Managerial Cost Accounting Practices: Departments of Education,  
Transportation, and the Treasury (19-DEC-05, GAO-06-301R).	 
                                                                 
Authoritative bodies have promulgated laws, accounting standards,
information system requirements, and related guidance to	 
emphasize the need for cost information and cost management in	 
the federal government. For example, the Chief Financial Officers
(CFO) Act of 1990, contains several provisions related to	 
managerial cost accounting, one of which states that an agency's 
CFO should develop and maintain an integrated accounting and	 
financial management system that provides for the development and
reporting of cost information. Statement of Federal Accounting	 
Standards No. 4, Managerial Cost Accounting Concepts and	 
Standards for the Federal Government, and the Joint Financial	 
Management Improvement Program's (JFMIP) Framework for Federal	 
Financial Management Systems established accounting standards and
system requirements for managerial cost accounting (MCA)	 
information at federal agencies. The Federal Financial Management
Improvement Act of 1996 built on this foundation and required,	 
among other things, CFO Act agencies' systems to comply 	 
substantially with federal accounting standards and federal	 
financial management systems requirements. MCA involves the	 
accumulation and analysis of financial and nonfinancial data,	 
resulting in the allocation of costs to organizational pursuits  
such as performance goals, programs, activities, and outputs. The
data analyzed depend on the operations and needs of the 	 
organization. Nonfinancial data measure the occurrences of	 
activities and can include, for example, the number of hours	 
worked, units produced, grants managed, inspections conducted,	 
people trained, or time needed to perform certain functions. In  
light of the requirements for federal agencies to prepare MCA	 
information, Congress asked us to determine the extent to which  
federal agencies develop cost information and use it for	 
managerial decision making. The objectives of our review were to 
determine how federal agencies generate managerial cost 	 
accounting information as well as how governmental managers use  
cost information to support managerial decision making and	 
provide accountability. 					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-301R					        
    ACCNO:   A43538						        
  TITLE:     Managerial Cost Accounting Practices: Departments of     
Education, Transportation, and the Treasury			 
     DATE:   12/19/2005 
  SUBJECT:   Accountability					 
	     Accounting standards				 
	     Cost accounting					 
	     Data collection					 
	     Decision making					 
	     Financial management systems			 
	     Internal controls					 
	     Management information systems			 
	     Performance measures				 

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GAO-06-301R

December 19, 2005

The Honorable Todd R. Platts

Chairman, Subcommittee on Government Management,

Finance, and Accountability

Committee on Government Reform

House of Representatives

Subject: Managerial Cost Accounting Practices: Departments of Education,
Transportation, and the Treasury

Dear Mr. Chairman:

Authoritative bodies have promulgated laws, accounting standards,
information system requirements, and related guidance to emphasize the
need for cost information and cost management in the federal government.
For example, the Chief Financial Officers (CFO) Act of 1990,1 contains
several provisions related to managerial cost accounting, one of which
states that an agency's CFO should develop and maintain an integrated
accounting and financial management system that provides for the
development and reporting of cost information. Statement of Federal
Accounting Standards No. 4, Managerial Cost Accounting Concepts and
Standards for the Federal Government, and the Joint Financial Management
Improvement Program's (JFMIP) Framework for Federal Financial Management
Systems2 established accounting standards and system requirements for
managerial cost accounting (MCA) information at federal agencies. The
Federal Financial Management Improvement Act of 19963 built on this
foundation and required, among other things, CFO Act agencies' systems to
comply substantially with federal accounting standards and federal
financial management systems requirements.

MCA involves the accumulation and analysis of financial and nonfinancial
data, resulting in the allocation of costs to organizational pursuits such
as performance goals, programs, activities, and outputs. The data analyzed
depend on the operations and needs of the organization. Nonfinancial data
measure the occurrences of activities and can include, for example, the
number of hours worked, units produced, grants managed, inspections
conducted, people trained, or time needed to perform certain functions.

1 Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).

2 In 2005, JFMIP's responsibilities for financial management and policy
oversight were realigned to the Office of Management and Budget, the
Office of Personnel Management, and the Chief Financial Officer's Council.

3 Pub. L. 104-208, div. A., S: 101(f), title VIII, 110 Stat. 3009,
3009-389 (Sept. 30, 1996).

In light of the requirements for federal agencies to prepare MCA
information, you asked us to determine the extent to which federal
agencies develop cost information and use it for managerial decision
making. The objectives of our review were to determine how federal
agencies generate managerial cost accounting information as well as how
governmental managers use cost information to support managerial decision
making and provide accountability.

