1. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS (SNP) School Nutrition Association USDA/State Agency Conference Nashville, Tennessee November 27, 2007

2. TOPICS TO COVER INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS TOPICS TO COVER Objectives of Federal Cost Principles Cost Principles in Context of SNP Cost Principles Vocabulary (Key Terms) Indirect Cost Methodology Indirect Costs in A-133 Audits

3. OBJECTIVES OF THE FEDERAL COST PRINCIPLES INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS OBJECTIVES OF THE FEDERAL COST PRINCIPLES OBJECTIVE 1: Cost Allocation OBJECTIVE 2: Cost Recovery

4. COST PRINCIPLES OBJECTIVE 1: COST ALLOCATION INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS 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.

5. COST PRINCIPLES OBJECTIVE 2: COST RECOVERY INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES OBJECTIVE 2: COST RECOVERY If a cost is allocable to our program, where (from whom) can we get the resources to pay it? Shifting deficit to another program NOT an option.

6. COST PRINCIPLES IN THE SNP CONTEXT INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES IN THE SNP CONTEXT TWO DIMENSIONS:TWO DIMENSIONS: –EXTERNAL: –EXTERNAL: Program Operator Incurs Program Costs; Seeks Recovery From Awarding (State) Agency. –INTERNAL: –INTERNAL: Internal Service Provider (General Fund) Seeks Recovery From Program Operator for Costs That Benefit Program.

7. EXTERNAL DIMENSION (GENERAL MODEL): CLAIMING REIMBURSEMENT FOR PROGRAM COST INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES IN THE SNP CONTEXT EXTERNAL DIMENSION (GENERAL MODEL): CLAIMING REIMBURSEMENT FOR PROGRAM COST State Agency Analyzes Claim; Approves COSTS For Reimbursement CLAIM: Direct Costs Indirect Costs Program Operator Prepares Claim for Reimbursement Program Operator Submits Claim to State Agency State Reimbursement Check Issued $$$$$$ STATE CHECK Program Operator Credits State Reimbursement To Program

8. EXTERNAL DIMENSION (SNP MODEL): SFA CLAIMS REIMBURSEMENT FOR MEALS SERVED INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES IN THE SNP CONTEXT EXTERNAL DIMENSION (SNP MODEL): SFA CLAIMS REIMBURSEMENT FOR MEALS SERVED State Agency Analyzes Claim; Approves MEALS For Reimbursement CLAIM: Paid, Free, & Reduced-Price Meals SFA Prepares Claim for Reim- bursement SFA Submits Claim to State Agency State Reimbursement Check Issued $$$$$$ STATE CHECK SFA Credits State Reimbursement To Nonprofit Food Service

9. INTERNAL DIMENSION: GENERAL FUND RECOVERS COSTS FROM SCHOOL FOOD SERVICE INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES IN THE SNP CONTEXT INTERNAL DIMENSION: GENERAL FUND RECOVERS COSTS FROM 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 Food Service Pays Bills Checks, Funds Transfers, Credits, etc.

10. COST PRINCIPLES IN THE SNP CONTEXT: SUMMARY INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES IN THE SNP CONTEXT: 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.

11. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY What’s a “Cost?” Q.What’s a “Cost?” Resource(s) given up to obtain a benefit. A.Resource(s) given up to obtain a benefit.

12. COST PRINCIPLES VOCABULARY INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY “ COST OBJECTIVE ”A “ COST OBJECTIVE ” is a Program, Function, Activity, or Other Category for which: –Cost information is needed for decision-making; and –Cost data are collected.

13. COST PRINCIPLES VOCABULARY INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY ALLOWABLEUNALLOWABLEALLOWABLE & 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.

14. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY CRITERIA FOR ALLOWABLE COSTS BENEFIT TO THE GRANT- SUPPORTED ACTIVITY! There must be a BENEFIT TO THE GRANT- SUPPORTED ACTIVITY! –A-87, Attachment A lists criteria for making this determination.

15. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS VOCABULARY – ALLOWABLE COSTS CRITERIA FOR BENEFIT TO GRANT REASONABLE and NECESSARY for program purposes!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: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!

16. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS VOCABULARY – ALLOWABLE COSTS CRITERIA FOR BENEFIT TO GRANT NOT Allocable or Charged to ANOTHER GRANT PRIOR APPROVAL if required TREATED CONSISTENTLY with non- grant transactions

17. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS VOCABULARY – ALLOWABLE COSTS INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS VOCABULARY – ALLOWABLE COSTS CRITERIA FOR BENEFIT TO GRANT NET of APPLICABLE CREDITSNET of APPLICABLE CREDITS DOCUMENTED CONFORM TO PROGRAM-SPECIFIC RULES Satisfy all these criteria and your costs will “fly!”

18. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS VOCABULARY – ALLOWABLE COSTS RULES FOR SPECIFIC ITEMS OF COSTRULES FOR SPECIFIC ITEMS OF COST –Found in A-87, Attachment B. –Must be read in conjunction with Attachment A Criteria.

19. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS VOCABULARY – ALLOWABLE COSTS RULES FOR SPECIFIC COST ITEMS SOME ALLOWABLE COST ITEMS:SOME ALLOWABLE COST ITEMS: –Salaries & Benefits –Travel –Training & Staff Development –Supplies –Meetings & Conferences –Printing & Publication

20. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS VOCABULARY – ALLOWABLE COSTS INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS VOCABULARY – ALLOWABLE COSTS RULES FOR SPECIFIC COST ITEMS UNALLOWABLE COSTS – AVOID!UNALLOWABLE COSTS – AVOID! –Alcoholic Beverages –Contributions to Contingency Funds –Entertainment –General Government ( Generally) –Lobbying

21. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY CAPITAL EXPENDITURECAPITAL EXPENDITURE –Expenditure to acquire or enhance a capital asset. –Equipment is principal example in SNP.

22. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY DIRECT COSTDIRECT 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.

23. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY INDIRECT COSTSINDIRECT 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.

24. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY indirect Q: Which cost items are inherently indirect ? directindirect A: Very few. Classification as direct or indirect normally depends on treatment in program operator’s accounting system.

25. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY Q: How does a program operator charge indirect cost to benefiting cost objectives? A: By applying an Indirect Cost Rate !

26. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY INDIRECT COST POOLINDIRECT COST POOL allowable –Sum of allowable indirect costs allocated to cost objectives by applying the indirect cost rate. allowable –Only allowable indirect costs admitted!

27. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY DIRECT COST BASEDIRECT COST BASE DIRECT COSTS INDIRECT COST POOL –Sum of DIRECT COSTS that benefit from incurring the costs in the INDIRECT COST POOL INDIRECT COST RATE –Used to Compute INDIRECT COST RATE –Direct Cost Bases Most Often Used: Direct Wages & Salaries Modified Total Direct Costs (MTDC)

28. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY MTDCQ: What’s “ MTDC ?” DIRECT COSTA: Total DIRECT COST minus distorting items, such as: –CAPITAL EXPENDITURES –Food costs –Payments to subgrantees & contractors beyond the first $25,000 –etc.

29. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY INDIRECT COST RATEINDIRECT COST RATE What is it? It’s a shorthand methodology for allocating allowable indirect costs to cost objectives.

30. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY INDIRECT COST RATEINDIRECT COST RATE –How is it derived? –Divide INDIRECT COST POOL by DIRECT COST BASE –Base includes both ALLOWABLE and UNALLOWABLE DIRECT COSTS

31. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY INDIRECT COST RATEINDIRECT COST RATE –How is it used? –Multiply rate by actual ALLOWABLE DIRECT COSTS in DIRECT COST BASE. –Product is INDIRECT COST allocable to COST OBJECTIVE.

32. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY INDIRECT COST RATE PROPOSAL (ICRP)INDIRECT COST RATE PROPOSAL (ICRP) –What is it? INDIRECT COST RATE –A schedule documenting formulation of INDIRECT COST RATE.

33. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY INDIRECT COST RATE PROPOSAL (ICRP)INDIRECT COST RATE PROPOSAL (ICRP) –How is it approved? COGNIZANT FEDERAL AGENCY –Submitted to COGNIZANT FEDERAL AGENCY if OMB has assigned one. SEALEA –Submitted to SEA if prepared by LEA. –Retained on file for audit in other cases.

34. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY FEDERAL COGNIZANT AGENCYFEDERAL COGNIZANT AGENCY –Speaks to program operator on behalf of all awarding agencies regarding cross-cutting matters such as cost allocation & recovery. –SEA performs this function for LEAs regarding cost allocation.

35. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY UNRESTRICTED RATESUNRESTRICTED RATES –Devised to enable full cost recovery. RESTRICTED RATESRESTRICTED RATES –Designed to implement “Supplement-not- Supplant” legislation.

36. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS COST PRINCIPLES VOCABULARY SUMMARY CostCost Cost ObjectiveCost Objective Allowable & Unallowable CostsAllowable & Unallowable Costs Capital ExpenditureCapital Expenditure Direct CostDirect Cost Indirect CostIndirect Cost Indirect Cost PoolIndirect Cost Pool Direct Cost BaseDirect Cost Base Indirect Cost RateIndirect Cost Rate Indirect Cost Rate Proposal (ICRP)Indirect Cost Rate Proposal (ICRP) Cognizant Federal AgencyCognizant Federal Agency Restricted & Unrestricted RatesRestricted & Unrestricted Rates

37. INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY 2 DIMENSIONS:2 DIMENSIONS: –Deriving the Rate –Applying the Rate

38. INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY Begin With SFA’s Financial Reports.

39. INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY STEP 1: Identify Expenditures From Financial Reports. NEW SCHOOL DISTRICT EXPENDITURES BY OBJECT CLASS OBJECT CODEACCOUNT TITLE EXPENDITURES 100Wages & Salaries $1,500,000 210Benefits – Insurance 25,000 220Benefits – Retirement 50,000 340Prof./Tech. Services 100,000 410Water & Sewer 100,000 420Cleaning 75,000 520Insurance 250,000 570Food Svc. Mgt. 200,000 580Travel 50,000 610General Supplies 100,000 630Food Purchases 200,000 730Equipment Purchases 350,000 ---------------- Total $3,000,000

40. INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY STEP 2: Analyze Expenditures From Financial Reports; Identify Them as Direct or Indirect Costs. NEW SCHOOL DISTRICT INDIRECT COST RATE PROPOSAL EXPENDITURES TOTAL COST DIRECT INDIRECT Wages & Salaries $1,500,000 $1,200,000 $300,000 Benefits – Insurance 25,000 20,000 5,000 Benefits – Retirement 50,000 42,000 8,000 Prof./Tech. Services 100,000 90,000 10,000 Water & Sewer 100,000 90,000 10,000 Cleaning 75,000 65,000 10,000 Insurance 250,000 235,000 15,000 Food Svc. Mgt. 200,000200,000 -0- Travel 50,000 20,000 30,000 General Supplies 100,000 90,000 10,000 Food Purchases 200,000 200,000 -0- Equipment Purchases 350,000300,000 50,000 ---------------- ---------------- -------------- Total $3,000,000 $2,552,000 $448,000

41. INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY Step 3: Eliminate Unallowable and Excluded Items From Total Indirect Costs to Obtain Indirect Cost Pool NEW SCHOOL DISTRICT INDIRECT COST RATE PROPOSAL INDIRECT UNALLOW- EXPENDITURES COST ABLE EXCLUDED FINAL Wages & Salaries $300,000 -0- -0- $300,000 Benefits – Insur. 5,000 -0- -0- 5,000 Benefits – Retire. 8,000 -0- -0- 8,000 Prof./Tech. Svcs. 10,000 (5,000) 1/ -0- 5,000 Water & Sewer 10,000 -0- -0- 10,000 Cleaning 10,000 -0- -0- 10,000 Insurance 15,000 -0- -0- 15,000 Food Svc. Mgt. -0- -0- -0- -0- Travel 30,000 (15,000) 2/ -0- 15,000 General Supplies 10,000 -0- -0- 10,000 Food Purchases -0- -0- -0- -0- Equip. Purchases 50,000 -0- 50,000 3/ -0- -------------- ------------ ------------- -------------- INDIRECT COST POOL $448,000 ($20,000) ($50,000) $378,000 1/$5,000 for unallowable public relations cost. 2/$15,000 for Superintendent’s travel cost that did not benefit Federal programs. 3/Equipment purchase is a capital expenditure – a distorting item.

42. INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY Step 4: Eliminate Distorting Items From Direct Costs to Obtain Modified Total Direct Cost (MTDC) Base. NEW SCHOOL DISTRICT INDIRECT COST RATE PROPOSAL EXPENDITURES DIRECT COST EXCLUDED FINAL Wages & Salaries $1,200,000 -0- $1,200,000 Benefits – Insurance 20,000 -0- 20,000 Benefits – Retirement 42,000 -0- 42,000 Prof./Tech. Services 90,000 -0- 90,000 Water & Sewer 90,000 -0- 90,000 Cleaning 65,000 -0- 65,000 Insurance 235,000 -0- 235,000 Food Service Mgt. 200,000 (175,000) 1/ 25,000 Travel 20,000 -0- 20,000 General Supplies 90,000 -0- 90,000 Food Purchases 200,000 (200,000) 2/ -0- Equipment Purchases 300,000 (300,000) 2/ -0- ---------------- MODIFIED TOTAL DIRECT (MTDC) COST BASE $1,877,000 1/Only first $25,000 of a contract’s cost is included; balance is distorting item. 2/ Food and equipment purchases are distorting items excluded from base.

43. INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY Step 5: Compute the Unrestricted Rate: ___Indirect Cost Pool____ = $378,000 Direct Cost Base (MTDC) $1,877,000 = 0.2024 or 20.24 % of MTDC

44. INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY Unrestricted Rate can be used to claim reimbursement for indirect costs. –Apply rate to program’s actual MTDC each period. –Do SFAs do that in the SNP?

45. INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY COMPUTING THE RESTRICTED RATE: –U.S. Educ. Dept. prescribes a formula. –Generally consists of THROWING OUT additional costs from the indirect cost pool. –Remainder conforms to “Supplement-not- Supplant” legislation.

46. 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.”

47. INDIRECT COSTS IN THE SNP INDIRECT COST METHODOLOGY General Funds have designated the following as “indirect cost” for billing purposes: –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.

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

49. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS INDIRECT COSTS IN A-133 AUDITS AUDIT OBJECTIVES :AUDIT OBJECTIVES : to Provide Reasonable Assurance That: –Indirect costs charged to Federal programs were allowable; and –Auditee had properly applied methodology in ICRP.

50. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS INDIRECT COSTS IN A-133 AUDITS AUDIT PROCEDURESAUDIT PROCEDURES: –Test Internal Controls. –Read Auditee’s Indirect Cost Rate Agreement. –Select Sample of Claims for Reimbursement & Determine That Auditee Properly Claimed Indirect Cost per its Agreement. –Determine Whether Documentation Supports Indirect Costs Claimed if Approved ICRP is Lacking.

51. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS INDIRECT COSTS IN A-133 AUDITS AUDITORS NOT REQUIRED TO TEST AUDITEE’S ICRP. –But encouraged to make interim tests if audit completed before ICRP.

52. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS SUMMARY & RECAP Objectives of Federal Cost Principles Cost Principles in Context of SNP Cost Principles Vocabulary (Key Terms) Indirect Cost Methodology Indirect Costs in A-133 Audits

53. INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS QUESTIONS & ANSWERS