Direct and Indirect School Food Service

Costs and the General Operating Fund

Every school district’s food service operation has its distinct direct and indirect costs of operation.   Often these costs are not directly expensed from the food service enterprise fund.  Instead they are funded from the district’s general fund.  Because of shrinking operational funds, educational leaders are looking closely at costs to determine what expenses should be charged to the food budget instead of the general fund.  Costs of food service operations are generally classified as “direct” or “indirect.” 

Direct Costs that may be charged to the food service operations include:

  • Labor – In addition to food service workers there are:
    • maintenance
    • custodial
    • security
    • student monitor workers/aides
    Where they spend the majority of their time in food service, such personnel are sometimes totally charged to the food service fund.  Other districts allocate the expense charged to food service operations based on a percentage of hours utilized in the food service operation.
  • Equipment – Includes equipment in the kitchen preparation area and the dining room area.  Such items include tables, chairs and safety equipment in the dining area.  Even if the dining area may be classified as a common area and used for other student gatherings, tables, chairs and other furniture items may be expensed from the food budget.
  • Supplies – All cost of supplies/materials to clean, repair and maintain the kitchen preparation and dining area may be expensed to the food budget.
  • Utilities – Telephone, electricity, gas, water, sewer and garbage disposal are major cost items.  They may be charged to food service operations on a prorated basis.  Pest control and other such expenses may be charged there as well.  Unlike telephone expenses, many of these costs are not metered directly to food service.  Districts may use a formula (such as the square footage percentage – cafeteria/kitchen square footage divided by total school square footage) to determine the proportion of the cost charged to food service.   

School Districts have discretion when it comes to charging “direct costs” to the food service budget.  In general if the expenditure will benefit the food service operation it may be charged to food service.  In some cases districts have expensed “portions” of a district funded improvement project to food service.  This might be for a capital improvement project where most of the improvement will benefit food service operation, such as improvement to the dining area.  It could also be for a district-wide quality assurance or Baldridge-type program.  A portion of it may be charged to the food service program as long as it is directly involved and will benefit.  

Indirect Cost is the amount a district may charge to the food service operation to offset general operating revenue-funded supporting management costs.  Examples of supporting management costs include accounting, budgeting, payroll preparation, purchasing, centralized data processing and other central office functions.  In most states the amount allowed varies district by district.

Each year the state’s comptroller office sets a “fixed rate” charge a school district may use to recover the general operating revenue cost for supporting the food service program.  This rate is normally based on budget experience two years prior to the current school year.

This rate is usually communicated to the district finance office.  The district chief business officer will know the allowable rate.  If not, a call to the state comptroller or Child Nutrition office will serve the purpose.

Here is an example of the application of the indirect cost rate.  In the state of California, for school year 07-08, the average indirect cost rate allowed for food service is 4.64%.  This percentage is then multiplied times the amount of non-food expenses in the food service budget to calculate the indirect cost amount.

Total district food budget - $25,000,000
Total amount of food cost - $11,000,000
Total amount of non-food cost – $14,000,000
To obtain the indirect cost multiple $14,000,000 times 4.64% = $649,600

In this example the amount of $649,600 may be expensed from the food service budget to reimburse the general operating budget.

Each state sets the allowable fixed indirect cost rate.  It may further be defined by county or district.  Each state has a cap.  The district must use the lower of the rate given to them or the cap.  On a national level these rates range from 3% to 24% of total non-food expenses. 

We are often asked if participation impacts the indirect cost rate and the potential return to the general operating fund.  The answer is yes.  Why?  Higher lunch and breakfast participation means more meals are served.  The more meals served, the higher the amount of non-food cost.  This includes labor, materials, food preparation supplies, etc.  The higher the non-food cost, the higher the total indirect cost amount that may be transferred to the general operating fund.

Many districts are currently experiencing shortfalls in unrestricted general operating revenue.  It is therefore, doubly important that they explore every available option for saving general operating funds.  Making sure that the district’s food service program is maximizing its revenue and bearing all allowed direct and indirect costs is one way to stretch these all-important and shrinking funds.

Portolan Associates, Inc is the nation’s premier provider of school district food service operations consulting.  Please feel free to contact us at 1-706-569-9669.