Managerial Cost Accounting Practices: Implementation and Use Vary
Widely across 10 Federal Agencies (20-JUL-07, GAO-07-679).	 
                                                                 
In the past 16 years, a number of laws, accounting standards,	 
system requirements, and related guidance have emphasized the	 
need for cost information in the federal government, establishing
requirements and accounting standards for managerial cost	 
accounting (MCA) information. In light of these requirements, GAO
was asked to determine how federal agencies generate MCA	 
information and how government managers use that information to  
support their decisions and provide accountability. Since 2005,  
GAO has reviewed and reported on MCA practices at 10 large	 
civilian agencies resulting in five reports. This report brings  
the overall observations of these studies together in one place. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-679 					        
    ACCNO:   A73018						        
  TITLE:     Managerial Cost Accounting Practices: Implementation and 
Use Vary Widely across 10 Federal Agencies			 
     DATE:   07/20/2007 
  SUBJECT:   Accounting procedures				 
	     Accounting standards				 
	     Cost accounting					 
	     Data integrity					 
	     Financial management				 
	     Financial management systems			 
	     Policy evaluation					 
	     Program implementation				 

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GAO-07-679

   

     * [1]Results in Brief
     * [2]Background

          * [3]Evolution of Managerial Cost Accounting

     * [4]Scope and Methodology
     * [5]Few Agencies Have MCA Systems That Can Provide Managers with

          * [6]Entitywide MCA Implementation
          * [7]Some Agencies Are Planning to Implement MCA When Upgrading T
          * [8]Some Agency Components Developed MCA Systems Independently
          * [9]Agencies Need Reliable Financial and Nonfinancial Data throu

               * [10]Problems with Financial Data
               * [11]Noncompliance with federal systems requirements
               * [12]Lack of adherence to federal accounting standards
               * [13]Noncompliance with the Standard General Ledger
               * [14]Problems with Nonfinancial Data

     * [15]Few Agencies Use Cost Information Routinely to Manage Their

          * [16]Entitywide Uses of MCA Information
          * [17]Component Agency Uses of MCA Information

     * [18]Agency Leadership Is Fundamental to Successful MCA Implement

          * [19]Strong Leadership Is Critical to Promoting the Benefits of M
          * [20]Focusing on Managing Costs Can Help Agencies Meet Government

     * [21]Conclusions
     * [22]GAO Contact
     * [23]Acknowledgments
     * [24]GAO's Mission
     * [25]Obtaining Copies of GAO Reports and Testimony

          * [26]Order by Mail or Phone

     * [27]To Report Fraud, Waste, and Abuse in Federal Programs
     * [28]Congressional Relations
     * [29]Public Affairs

Report to Congressional Requesters

United States Government Accountability Office

GAO

July 2007

MANAGERIAL COST ACCOUNTING PRACTICES

Implementation and Use Vary Widely across 10 Federal Agencies

GAO-07-679

Contents

Letter 1

Results in Brief 2
Background 4
Scope and Methodology 10
Few Agencies Have MCA Systems that Can Provide Managers with Cost
Information for Daily Use 11
Few Agencies Use Cost Information Routinely to Manage Their Operations 22
Agency Leadership Is Fundamental to Successful MCA Implementation 25
Conclusions 28
Appendix I Research Resources 30
Appendix II Gao Contact and Staff Acknowledgments 33

Tables

Table 1: Reported Costs and Earned Revenues for 10 Civilian Agencies, for
the Fiscal Year Ended September 30, 2005 9
Table 2: Auditors' FFMIA Assessments for Fiscal Year 2005 17

Figure

Figure 1: Agency Systems Architecture 5

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separately.

United States Government Accountability Office
Washington, DC 20548

July 20, 2007

The Honorable Brian P. Bilbray
Ranking Minority Member
Subcommittee on Government Management, Organization, and Procurement
Committee on Oversight and Government Reform
House of Representatives

The Honorable Todd R. Platts
House of Representatives

A number of laws, accounting standards, information systems requirements,
and related guidance have emphasized the need for cost information and
cost management in the federal government. At the forefront, the Chief
Financial Officers (CFO) Act of 19901 contains several provisions related
to managerial cost accounting (MCA), one of which states that an agency's
CFO should develop and maintain an integrated accounting and financial
management system that provides for the systematic measurement of
performance and the development and reporting of cost information. The
Statement of Federal Financial 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,2 established accounting standards
and system requirements, respectively, for MCA information at federal
agencies. In addition, the Federal Financial Management Improvement Act of
1996 (FFMIA)3 required, among other things, that the systems of CFO Act
agencies comply substantially with federal accounting standards and
federal financial management systems requirements.

MCA offers a way for agencies to help maximize efficiency and
effectiveness in using existing resources by identifying the true costs of
programs and providing better information for making decisions and
enhancing accountability. Given this, as well as the requirements for CFO
Act agencies to prepare MCA information, you asked us to determine the
extent to which those agencies develop cost information and use it for
managerial decision making. Accordingly, over the past 2 years, we
completed reviews of MCA practices in 10 large CFO Act agencies, resulting
in five reports.4 This report summarizes our findings from those reports
on (1) the ways federal agencies generate managerial cost accounting
information, (2) how government managers use cost information to support
managerial decision making and provide accountability, and (3) the need
for stronger leadership for implementing MCA in many of the agencies we
reviewed. This capping report was prepared between September 2006 and June
2007 in accordance with generally accepted government auditing standards.

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

2In December 2004, the JFMIP principals voted to modify the roles and
responsibilities of the JFMIP Program Office, which is now known as the
Financial Systems Integration Office (FSIO).

3Pub. L. No. 104-208, div. A., S 101 (f), title VIII, 110 Stat. 3009,
3009-389 (Sept. 30, 1996).

Results in Brief

More than 16 years after the passage of the CFO Act, we found that few
federal agencies have systems that can routinely provide managers with
reliable cost information to inform decision making. Of the 10 agencies we
reviewed, only 3 had implemented MCA systems entitywide: the Department of
the Interior (DOI), the Social Security Administration (SSA), and the
Department of Labor (DOL). In addition, the Department of Transportation
(DOT) had made significant progress in implementing MCA entitywide. Three
agencies--the Departments of Agriculture (USDA), Health and Human Services
(HHS), and Housing and Urban Development (HUD)--planned to implement MCA
systems when upgrading their overall financial management systems, but
they had not yet adequately considered their MCA needs. The three
remaining agencies we reviewed--the Departments of Education, the
Treasury, and Veterans Affairs (VA)--had no plans to implement MCA
departmentwide, although VA was initiating a review to explore
opportunities to do so. Further, some component agencies at Education,
Treasury, and VA had implemented their own MCA systems. In addition, some
agencies do not yet have the accurate, reliable, and timely data needed
for MCA systems to ensure the outputs are useful and reliable.

4 GAO, Managerial Cost Accounting Practices: Leadership and Internal
Controls Are Key to Successful Implementation, [30]GAO-05-1013R
(Washington, D.C.: Sept. 2, 2005); Managerial Cost Accounting Practices:
Departments of Education, Transportation, and the Treasury,
[31]GAO-06-301R (Washington, D.C.: Dec. 19, 2005); Managerial Cost
Accounting Practices: Department of Health and Human Services and Social
Security Administration, [32]GAO-06-599R (Washington, D.C.: Apr. 18,
2006); Managerial Cost Accounting Practices: Department of Agriculture and
Department of Housing and Urban Development, [33]GAO-06-1002R (Washington,
D.C.: Sept. 21, 2006); and Managerial Cost Accounting Practices at the
Department of the Interior, [34]GAO-07-298R (Washington, D.C.: May 24,
2007).

Few of the federal agencies we reviewed were using MCA to make day-to-day
decisions. Only DOI and SSA used cost information routinely to manage
operations entitywide. In addition, DOL was developing plans for using its
recently implemented MCA system. Other agencies used cost information
primarily for external financial reporting, and they cited a limited
number of examples showing how cost information was used to help make
management decisions. Finally, some components of agencies that did not
have overall MCA systems used cost information more routinely to, among
other things, evaluate programs, formulate budgets, and set fees and
prices.

Strong leadership for MCA was in place at DOI, DOL, SSA and DOT. Other
agencies have not yet made concerted efforts to promote the benefits of
MCA and oversee its implementation and use throughout their respective
components. Because implementing MCA takes time, requires monitoring, and
inevitably mid-course adjustments, the managers who will use the
information need to see its value and take ownership of the system. Strong
leadership can set the tone and the expectations to make this happen, and
encourage a continuing transition in federal government culture to one of
identifying and managing costs, in addition to managing the budget.

