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Food and Nutrition Programs

Nonprofit School Food Service Account Direct and Indirect Costs

To:Local Education Agencies
From:Robert M. Leshin, Director, Office for Food and Nutrition Programs
Date:October 8, 2026

Introduction

The purpose of this memorandum is to supplement the Allowable and Indirect Costs memorandum issued on February 1, 2024, and provide additional detail and examples of the distinction between direct and indirect costs. The guidance below is outlined in the USDA Indirect Costs Guidance Manual. While charging indirect costs is generally allowable for federal programs including school nutrition funds, a Local Education Agency (LEA) has discretion on whether to actually recover those costs. The Office for Food and Nutrition Programs (FNP) encourages the full investment of all nonprofit school food service account funds for the improvement of school nutrition programs. Please refer to the FNP memorandum titled "Revised: Investing in School Nutrition Programs" for more information.

Direct Costs

Section 2 CFR 200.413 indicates that direct costs are "those that can be identified specifically with a particular final cost objective." Direct costs are exclusively attributable to the nonprofit school food service account and can be substantiated through written documentation such as timecards, invoices, and receipts.

Examples of direct costs include:

  • Wages and salaries of food service workers;
  • Cost of purchased food;
  • Food service supplies;
  • Media/promotional materials related to food service and;
  • Capital expenditures related to food service (i.e. equipment purchases)

Indirect Costs

Indirect costs are costs incurred for the benefit of multiple programs, functions, or other cost objectives that cannot be readily and specifically identified with a particular program or other cost objective. Indirect costs typically support administrative overhead functions.

Examples of indirect costs include:

  • Payroll;
  • Fringe benefits;
  • Workers' compensation;
  • Facilities management;
  • Procurement and;
  • Utilities

Charging Indirect Costs

School Food Authorities (SFAs) have the discretion to bill indirect costs against the school nutrition program and must follow equitable and consistent methodologies to identify and allocate allowable indirect costs to allocable federal awards. SFAs that decide to charge indirect costs must use one of the two acceptable methods below to allocate indirect costs. Please note that in either method the SFA cannot charge more than the maximum "allowable direct cost base".

1. Indirect Cost Rate Method:

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 nonprofit school food service account.

The legislation authorizing the federal school meal program allows for the general fund to bill the nonprofit school nutrition account at the unrestricted rate. The school food service's share of indirect costs is determined by applying the Department of Elementary and Secondary Education's (DESE) annual approved unrestricted indirect cost rate to the school food service's direct cost base. The unrestricted indirect cost rates calculated by DESE is compiled using district submitted audited end of year expenditure details. Each district has a unique indirect cost rate. The rate can be applied to the nonprofit school food service's direct cost base.

  • Indirect Cost Recovery Calculation

    Exclude all costs from school 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, the remaining direct cost base can then determine the allowable maximum indirect costs that can be charged to school food service.

2. Cost Allocation Plan Method:

The SFA should complete a Cost Allocation Plan as a mechanism to assign indirect costs to particular programs and other cost objectives, such that each program or other cost objective bears a portion of the indirect costs that is commensurate with the benefit received from such costs. This method provides an approach to determining, in a reasonable manner, the proportion of indirect costs each program or other cost objective should bear.

Examples of items that may need a cost allocation plan include:

  • tables and chairs;
  • administrative assistants (if they have responsibilities outside of the school meal programs);
  • lunch aides (if they have responsibilities outside of the school meal programs);
  • copier

2 CFR 100.403 states a cost item must be treated consistently as direct or indirect in all activities of the SFA. Furthermore, all costs to Federal programs, whether direct or indirect, must be treated consistently with policies and procedures that apply uniformly to both federally financed and other activities of the non-federal entity.

FNP's Financial Management Team is available to answer your questions and provide technical assistance.

This institution is an equal opportunity provider.





Last Updated: October 8, 2026



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