indirect costs in the school nutrition programs (snp) school nutrition association usda/state agency...

INDIRECT COSTS IN THE INDIRECT COSTS IN THE SCHOOL NUTRITION SCHOOL NUTRITION PROGRAMS (SNP)PROGRAMS (SNP)

School Nutrition Association School Nutrition Association USDA/State Agency ConferenceUSDA/State Agency Conference

Nashville, TennesseeNashville, TennesseeNovember 27, 2007November 27, 2007

INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS

TOPICS TO COVERTOPICS 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


OBJECTIVES OF THE FEDERAL COST OBJECTIVES OF THE FEDERAL COST PRINCIPLESPRINCIPLES

• OBJECTIVE 1: Cost Allocation

• OBJECTIVE 2: Cost Recovery


COST PRINCIPLES OBJECTIVE 1:COST PRINCIPLES OBJECTIVE 1:

COST ALLOCATIONCOST ALLOCATION

• Costs charged to cost objectives (programs, etc.) that benefit from them.

• Shared costs charged to cost objectives commensurate with benefit received.


COST PRINCIPLES OBJECTIVE 2:COST PRINCIPLES OBJECTIVE 2: COST COST RECOVERYRECOVERY

• 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.


COST PRINCIPLES IN THE SNP CONTEXTCOST PRINCIPLES IN THE SNP CONTEXT

• TWO DIMENSIONS:TWO DIMENSIONS:

– EXTERNALEXTERNAL:: Program Operator Incurs Program Costs; Seeks Recovery From Awarding (State) Agency.

– INTERNALINTERNAL:: Internal Service Provider (General Fund) Seeks Recovery From Program Operator for Costs That Benefit Program.


COST PRINCIPLES IN THE SNP CONTEXT

EXTERNAL DIMENSION (GENERAL EXTERNAL DIMENSION (GENERAL MODEL): CLAIMING MODEL): CLAIMING

REIMBURSEMENT FOR REIMBURSEMENT FOR PROGRAM PROGRAM COSTCOST

State AgencyAnalyzes Claim;

Approves COSTS For Reimbursement

CLAIM:Direct Costs

Indirect Costs

Program OperatorPrepares Claim for

Reimbursement

Program Operator

Submits Claim to State Agency

StateReimbursement

Check Issued

$$$$$$STATECHECK

ProgramOperator

Credits State Reimbursement

To Program



EXTERNAL DIMENSION (SNP EXTERNAL DIMENSION (SNP MODEL): SFA CLAIMS MODEL): SFA CLAIMS

REIMBURSEMENT FOR REIMBURSEMENT FOR MEALS MEALS SERVEDSERVED

State AgencyAnalyzes Claim;

Approves MEALS For Reimbursement

CLAIM:Paid, Free, &

Reduced-Price Meals

SFA PreparesClaim for

Reim-bursement

SFA Submits Claim

to State Agency

StateReimbursement

Check Issued

$$$$$$STATECHECK

SFA Credits State

ReimbursementTo Nonprofit Food Service



INTERNAL DIMENSION: GENERAL FUND INTERNAL DIMENSION: GENERAL FUND RECOVERS COSTS FROM SCHOOL FOOD RECOVERS COSTS FROM SCHOOL FOOD

SERVICESERVICE

General Fund Incurs CostsBenefiting

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.


COST PRINCIPLES IN THE SNP CONTEXT: COST PRINCIPLES IN THE SNP CONTEXT: SUMMARY 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.

0

50

100

1stQtr

4thQtr

East

West

North


COST PRINCIPLES VOCABULARY

Q. What’s a “Cost?”What’s a “Cost?”

A. Resource(s) given up to Resource(s) given up to obtain obtain a benefit.a benefit.


COST PRINCIPLES VOCABULARYCOST PRINCIPLES VOCABULARY

• A ““COST OBJECTIVECOST OBJECTIVE”” is a Program, Function, Activity, or Other Category for which:– Cost information is needed for decision-making; and– Cost data are collected.



• ALLOWABLEALLOWABLE & UNALLOWABLEUNALLOWABLE 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.


COST PRINCIPLES VOCABULARY CRITERIA FOR ALLOWABLE COSTS

There must be a BENEFIT TO BENEFIT TO THE GRANT-THE GRANT-SUPPORTED SUPPORTED ACTIVITY!ACTIVITY!

– A-87, Attachment A lists criteria for making this determination.

INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMSINDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS

VOCABULARY – ALLOWABLE COSTSVOCABULARY – ALLOWABLE COSTS

CRITERIA FOR BENEFIT TO GRANTCRITERIA FOR BENEFIT TO GRANT

• REASONABLEREASONABLE andand NECESSARYNECESSARY forfor program purposes!program purposes!– Necessary to carry out the grant.Necessary to carry out the grant.– Reasonable if a prudent person would Reasonable if a prudent person would

incur the cost in like circumstances.incur the cost in like circumstances.

• Example:Example:– May beMay be NECESSARYNECESSARY to provide attendees to provide attendees

a meal in order to carry out a conference.a meal in order to carry out a conference.– NotNot REASONABLEREASONABLE to make that meal a to make that meal a

multi-course gourmet repast!multi-course gourmet repast!



CRITERIA FOR BENEFIT TO GRANTCRITERIA FOR BENEFIT TO GRANT

• NOT Allocable or Charged to ANOTHER GRANT

• PRIOR APPROVAL if required• TREATED CONSISTENTLY with non-

grant transactions



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 Satisfy all these criteria and your costs will “fly!”will “fly!”



• RULES FOR RULES FOR SPECIFIC ITEMS SPECIFIC ITEMS OF COSTOF COST

– Found in A-87, Attachment B.

– Must be read in conjunction with Attachment A Criteria.



RULES FOR SPECIFIC COST ITEMSRULES FOR SPECIFIC COST ITEMS

• SOME ALLOWABLE SOME ALLOWABLE COST ITEMS:COST ITEMS:

– Salaries & BenefitsSalaries & Benefits– TravelTravel– Training & Staff Training & Staff

DevelopmentDevelopment– SuppliesSupplies– Meetings & Meetings &

ConferencesConferences– Printing & PublicationPrinting & Publication



RULES FOR SPECIFIC COST ITEMS

• UNALLOWABLE UNALLOWABLE COSTS – AVOID!COSTS – AVOID!

– Alcoholic Beverages– Contributions to

Contingency Funds – Entertainment– General Government

(Generally)

– Lobbying



• CAPITAL CAPITAL EXPENDITUREEXPENDITURE– Expenditure to

acquire or enhance a capital asset.

– Equipment is principal example in SNP.



• 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.



• INDIRECT COSTSINDIRECT COSTS– Administrative Overhead Administrative Overhead

costs.costs.– Benefit multiple cost Benefit multiple cost

objectives.objectives.– Assigned to cost objectives Assigned to cost objectives

by allocation.by allocation.– Examples may include Examples may include

human services, payroll, human services, payroll, purchasing, accounting, purchasing, accounting, facilities mgt., etc.facilities mgt., etc.



Q: Which cost items are inherently indirectindirect?

A: Very few. Classification as directdirect or indirectindirect normally depends on treatment in program operator’s accounting system.



Q: How does a Q: How does a program operator program operator charge indirect charge indirect cost to benefiting cost to benefiting cost objectives?cost objectives?

A: By applying anA: By applying an

Indirect Cost Indirect Cost RateRate!!



• INDIRECT INDIRECT COST POOLCOST POOL– Sum of allowableallowable

indirect costs allocated to cost objectives by applying the indirect cost rate.

– Only allowableallowable indirect costs admitted!



• DIRECT COST DIRECT COST BASEBASE– Sum of DIRECT COSTSDIRECT COSTS

that benefit from incurring the costs in the INDIRECT COST POOLINDIRECT COST POOL

– Used to Compute INDIRECT COST RATEINDIRECT COST RATE

– Direct Cost Bases Most Often Used:

• Direct Wages & Salaries• Modified Total Direct

Costs (MTDC)



• Q: What’s “MTDCMTDC?”

• A: Total DIRECT COSTDIRECT COST minus distorting items, such as:– CAPITAL EXPENDITURESCAPITAL EXPENDITURES– Food costs– Payments to subgrantees &

contractors beyond the first $25,000

– etc.



• INDIRECT INDIRECT COST RATECOST RATE

What is it?

It’s a shorthand methodology for allocating allowable indirect costs to cost objectives.



• INDIRECT INDIRECT COST RATECOST RATE– How is it derived?How is it derived?

– Divide Divide INDIRECT COST INDIRECT COST POOLPOOL by by DIRECT COST DIRECT COST BASEBASE

– Base includes both Base includes both ALLOWABLEALLOWABLE and and UNALLOWABLEUNALLOWABLE DIRECT COSTSDIRECT COSTS



•INDIRECT COST RATEINDIRECT COST RATE– How is it used?How is it used?– Multiply rate by actualMultiply rate by actual ALLOWABLE ALLOWABLE DIRECT DIRECT

COSTSCOSTS inin DIRECT COST BASE.DIRECT COST BASE.– Product isProduct is INDIRECT COSTINDIRECT COST allocable toallocable to COST COST

OBJECTIVEOBJECTIVE..



