# Presentation: 105179

## Cost Measurement, Management, and Control for USDA

***Cost Measurement, Management, and Control for USDA***

**©**** Dr. Dale R. Geiger CMA CGFM**

## Cost Issue Development

**18 Years**

**output**

**thesis**
**issues**

**measurement**
**issues**

**management**
**issues**

**output**

**output**

**output**

**?**

**control**
**issues**

**output**

## Thesis Issue

**What is the Role of Management Accounting in the Public Sector?**
**Context:**
**Chief Financial Officers Act of 1990**
**Waste, Fraud, and Abuse Concerns**
**Comptroller General Interest**

## Chief Financial Officers Act

**Billions Of Dollars Lost Each Year Through ... *****Mismanagement***
**Losses Could Be Significantly Decreased By Improved *****Management***
**Great Need Of Fundamental Reform In Financial *****Management***
**Current Practices Do Not Provide Timely Information Required For Efficient *****Management***

**Notes:**
The statements on this slide are drawn directly from the findings in the first paragraph of the The Chief Financial Officers Act (1991).  In this Act, Congress requires federal agencies to name a Chief Financial Officer to promote financial management and to develop the information needed for better financial management.  Congress’s focus on management is obvious.

## Government Performance and Results Act: Goals

**Improve the Confidence of the American People by Holding Agencies *****Accountable***
**Improve Effectiveness & *****Accountability***** By Focusing on Results, Quality, Customer **
**Help Managers by Requiring They Plan and by Providing *****Information***
**Improve Congressional *****Decision Making***
**Improve Internal *****Management***

**Notes:**
The Government Performance and Results Act (1993) recognizes that citizens’ confidence in government will only improve through promoting better management in government.  
The Act requires government organizations to define their mission and performance goals, and then measure performance according to those goals.  This will provide accountability.
A war isn’t a “war” unless Congress declares it...are these acts a declaration of the Cost War?

## Thesis - Figure 1

**Financial**
**Accounting**

**Fund**
**Accounting**

**?**

**Management**
**Accounting**

**External **
**Reporting**
**Internal **
**Reporting**

**Private Sector       Public Sector**

## Thesis Design

**Survey Research**
**GAO Survey of Cost Accounting Use**
**Field Research**
**USDA****	****Federal Grain Inspection Service**
**GSA****	****Public Building Service**
**DoD****	****Army Watervliet Arsenal**
**DOI****	****BLM Fire Fighting Operations**
**HHS****	****NIH Support Services and Management **
**Experimental Research**
**Introduction of ABC into IRS Audit Division**

## Survey Findings

**Funding Source and Legislative Requirements Drove Cost Accounting**
**Costing Less Likely in Appropriated Organizations **
**Considerable Diversity in Use of Cost Accounting**
_**Accounting, Organizations and Society**_**, August 1996**

## Field Findings 

**Appropriations Reduce Risk, Need for Cost Management, and Need for Cost Accounting **
**Different Environments Motivate Significantly Different Cost Accounting**
_**Government Accountants Journal**_**, Spring 1995**

## Cost Accounting Uses at 59 Federal Organizations

**Notes:**
These diagrams represent the uses of cost systems at 59 federal organizations.  
There are four dimensions of cost system use:  Required costing, Overhead allocation, Pricing, and management control.  The shape of the diagram for each organization represents to what degree the cost system is used for that dimension.  
BLM = Bureau of land management.  Uses cost system mostly for overhead allocation and managerial control. 
PBS = Public Building Service:  uses cost system primarily for pricing and managerial control.
FGIS = Federal grain inspection service:  Pricing, Overhead allocation, managerial control
VMSS = Veterinary Medical Supply Service: control, pricing and allocation
WVA = Watervliet Arsenal: All four

## Experiment Findings

**Management Cost Awareness and Cost Accountability Low**
**Cost Accounting Infrastructure Weak **
**Simple ABC Accounting Provided New and Important Insights and Impacted Decision Making**
_**Government Accountants Journal**_**, Winter 1993**

