Managerial Cost Accounting Practices:

Departments of Education, Transportation, and the Treasury

GAO-06-301R: Published: Dec 19, 2005. Publicly Released: Dec 19, 2005.

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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.

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. Transportation has in recent years shown strong leadership in developing MCA systems both departmentwide and at the individual operating administrations (OA). According to Transportation officials, the 12 OAs were developing MCA systems tailored to their respective needs, which should be able to interface with Delphi--an 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. 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. The 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.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To help ensure that Education components implement and use reliable managerial cost accounting methodologies, the Secretary of Education should direct the Chief Financial Officer of the Department of Education to develop and issue a policy for implementing MCA departmentwide.

    Agency Affected: Department of Education

    Status: Open

    Comments: Education has provided documentation concerning departmentwide Managerial Cost Accounting (MCA) policy. However, GAO has not yet assessed the adequacy of the Department's policy guidance.

    Recommendation: To help ensure that Education components implement and use reliable managerial cost accounting methodologies, the Secretary of Education should direct the Chief Financial Officer of the Department of Education to develop and issue procedures for monitoring implementation of its departmentwide managerial cost accounting policy and for establishing a sound system of controls.

    Agency Affected: Department of Education

    Status: Open

    Comments: Education has documentation concerning procedures for monitoring implementation of its departmentwide managerial cost accounting policy. However, GAO has not yet assessed the adequacy of this guidance.

    Recommendation: To help ensure cost data reliability, more efficient utilization of the agency's cost accounting system, and adequate staff knowledge of that system, the Secretary of Education should direct the Chief Operating Officer of Federal Student Aid to document the design of controls that are being used to help ensure the reliability of the nonfinancial data.

    Agency Affected: Department of Education

    Status: Closed - Implemented

    Comments: In September 2006, the Federal Student Aid (FSA) provided the Activity Based Management Nonfinancial Data Collection Procedures and Controls manual which documents the design and completion of control procedures for nonfinancial data. The manual, which is to be updated as needed, requires that data updates be approved by the Activity Based Management team lead before entry into the cost model. With these actions, FSA has helped ensure the reliability of cost data used for managerial decision making.

    Recommendation: To help ensure cost data reliability, more efficient utilization of the agency's cost accounting system, and adequate staff knowledge of that system, the Secretary of Education should direct the Chief Operating Officer of Federal Student Aid to document the proper completion of these control procedures.

    Agency Affected: Department of Education

    Status: Closed - Implemented

    Comments: In September 2006, the Federal Student Aid (FSA) provided the Activity Based Management Nonfinancial Data Collection Procedures and Controls manual which documents the design and completion of control procedures for nonfinancial data. The manual, requires that data updates be approved by the Activity Based Management team lead before entry into the cost model. With these actions, FSA has helped ensure the reliability of cost data used for managerial decision making.

    Recommendation: To help ensure cost data reliability, more efficient utilization of the agency's cost accounting system, and adequate staff knowledge of that system, the Secretary of Education should direct the Chief Operating Officer of Federal Student Aid to provide all appropriate staff direct access to cost accounting system output information.

    Agency Affected: Department of Education

    Status: Closed - Implemented

    Comments: In March 2008, Education upgraded its cost accounting software to enable business unit program managers direct access the cost accounting system to obtain both standardized and customized reports, query data and run cost accounting data scenarios. Education provided us with examples of some of the cost accounting output reports accessed by program managers. As a result of these actions, Education's program managers can now more readily obtain cost accounting information for use in managerial decision-making.

    Recommendation: To help ensure cost data reliability, more efficient utilization of the agency's cost accounting system, and adequate staff knowledge of that system, the Secretary of Education should direct the Chief Operating Officer of Federal Student Aid to develop adequate training plans for all staff who could effectively utilize managerial cost accounting information.

    Agency Affected: Department of Education

    Status: Closed - Implemented

    Comments: In March 2006, Education designated ABC team liaisons to work with FSA program staff to further their understanding of the ABC model and its uses. In August 2006, the team completed an intensive 3 day training course focusing on the functionality of the new costing software that will be installed at FSA. The training course focused on areas needed to successfully utilize the cost accounting system and reporting capabilities. Education reports that the same training, adjusted to meet the needs of end-users, will be used in conjunction with the roll-out to additional FSA users. As a result of thee actions, FSA staff should be better prepared to create and use managerial cost accounting information for program management.

    Recommendation: The Secretary of Education should direct the Chief Operating Office 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 to plan to use cost data in managing day-to-day operations.

