B-130007, DEC. 7, 1956

B-130007: Dec 7, 1956

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TO THE SECRETARY OF DEFENSE: THIS IS IN REFERENCE TO A MEMORANDUM OF THE OFFICE OF THE ASSISTANT SECRETARY OF DEFENSE. THIS MEMORANDUM WAS ADDRESSED TO THE DIRECTOR. THE MEMORANDUM WAS REFERRED TO MY OFFICE FOR CONSIDERATION AND REPLY. THE PURPOSE OF THE PROPOSED DIRECTIVE IS STATED TO BE THE ESTABLISHMENT OF STANDARD PRICES FOR MATERIALS. EQUIPMENT ON THE BASIS OF CURRENT PURCHASE OR PRODUCTION COST OF THE ITEMS AT THE TIME THE PRICE IS ESTABLISHED. EQUIPMENT ENCOMPASSED BY THE PROPOSED DIRECTIVE IS SECTION 601 OF THE ECONOMY ACT. WE ARE AWARE OF THE IMPRACTICABILITY OF ESTABLISHING DIFFERENT PRICES FOR THE SAME MATERIALS. WE THEREFORE WILL NOT OBJECT TO THE ISSUANCE AT THIS TIME OF THE REVISED PROPOSED DIRECTIVE SENT TO US ON NOVEMBER 8.

B-130007, DEC. 7, 1956

TO THE SECRETARY OF DEFENSE:

THIS IS IN REFERENCE TO A MEMORANDUM OF THE OFFICE OF THE ASSISTANT SECRETARY OF DEFENSE, DEPUTY COMPTROLLER FOR ACCOUNTING POLICY, DATED JUNE 18, 1956, RELATIVE TO A PROPOSED DEPARTMENT OF DEFENSE DIRECTIVE ESTABLISHING A UNIFORM PRICING POLICY FOR MATERIALS, SUPPLIES, AND EQUIPMENT FINANCED BY MILITARY APPROPRIATED FUNDS. THIS MEMORANDUM WAS ADDRESSED TO THE DIRECTOR, DEFENSE ACCOUNTING AND AUDITING DIVISION, FOR COMMENT. AFTER RECENT DISCUSSION OF THE MATTER WITH REPRESENTATIVES OF THE STAFF OF THE OFFICE OF THE ASSISTANT SECRETARY OF DEFENSE, DEPUTY COMPTROLLER FOR ACCOUNTING POLICY, THE MEMORANDUM WAS REFERRED TO MY OFFICE FOR CONSIDERATION AND REPLY.

THE PURPOSE OF THE PROPOSED DIRECTIVE IS STATED TO BE THE ESTABLISHMENT OF STANDARD PRICES FOR MATERIALS, SUPPLIES, AND EQUIPMENT ON THE BASIS OF CURRENT PURCHASE OR PRODUCTION COST OF THE ITEMS AT THE TIME THE PRICE IS ESTABLISHED. THE STATUTORY AUTHORITY, HOWEVER, FOR A SUBSTANTIAL PORTION OF THE SALES OF MATERIALS, SUPPLIES, AND EQUIPMENT ENCOMPASSED BY THE PROPOSED DIRECTIVE IS SECTION 601 OF THE ECONOMY ACT, AS AMENDED, 31 U.S.C. 686, WHICH PROVIDES THAT PAYMENT THEREFOR SHALL BE ON THE BASIS OF ACTUAL COST. THE TERM "ACTUAL COST" AS USED IN THAT STATUTE REFERS TO HISTORICAL COSTS AND MAY NOT BE INTERPRETED TO PERMIT REIMBURSEMENT FOR SUCH TRANSFER OF MATERIALS, SUPPLIES, AND EQUIPMENT TO BE MADE ON THE BASIS OF CURRENT PURCHASE OR PRODUCTION COST. IN VIEW OF THIS STATUTORY REQUIREMENT FOR CERTAIN PRICES TO BE UPON AN ACTUAL COST BASIS AND THE REQUIREMENT OF, OR AUTHORIZATIONS IN, OTHER STATUTORY PROVISIONS WHICH PERMIT THE USE OF CURRENT PURCHASE OR PRODUCTION COST, WE DO NOT BELIEVE THAT UNIFORM STANDARD PRICES BASED UPON CURRENT PURCHASE OR PRODUCTION COST MAY BE LEGALLY ESTABLISHED UNDER EXISTING LEGISLATION AS CONTEMPLATED BY THE PROPOSED DIRECTIVE.