Background

The policies and standards prescribed for executive agencies to follow in
developing, operating, evaluating, and reporting on financial management
systems are included in Office of Management and Budget (OMB) Circular No.
A-127, Financial Management Systems. The components of an integrated
financial management system include the core financial system,5 a
managerial cost accounting system, and certain administrative and
programmatic systems. Administrative systems are those that are common to
all federal agency operations,6 and programmatic systems are those needed
to fulfill an agency's mission. Figure 1 illustrates how these systems
should interrelate in an agency's overall systems architecture.

5Core financial systems, as defined by the Office of Federal Financial
Management (OFFM), include managing general ledger, funding, payments,
receivables, and certain basic cost functions.

6Examples of administrative systems include budget, acquisition, travel,
property, and human resources and payroll.

Figure 1: Agency Systems Architecture

The Statement of Federal Financial Accounting Standards No. 4 (SFFAS 4),
Managerial Cost Accounting Concepts and Standards for the Federal
Government, which became effective in fiscal year 1998, sets forth the
fundamental elements for MCA in government agencies.7 The five standards
in SFFAS 4 require government agencies to (1) accumulate and report the
costs of activities on a regular basis for management information
purposes; (2) establish responsibility segments, and measure and report
the costs of each segment's outputs and calculate the unit cost of each
output; (3) determine and report the full costs of government goods and
services, including direct8 and indirect9 costs; (4) recognize the costs
of goods and services provided by other federal entities; and (5) use and
consistently follow costing methodologies or cost finding techniques most
appropriate to the segment's operating environment to accumulate and
assign costs to outputs. SFFAS 4 states that MCA should be a fundamental
part of the financial management system and, to the extent practical,
should be integrated with other parts of the system.

7 In October 1997, the Federal Accounting Standards Advisory Board delayed
SFFAS 4 implementation from fiscal year 1997 to fiscal year 1998.

There are many potential applications for cost information in the federal
government. This information can be used by federal executives for
budgeting and cost control, performance measurement, determining
reimbursements and setting fees and prices, program evaluations, and
decisions that involve economic choices, such as whether to do a project
in-house or contract it out.10 The Congress can also use MCA information
to determine how to fund programs and monitor agency performance, as well
as to analyze the merits of proposals advocated by different parties. The
public, in turn, can benefit from greater transparency about program
performance and ready access to information on how its tax dollars are
spent.

Managerial cost accounting entails answering a very simple question. How
much does it cost to do something, be it an extensive overall program
effort or the incremental and iterative efforts associated with a project
activity? As such, it involves accumulating and analyzing both financial
and nonfinancial data11 to determine the costs of achieving performance
goals, delivering programs, and pursuing other activities. The principal
purpose is to assess how much it costs to do whatever is being measured,
thus allowing management to analyze whether that cost seems reasonable, or
to establish a baseline for comparison with others who do similar work.
The factors analyzed and the level of detail depend on the operations and
needs of the organization. Reliable financial and nonfinancial data are
cornerstones of this assessment because if the data are wrong, the
resulting analysis can give a distorted view of how well the organization
is doing, thereby affecting decision making. MCA differs from financial
accounting in that it is primarily intended to provide information for
internal decision making rather than external reporting.

8Direct costs are costs that can be specifically identified with an
output, including salaries and benefits for employees working directly on
the output, materials, supplies, and costs with facilities and equipment
used exclusively to produce the output.

9Indirect costs are costs that are not specifically identifiable with any
output and may include costs for general administration, research and
technical support, and operations and maintenance for building and
equipment.

10See Statement of Federal Financial Accounting Standards No. 4,
Managerial Cost Accounting Concepts and Standards for the Federal
Government, issued July 31, 1995.

11Nonfinancial data measure the occurrences of activities and can include
such things as hours worked, units produced, grants managed, inspections
conducted, or people trained.

Evolution of Managerial Cost Accounting

With the growth of continuous improvement initiatives since the 1970s, the
role of cost accounting has evolved in many organizations from measuring
and reporting business initiatives to helping organizations implement
management initiatives.12 Activity-based Costing (ABC), which is a type of
MCA, is a set of management information and accounting methods used to
identify, describe, assign costs to, and report on an organization's
operations.13 Activity-based Costing/Management (ABC/M) uses ABC to
achieve the broad objective of improving management decision making and
reducing costs by providing accurate cost information and encouraging
continuous improvement efforts.14

The private sector began to use ABC/M in the 1980s to analyze work
activities and provide information on core business processes to promote
effectiveness in an era of increased competitiveness.15 At the same time,
the federal government was experiencing growing problems in financial
management, with frequent disclosures of fraud, waste, and abuse in
federal programs. In 1985 the Comptroller General issued a two-volume
report, entitled Managing the Cost of Government: Building an Effective
Financial Management Structure, which provided the framework for the
reforms needed to improve federal financial management and manage the cost
of government.16

12Tom Albright and Marco Lam, "Managerial Accounting and Continuous
Improvement Initiatives: A Retrospective and Framework," Journal of
Managerial Issues, vol. XVIII, no. 2 (Summer 2006), 157-174.

13 Clif Williams and Ward Melhuish, "Is ABC Destined for Success or
Failure in the Federal Government?" Public Budgeting & Finance (Summer
1999), 22-36.

14Albright and Lam, 2006, p. 164.

15Williams and Melhuish, 1999, p. 22.

16GAO, Managing the Cost of Government: Building an Effective Financial
Management Structure, [35]GAO/AFMD-85-35 and 35A (Washington, D.C.:
February 1985).

The Chief Financial Officers Act (CFO Act) of 199017 was the beginning of
a series of management reform laws to improve federal financial management
and set the stage for other key reforms that followed. Among other things,
the CFO Act established a leadership structure for financial management,
required audited financial statements, and strengthened accountability
reporting. It 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 of cost information and systematic
performance measurement. The end goal of the CFO Act is to greatly enhance
the ability of managers to do their jobs by providing the full range of
financial information needed for day-to-day management.

The CFO Act was followed by the Government Performance and Results Act
(GPRA) in 1993.18 GPRA requires agencies to develop strategic plans, set
performance goals, and report on actual performance compared to goals each
year. Accurate cost information can enhance the utility of selected
performance measures. GPRA, in turn, was followed by the Government
Management and Reform Act (GMRA) of 1994,19 which made the CFO Act's pilot
program for annual audited agency financial statements permanent and
expanded this requirement to all agencies covered by the CFO Act.

The Federal Financial Management Improvement Act of 199620 (FFMIA) built
on this foundation in order to help generate reliable, useful, and timely
information for management decision making and to help ensure ongoing
accountability by requiring agencies covered by the CFO Act21 to have
systems that comply substantially with federal accounting standards, such
as SFFAS 4, federal financial management systems requirements and the U.S.
Government Standard General Ledger (SGL) 22 at the transaction level. In
addition, FFMIA requires that we report to the Congress on its
implementation status each year. While the number of CFO Act agencies
receiving unqualified opinions on their financial statements has increased
from 11 in fiscal year 1997 to 19 in fiscal year 2005, the ability of
federal financial management systems to fully address FFMIA requirements
has not advanced at the same pace. For fiscal year 1997, 20 agencies were
reported as having systems that were not in substantial compliance with at
least one of the three FFMIA systems requirements; for fiscal year 2005,
auditors for 18 of the CFO Act agencies reported that the agencies'
financial management systems did not substantially comply with at least
one of the three FFMIA requirements.

17Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).

18Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993).

19Pub. L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994).

20Pub. L. No. 104-208, div. A., S 101(f), title VIII 110 Stat. 3009,
3009-389 (Sept. 30, 1996).

21As of fiscal year 2005, 24 agencies were covered by the CFO Act.

22The SGL provides a standard chart of accounts and transactions for
agency financial systems.

The federal government is one of the largest, most complex organizations
in the world, and operating, maintaining, and updating its financial
management systems is a monumental economic and technical challenge. The
10 agencies reviewed through our series of MCA engagements over the past 2
years represent a broad diversity of mission and purpose, and accounted
for over 88 percent of the reported total net costs of civilian federal
government agencies in fiscal year 2005 (see table 1).