    Agency Affected: Department of Education

    Status: Closed - Implemented

    Comments: In February 2009, Education issued a report on its post implementation review of its Activity Based Costing (ABC) system, Costperform. The post-implementation review contained a scorecard and rating evaluation of performance against project goals for the FSA program. Also included were survey results which focused on overall user satisfaction with the software. The results of the survey were intended to gain a thorough understanding of how users and customers view the system and the usefulness of the software for the FSA program. The customer and user feedback survey and evaluation showed that the users were "Usually Satisfied" with Costperform features and functionality. As a result of these actions, Education management now has better information on the extent to which its cost accounting system meets organizational needs and any areas of improvement concerning the FSA program.

    Recommendation: To help ensure that Transportation components implement reliable cost accounting methodologies for use in managerial decision making in accordance with departmental objectives, the Secretary of Transportation should direct appropriate department officials to finalize and issue a policy for implementing MCA departmentwide.

    Agency Affected: Department of Transportation

    Status: Open

    Comments: Transportation is currently in the first year of a major, multi-year department-wide program to re-engineer their financial processes, including cost accounting. Because of the complexity of cost accounting and the complications of the next release of their financial software, Transportation has told us that cost accounting is scheduled as a future process to be reviewed, most likely in FY 11 or FY 12. As a result, Transportation has not implemented this recommendation to finalize and issue a policy for implementing MCA departmentwide. We will revisit it in FY 11 or FY 12.

    Recommendation: To help ensure that Transportation components implement reliable cost accounting methodologies for use in managerial decision making in accordance with departmental objectives, the Secretary of Transportation should direct appropriate department officials to finalize and issue formal procedures, revised as necessary, to monitor implementation of that policy and establish a sound system of controls.

    Agency Affected: Department of Transportation

    Status: Open

    Comments: Transportation is currently in the first year of a major, multi-year department-wide program to re-engineer their financial processes, including cost accounting. Because of the complexity of cost accounting and the complications of the next release of their financial software, Transportation has told us that cost accounting is scheduled as a future process to be reviewed, most likely in FY 11 or FY 12. As a result, Transportation has not finalized or issued a policy for implementing MCA departmentwide. This recommendation, to finalize and issue formal procedures to monitor implementation of that policy and establish a sound system of controls, cannot be implemented until the policy is issued. We will revisit it in FY 11 or FY 12.

    Recommendation: 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, the Secretary of Transportation should direct the Administrator of FAA to implement the planned system improvement for assigning labor costs to National Airspace System maintenance projects, with appropriate internal controls to help ensure data reliability.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: In 2006, FAA implemented improvements to its cost accounting system (CAS) used for assigning labor costs to National Airspace System maintenance projects, including replacing allocation business rules with actual labor costs by project and task. With his action, FAA has improved the data reliability of labor costs related to its National Airspace System equipment.

    Recommendation: 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, the Secretary of Transportation should direct the Administrator of FAA to implement managerial cost accounting in its two lines of business that have not completed implementation.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: FAA implemented its cost accounting system (CAS) in the last two remaining lines of business, Airports (ARP) and Aviation Safety (AVS), in August 2006. According to a Department of Transportation official, these lines of business are to use available cost data to conduct cost analysis. By implementing CAS in these last two lines of business, FAA should be better able to obtain consistent, agency-wide data for managerial decision making.

    Recommendation: To help ensure that Treasury components implement and use reliable managerial cost accounting methodologies, the Secretary of the Treasury should 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.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: In 2007, Treasury formed a Treasury Chief Financial Officers Council (TCFOC) work group to improve, among other things, managerial cost accounting (Managerial Cost Accounting) practices throughout the Department. The work group focused on topics such as MCA implementation and promotion, cost accounting terms and definitions, cost allocation methodologies and controls over non-financial data. In July 2008, the office of the Deputy Chief Financial Officer issued an accounting policy memorandum which provided the Department's overall policy, expectations and requirements for the implementation of MCA. The policy memorandum also required all bureaus to respond to an annual Department survey. Responses to the first annual MCA survey, conducted in March 2009, highlighted needed improvements in bureaus' MCA practices. The Department responded by developing a set of planned follow-up actions including providing onsite bureau visits for demonstrations of the implemented MCA. In July 2010, the Department issued specific instructions concerning required Treasury component detailed action plans describing how and when full compliance with the Department's MCA policy will be achieved. Based on these cumulative actions, Treasury has substantively addressed our recommendation to develop and implement written procedures, including a sound system of controls, to oversee the implementation and continued use of appropriate cost accounting methodologies at its bureaus and departmental offices.