## Post-Doc Sites

**Treasury****	****Bureau of Engraving and Printing****	****Case Study****	****	****	****Internal Revenue Service****	****	****Consulting****	****	****	****Treasury Agency Services****	****	****Teaching**
**Navy****	****	****SPAWAR R&D Lab****	****	****ABC Implementation****	****	****Naval Air Command****	****	****Consulting**
**Army****	****Managerial Costing Advisory Board****	****Service****	****	****	****	****Cost and Economics Center****	****	****Training/Consulting****	****	****Garrison Pre-Command Course****	****Training****	****	****	****	****Army Audit Agency****	****	****Training****	****	****	****	****Installation Management Agency****	****Training/Consulting****	****	****Fort Huachuca****	****	****	****Cost Mgmt Pilot****	****	****	****Fort Leonard Wood****	****	****Cost Mgmt Pilot****	****	****	****Fort Detrick****	****	****	****Cost Mgmt Pilot****	****	****	****Fort Riley****	****	****	****Cost Mgmt Pilot****	****	****	****US Army – Korea****	****	****	****Training**
**Air Force****	****Aeronautical System Command****	****Consulting****	****	****	****Cost Accounting Summit****	****	****Presentation**
**NSA****	****	****Controller****	****	****	****Training/Consulting**

## FDIC		Chief Financial Officer		ABC Implementation
DOI		Bureau of Land Management	Research Paper
HHS		FDA – Medical Devices Center	Training/Consulting		FDA – Prescription Drug Center	Training/Consulting		FDA – Veterinary Med Center	Training/Consulting
NAPA	GAO Investigation		Investigator			Federal Courts Study		Principal
JFMIP	Cost Accounting Advisory Board	Service
FASAB	Managerial Costing Standard	Service/Testimony
FAEC	Federal Audit Executive Council	Presentation
USDA	National Forest Service		Training
Senate	Senate Staff			Training	
House	Comm on Government Operations	Service/Testimony
OMB		Chief Financial Officers Council	Presentation
GAO		Financial Management Division	Training				US Customs Audit			Subject Expert
DC		City Managers 			Training
CA		Department of Justice		Expert Witness			State Controller			Project Manager	

**DOI****	****	****Bureau of Land Management****	****Research Paper**
**HHS****	****	****FDA – Medical Devices Center****	****Training/Consulting****	****	****FDA – Prescription Drug Center****	****Training/Consulting****	****	****FDA – Veterinary Med Center****	****Training/Consulting**
**NAPA****	****GAO Investigation****	****	****Investigator****	****	****	****Federal Courts Study****	****	****Principal**
**JFMIP****	****Cost Accounting Advisory Board****	****Service**
**FASAB****	****Managerial Costing Standard****	****Service/Testimony**
**FAEC****	****Federal Audit Executive Council****	****Presentation**
**USDA****	****National Forest Service****	****	****Training**
**Senate****	****Senate Staff****	****	****	****Training****	**
**House****	****Comm on Government Operations****	****Service/Testimony**
**OMB****	****	****Chief Financial Officers Council****	****Presentation**
**GAO****	****	****Financial Management Division****	****Training****	****	****	****	****US Customs Audit****	****	****	****Subject Expert**
**DC****	****	****City Managers ****	****	****	****Training**
**CA****	****	****Department of Justice****	****	****Expert Witness****	****	****	****State Controller****	****	****	****Project Manager****	**

## Post-Doc Directions

**Survey Research**
**Field Research**
**Experimental Research**

**Cost Measurement Issues**
**Federal Accounting Standards Advisory Board**
**Managerial Costing Design**
**Cost Management Issues**
**Managerial Costing Use**

## Cost Measurement Issues

**Federal Accounting Standards Advisory Board**
**Managerial Costing Standard (#4)**
**Drafting Team Member**
**Testified Twice**
**Key Issue: Would Costing Standard Emphasize Comparable Consistency or Relevant Customization?**
_**Governments Accountants Journal**_**, Summer 1994**