Table 1: Reported Costs and Earned Revenues for 10 Civilian Agencies, for
the Fiscal Year Ended September 30, 2005

(dollars in billions)                                                      
                                              Percentage                      
                               Gross   Earned     earned           Percentage 
                               costc revenued    revenue Net coste   net cost 
Department of Health and                                                   
Human Services             $623.4    $39.6               $583.8            
Social Security                                                            
Administration              572.1     -2.0                574.1            
Department of Veterans                                                     
Affairs                     276.6      3.4                273.2            
Department of                                                              
Agriculture                 112.6     19.9                 92.7            
Department of the                                                          
Treasurya                    82.3      3.1                 79.2            
Department of Education      75.6      4.7                 70.9            
Department of                                                              
Transportation               62.4      0.6                 61.8            
Department of Labor          50.0      0.0                 50.0            
Department of Housing                                                      
and Urban Development        43.6      1.3                 42.3            
Department of the                                                          
Interior                     19.5      3.2                 16.3            
Subtotal                 $1,918.1    $73.8      37.3%  $1,844.3      88.2% 
Other civilian agencies     371.4    124.1      62.7%     247.3      11.8% 
Total civilian agenciesb $2,289.5   $197.9     100.0%  $2,091.6     100.0% 

Source: Department of the Treasury, Financial Management Service,
Financial Report of the United States Government, 2005, Washington, D.C.

aInterest on Treasury securities held by the public is not included.

bThis equals the total costs and revenues for the U.S. government, less
costs and revenues for the Department of Defense and interest on Treasury
securities held by the public.

cGross cost is the full cost of providing agency goods and services.

dEarned revenues arise when a government entity provides goods and
services to the public or to another government entity for a price.

eNet cost equals the gross cost less earned revenues.

Scope and Methodology

This report summarizes the results of our series of reviews concerning how
10 large federal agencies generate and use MCA information. In addition to
summarizing our prior reports, we also researched literature on MCA
implementation to learn whether the MCA practices and problems we found
were similar to those in other federal agencies, state and local
government, and private industry. The reports we summarized and the
literature we reviewed are listed in appendix I.

We followed a consistent methodology when reviewing MCA at each of the 10
large civilian agencies. To obtain an understanding of how agencies
generated managerial cost information, we reviewed documentation and
interviewed officials on the status of MCA system implementation and the
related obstacles to managerial costing. We also examined agency guidance
and looked for evidence of leadership on and commitment to the
implementation of entitywide cost management practices. Using the
Standards for Internal Control in the Federal Government 23 as a guide, we
identified internal controls over the reliability of financial and
nonfinancial information used in MCA. To determine how managers used cost
information to support decision making and provide accountability for
government resources, we obtained an understanding of how agencies used
cost accounting data for budgeting, costing services or products,
preparing the Statement of Net Cost, managing contractors' reimbursable
costs, and other managerial uses through a review of documentation
provided by the agencies and interviews with agency officials.

During our reviews, we visited agency headquarters in Washington, D.C. We
also visited certain component agencies at each department and held
teleconferences with other agency officials as necessary. When possible,
we corroborated information obtained in interviews with documents on
policies, procedures, system descriptions, and flowcharts. We also
reviewed prior Office of Inspector General (OIG), independent public
accountant, and our reports on MCA activities, systems, and data. In
performing our work, we issued five reports, which are listed in footnote
4. The agencies provided comments on each of these five report drafts,
which we considered and incorporated as appropriate. We performed this
body of work in accordance with U.S. generally accepted government
auditing standards between March 2005 and January 2007. We did not request
comments from affected agencies on a draft of this capping report because,
in accordance with our Agency Protocols, we do not seek comments from
agencies when a product largely reflects our prior work.24 This capping
report was prepared between September 2006 and June 2007 in accordance
with generally accepted government auditing standards.

23 GAO, Standards for Internal Control in the Federal Government,
[36]GAO/AIMD-00-21 .3.1 (Washington, D.C.: November 1999).

Few Agencies Have MCA Systems That Can Provide Managers with Cost Information
for Daily Use

Of the 10 CFO Act agencies we reviewed, only DOI and SSA had MCA systems
in place that could provide managers entitywide with cost information on a
routine basis for daily decision making. In addition, DOL had recently
implemented a departmentwide MCA system and was developing plans for using
it, and DOT had made significant progress in implementing MCA
departmentwide. Three departments--USDA, HHS, and HUD--planned to
implement MCA systems when upgrading their overall financial management
systems, but they had not yet adequately considered their MCA needs. The
remaining three departments--Education, Treasury, and VA-- did not yet
have procedures in place to ensure implementation of MCA departmentwide,
although VA was initiating a review to explore opportunities for a
departmentwide MCA system. Further, some component agencies at Education,
Treasury, and VA had implemented their own MCA systems. The usefulness of
each of the systems we reviewed, however, depends on the reliability of
the financial and nonfinancial data used. Our review found many agencies
still may not have accurate, reliable, and timely data throughout the
year.

Entitywide MCA Implementation

DOI, SSA, DOL, and DOT had all chosen to implement MCA entitywide. The
following paragraphs note the systems each implemented.

DOI has a departmentwide MCA system known as Activity-based
Cost/Management (ABC/M), which provides information about the cost of work
activities. Financial data are extracted daily from the DOI bureaus'
stand-alone general ledger systems, and nonfinancial data are obtained
from other bureau source systems. ABC/M is intended to measure the cost of
activities, such as issuing permits, maintaining trails, and performing
site inspections. ABC/M provides information about the cost of
approximately 300 work activities, which align to DOI's four strategic
mission objectives. Nonfinancial data such as hours, miles, or acres are
obtained from various source systems maintained by each of the bureaus and
may be entered either manually or extracted from these systems. As noted
later in this report, DOI's noncompliance with FFMIA requirements could
affect the quality of financial data exported to its MCA systems. DOI is
in the process of implementing a new integrated financial management
system, Financial Business Management System (FBMS). The current FBMS
implementation plan for the general ledger module calls for a phased
implementation with seven deployments beginning in April 2006 and ending
in fiscal year 2011.

24GAO, GAO's Agency Protocols, [37]GAO-05-35G (Washington, D.C.: October
2004).

SSA's agencywide MCA system, the Cost Analysis System (CAS), was first put
in use in 1976. CAS collects data on full costs from SSA's nationwide
network of offices, except for those expenses incurred by other agencies
for SSA's benefit, such as certain postretirement costs paid by OPM.
According to SSA officials, CAS integrates data from payroll, work
measurement accounting, and other management information systems, and
assigns costs to specific workloads. To better integrate data and systems
for decision making, management is in the process of implementing the
Managerial Cost Analysis System (MCAS), a new second-generation MCA
system. SSA officials expect that MCAS will be implemented by September
2008. MCAS is intended to eliminate several legacy systems and integrate
with a new data warehouse, provide more detailed management information,
and help address outstanding audit findings, which noted a lack of
policies, procedures, and documentation concerning the collection, review,
and reporting of information for some individual performance indicators.
In addition to annual financial statement audits, SSA's system of internal
controls includes demonstrated tone at the top setting SSA's values,
philosophy, and operating style; documented MCA policies and procedures;
edit checks and variance analysis to help ensure data quality; routine
monitoring and assessment of performance and financial information; and
regular internal review of financial and feeder systems.

In its 2004 Financial Data Integration Improvement Plan, DOL identified
MCA as one way to address its most pressing management challenges. DOL
assigned responsibility for MCA development to the Office of the Chief
Financial Officer. According to DOL officials, the resulting MCA tool,
Cost Analysis Manager (CAM), will be able to identify, accumulate, and
assign costs to outputs and bring relevant cost information to the desktop
computers of managers throughout the department. Component-specific CAM
models were developed in all 10 DOL mission agencies and 5 of the 8
support offices. Planned systemwide refinements included automating the
data extraction/import process and adding programs and outputs to baseline
models.

In November 2003, DOT implemented a new integrated financial management
system called Delphi, a component of which may be used by DOT's 12
operating administrations (OA) for cost accounting. Each of the 12 OAs was
developing its own MCA system tailored to its respective needs. In
addition, the Federal Aviation Reauthorization Act of 1996 requires the
Federal Aviation Administration (FAA), one of the largest OAs, to develop
a cost accounting system that accurately reflects the asset value,
operating and overhead cost, and other financial measurement and reporting
aspects of its operations.25 According to DOT officials, FAA has completed
implementing its MCA system, the Cost Accounting System (CAS), and CAS is
already linked to Delphi. The other DOT OAs expected to have MCA models in
place by the end of fiscal year 2007.

