Auditing and Financial Management:

Managerial Cost Accounting Practices at the Department of the Interior

GAO-07-298R: Published: May 24, 2007. Publicly Released: May 24, 2007.

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Authoritative bodies have promulgated laws, accounting standards, information system requirements, and related guidance emphasizing the need for accurate and reliable cost information in the federal government. For example, the Chief Financial Officers (CFO) Act of 1990 contains several provisions related to managerial cost accounting (MCA), one of which provides 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 Financial Accounting Standards (SFFAS) 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 MCA information at federal agencies. In addition, the Federal Financial Management Improvement Act of 1996 required, among other things, that CFO Act agencies' systems comply substantially with federal accounting standards and federal financial management systems requirements. In light of the provision related to MCA information in federal agencies, we were asked to review the status of MCA in 10 of the largest civilian agencies. Our objectives were to determine how (1) federal agencies generate MCA information and (2) agency managers use cost information to support managerial decision making and accountability.

The Department of the Interior (Interior) and the four bureau-level components we reviewed each have systems for generating MCA information. The driving force for implementing MCA at Interior was strong management commitment. However, there is no single or integrated information system from which MCA data are generated. Additionally, there are multiple, independent systems at the department and bureaus from which financial and nonfinancial data are obtained for MCA. Controls over nonfinancial data quality for these systems are generally limited to bureau-level reviews for reasonableness. Those bureau-level controls may not be adequate to help ensure the accuracy, and therefore the usefulness, of MCA data. Further, Interior does not allocate cost elements consistently between bureaus. For example, the Bureau of Reclamation (BOR) uses the number of facilities to determine the cost of building maintenance whereas the department uses a square footage calculation. In addition, Interior does not have written procedures for monitoring the quality and accuracy of the data in its MCA system or a consistent methodology for pricing services at one of its components. In this regard, recognizing the need to help control risks resulting from multiple financial systems as well as a need for better functionality, Interior management is in early stages of implementing an integrated financial system, Financial Business Management System (FBMS), including developing a MCA module, for the department and each of its bureaus. Information from its various systems is routinely used by management at Interior and its bureaus for managerial decision making. At the department level, Interior uses cost information to highlight costs of department-wide activities, support recommendations for such things as changes to work processes, and to prepare budgets and performance targets. The bureaus we reviewed used MCA, among other things, to review and evaluate work processes, set prices and fees, identify workload trends, reallocate resources, and track performance indicators.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Interior's National Business Center (NBC) took action to implement a methodology for pricing its services to Interior and non-Interior agencies. Specifically, in September 2008, NBC released a policy (NBCM-FM-6600-007) that provided the framework, responsibilities, operating principles, and procedures for setting rates for services provided by the Interior Franchise Fund. The rates are to return in full all expenses of operation, including accrued annual leave pay, depreciation of plant and equipment, amortization of data processing software and systems, and an amount necessary to maintain reasonable operating reserves. Additionally, a percentage of fiscal year total income after expenses may be retained to fund capital investments. The policy was revised in September 2010 to clarify NBC's lines of business fee procedures.

    Recommendation: To promote the effective use of proper cost accounting methodologies to support pricing and other managerial decision making at NBC, the Secretary of the Interior should direct appropriate NBC officials to complete determination of methodology, and implement a consistent methodology for pricing of services at NBC.

    Agency Affected: Department of the Interior

  2. Status: Closed - Implemented

    Comments: In March 2008, the National Business Center (NBC) revised its Cost Accounting Policy (NBCM-BF-6600-003) to call for full cost recovery though a cost model intended to ensure that certain costs, direct and indirect, are accumulated and assigned to product lines for purposes of determining charges to its customers. Also, in September 2008, NBC released Franchise Fund Policy (NBCM-FM-6600-007) to provide a framework, responsibilities, operating principles, and procedures for setting rates that include the costs of accrued annual leave, depreciation and amortization, and an amount necessary to maintain reasonable operating reserves. Finally, in September 2010, NBC completed actions to substantially address the intent of our recommendation with the release of the Franchise Fund Policy to clarify its lines of business, appropriate levels for reserves, and fee approval procedures.

    Recommendation: To promote the effective use of proper cost accounting methodologies to support pricing and other managerial decision making at NBC, the Secretary of the Interior should direct appropriate NBC officials to document all policies and procedures to help ensure the recovery of costs by product lines to help prevent over and under charging of customers.

    Agency Affected: Department of the Interior

  3. Status: Open

    Comments: Interior revised Cost Accounting Policy (NBCM-BF-6600-003) dated March 24, 2008 that addresses both direct and indirect cost and requires inclusion of annual leave and holidays in its direct activity cost process. However, Interior has not provided support that NBC officials are monitoring compliance in relation to the application of direct costs.

