Food and Nutrition Programs

Allowable and Indirect Costs

The purpose of this memorandum is to outline the federal requirements State Agencies (SAs) and school food authorities (SFAs) must comply with in the National School Lunch Program (NSLP) and School Breakfast Program (SBP) with respect to indirect costs. The guidance below, outlined in the USDA Indirect Costs Guidance Manual, is intended to ensure the nonprofit school food service account (school lunch revolving account) funds are limited to those expenses that are reasonable, necessary, and allocable. Additional procedures are outlined below to develop and charge indirect costs.

Criteria for Allowable Costs

In order to determine whether a cost is allowable, it must be considered necessary, reasonable and allocable, in addition to the following criteria per 2 CFR 200.403:

• Consistent with policies and procedures that apply uniformly to both federally financed and other activities of the non-federal entity;
• Consistently treated as direct or indirect;
• Determined in accordance with Generally Accepted Accounting Principles (GAAP);
• Not included as a cost or matching contribution of any other grant (except where allowed by Federal regulations);
• Adequately documented.

Necessary and Reasonable (2 CFR 200.404)

In order to be allowable, a cost must be necessary for the performance or administration of the funds provided by the United States Department of Agriculture (USDA) Food and Nutrition Service (FNS) to the SA for the NSLP and SBP. A cost is necessary if the school meals program's authorizing statutory provisions, resulting program regulations or applicable FNS policy establish that the nonprofit school food service cannot be operated without incurring the cost (e.g., a school food service cannot be operated without incurring the cost of appropriate food).

A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost. The cost must be the result of sound business practice and competitive prices. For example, the cost of food is a reasonable cost to operate the nonprofit school food service if incurred according to these conditions.

Allocable (2 CFR 200.405)

A cost must be assigned to the program(s), function(s), activity(ies) or other cost objective(s) that benefit from that cost and each cost objective must be charged commensurate with the benefit received. As already noted, cost allocation is the process of achieving that outcome. Depending on which program(s), function(s), and/or activity(ies) benefit from the cost, and the extent to which each benefited, a cost may be allocated to such cost objective(s) through direct or indirect cost allocation. The prudent person standard requires each person to owe a duty to behave as a reasonable person would under the same or similar circumstances.

For example, the salary of an employee whose duties consist solely of preparing and serving school meals is 100?percent allocable to the SFA's school food service and is therefore treated as a direct cost. By contrast, the superintendent's salary benefits all programs, functions, and activities of the school district; the portion that benefits the school food service can be determined only through a mathematical allocation process which is the reason it is an indirect cost. A cost allocable to a particular Federal award or other cost objective under the Federal cost principles may not be charged to other Federal awards to overcome fund deficiencies, to avoid restrictions imposed by regulations or terms of the Federal awards, or for other reasons; to do so would assign the cost to a cost objective that did not benefit from it.

Documentation

This criterion does not imply the existence of a one?size?fits?all definition of "adequately." It means, rather, that the record of a School Meal Programs' (SMPs) operation must be able to stand on its own, without depending on augmentation, interpretation, or "spin" by the program operator.

Treated Consistently (2 CFR 200.412)

An SFA must conduct transactions using Federal program funds in the same way that it conducts transactions with its own non?Federal funds. A cost item must be treated consistently as direct or indirect in all activities of the SFA unless legislation, regulations, or guidance from an awarding agency dictates otherwise. A cost may not be assigned to a Federal award as a direct cost if that same cost, incurred for the same purpose in similar circumstances, has been allocated to other Federal awards as an indirect cost.

Charging Indirect Costs

Districts have the discretion to bill indirect costs against the school food service program. Districts that decide to charge indirect costs must follow federal guidance outlined in the USDA Indirect Costs Guidance Manual. and are encouraged to use the DESE approved indirect rate.

Step 1: Properly Billed Indirect Costs:

• The food service's share of indirect costs is determined by applying the approved indirect cost rate to the school food service's direct cost base.
• School food service is allowed to pay properly billed indirect costs with funds from the school lunch revolving account; and
• School food service is not allowed to pay any amount in excess of the properly billed indirect costs (the portion that does not support the operation or improvement of the food service) with funds from the school lunch revolving account.

Whether the general fund bills a direct cost activity, such as the school food service, for indirect costs at the restricted or unrestricted rate depends on the Federal programs operated within that activity. If such programs' authorizing legislation includes the "supplement?not?supplant" language (discussed in more detail in the Indirect Cost Manual), the restricted rate must be used.

The legislation authorizing the federal school meal program does not contain such a requirement; therefore, the general fund may bill the school lunch revolving account at the unrestricted rate¹.

Step 2: Remove All Excluded Costs

Exclude all costs from Food Service expenses that would distort the final result. "Distorting items" should be excluded because they do not generate or benefit from the administrative overhead in the same manner as wages, salaries, etc. Some distorting items include:

• Equipment purchases and other capital expenditures
• Payments to contractors beyond the first $25,000
• Food costs in the school food service
• Renovations and alterations, and
• Certain unallowable costs (e.g., fines, penalties, bad debts).

After removing these "Distorting items" from the school food service costs, you are left with the SFS Direct Cost Base and can then determine the allowable maximum Indirect Costs that can be charged to the School Food Service.

For example, XYZ School District has the following details relative to Indirect Costs:

• XYZ District has an Unrestricted Indirect Cost Rate of 7%.
• XYZ District School Food Service has total expenses of $1.1M.
• XYZ District School Food Service has $495K in Distorting items within those expenses.

The maximum indirect costs that can be charged to XYZ District School Food Service is:

• $1,100,000 - $495,000 = $605,000 x .07 = $42,350

If you have questions about indirect costs, please contact FNP's Financial Management Team.

¹ Indirect Cost Rates are computed annually by DESE using districted submitted cost information. The unrestricted rate is to be used against the school lunch revolving account. These rates change every year and can be found on the DESE School Finance Office public website at: Essential Information - Grants and Other Financial Assistance Programs