Some Agencies Are Planning to Implement MCA When Upgrading Their Financial
Management Systems

USDA, HHS, and HUD planned to implement MCA systems as part of their
ongoing efforts to upgrade their overall financial management systems, but
they had not yet adequately considered their MCA needs at the time of our
reviews.

USDA's current financial system was not designed to provide in-depth MCA
information; however, a draft Financial Data Integration Improvement Plan
(FDIIP) refers in general terms to incorporating MCA into the agency's
financial management improvement efforts. The FDIIP includes the Financial
Management Modernization Initiative (FMMI) system to replace USDA's
current financial system. FMMI is scheduled to be fully implemented by the
end of fiscal year 2012, and management expects it to include a cost
accounting module. However, except for the date of overall implementation
for FMMI and ongoing MCA initiatives at the Farm Services Agency, the
Forest Service, and Rural Development, the FDIIP had not yet set time
frames or requirements for the other component agencies to improve cost
management.

25Pub. L. No. 104-264, 110 Stat. 3213 (Oct. 9, 1996).

On its own initiative, one USDA component, the Food and Nutrition Service
(FNS), implemented a National Data Bank (NDB) system to integrate detailed
cost and program performance information with its state grantee program
data reporting system. NDB includes both FNS and department-level direct
and indirect costs. Officials said that internal controls over NDB data
include audits by state auditors and CPA firms under the OMB Circular No.
A-133 single audit process to determine whether state program and
administrative costs charged to FNS are allowable.

HHS is currently implementing a new financial management system, Unified
Financial Management System (UFMS), a commercial, off-the-shelf
(COTS)-based Oracle software package, which is expected to replace
outdated systems by fiscal year 2008. According to HHS officials, plans
for UFMS include a module, Oracle Projects, which can be used for cost
accounting. HHS officials told us that all components will incorporate
Oracle Projects in their planned UFMS implementation and tailor it to meet
their needs. However, there were differences between HHS expectations and
plans for implementing Oracle Projects at the two components we reviewed.
Specifically, a Center for Medicare and Medicaid Services (CMS) official
told us CMS was uncertain whether it would use the Oracle Projects cost
accounting module for MCA. Similarly, a Centers for Disease Control (CDC)
official said that CDC had no current plans to use the module for MCA and
had not yet completed a full assessment of its MCA needs. In the meantime,
the Medicare Program Division at CMS developed its own ABC system for
contractors to report their costs. The system took costs from the
contractors' accounting systems, distributed the costs among activities,
and provided CMS managers with fully loaded costs for products, services,
and activities, which they use to monitor contractor performance.

In order to obtain MCA information, HUD currently must accumulate and
integrate financial and nonfinancial data elements from a number of
sources including a workload survey used to allocate costs to programs,
and a financial Data Mart.26 In response to our review, HUD acknowledged
that a major core financial management systems modernization effort, the
HUD Integrated Financial Management Improvement Project (HIFMIP),
presented an opportunity to reassess the application of MCA practices at
HUD. HIFMIP is an enterprisewide initiative to develop an integrated
accounting system that HUD plans to have fully implemented in 2013. HUD
expected, however, that any increased application of MCA would be done
through its financial Data Mart which, according to HUD, provided the
capability to combine accounting/cost data with other data sources to
produce automated management reports. HUD also planned to pilot a full ABC
effort in its Single Family Housing Mortgage Insurance Programs area and,
upon assessment of that pilot effort, consider applying ABC in other
areas.

26Data Mart is HUD's repository for selected information extracted from
its general ledger and other sources of financial and nonfinancial data.
It has been used primarily as a cash management and financial reporting
tool.

Some Agency Components Developed MCA Systems Independently

Education, Treasury, and VA did not have plans in place to implement MCA
departmentwide and had not taken steps at the department level to monitor
component-level MCA implementation. However, each of the three departments
had one or more component agencies that had developed its own MCA systems.

At Education, only 1 of 10 program offices, Federal Student Aid (FSA), had
a MCA system in place at the time of our review. Education did not promote
or monitor MCA implementation at the component offices, nor did it have
policies and procedures for implementing MCA departmentwide. FSA's
Activity-based Management system was initiated in response to the 1998
amendments to the Higher Education Act of 196527 that designated FSA a
performance-based organization and required it to reduce administrative
costs.28 FSA used COTS software to assign full costs, both direct and
indirect, and non-FSA overhead, to business processes.

By policy, Treasury delegated responsibility to implement MCA to its
bureaus. Treasury retained oversight responsibility to ensure consistent
implementation of MCA departmentwide, but had no specific procedures in
place to ensure that consistent, periodic, department-level oversight was
conducted. Treasury's Bureau of Engraving and Printing (BEP) used COTS
software to accumulate and assign full costs to products, organizational
units, and specific operations. In addition to annual financial statement
audits, various controls over financial and nonfinancial data were in
place at BEP including periodic review of labor, material, and overhead
costs, and risk-based inventory cycle counts of production units such as
ink and paper to measure utilization and shrinkage. Similarly, Treasury's
Financial Management Service (FMS) used COTS software to integrate
financial and nonfinancial data from payroll, travel, requisition, and
property systems. Internal controls included data validation rules to help
ensure that transmitted data were accurate and fell within predetermined
ranges, and FMS officials said that they reviewed data for reasonableness
and researched variances.

27Higher Education Amendments of 1998, Pub. L. No. 105-244, 112 Stat.
1581, 1604-05 (Oct. 7, 1998).

28A performance-based organization is a discrete management unit which
commits to accountability for results by having clear objectives, specific
measurable goals, customer service standards, and targets for improved
performance. In exchange, it can be granted managerial flexibilities to
achieve these aims and goals in areas such as personnel, procurement,
financing, and real property.

By design and policy, VA did not have a departmentwide MCA model at the
time of our review. Officials told us that VA's financial management
priority had been the removal of a material weakness related to the lack
of an integrated financial management system at the department. Subsequent
to our review, however, VA officials said that they were investigating
opportunities for a departmentwide MCA system.29 They said that a
centralized MCA system would improve the accessibility and availability of
cost accounting data and enhance managerial decision-making throughout VA.
Further, while one VA component agency had discontinued use of its MCA
system in 2003, VA's Veterans Health Administration (VHA) used its
Decision Support System (DSS) for MCA. DSS enabled cost analyses by VHA
location, program, and activity, and tracked costs for individual patient
care, although the extent and nature of DSS use varied from one medical
facility to the next because of differences in staff training. DSS
obtained data from 49 feeder sources, including VA's general ledger and
VHA's Veteran's Health Information Systems and Technology Architecture
(VistA), a nonfinancial workload information system.

29Statement of the Honorable Tim S. McClain, General Counsel and Chief
Management Officer, U.S. Department of Veterans Affairs, before the
Subcommittee on Government Management, Finance, and Accountability,
Committee on Government Reform, U.S. House of Representatives, during an
oversight hearing concerning Implementing Cost Accounting at the
Department of Veterans Affairs and the Department of Labor, September 21,
2005.

Agencies Need Reliable Financial and Nonfinancial Data throughout the Year for
MCA Systems to Be Useful

The completeness and accuracy of the data in MCA systems depends on the
quality of the data from feeder systems, both financial and nonfinancial.
Many agencies still may not have accurate, reliable, and timely financial
and nonfinancial data available throughout the year.

  Problems with Financial Data

Although agencies have made improvements and have other enhancements under
way, the systems deficiencies that have prompted unfavorable FFMIA
assessments indicate that the financial management systems of many
agencies are still not able to produce reliable, useful, and timely
financial information routinely. As shown in table 2, in fiscal year 2005,
independent auditors concluded that 8 of the 10 agencies reviewed in our
series of MCA engagements had systems that were not compliant with one or
more of the three FFMIA requirements.30 Only SSA and DOL met all three
FFMIA requirements.

Table 2: Auditors' FFMIA Assessments for Fiscal Year 2005

                               Auditors'                    
                             assessment of   Areas auditors identified as not
                            FFMIA compliance    in substantial compliance
CFO Act                                      Systems      Accounting       
departments/agencies       Yes      No     requirements   standards   SGL  
Department of                        X          X             X        X   
Agriculture                                                                
Department of Education              X          X                          
Department of Health and             X          X                      X   
Human Services                                                             
Department of Housing                X          X                          
and Urban Development                                                      
Department of the                    X                        X        X   
Interior                                                                   
Department of Labor         X                                              
Department of                        X          X             X        X   
Transportation                                                             
Department of the                    X          X             X        X   
Treasury                                                                   
Department of Veterans               X          X                          
Affairs                                                                    
Social Security             X                                              
Administration                                                             

Source: GAO, Financial Management: Improvements Under Way but Serious
Financial Systems Problems Persist, [38]GAO-06-970 (Washington, D.C.:
September 2006), p. 68.

