology

51 INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS QUESTIONS & ANSWERS

INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS

School Nutrition Association Annual National Conference Philadelphia, Pennsylvania Education Session July 20, 2008 INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS I. Introduction. The concept of indirect