This report summarizes information provided during our November 8, 2005,
briefing to your staff concerning our review of MCA practices at the
Department of Education (Education), the Department of Transportation
(Transportation), and the Department of the Treasury (Treasury). This was
our second in a series of briefings concerning the status of MCA
activities at large government agencies. Our first briefing covered the
status of MCA activities at the Department of Veterans Affairs and the
Department of Labor.4 The November 8, 2005, slides are presented in
enclosure I.

Status of Departmental Efforts to Implement Managerial Cost Accounting

Similar to issues that surfaced in our earlier assessment at the
Department of Veterans Affairs and the Department of Labor, we found
uneven progress in MCA implementation and a need for enhanced controls
over MCA data at Education, Transportation, and Treasury.

Department of Education

At Education, 1 of 10 program offices had an MCA system in place at the
time of our review. Education did not take a department-level leadership
role to promote and monitor MCA implementation, nor did it have policies
and procedures for implementing MCA departmentwide. Rather, according to
Education officials, other priorities, such as improving controls over
financial reporting, were taking precedence.

Federal Student Aid (FSA), the one Education program office with an
operational MCA system, independently developed its MCA system after being
statutorily designated as a performance-based organization in 1998. FSA
managers, however, still did not have direct access to the system and had
to rely on a team of cost accounting personnel to provide system outputs.
In addition, FSA had not completed development of a training strategy for
current and potential users of the data. Also, FSA had not documented the
design of controls or completion of those control procedures when
performed to help ensure the reliability of nonfinancial data. Adequately
designed controls and properly implemented procedures are key when
determining the cost of work outputs. Further, FSA had not performed and
documented a comprehensive post-implementation review of its MCA system
which would have determined how well the system met expectations and cost
estimates, and would have documented lessons learned for current and
future stakeholders.

4 GAO, Managerial Cost Accounting Practices: Leadership and Internal
Controls Are Key to Successful Implementation, GAO-05-1013R (Washington,
D.C.: Sept. 2, 2005).

Department of Transportation

Transportation has in recent years shown strong leadership in developing
MCA systems both departmentwide and at the individual operating
administrations (OA). For example, two staff members from the Office of
the Secretary provided daily support to the OAs in the area of MCA and
monitored their progress in implementing MCA. In addition, MCA was
discussed at CFO Group meetings, and at meetings of the Cost Accounting
Steering Group.

According to Transportation officials, the 12 OAs were developing MCA
systems, tailored to their respective needs, which should be able to
interface with Delphi - the department's integrated financial management
system, a component of which could be used by OAs for cost accounting. One
of the two largest OAs, the Federal Aviation Administration (FAA), was
mandated to develop a cost accounting system in 1996, and had implemented
MCA in two business lines covering over 80 percent of its budget. The
other 11 OAs expected to have their MCA models in place by early fiscal
year 2006.

While Transportation supported and monitored implementation of MCA, and
had issued related procedures in 2002, it did not have a written
departmentwide MCA policy. At FAA, officials cited several controls to
help ensure the reliability of nonfinancial data, and stated that system
improvements for assigning labor costs related to the maintenance of older
National Airspace System equipment were planned.

Department of the Treasury

By policy, Treasury delegated to its bureaus responsibility to implement
MCA systems and processes to meet federal standards. Treasury retained
oversight responsibility to ensure consistent implementation of MCA
departmentwide. Treasury officials, however, had no specific procedures in
place to ensure that consistent, periodic department-level oversight was
conducted, and they promoted MCA and monitored MCA implementation on an
informal and sporadic basis. This contributed to widely disparate
implementation and use of MCA among Treasury's operating bureaus and
department-level offices. For example, the Bureau of Engraving and
Printing and the Financial Management Service (FMS) had established MCA
systems and practices, and management utilized cost information to make
key decisions. However, at Treasury's largest component, the Internal
Revenue Service (IRS), MCA capability was limited. IRS's newly implemented
MCA module had less than 1 full year of data, and could only account for
costs by activity, output, or program when those activities, outputs, or
programs were completely housed within a single cost center.

Controls to ensure the reliability of MCA data needed improvement in two
of the three Treasury bureaus we reviewed. Specifically, at FMS and IRS,
formal MCA policies and procedures had not been finalized, approved, or
disseminated. Further, improved department-level oversight of bureaus is
needed to ensure appropriate systems that provide reliable information are
implemented departmentwide.

Recommendations for Executive Action

We are making 17 recommendations to the Secretaries of the Departments of
Education, Transportation, and the Treasury.

Recommendations to the Secretary of Education

To help ensure that Education components implement and use reliable
managerial cost accounting methodologies, we recommend that the Secretary
of Education direct the Chief Financial Officer of the Department of
Education to develop and issue

           o  a policy for implementing MCA departmentwide and
           o  procedures for monitoring implementation of its departmentwide
           managerial cost accounting policy and for establishing a sound
           system of controls.