    Recommendation: To help ensure that the Internal Revenue Service implements and uses reliable cost accounting methodologies in accordance with management objectives, the Secretary of the Treasury should require the Commissioner of Internal Revenue to direct the Chief Financial Office of IRS to finalize and issue an Internal Revenue Service policy to carry out Treasury's managerial cost accounting policy.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: Treasury issued IRS's Managerial Cost Accounting Policy on August 31, 2007. This policy document provides guidance on the concepts and requirements for Managerial Cost Accounting (MCA) within the IRS and outlines a clear set of procedures for the IRS to use in order to consistently and reliably accumulate and report on the full costs of its programs, activities, and associated output, to allow for better decision-making. As a result of these actions, IRS should have more consistent and reliable cost accounting methodologies for generating cost information for management's use in decision making.

    Recommendation: To help ensure that the Internal Revenue Service implements and uses reliable cost accounting methodologies in accordance with management objectives, the Secretary of the Treasury should require the Commissioner of Internal Revenue to direct the Chief Financial Office of IRS to finalize and issue formal procedures, including a sound system of controls to implement that policy.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: Treasury issued IRS's Managerial Cost Accounting Policy on August 31, 2007. This policy document provides guidance on the concepts and requirements for Managerial Cost Accounting (MCA) within the IRS and outlines a clear set of procedures for the IRS to use in order to consistently and reliably accumulate and report on the full costs of its programs, activities, and associated output, to allow for better decision-making. As a result of these actions, IRS should have more consistent and reliable cost accounting methodologies for generating cost information for management's use in decision making.

    Recommendation: The Secretary of the Treasury should require the Commissioner of the Financial Management Service to direct the Chief Financial Officer of the Financial Management Service to finalize and issue a Financial Management Service policy to carry out Treasury's managerial cost accounting policy.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: The Financial Management Service (FMS) at the Department of the Treasury is responsible for providing centralized services for the federal government including managerial cost accounting (MCA) information. At the time of our 2005 review of the FMS managerial cost accounting practices, Treasury's Office of Strategic Planning and Performance Management was developing a framework intended to integrate financial, cost, and performance data into a management decision-making tool. However, formal MCA policies and procedures had not been finalized, approved, or disseminated. Therefore, we recommended that the Secretary of the Treasury require the Commissioner of the Financial Management Service to direct the Chief Financial Officer of the Financial Management Service to finalize and issue policies and procedures. Based on our work, FMS finalized and issued its Manual of Administration Part IV-Financial Management Chapter 600-Cost Accounting on January 19, 2006. The manual establishes policy and procedures for MCA at FMS and provides the FMS with a process for managing cost accounting data. By implementing GAO's recommendation, FMS should have more consistent and reliable MCA data for managerial decision making.

    Recommendation: The Secretary of the Treasury should require the Commissioner of the Financial Management Service to direct the Chief Financial Officer of the Financial Management Service to finalize and issue formal procedures, including a sound system of controls, to implement that policy.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: The Financial Management Service (FMS) at the Department of the Treasury is responsible for providing centralized services for the federal government including managerial cost accounting (MCA) information. At the time of our 2005 review of the FMS managerial cost accounting practices, Treasury's Office of Strategic Planning and Performance Management was developing a framework intended to integrate financial, cost, and performance data into a management decision-making tool. However, formal MCA policies and procedures had not been finalized, approved, or disseminated. Therefore, we recommended that the Secretary of the Treasury require the Commissioner of the Financial Management Service to direct the Chief Financial Officer of the Financial Management Service to finalize and issue policies and procedures. Based on our work, FMS finalized and issued its Manual of Administration Part IV-Financial Management Chapter 600-Cost Accounting on January 19, 2006. The manual establishes policy and procedures for MCA at FMS and provides the FMS with a process for managing cost accounting data. By implementing GAO's recommendation, FMS should have more consistent and reliable MCA data for managerial decision making.

    Recommendation: The Secretary of the Treasury should 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.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: As part of our audit of IRS's FY 2009 financial statements, we found IRS had developed (1) full cost information on numerous additional IRS programs and activities, (2) full cost information and cost-benefit measures for the enforcement program and (3) a plan to standardize the use of cost information agency-wide. Further, IRS issued a MCA policy on July 13, 2009 that provided for implementation of a cost accounting system within IRS's Integrated Financial System (IFS) and strategy for utilizing cost information provided by IFS, as well as data from business units' operational systems to calculate the full cost of IRS products and services. The MCA module in IFS currently contains five years of data available for conducting cost benefit analysis to support managerial decision making. IRS has also established a Cost Users Group in 2009 to ensure standardization and consistency in reporting cost information that supports management decision making. As a result of these actions, IRS has, consistent with the requirements of SFFAS No. 4, substantially addressed the need to develop and implement a cost accounting system capable of determining the cost of activities, services, and products at levels of detail suitable for informing IRS managerial decision making.

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