30GAO, Financial Management: Improvements Under Way but Serious Financial
Systems Problems Persist, [39]GAO-06-970 (Washington, D.C.: Sept. 26,
2006).

  Noncompliance with federal systems requirements

As seen in table 2, 7 of the 10 agencies we reviewed had systems that were
not in compliance with federal financial management systems requirements,
as required by FFMIA. These 7 agencies had problems such as nonintegrated
financial management systems, inadequate reconciliation procedures, a lack
of accurate and timely recording of financial information, and weak
security controls over information systems. Agencies that lack integrated
financial systems typically expend major effort and resources to develop
information that their systems should be able to provide on a daily or
recurring basis. In addition, opportunities for errors are increased when
agency systems are not integrated. Improper reconciliation procedures
contribute to errors in financial reporting. A reconciliation process,
whether manual or automated, is a necessary and valuable part of a sound
financial management system. The less integrated the financial management
system, the greater the need for adequate reconciliations because data are
being accumulated from a number of different sources. Accurate and timely
recording of financial information is also essential for successful
financial management. Agencies that have not accurately recorded
transactions throughout the fiscal year must often make substantial manual
efforts at year-end to prepare financial statements. These extensive last
minute efforts are susceptible to error and increase the risk of
misstatements. Finally, information security weaknesses place vast amounts
of government assets at risk of inadvertent or deliberate misuse,
financial information at risk of unauthorized modification or destruction,
other sensitive information at risk of inappropriate disclosure, and
critical operations at risk of disruption. Unresolved information security
weaknesses can also compromise the reliability and availability of data
recorded in or transmitted by an agency's financial management system.

  Lack of adherence to federal accounting standards

According to their independent auditors, 4 of the 10 agencies we reviewed
had systems that were not in compliance with federal accounting standards.
Adherence to federal accounting standards requires that agencies account
for transactions in a way that ensures federal financial reports provide
users with understandable, relevant, and reliable information about the
financial position, activities, and results of government operations. In
their FFMIA reviews, auditors reported that three standards were most
troublesome for agencies: SFFAS No. 1, Accounting for Selected Assets and
Liabilities; SFFAS No. 4, Managerial Cost Accounting Concepts and
Standards; and SFFAS No. 6, Accounting for Property, Plant, and Equipment.
In particular, SFFAS 4 continued to be difficult for federal managers to
implement.

  Noncompliance with the Standard General Ledger

Five of the 10 agencies we reviewed did not have systems that implemented
the SGL at the transaction level, as required by FFMIA. Using the SGL
promotes consistency in financial transaction processing and reporting by
providing a uniform chart of accounts and pro forma transactions that give
a basis for comparison at the agency and governmentwide levels. This
standardizes the accumulation of agency financial information, enhances
financial control, and supports financial statement preparation and other
external reporting. Failure to use the SGL impedes the ability of the
federal government to complete accurate, governmentwide financial
statements.

During our series of MCA reviews, we noted numerous problems with
financial data that illustrate the types of issues discussed in our FFMIA
reviews. For instance, for fiscal year 2005, USDA's OIG reported that the
agency needed stronger internal controls to improve the timeliness and
accuracy of financial data available to managers and cited material
weaknesses related to overall financial management across the agency. The
agency's independent auditor identified "abnormal balances" in more than
90 accounts, totaling over $1 billion, which had not been fully researched
or corrected before the end of the fiscal year. Similarly, the Forest
Service, a component of USDA, received an unqualified opinion on its
fiscal year 2005 financial statements after making 177 accounting
adjustments with an absolute value of $1.9 billion. For fiscal year 2006,
the USDA OIG again cited a material weakness related to improvements
needed in overall financial management across the agency. Further, while
indicating that the Forest Service made significant improvement in its
reporting processes during fiscal year 2006, the OIG noted areas where
further improvements are needed before the Forest Service can produce
accurate and timely financial information.

Independent auditors also reported serious weaknesses in financial systems
and processes at HHS, HUD, and DOT. At HHS, system limitations led many
operating divisions to record numerous entries outside of the general
ledger system, which required intensive manual procedures to prepare the
year-end financial statements for fiscal year 2005. Similarly, according
to the independent auditor's report covering the fiscal year 2006
financial statements, HHS continued to have serious internal control
weaknesses in its financial management systems and processes, and still
needed intensive manual procedures to prepare the year-end financial
statements. In November 2005, HUD's OIG reported that the department
relied on extensive manual procedures that were costly, labor intensive,
and not always effective to prepare its annual financial statements. These
problems continued in fiscal year 2006, with the HUD OIG reporting that
HUD still relied on extensive compensating procedures. The DOT OIG
reported that DOT had three material weaknesses affecting financial
reporting for fiscal year 2005. In particular, the DOT OIG reported
continuing serious weaknesses in timely processing of transactions and
reconciliation of accounts at FAA, and problems with financial statement
preparation and analysis and resolving reconciliation differences at the
Federal Highway Administration (FHWA). For fiscal year 2006, the OIG
reported that DOT still had two material weaknesses: (1) untimely
processing of transactions and accounting for the FAA construction in
progress account and (2) financial management, reporting, and oversight
problems at the Highway Trust Fund agencies, including FHWA.

  Problems with Nonfinancial Data

Agencies also need to ensure that nonfinancial data such as data on labor
distribution, performance and workload, is accurate. Nonfinancial data are
as important as financial data in determining reliable managerial cost
information because they provide the basis for assigning costs to various
programs, activities, or outputs and for determining program efficiency.
For example, overcounting the number of people trained in a job training
program in one city would result in an understatement of the unit cost of
training each program participant in that city.31 Due to the inaccurate
nonfinancial data, the program in this city could appear, falsely, to be
more efficient in execution in comparison to similar programs in other
cities.

As with financial data, adequately designed controls and properly
implemented procedures for nonfinancial data are key when determining the
cost of work outputs. In some of our MCA reviews, we noted that procedures
to ensure reliability of nonfinancial data were not documented. Also, a
lack of readily available system documentation could inhibit efforts to
determine whether costs are properly assigned and preclude an opportunity
to provide guidance for employees using the system. Some agencies rely on
controls from the offices providing the nonfinancial data. Examples of
problems with controls over nonfinancial data at Education, DOI, DOL, and
VA follow.

Education's FSA officials relied mainly on controls within the offices
that are the sources of nonfinancial data. In addition, they reviewed the
nonfinancial performance data periodically for anomalies by comparing data
to standard system reports, and performing trend analyses and comparing
data for consistency. FSA, however, had not documented the design of
controls that are being used to help ensure the reliability of the
nonfinancial data, nor had it documented that control procedures were
properly completed.

31If it cost $100,000 to fund a training program, the unit cost of
training each participant would be $1,000 if 100 people were trained, but
the unit cost would be $2,000 if only 50 people were trained.

DOI officials stated that DOI does not have written procedures for
monitoring the quality and accuracy of its ABC/M data and that not all
bureaus have written procedures for performance data validation and
verification. In addition, controls over nonfinancial data are generally
limited to a bureau-level review for reasonableness. DOI has acknowledged
the need for independent department-level validation and verification of
nonfinancial ABC/M data, and plans to follow up in 2007 to ensure that
bureaus have implemented data validation and verification standards and
procedures.

In its fiscal year 2004 performance plan, DOL identified the validation of
labor distribution and performance data as one of its challenges. Labor
cost is often the predominant factor when determining the cost of an
activity. At DOL's largest component agency, the Employment and Training
Administration (ETA),32 the OIG noted high error rates in performance data
reported by grantees. In 2004 the OIG also raised concerns about DOL using
those data for decision making. DOL officials responded that they were
implementing additional data validation systems to address these issues.
In fiscal year 2007, the OIG plans to audit the new data validation system
developed by ETA to improve the reliability of program performance
information reported by its grantees.