To help ensure cost data reliability, more efficient utilization of the
agency's cost accounting system, and adequate staff knowledge of that
system, we also recommend that the Secretary of Education direct the Chief
Operating Officer of Federal Student Aid to

           o  document the design of controls that are being used to help
           ensure the reliability of the nonfinancial data,
           o  document the proper completion of these control procedures,
           o  provide all appropriate staff direct access to cost accounting
           system output information, and
           o  develop adequate training plans for all staff who could
           effectively utilize managerial cost accounting information.

We also recommend that the Secretary of Education direct the Chief
Operating Officer of Federal Student Aid to perform and document a
post-implementation review to evaluate whether managerial cost information
meets organizational objectives and users' needs. This review should also
determine the extent to which managers use or plan to use cost data in
managing day-to-day operations.

Recommendations to the Secretary of Transportation

To help ensure that Transportation components implement reliable cost
accounting methodologies for use in managerial decision making in
accordance with departmental objectives, we recommend that the Secretary
of Transportation direct appropriate department officials to finalize and
issue

           o  a policy for implementing MCA departmentwide, and
           o  formal procedures, revised as necessary, to monitor
           implementation of that policy and establish a sound system of
           controls.

In order for FAA to develop cost accounting information that is
sufficiently reliable for ongoing managerial decision making, consistent
with FAA-identified concerns and ongoing efforts, we also recommend that
the Secretary of Transportation direct the Administrator of FAA to

           o  implement the planned system improvement for assigning labor
           costs to National Airspace System maintenance projects, with
           appropriate internal controls to help ensure data reliability, and
           o  implement managerial cost accounting in its two lines of
           business that have not completed implementation.

Recommendations to the Secretary of the Treasury

To help ensure that Treasury components implement and use reliable
managerial cost accounting methodologies, we recommend that the Secretary
of the Treasury direct the Chief Financial Officer of the Department of
the Treasury to develop and implement written procedures, including a
sound system of controls, to better carry out Treasury's policy to oversee
the implementation and continued use of appropriate cost accounting
methodologies at its bureaus and departmental offices.

To help ensure that the Internal Revenue Service implements and uses
reliable cost accounting methodologies in accordance with management
objectives, we recommend that the Secretary of Treasury require the
Commissioner of Internal Revenue to direct the Chief Financial Officer of
IRS to finalize and issue

           o  an Internal Revenue Service policy to carry out Treasury's
           managerial cost accounting policy and
           o  formal procedures, including a sound system of controls to
           implement that policy.

We also recommend that the Secretary require the Commissioner of Internal
Revenue to direct the Chief Financial Officer of IRS to finalize
development and implementation of a cost accounting system capable of
determining the cost of activities, services, or products at levels of
detail suitable to assist managerial decision making.

Similarly, we recommend that the Secretary require the Commissioner of
Financial Management Service to direct the Chief Financial Officer of the
Financial Management Service to finalize and issue

           o  a Financial Management Service policy to carry out Treasury's
           managerial cost accounting policy and
           o  formal procedures, including a sound system of controls, to
           implement that policy.

Agency Comments and Our Evaluation

We requested comments on a draft of our briefing presentation from the
Secretaries of Education, Transportation, and the Treasury or their
designees. We received written comments from the Chief Financial Officer
of the Department of Education and from the Acting Deputy Chief Financial
Officer of the Department of the Treasury. Transportation elected not to
provide written comments, but did provide technical comments. We
incorporated the agencies' comments, as appropriate. Education and
Treasury comments are reprinted as enclosures II and III, respectively.

Comments from the Department of Education

Education agreed with six of our seven recommendations. In particular, it
agreed with our four recommendations pertaining to data reliability and
MCA utilization and said it would address these issues when implementing a
new MCA system. Further, Education agreed with our two recommendations
pertaining to departmentwide MCA policies and procedures for implementing
that MCA policy, but said other priorities, such as improving controls
over financial reporting, currently take precedence.

Regarding our seventh recommendation concerning the need to perform and
document a post-implementation review for the managerial cost information
system, Education stated that it conducted a post-implementation review of
its activity-based costing system on an ongoing basis, but that the
results of the review were not documented. While the review process used
by Education has benefits, a comprehensive post-implementation review
undertaken and documented in accordance with Office of Management and
Budget (OMB) Circular A-130, Management of Federal Information Resources,
would provide a broader range of information about FSA's system and how it
is achieving its organizational objectives. This information could benefit
current and future stakeholders. Accordingly, we made no change to our
recommendation.