## The Consistent Combat Ship

***The Consistent Combat Ship***

- 16" guns

- cruise missiles

- landing gates

- periscope

- ballistic missiles

- flight deck

- submersible hull

- helicopter pad

- torpedo

- tubes

**Notes:**
The consistent combat ship would have several advantages for the Navy.  They would only have to stock one kind of fuel.  Parts would be interchangeable.  It would be easy to compare one ship’s performance with another:  Fuel consumption, staffing requirements and ammunition use would be standardized.  
However, serious problems arise when you think about what this ship might look like.  It would need a flight deck for at sea takeoffs and landings.  It would also need a submersible hull, periscope and conning tower for underwater operation.  This might complicate aircraft landings, but the engineers could figure out a way to make it work.  
It would need all types of weapons:  ballistic missiles (could complicate landings and takeoffs:  another job for the engineers) cruise missiles, 16” guns, torpedo tubes.  
It would also need landing gates for beach assaults by the Marines.  These would need to be integrated with the torpedo tubes.  Those engineers will be busy...
Could such a ship be built?  Yes.  Would it be expensive?  Very.  And it probably wouldn’t do any of the jobs very well.  
Consistent cost systems pose many of the same problems.  They could be designed to do all of the jobs for everyone, but they would be very expensive and wouldn’t do any one job very well.  

## Costing Approaches Differ

**Internally Specified**
**Require-ments**

**Externally Specified**
**Require-ments**

**Goals:**
**  ****Consistency**
**  ****Comparability**
**  ****Equity**
**Users:**
**  ****Shareholders**
**  ****Congress**
**  ****Regulators**
**  ****Tax Authorities**
**Methodology:**
**  ****Laws**
**  ****Rules**
**  ****GAAP**

**Goals:**
**  ****Fit**
**  ****Functionality**
**  ****Relevance**
**Users:**
**  ****Managers**
**Methodology:**
**  ****Situation **
**    ****Dependent**

***Financial &***
***Regulatory***

***Managerial***

**Notes:**
(THIS IS A KEY SLIDE AND AN IMPORTANT CONCEPT IN DIFFERENTIATING MANAGERIAL COSTING.)

Most accounting systems focus on meeting external reporting requirements.  External reporting is a fact of life and a cost of operation.  However, goals for the measurement process in external reporting are seldom the same as management information goals.  While external reporting requires consistency and comparability, management needs information that is relevant to its decision making needs
An individual would not generally use the information in his IRS form 1040 (an external reporting requirement) to manage his household budget (an internal reporting application).  He will need to take his financial information (probably his checkbook) and determine what information is important for his own decision making. (How much did I spend on groceries last month?)
The comparability and consistency goalset of external reporting requires a rigid accounting methodology that is auditable.  Managerial information systems do not need audits for the same reason that your checkbook does not get audited.  If you cheat on your checkbook, it’s your own problem.

## Measurement Issue Outputs

**Managerially Oriented FASAB Standard**
_**Journal of Government Financial Mgmt**_
**“****Practical Issues in Managerial Cost Accounting” (Spring 2001)**
**“****Practical Issues in Cost Object Selection and Measurement” (Summer 2000)**
**“****Practical Issues in Cost Driver Selection” ****	****   (Spring 2000)**
**“****Practical Issues in Level of Precision and System Complexity” (Summer 1999)**
**“****Practical Issues in Avoiding Pitfalls in Managerial Costing Implementation” (Summer 1998)**

## Managerial Costing Conclusions

**Must Be Useful and Relevant**
**Or It Will Die for Lack Management Benefit**
**Must Be Technically Credible**
**Or It Will Not be Trusted for Decision Making**
**Must Be Affordable**
**Or It Will Consume Resources Needed Elsewhere**

## Minimum Cost vs Benefit Criteria

**credibility**

**measurement**
**cost**

**beneficial**
**use**

## Cost Management Issues

**IRS, Army, and Others Invested Heavily In Activity Based Cost Accounting Systems**
**Little Benefit Occurred and Many Systems were Abandoned**
**What Management Paradigm Fits Government Organizations that Don’t Have the Profit Motive of the Corporate World?**

## Command Control and Communication Theory

**Battlefield Management Unique to Government **
**No Profit Motive Exists**
**We’re Pretty Good at It**
**Command, Control, and Communication Paradigms Provide a Useful Template for Cost Management in**
_**Winning the Cost War**_**, 2000**

## Risk to Mission = Cost War

**The Cost War is the Struggle:**
**To Accomplish and Enhance Your Organization’s Mission **
**With Fewer Financial Resources than Needed**
**While Meeting Specifications for Quality, Customer Service, and Ethics**