At VA's Veterans Health Administration (VHA), both independent auditors
and the OIG have raised concerns about the quality of data for feeder
systems for its Decision Support System (DSS). DSS has 49 feeder sources,
including VistA. In August 2004, the OIG reported that most of the legacy
systems, such as VistA, at Bay Pines Medical Center contained inaccurate
data. The OIG further stated that this might be a systemic problem
throughout VHA. In addition, the VA's VHA Decision Support Office was
unable to readily produce documentation of the mechanism used to assign
indirect costs to cost objects in DSS. Subsequent to our audit, VHA
officials said they took steps to address these issues, including the
development and implementation of a standardized audit protocol to confirm
the accuracy of the data fed into DSS and the uniformity of its
processing.

32DOL's Employment Training and Administration contributes to the more
efficient functioning of the U.S. labor market by providing high-quality
job training, employment, labor market information, and income maintenance
services primarily through state and local workforce development systems.

Few Agencies Use Cost Information Routinely to Manage Their Operations

We found that progress implementing MCA practices, and thus the
development of uses for cost information, while ongoing, is slow. Among
the 10 agencies we reviewed, only DOI and SSA routinely used cost
information entitywide to make decisions. In addition, DOL had recently
implemented its MCA system, and was in the process of developing plans for
using it. The other agencies used cost information primarily for external
financial reporting in the Statement of Net Cost, and they cited isolated
examples of how cost information was used to inform management decisions.
These agencies did not provide evidence to us that cost information was
routinely used to inform their decision making. Finally, some component
agencies of departments that did not have overall MCA systems, including
BEP and FMS at Treasury, FAA at DOT, and FNS at USDA, used cost
information more routinely to, among other things, evaluate programs,
formulate budgets, and set fees and prices.

Entitywide Uses of MCA Information

Management at 2 of the 10 agencies we reviewed routinely used MCA to make
decisions, and a third agency was in the process of developing uses.

DOI used cost information to provide visibility on the costs of activities
and initiatives of interest to departmental leadership. For example, a
graphical report to senior Interior executives, called the Executive
Dashboard, provided department leadership with access to some
department-level program cost information. MCA was used to support
recommendations to change work processes, reallocate resources, and
prepare budgets and performance targets. DOI bureaus used MCA to project
future resource needs based on estimated workloads, identify and examine
workload trends, and set fees.

SSA's uses of MCA information included tracking productivity improvement,
allocating administrative expenses to various funds, determining unit
costs and production rates for various time periods, tracking workload
output, measuring performance, assisting with budget formulation and
execution, and facilitating recovery of the full cost for reimbursable
activities such as earning records requests from pension funds and
individuals. For example, during one of our subsequent reviews, an SSA
official said SSA used workload information from its Unified Measurement
System, a component of the MCA system, and other financial information to
reallocate workloads among two different field offices to better match
available staff resources.33 SSA also used the data to compare the
estimated costs of moving staff versus moving work.

At the time of our review, DOL had only recently implemented its MCA
system. DOL officials identified many potential uses for MCA data they
expect will lead to better information for managerial decisions, and said
they plan to use MCA to identify and analyze

           o program costs across regions;
           o comparative costs of grant management activities, by type of
           grant;
           o full administrative costs related to the development of
           policies, regulations, and legislative proposals;
           o unit costs of training and employment programs; and
           o budget justifications and resource allocations.

For example, in one of our subsequent reviews,34 Labor's ETA officials
said they used financial information to help manage construction contracts
for the $1.4 billion Job Corps program. They said they used a report with
project cost and schedule data to make program management decisions during
monthly meetings with contractors. As another example, officials from
Labor's Employee Benefits Security Administration (EBSA) told us they used
obligation data from the core accounting system and unit cost data from
the cost accounting system to allocate funding resources and manage their
business. EBSA managers told us that they used the data to (1) determine
the effect of funding constraints; (2) assess whether extraordinary
measures, like a hiring freeze, are needed to remain within a given
funding level; and (3) target resources to achieve the program's
objectives.

Component Agency Uses of MCA Information

We also found several agency components that were using cost information
to make decisions: BEP and FMS at Treasury, FAA at DOT, FNS at USDA, and
FSA at Education.

33GAO, President's Management Agenda: Review of OMB's Improved Financial
Performance Scorecard Process, [40]GAO-07-95 (Washington, D.C.: Nov. 16,
2006).

34 [41]GAO-07-95 .

BEP officials cited three ways they used MCA information. They were
analyzing cost and spoilage information to help implement a new automated
inspection process which, according to officials, resulted in a
substantial reduction in cost without jeopardizing quality. They also told
us they used MCA information to analyze the costs and benefits of a
proposed robotics currency packaging system which, according to officials,
could significantly reduce staffing at their manufacturing facilities.
Finally, BEP officials cited using the information to identify decreasing
efficiencies in older manufacturing presses as a way of targeting machines
for overhaul.

According to FMS officials, examples of MCA information uses include
formulating budgets, evaluating programs, and setting fees and prices for
services provided to other government entities. Officials also told us FMS
analyzes and reports unit costs for federal government payments and
collections so it can provide services at a lower cost.

FAA used cost information to decide whether to contract out Air Traffic
Organization Flight Service Stations. In addition to operating savings,
FAA identified savings in the Facilities and Equipment appropriation as
well as a reduction of 400 staff. FAA estimated total savings to be about
$2.2 billion over 10 years for contracting out service stations. FAA also
used cost information to cancel a $27 million weather program and to
modify an airport radar surveillance program, avoiding a cost of $7
million.

FNS used cost data to investigate changes in program participation rates
and cost. For example, FNS officials told us they used cost data to
analyze Women, Infants and Children (WIC) program cost increases related
to the proliferation of WIC-only stores, which often charged higher prices
than stores that also sell to the general public. Subsequent legislation
required that average payments to WIC-only stores not be higher than
average payments to other stores. Officials also stated that FNS used cost
data to identify declining Food Stamp participation rates and costs in one
state.

At FSA, officials said they used unit cost information to renegotiate and
consolidate several contracts relating to the administration of FSA's
direct loan program and reduce FSA's unit cost for loan consolidations
from $115 per unit to $66 per unit, over a period of 18 months.35

35 [42]GAO-07-95 .

Agency Leadership Is Fundamental to Successful MCA Implementation

Strong leadership and commitment from senior management may be the single
most important elements in implementing and sustaining the institutional
and cultural changes MCA requires. Leadership that understands the
importance of timely, accurate cost information and can communicate its
uses to managers is critical to the success of an MCA program. Because
implementing MCA takes time, requires monitoring, and inevitably
mid-course adjustments, the managers who will use the information need to
see its value and take ownership of the system. Strong leadership can set
the tone and the expectations to make this happen, and help change the
culture in the federal government to one of managing costs, and not just
managing the budget.

Strong Leadership Is Critical to Promoting the Benefits of MCA

We found strong leadership for MCA implementation at DOI, DOL, SSA, and
DOT. Other agencies needed to step up efforts to promote the benefits of
MCA and oversee its implementation and use throughout their respective
agencies. At many agencies, stronger leadership was needed to ensure that
both the larger agency and its components have policies requiring MCA
implementation, procedures to monitor implementation entitywide, and
internal controls to help ensure the reliability of financial and
nonfinancial data used in MCA systems. Examples of how leadership at DOI,
DOL, SSA, and DOT promoted the benefits of MCA and oversaw its
implementation follow.

DOI leadership, including the Secretary, took an active role in promoting
MCA implementation and use at its bureaus. DOI actions included directing
the bureaus to take the lead developing MCA; establishing a
department-level steering committee to provide overall guidance;
facilitating issue coordination across the department; enlisting
additional bureau-level input through several groups, including an FBMS
steering committee; and issuing departmentwide policy and procedural
guidance to ensure that bureau cost data are in line with Interior
strategic goals.

In 2004, DOL identified MCA as one way to address its most pressing
management challenges and assigned responsibility for its development to
the Office of the Chief Financial Officer. DOL's Secretary discussed the
MCA system in meetings with department heads, and component-specific MCA
models were developed and put in place at all 10 mission agencies and 5 of
the 8 support offices.

SSA's basic cost allocation policy was established about 1965, and SSA has
used its existing Cost Analysis System (CAS) for MCA for over 30 years. In
her opening message in the agency's 2004 Performance and Accountability
Report, SSA's Commissioner at that time committed to better integrating
financial and budget data for decision making. In that regard, SSA was
upgrading CAS at the time of our review. In addition, the implementation
status of SSA's new Managerial Cost Analysis System, which will replace
CAS, was being tracked as a monthly indicator.