Comments from the Department of Transportation

Transportation provided comments concerning MCA implementation at FAA and
several other technical issues in two e-mails, but neither agreed nor
disagreed with our four recommendations. We considered its technical
comments and incorporated them, as appropriate.

Comments from the Department of the Treasury

Treasury agreed with our six recommendations and stated that it recognizes
the importance of addressing its cost accounting needs. However, Treasury
stated that resource constraints limit the department's ability to oversee
MCA activities and that the cost of MCA should be weighed against its
benefits and other competing priorities. We agree that the costs and
benefits of an activity are important considerations but believe that MCA,
conceptually, is what is needed to help promote efficiency, productivity,
and the best use of limited resources. In our view, properly functioning
MCA capabilities, as envisioned in laws and regulations, could help
Treasury meet its mission needs in an era of constrained resources.

Treasury also made several comments regarding specific information in the
report. Treasury commented that information we presented about current MCA
efforts at IRS and the status of its MCA system were not accurate. It said
that the IRS system allocates costs to over 13,000 IRS-defined cost
centers. While IRS may have cost-center-level accounting, we remain
concerned that according to IRS officials, IRS can only account for costs
by activity, output, or program when those activities, outputs, or
programs reside completely within a single cost center, thus not allowing
IRS an enterprise-wide perspective on costs.

Treasury also said that once sufficient data are collected, the current
system along with information from other systems, such as performance
data, will be used to obtain cost data in greater detail to support
decision making. However, during our review, IRS officials told us that
such analysis was not possible with the current system without
implementing certain system upgrades. We believe that this perceived
difference in position between Treasury and IRS officials about the
capabilities of the current IRS system and the agency's MCA requirements
needs to be resolved. In any event, we continue to believe that the
ability to generate more detailed cost information could be enhanced if an
upgraded and integrated cost module or similar system was in place.
Accordingly, we did not modify our position on this topic.

In addition, Treasury said that the disparate implementation of MCA across
the department is not solely the result of informal and sporadic
departmental oversight. We clarified our briefing to instead acknowledge
that the informal and sporadic oversight was a contributing factor to
disparate MCA implementation, and also noted that the sophistication,
extent, and cost of implementing MCA would depend on the operations and
needs of the organization.

Scope and Methodology

Our methodology was consistent with the one employed in our prior review
of MCA practices at the Department of Labor and the Department of Veterans
Affairs.5 To obtain an understanding of how MCA systems at Education,
Transportation, and Treasury generate cost information, we interviewed
officials and reviewed documentation on the status of MCA system
implementation and the related obstacles to managerial costing. We also
examined departmental guidance and looked for evidence of leadership and
commitment to the implementation of entity-wide cost management practices.
Using the Standards for Internal Control in the Federal Government6  as a
guide, we identified internal controls over the reliability of financial
and nonfinancial information used in MCA. To determine how managers use
cost information to support managerial decision making and provide
accountability, we obtained an understanding of how Education,
Transportation, and Treasury use cost accounting data for budgeting,
costing services or products, preparation of the Statement of Net Cost,
and other managerial uses through interviews of agency officials and a
review of documentation provided by the departments.

5 GAO-05-1013R, 12.

6 GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999).

During our review, we visited Education, Transportation, and Treasury
headquarters in Washington, D.C. We interviewed managers and senior-level
officials about their MCA activities at the departmental level and at
selected component agencies. When possible, we corroborated information
obtained in interviews with agency documents such as policies, procedures,
system descriptions, and flowcharts. We also reviewed prior office of
inspector general and GAO reports regarding MCA activities, systems, and
data. The agencies provided comments on a draft of this report, which we
considered and incorporated as appropriate. We performed this work in
accordance with U.S. generally accepted government auditing standards from
May 2005 through October 2005.

We are sending this report to the Secretaries of Education,
Transportation, and the Treasury; the Director of OMB; and other
interested parties. Should you or your staff have any questions on the
matters discussed in this correspondence, please contact me at (202)
512-6131 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs can be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in enclosure IV.

Sincerely yours,

Robert E. Martin

Director, Financial Management and Assurance

Enclosure II

                   Comments from the Department of Education

Enclosure III

                  Comments from the Department of the Treasury

Enclosure IV

                     GAO Contact and Staff Acknowledgments

GAO Contact

Robert E. Martin (202) 512-6131 or [email protected]

Acknowledgments

In addition to the contact named above, key contributors to this
assignment were Jack Warner, Assistant Director; Paul Begnaud; Lisa Crye;
Dan Egan; Fred Evans; Barry Grinnell; Barbara House; Jerrica Kahle; Paul
Kinney; Lisa Knight; James Moses; Lori Ryza; Glenn Slocum; and Bill
Wright.

(197011)

                           November 8, 2005 Briefing

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