    Recommendation: To promote the effective use of proper cost accounting methodologies to support pricing and other managerial decision making at the National Business Center (NBC), the Secretary of the Interior should direct appropriate NBC officials to monitor compliance to existing policies in relation to the application of direct costs, including annual leave and holidays.

    Agency Affected: Department of the Interior

  4. Status: Closed - Implemented

    Comments: In September 2008, BOR established a plan to change its work activity output measure from number of facilities to square footage to be consistent with Interior's work output measure. BOR began using square footage data as its work activity measurement for fiscal year 2010. The resulting data on asset usage, value, and square footage should help Interior and BOR consistently accumulate and accurately analyze the cost of its activities and thereby support more informed managerial decision making at Interior and BOR.

    Recommendation: To promote the implementation and use of reliable MCA methodologies to support more informed managerial decision making in the Bureau of Reclamation (BOR), the Secretary of Interior should direct BOR officials to identify and address any inconsistent work output measures between the bureau and departmental systems that are essential to Interior management to help form the basis for consistent cost measurement.

    Agency Affected: Department of the Interior

  5. Status: Closed - Implemented

    Comments: Interior took action to monitor the phases of Financial Business Management System (FBMS) relating to master data maintenance, the allocation of costs, and the calculation and application of overhead costs. The master data maintenance process, initially set up in January 2007, was subsequently updated 8 times through October 2010 during FBMS implementation. These updates included such activities as setting up cost centers for bureaus. The business process for allocation of costs and the calculation and application of overhead costs was initially set up in December 2007 and updated for comments from bureaus as well as reexamination for subsequent FBMS deployments. Interior's monitoring actions over user implementation substantially addresses our recommendation.

    Recommendation: To promote the implementation and use of reliable MCA methodologies to support more informed managerial decision making in Interior and its bureaus and department offices, the Secretary of Interior should direct department officials to continue to monitor the Financial Business Management System implementation plan to determine that MCA functionalities that meet user requirements are included.

    Agency Affected: Department of the Interior

  6. Status: Closed - Implemented

    Comments: Interior Deputy Assistant Secretary issued a memo dated May 2007 directing bureaus and office officials to implement prescribed data validation and verification (V&V) standards on the performance data. Between June and August 2007, Interior bureau officials provided certifications to the department that they are implementing the prescribed V&V standards.

    Recommendation: To promote the implementation and use of reliable MCA methodologies to support more informed managerial decision making in Interior and its bureaus and department offices, the Secretary of Interior should direct department officials to monitor bureau's development and implementation of written procedures for performance data validation and verification at all bureaus.

    Agency Affected: Department of the Interior

  7. Status: Closed - Implemented

    Comments: In May 2007 Interior directed bureaus and office officials to conduct an assessment of internal controls related to nonfinancial data and to certify data completeness and reliability as required in its January 2003 guidance on performance data reliability. Of the 7 major bureaus (BIA, BLM, BOR, NPS, FWS, USGS, and MMS (re-organized into Office of Surface Mining), all but NPS and USGS submitted adequate documentation to Interior between June and August 2007 demonstrating their internal controls are adequate and meet the department's published guidance. Interior's corrective actions substantially addressed our recommendation.

    Recommendation: To promote the implementation and use of reliable MCA methodologies to support more informed managerial decision making in Interior and its bureaus and department offices, the Secretary of Interior should direct department officials to perform an assessment of the internal controls related to nonfinancial data, including key indicators used for executive decision making, such as the Executive Dashboard and determine whether the current internal controls are adequate and meet the department's published guidance.

    Agency Affected: Department of the Interior

  8. Status: Closed - Implemented

    Comments: Interior's National Business Center (NBC) took action to document guidance for establishing reserves. Specifically, in September 2008 NBC released a policy (NBCM-FM-6600-007) that provided the framework, responsibilities, operating principles, and procedures for setting rates for services provided by Interior Franchise Fund. The rates are to return in full all expenses of operation, including accrued annual leave, depreciation of plant and equipment, amortization of data processing software and systems, and an amount necessary to maintain reasonable operating reserves. Additionally, a percentage of fiscal year total income after expenses may be retained to fund capital investments. NBC revised the policy in September 2010 to clarify appropriate reserve levels.

    Recommendation: To promote the effective use of proper cost accounting methodologies to support pricing and other managerial decision making at NBC, the Secretary of the Interior should direct appropriate NBC officials to document policies and procedures for establishing reserves.

    Agency Affected: Department of the Interior

 

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