DOT provided strong leadership and support for MCA from the Secretary's
level by assigning two staff members from the Office of the Secretary to
provide daily support to component agencies on MCA and to monitor their
progress. In addition, the Office of Secretary emphasized the importance
of MCA in several memoranda to the components, and outlined steps the
components should follow to implement MCA. Also, MCA was discussed at
monthly CFO meetings as well as at meetings of DOT's Cost Accounting
Steering Group.

Focusing on Managing Costs Can Help Agencies Meet Government Reform Goals

Traditionally, government financial systems and government managers have
focused on tracking how agencies spend their budgets, but have not focused
on assessing the costs of activities to achieve efficiencies. MCA, on the
other hand, begins with an output such as a service and traces the costs
of activities needed to produce the service. It allows management to link
services or other outputs directly with the budget and allocate resources
based on the level of service they desire.

Under the President's Management Agenda (PMA), agencies must be able to
measure performance and connect resources with results.36 The PMA includes
five governmentwide initiatives for improving government performance:
strategic management of human capital, competitive sourcing, improved
financial performance, expanded electronic government, and budget and
performance integration. On a quarterly basis, the Office of Management
and Budget (OMB) publishes a scorecard reporting system using green,
yellow, or red to indicate agencies' current status and progress in
implementing the five governmentwide initiatives.

To "get to yellow" on improved financial performance, agencies need to,
among other things, receive unqualified opinions on their annual financial
statements, meet financial statement reporting deadlines, and be in
compliance with FFMIA requirements.37 To "get to green," agencies need to
meet all requirements for getting to yellow and, in addition, provide
evidence that financial information is available for managers on demand,
that information is actively being used to help agencies achieve results
in key areas of operations, and that the agency is implementing a plan to
continuously expand the scope of its routine data use to inform management
decisionmaking.38 In other words, agencies need to demonstrate how
financial data are used routinely by managers to make smarter decisions,
and show how the data are used to address significant challenges faced by
the agency. As of March 31, 2007, of the 10 agencies we reviewed, only
HUD, Education, DOL and SSA had gotten to green on improved financial
performance.39

36Executive Office of the President, Office of Management and Budget, The
President's Management Agenda (Washington, D.C.: 2002).

While there has been substantial progress in federal financial management
and the way it is carried out since the passage of the CFO Act, challenges
remain. To the extent programs are funded based on performance, agencies
will need accurate cost information to justify budget requests. This will
require a cultural change in traditional financial management practices,
from managing the budget to identifying desired outcomes and the costs of
delivering them. Stronger leadership will be needed from senior management
to effect this change where programs are being managed by budgets and
appropriations. For example, managers at HUD told us it was a
budget-driven organization primarily focused on oversight of its programs,
and that it manages its operations principally with required budgetary
data. They told us they believed they had sufficient information to
effectively support budget formulation and management of enacted programs.
In response to our recommendations about promoting the benefits and uses
of MCA and developing an MCA policy for the agency, however, HUD's CFO
stated that a new Executive Financial Management Advisory Committee would
address both of these issues. USDA delegated responsibility for MCA to its
components, but had not shown strong leadership to promote, guide, and
monitor MCA implementation. As a result, some USDA managers were
continuing to focus on budget management rather than improved cost
management.

37Executive Office of the President, Office of Management and Budget,
Achieving Green in Financial Performance, the President's Management
Agenda, Improved Financial Performance Initiative, Version 1, July 2005.

38GAO recently reviewed OMB's methodology and supporting documentation for
agency ratings reported on the PMA scorecard. See GAO, President's
Management Agenda: Review of OMB's Improved Financial Performance
Scorecard Process, [43]GAO-07-95 , (Washington, D.C.: Nov. 16, 2006).

39While HUD, Education, and DOL had received green ratings in improved
financial performance, we noted room for improvement in MCA implementation
at these agencies at the time of our MCA reviews. For example, HUD had not
issued departmentwide policy guidance on MCA and the agency's plans for
current and future systems lacked broad MCA functionalities. To improve
HUD's implementation and use of reliable MCA methodologies, we made five
recommendations to the Secretary of HUD. (See GAO, Managerial Cost
Accounting Practices: Department of Agriculture and the Department of
Housing and Urban Development, [44]GAO-06-1002R (Washington, D.C.: Sept.
21, 2006). Education officials told us that they had not considered cost
accounting a key issue because most of their appropriations were disbursed
as grants and loans and administrative costs made up only 2 percent ($1.3
billion) of Education's appropriations. Further, according to department
officials, 61 percent of the $1.3 billion was administrative costs
attributable to FSA and were already subject to MCA methodologies. We
recommended that Education develop and disseminate a department-wide MCA
policy and develop procedures for monitoring implementation of its
department-wide MCA policy. (See GAO, Managerial Cost Accounting
Practices: Departments of Education, Transportation, and the Treasury,
[45]GAO-06-301R (Washington, D.C.: Dec. 19, 2005). DOL had recently
implemented its departmentwide MCA system, and was still in the process of
developing plans for using it. (See GAO, Managerial Cost Accounting
Practices: Leadership and Internal Controls Are Key to Successful
Implementation, [46]GAO-05-1013R (Washington, D.C.: Sept. 2, 2005).

Although the views about how an organization can change its culture vary
considerably, the organizations we and others have studied identified
leadership as the most important factor in successfully making cultural
changes. Departmental leadership throughout government must be totally
committed in both words and deeds to changing the culture in the federal
government to one of managing costs, in addition to managing the budget.
In order to bring about this cultural change, top management will need to
lead by example. Establishing policies, performance measures, and
monitoring and reporting procedures are first steps, but in themselves are
not enough to fundamentally restructure how the business of government is
conducted.

Conclusions

Given the fundamental financial and accounting issues many federal
agencies continue to address and the ongoing challenges inherent in
implementing effective, integrated financial systems, it is not surprising
that relatively few agencies are using MCA for day-to-day management. Our
work identified large disparities in the level of MCA implementation among
the agencies we reviewed as well as the ways in which they use cost
information. Although MCA can be implemented without an integrated
financial management system, in those cases it tends to be used for single
programs or projects rather than providing day-to-day information for
managerial decision making entitywide. While some agencies have made
progress toward implementing MCA, full implementation will require strong
executive leadership and participation, improved financial management
systems, and a continuing transition in agency culture to one of
identifying and managing costs, in addition to managing the budget.

Full, effective MCA implementation will require resources and commitment
up front if agencies are to achieve the long-term rewards of those
efforts. As a result, it is key for leadership to understand the uses and
advantages of MCA, communicate them to management, and work with the
process as it continually evolves to foster better government. For MCA
implementation to be successful across the federal government, it must be
tailored to the needs of individual organizations, be a tool managers can
use to make everyday decisions, and be based on sound financial and
nonfinancial data.

We are sending copies of this report to the Director of the Office of
Management and Budget and other interested parties. This report will be
available at no charge on GAO's Web site at [47]http://www.gao.gov .
Should you or your staff have any questions on the matters discussed in
this report, please contact me at (202) 512-6131 or [48][email protected] .
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. GAO staff who made
major contributions to this report are listed in appendix II.

Robert E. Martin
Director, Financial Management and Assurance

Appendix I: Research Resources

Albright, Tom and Marco Lam. "Managerial Accounting and Continuous
Improvement Initiatives: A Retrospective and Framework." Journal of
Managerial Issues. vol. XVIII, no. 2 (Summer 2006): 157-174.

Behn, Robert D. Performance Leadership: 11 Better Practices That Can
Ratchet Up Performance. IBM Center for the Business of Government,
Managing for Performance and Results Series. Washington, D.C.: May 2004.

Candreva, Philip J. "Controlling Internal Controls." Public Administration
Review (May-June 2006): 463-465.

City of Sunnyvale. An Overview of the City of Sunnyvale's Planning and
Management System. City of Sunnyvale: 1999.

Cokins, Gary. Activity-Based Cost Management in Government. Management
Concepts. Vienna, Virginia: (2006).

Cooper, Robin. "The Rise of Activity-Based Costing-Part One: What Is An
Activity-Based Cost System?" Journal of Cost Management (Summer 1988):
45-54.

Cooper, Robin. "The Rise of Activity-Based Costing-Part Two: When Do I
Need an Activity-Based Cost System?" Journal of Cost Management (Fall
1988): 41-48.

Cooper, Robin. "The Rise Of Activity-Based Costing-Part Three: How Many
Cost Drivers Do You Need, And How Do You Select Them?" Journal Of Cost
Management (Winter 1989): 34-45.

Cooper, Robin. "The Rise Of Activity-Based Costing-Part Four: What Do
Activity-Based Cost Systems Look Like?" Journal of Cost Management (Spring
1989): 38-49.