## Command, Control, and Communication of Cost

**Battlefield Intelligence**
**becomes**
**Managerial Costing**

**Warrior Pull**
**becomes**
**Cost Warrior Pull**

**Modeling & Simulation**
**becomes**
**Cost Planning**

**War Fighting Success**
**becomes**
**After Action Cost **
**Review**

***Command, Control, and Communication of Cost***

**Notes:**
These four components can be easily translated to become relevant to the Cost War:
Cost Warrior Pull suggests that the cost warrior, or decision maker, defines the information needed to perform the mission
Managerial Costing represents gathering the information needed to fight the battle.  Such information must be timely and relevant to the situation
Cost Forecasting allows cost warriors to ask “What if” or to simulate the changes in performance given different situations or variables
After Action Cost Review evaluates performance after execution, comparing actual results to the plan
Together these four components represent an Interactive Cost Based Management System.  It is considered interactive because management reviews the results of its actions and then applies the lessons learned to future situations and decisions.

## The Role ofManagerial Costing

**Develop Needed Intelligence for the Cost Warrior on the Cost War Battlefield **
**Needed: Credible Measurement of True Costs of Resource Consumption**
**Provide Information to the Cost Management Process**
**Needed for Decision Making, Planning Processes, and After Action Reviews**

**Notes:**
Managerial Costing is the key to developing the needed intelligence for the Cost war battlefield.  Understanding the true cost of resource consumption will help to eliminate free goods, and decrease unneeded consumption.  Understanding true cost also gives management the information needed for planning and decision making.  (Managers can make rational decisions based on true cost)  
Managerial costing also provides the information needed for after action review, or performance evaluation.

## Process Feedback in the Cost Management Process

**refined info needs**

**improved planning**

**better execution**

**learning**

** ****plan****	****	****execute****	****measure            review**

## Garrison Commander Conducting AAR

***Garrison Commander Conducting AAR***

***“******When I’m sad ......***
***        ******my people get sad”***

***“******and then they try***
*** ******to make me happy!”***

## Slide 29

## Slide 30

## FY03

**GARRISON MANAGEMENT SYSTEM **

**FY03**

## Control Issues

**Current Status**
**Some Islands of Cost Management **
**Good Cost Measurement Doesn’t Guarantee Success**
_**Winning the Cost War**_** Process Doesn’t Guarantee Success**
**What is Needed for Cost Measurement and Management to Significantly Impact Mission Execution?**

## Cost Control Offers Mission Improvement Opportunities

**credibility**

**mission benefits**

***Desired 10 to 1 Ratio***

**process & measurement costs**

## Financial Management Improvement Strategies

- 			**Centralized****	****	****Decentralized**
**Discontinuous****       ****	****A-76****	****	****	****Business Process****	****	****	****	****	****	****	****  Reengineering**
**Continuous****	****	****Budget Mgmt****	****	****Management Control****	****	****	****PART****	****	****	****          Processes**

## Management Control Spectrum

**Less “Full” ****	****	****	****	****More “Full” Cost Views****	****	****	****	****Cost Views**

**More Often**
**Less Often**

***Organization Based***

***Role Based***

***Output Based***

## Requirements for Success

**Aggressive, Knowledgeable Management**
**Talented, Smart Support Staff **
**Interactive, Learning Oriented Review Process**
**Good Cost Information**

## Current Status

**Management: Unfamiliar with Control Role**
**Don’t Know What They Don’t Know**
**Staff: Need Strong Mgmt Accounting Skills**
**Rare in Most Government Agencies**
**Process: Must Evolve to Fit Organization  **
_**Winning the Cost War**_** Provides Workable Template**
**Cost Info: Need Simple, but Customized Views**
**Useful, Credible, Affordable Designs Work**

## Significant Possibilities

- Sent: Thursday, January 06, 2005 5:40 AM
- To: Dale R. Geiger
- Subject: Greetings
- Dale, long time no hear-what are you up to these days?  I'm still fighting the good fight (I think) as the FORSCOM Asst G8. We had $22B last year, and look to be headed toward $26B this year. Sent you a note sometime ago about our cost control efforts-amazingly,** **_***we knocked out $2B of expenses by going through the cost control techniques you led us through at Leonard Wood***_**. **Hard business as many don't really have it in their plans to do this, so you have to keep pushing.
- kjk

***Significant Possibilities***

## Concluding Questions

**Is USDA in a Cost War?**
**Would the Mission Benefit from Sustained Efficiency Improvement?**
**If so, What are You Going to Do About It?**
**What is the Role of the CFO Organization?**