WE ARE AWARE OF THE IMPRACTICABILITY OF ESTABLISHING DIFFERENT PRICES FOR THE SAME MATERIALS, SUPPLIES, OR EQUIPMENT DEPENDING UPON THE USER OR IN THE CASE OF SALES UPON THE STATUTORY PROVISIONS WHICH AUTHORIZED THE SALE. WE THEREFORE WILL NOT OBJECT TO THE ISSUANCE AT THIS TIME OF THE REVISED PROPOSED DIRECTIVE SENT TO US ON NOVEMBER 8, 1956, PROVIDED THAT APPROPRIATE STATUTORY AUTHORITY THEREFOR IS OBTAINED DURING THE NEXT CONGRESS AND SUBJECT TO THE FOLLOWING COMMENTS.

IN REGARD TO SECTION IV OF THE PROPOSED DIRECTIVE:

A. IN IV.A.2. THERE ARE LISTED THE ELEMENTS TO BE INCLUDED AND THOSE TO BE EXCLUDED IN THE DETERMINATION OF STANDARD PRICES, AND IN IV.B.2. REFERENCE IS MADE TO THE INCLUSION OF GOVERNMENT-PROVIDED MATERIALS IN CONTRACT OR PRODUCTION COSTS. WE BELIEVE THAT IT IS ESSENTIAL TO DEFINE THE TERM "PRODUCTION COST" IN VIEW OF THE VARIATIONS WITHIN THE DEPARTMENT OF DEFENSE IN PROGRAMMING, BUDGETING, FINANCING, AND ACCOUNTING FOR THE VARIOUS COST ELEMENTS APPLICABLE TO PRODUCTION. ALTERNATIVELY, IT MAY BE MORE APPROPRIATE TO ESTABLISH CRITERIA BOTH FOR THE COSTS TO BE INCLUDED AND THOSE TO BE EXCLUDED, WITH EXAMPLES CITED. IN ANY EVENT, CLARIFICATION OF THE ELEMENTS TO BE INCLUDED SHOULD FACILITATE THE EFFECTIVE IMPLEMENTATION OF THE PROPOSED POLICIES AND PROCEDURES.

B. ONE OF THE CHIEF ADVANTAGES CLAIMED FOR SYSTEM-WIDE STANDARD PRICES IS THE PROVISION OF A COMMON DENOMINATOR FOR PLANNING, BUDGETING, AND ACCOUNTING IN THE PROCUREMENT, CONSUMPTION, AND SUPPLY MANAGEMENT AREAS. UNLESS THE USE OF REGIONAL AND LOCAL PRICES AS PERMITTED IN PARAGRAPH IV.A.2. ARE JUSTIFIABLE FOR SPECIAL PURPOSES ONLY, THEIR USE WOULD APPARENTLY DEFEAT THE OBJECTIVES BEING SOUGHT.

IN ORDER TO ACCOMPLISH EFFECTIVELY THE BROADER OBJECTIVES OF THE PROPOSED UNIFORM PRICING POLICY AS WE UNDERSTAND THEM, IT IS ESSENTIAL THAT AN ADEQUATE SYSTEM OF FINANCIAL ACCOUNTING AND INTERNAL CONTROL BE ESTABLISHED AND MAINTAINED. SUCH ACTION IS NECESSARY TO PROVIDE FOR MONETARY CONTROLS OF INVENTORIES, OTHER ASSETS, AND LIABILITIES AND TO PROVIDE DATA WHICH WILL ADEQUATELY DISCLOSE THE RESULTS OF USING STANDARD PRICES BASED ON CURRENT PURCHASE OR PRODUCTION COSTS. THE DATA SHOULD BE USEFUL FOR BOTH OPERATING AND FINANCIAL MANAGEMENT IN THE PROCUREMENT, SUPPLY, AND CONSUMPTION AREAS. IN THIS CONNECTION, WE BELIEVE THAT PROVISION SHOULD BE MADE FOR THE USE OF VARIANCE ACCOUNTS TO DISCLOSE THE INCREASES AND DECREASES RESULTING FROM THE USE OF STANDARD PRICES AS COMPARED WITH ACTUAL COSTS. IT WOULD ALSO APPEAR DESIRABLE TO PROVIDE FOR AN ANALYSIS OF THESE VARIANCES TO IDENTIFY THAT PORTION OF THE DIFFERENCES BETWEEN ACTUAL COST AND STANDARD PRICES WHICH IS APPLICABLE TO PRIOR TRANSACTIONS AND THAT PORTION APPLICABLE TO EXISTING INVENTORIES.

WE APPRECIATE THE OPPORTUNITY TO REVIEW TO PROPOSED DIRECTIVE. AFTER THE DIRECTIVE HAS BEEN PLACED IN EFFECT, A REVIEW OF ITS APPLICATION DURING THE COURSE OF OUR REGULAR AUDITS WILL PLACE US IN A BETTER POSITION TO OFFER A MORE COMPREHENSIVE EVALUATION.

IN THE EVENT YOU HAVE ANY QUESTIONS CONCERNING OUR COMMENTS, WE WILL BE GLAD TO DISCUSS THE MATTER AT YOUR CONVENIENCE.