GAO. Managerial Cost Accounting Practices: Leadership and Internal
Controls Are Key to Successful Implementation. [49]GAO-05-1013R .
Washington, D.C.: September 2, 2005.

GAO. Managerial Cost Accounting Practices: Departments of Labor and
Veterans Affairs. Statement of Robert E. Martin before the Subcommittee on
Government Management, Finance, and Accountability, Committee on
Government Reform, House of Representatives. [50]GAO-05-1031T .
Washington, D.C.: September 21, 2005.

GAO. CFO Act of 1990: Driving the Transformation of Federal Financial
Management. Statement of Jeffrey C. Steinhoff before the Subcommittee on
Government Management, Finance, and Accountability, Committee on
Government Reform, House of Representatives. [51]GAO-06-242T . Washington,
D.C.: November 17, 2005.

GAO. Managerial Cost Accounting Practices: Departments of Education,
Transportation, and the Treasury. [52]GAO-06-301R . Washington, D.C.:
December 19, 2005.

GAO. Managerial Cost Accounting Practices: Department of Health and Human
Services and Social Security Administration. [53]GAO-06-599R . Washington,
D.C.: April 18, 2006.

GAO. Managerial Cost Accounting Practices: Department of Agriculture and
the Department of Housing and Urban Development. [54]GAO-06-1002R .
Washington, D.C.: September 21, 2006.

GAO. Managerial Cost Accounting Practices at the Department of the
Interior. [55]GAO-07-298R . Washington, D.C.: May 24, 2007.

GAO. Financial Management: Improvements Under Way but Serious Financial
Systems Problems Persist. [56]GAO-06-970 . Washington, D.C.: September 26,
2006.

GAO. Potential Oversight Issues: Suggested Areas for Oversight for the
110th Congress. [57]GAO-07-235R . Washington, D.C.: November 17, 2006.

GAO. Federal Financial Management: Critical Accountability and Fiscal
Stewardship Challenges Facing Our Nation. Statement of David M. Walker
before the Subcommittee on Federal Financial Management, Government
Information, Federal Services and International Security, Committee on
Homeland Security and International Affairs, United States Senate.
[58]GAO-07-542T . Washington, D.C.: March 1, 2007.

Geiger, Dale. "Practical Issues in Managerial Cost Accounting." The
Government Accountants Journal (Summer 1998): 48-53.

Geiger, Dale. "Practical Issues in Cost Object Selection and Measurement."
The Government Accountants Journal (Summer 1999): 47-53.

Geiger, Dale. "Practical Issues in Cost Driver Selection for Managerial
Costing Systems." The Government Accountants Journal (Fall 1999): 32-39.

Geiger, Dale. "Practical Issues in Level of Precision and System
Complexity." The Government Accountants Journal (Summer 2000): 28-37.

Geiger, Dale. "Practical Issues in Avoiding Pitfalls in Managerial Costing
Implementation." The Journal of Government Financial Management (Spring
2001): 26-34.

Martinson, Otto B. "A Look at Cost Accounting in the Service Industry and
the Federal Government." The Journal of Government Financial Management.
(Spring 2002): 18-25.

Mercer, John. "The Results Act: Has It Met Congressional Expectations?"
Statement before the Subcommittee on Government Efficiency, Financial
Management, and Intergovernmental Relations, U.S. House of
Representatives, June 19, 2001.

Mok, Samuel T. "Implementing Managerial Cost Accounting: A Labor Case
Study." The Journal of Government Financial Management (Spring 2006):
26-29.

Nuclear Regulatory Commission. Best Practices in Implementing Managerial
Cost Accounting. OIG/00E-06. Washington, D.C.: April 24, 2000.

Peckenpaugh, Jason. "Teaching the ABCs." Government Executive (April
2002): 41-46.

Rutgers University. A Brief Guide for Performance Measurement in Local
Government. Citizen-Driven Government Performance:
[59]http://www.andromeda.rutgers.edu/~ncpp/cdgp/teaching/brief-manual.html
(downloaded Sept. 27, 2006)

Stone, Lawrence E. "Performance Management: What It Is and How to Get
There." Cal-Tax Digest (February 2005).

Williams, Clif and Ward Melhuish. "Is ABC Destined for Success or Failure
in the Federal Government?" Public Budgeting & Finance (Summer 1999):
22-36.

Appendix II: Gao Contact and Staff Acknowledgments

GAO Contact

Robert E. Martin, (202) 512-6131, or [60][email protected]

Acknowledgments

In addition to the contact named above, Glenn Slocum (Assistant Director),
Lisa Crye, Barbara House, and Jim Moses made key contributions to this
report. Other key contributors to the body of work covered by this report
include Elizabeth Curda, Paul Kinney and Jack Warner (Assistant
Directors), Paul Begnaud, Lisa Brownson, Debra Cottrell, Dan Egan, Fred
Evans, Barry Grinnell, Tom Hackney, Jacquelyn Hamilton, Jeffrey Isaacs,
Diane Morris, John O'Connor, Lori Ryza and George Warnock.

(197014)

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[67]www.gao.gov/cgi-bin/getrpt?GAO-07-679 .

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Highlights of [68]GAO-07-679 , a report to congressional requesters

July 2007

MANAGERIAL COST ACCOUNTING PRACTICES

Implementation and Use Vary Widely across 10 Federal Agencies

In the past 16 years, a number of laws, accounting standards, system
requirements, and related guidance have emphasized the need for cost
information in the federal government, establishing requirements and
accounting standards for managerial cost accounting (MCA) information. In
light of these requirements, GAO was asked to determine how federal
agencies generate MCA information and how government managers use that
information to support their decisions and provide accountability. Since
2005, GAO has reviewed and reported on MCA practices at 10 large civilian
agencies resulting in five reports.

This report brings the overall observations of these studies together in
one place.

[69]What GAO Recommends

Our previous MCA reports included detailed recommendations to the agencies
we reviewed. This report contains no new recommendations.

Our work identified large disparities in the level of MCA implementation
among federal agencies as well as the ways in which they use cost
information. Of the 10 agencies we reviewed, only 3 had implemented MCA
systems agencywide: the Department of the Interior (DOI), the Social
Security Administration (SSA), and the Department of Labor (DOL). In
addition, the Department of Transportation (DOT) had made significant
progress in implementing MCA departmentwide. Three agencies--the
Departments of Agriculture (USDA), Health and Human Services (HHS), and
Housing and Urban Development (HUD)--planned to implement MCA systems when
upgrading their overall financial management systems, but they had not yet
adequately considered their MCA needs. The 3 remaining agencies--the
Departments of Education, the Treasury, and Veterans Affairs (VA)--had no
plans to implement MCA departmentwide, but some of their component
agencies had implemented their own MCA systems. In addition, many agencies
do not yet have the accurate, reliable, and timely data needed for MCA
systems to ensure the outputs are useful and reliable.

Few of the federal agencies we reviewed were using MCA to make day-to-day
decisions. Only DOI and SSA were using cost information routinely to
manage operations entitywide. In addition, some component agencies of
departments that did not have overall MCA systems were using cost
information more routinely to evaluate programs, formulate budgets, and
set fees and prices. DOL was developing plans for using its MCA system.
Other agencies used cost information primarily for external financial
reporting, and were only able to cite a limited number of examples showing
how cost information was currently used to help make management decisions.

Strong leadership for MCA was in place at DOI, DOL, SSA, and DOT. Other
agencies have not yet made concerted efforts to promote the benefits of
MCA and oversee its implementation and use throughout their respective
agencies. Although MCA can be implemented without an integrated financial
management system, in those cases it tends to be used for single programs
or projects rather than providing day-to-day information for managerial
decision making agencywide. For MCA implementation to be successful, it
must be tailored to the needs of the organization, be a tool managers can
use to make everyday decisions, and be based on sound financial and
nonfinancial data. Full MCA implementation across the federal government
will require strong executive leadership, improved financial management
systems, and a continuing transition in government culture to one of
managing costs, in addition to managing the budget.

References

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  50. http://www.gao.gov/cgi-bin/getrpt?GAO-05-1031T
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  61. http://www.gao.gov/
  62. http://www.gao.gov/
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  64. mailto:[email protected]
  65. mailto:[email protected]
  66. mailto:[email protected]
  67. http://www.gao.gov/cgi-bin/getrpt?GAO-07-679
  68. http://www.gao.gov/cgi-bin/getrpt?GAO-07-679
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