• INDIRECT COST INDIRECT COST RATE PROPOSAL RATE PROPOSAL (ICRP)(ICRP)

– What is it?

– A schedule documenting formulation of INDIRECT COST INDIRECT COST RATERATE.



• INDIRECT COST RATE PROPOSAL INDIRECT COST RATE PROPOSAL (ICRP)(ICRP)– How is it approved?– Submitted to COGNIZANT FEDERAL COGNIZANT FEDERAL

AGENCYAGENCY if OMB has assigned one.– Submitted to SEASEA if prepared by LEALEA.– Retained on file for audit in other cases.



• FEDERAL COGNIZANT FEDERAL COGNIZANT AGENCYAGENCY

– 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.



• UNRESTRICTED UNRESTRICTED RATESRATES– Devised to enable full Devised to enable full

cost recovery.cost recovery.

• RESTRICTED RESTRICTED RATESRATES– Designed to implement Designed to implement

“Supplement-not-“Supplement-not-Supplant” legislation.Supplant” legislation.



SUMMARYSUMMARY

• CostCost• Cost ObjectiveCost Objective• Allowable & Allowable &

Unallowable CostsUnallowable 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 Indirect Cost Rate

Proposal (ICRP)Proposal (ICRP)• Cognizant Federal Cognizant Federal

AgencyAgency• Restricted & Restricted &

Unrestricted RatesUnrestricted Rates

INDIRECT COSTS IN THE SNP

INDIRECT COST METHODOLOGY

• 2 DIMENSIONS:2 DIMENSIONS:

– Deriving the Deriving the RateRate

– Applying the Applying the RateRate



• Begin With SFA’s Financial Reports.


INDIRECT COST METHODOLOGY• • STEP 1: Identify Expenditures From Financial Reports.

• NEW SCHOOL DISTRICT• EXPENDITURES BY OBJECT CLASS

• OBJECT CODE ACCOUNT TITLE EXPENDITURES

• 100 Wages & Salaries $1,500,000• 210 Benefits – Insurance 25,000 • 220 Benefits – Retirement 50,000• 340 Prof./Tech. Services 100,000 • 410 Water & Sewer 100,000 • 420 Cleaning 75,000 • 520 Insurance 250,000 • 570 Food Svc. Mgt. 200,000 • 580 Travel 50,000 • 610 General Supplies 100,000 • 630 Food Purchases 200,000 • 730 Equipment Purchases 350,000 • ----------------• Total $3,000,000

INDIRECT COSTS IN THE SNPINDIRECT 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. 200,000 200,000 -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 350,000 300,000 50,000• ---------------- ---------------- -------------- • Total $3,000,000 $2,552,000 $448,000


• 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.


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 FINALWages & Salaries $1,200,000 -0- $1,200,000Benefits – Insurance 20,000 -0- 20,000Benefits – Retirement 42,000 -0- 42,000Prof./Tech. Services 90,000 -0- 90,000Water & Sewer 90,000 -0- 90,000Cleaning 65,000 -0- 65,000Insurance 235,000 -0- 235,000 Food Service Mgt. 200,000 (175,000) 1/ 25,000Travel 20,000 -0- 20,000General Supplies 90,000 -0- 90,000Food 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.


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



• 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?



• 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.



• 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.”



• 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.


INDIRECT COST METHODOLOGYINDIRECT COST METHODOLOGY

• SFA Food Service Directors need not be experts in indirect cost calculation, BUTBUT……

• They do need to be expert in whether and how the G/F charges food service for indirect costs.


INDIRECT COSTS IN A-133 AUDITSINDIRECT COSTS IN A-133 AUDITS

• AUDIT OBJECTIVESAUDIT OBJECTIVES:: to Provide Reasonable Assurance That:– Indirect costs charged to

Federal programs were allowable; and

– Auditee had properly applied methodology in ICRP.

INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMSINDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS INDIRECT COSTS IN A-133 AUDITSINDIRECT 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.

INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMSINDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMS INDIRECT INDIRECT COSTS IN A-133 AUDITSCOSTS IN A-133 AUDITS

• AUDITORS NOT REQUIRED TO TEST AUDITEE’S ICRP.

– But encouraged to make interim tests if audit completed before ICRP.


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

INDIRECT COSTS IN THE SCHOOL INDIRECT COSTS IN THE SCHOOL NUTRITION PROGRAMSNUTRITION PROGRAMS

QUESTIONS &QUESTIONS &

ANSWERSANSWERS

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