Scope and Methodology

We conducted our audit work at the Bureau’s Denver, Colorado office and  at its Mid-Pacific region.  We reviewed and analyzed relevant legislation,  written policies and directives, accounting standards, and other documents  pertaining to managerial cost accounting.  We also interviewed  knowledgeable personnel at each audit site to obtain information relevant  to the objectives of this assignment.
The scope of our review included the Bureau’s managerial cost accounting  practices and the Bureau’s treatment of different types of costs related to  its administration and operation of its projects and the delivery of its  programs.  We conducted our review from November 2001 to July 2002 in  accordance with generally accepted government auditing standards.   Appendix I describes our objectives, scope, and methodology in detail.  We  provided the Department of the Interior and the Bureau of Reclamation  with copies of a draft of this report for review and received written  comments on the report.

	Background

The Bureau constructs and operates multiple-purpose water resource  projects in 17 western states.  These projects provide water for irrigation,  M&I use, power generation, recreation, and fish and wildlife protection,  and also provide for flood control, water conservation, and land resource  management.  The Bureau’s facilities include 348 reservoirs with a storage  capacity of 245 million acre-feet of water, 58 hydroelectric power plants,  and more than 300 recreation sites.  These facilities:  generate more than 40 billion kilowatt hours of energy each year,  making the Bureau the nation’s second largest producer of hydroelectric  power;  deliver water to one out of every five western farmers for about 10  million acres of irrigated land that produces 60 percent of the nation’s  vegetables and 25 percent of its fruit and nuts;  deliver 10 trillion gallons of municipal, rural, and industrial water to  over 31 million people in the West;  provide water to support habitat for wildlife refuges, migratory  waterfowl, fish, and threatened and endangered species;  deliver water to Native American tribes through irrigation projects and   provide water-based recreation activities for about 90 million visitors a   provide flood control benefits and drought contingency planning and  assistance to western states and tribes.
Construction, operation, and maintenance of these projects and Bureau  programs are financed primarily with federal funds.  The Bureau assigns a  percentage of capital and operation and maintenance (O&M) costs to each  project purpose based on the project’s expected uses and benefits.  Costs  associated with irrigation, M&I use, and power generation are generally  required to be recovered through water delivery contracts and rates  charged for water and power.  In contrast, costs associated with flood  control, fish and wildlife enhancement, and recreation are generally not  recoverable under current law.  To facilitate cost recovery and manage the  projects and programs, the Bureau collects budget and cost information  through its program and budget and financial accounting systems.
The need for cost information is not unique to the Bureau.  Cost  information is needed throughout government for management, resource  allocation, and oversight purposes.  The cost of government is a concern to  the public as well as to the federal government itself.  One of the ways to  capture cost information is by applying managerial cost accounting  techniques.  By using managerial cost accounting information, agency  executives and managers, the Congress, citizens, news media, and interest  groups can better assess the costs of governmental activities.
The need for useful managerial cost information has been recognized for  some time.   The Congress and others have taken a number of actions to  require cost accounting information and to encourage its use in  administering federal projects and programs.  Some of the specific  requirements for managerial cost accounting are as follows.
The Chief Financial Officers Act of 1990 includes among the functions of  chief financial officers “the development and reporting of cost  information” and “the systematic measurement of performance.”
Statement of Federal Financial Accounting Concepts (SFFAC) No. 1,  Objectives of Federal Financial Reporting, issued in 1993, states that  the objectives of federal financial reporting are to provide useful  information to assist internal and external users in assessing the budget  integrity, operating performance, stewardship, and systems and control  of the federal government.  It also states that federal financial reporting  should provide information that helps users to determine the (1) costs  of specific programs and activities and the composition of, and changes  in, those costs, (2) efforts and accomplishments associated with federal  programs and their changes over time and in relation to costs, and (3)  efficiency and effectiveness of the government’s management of its  assets and liabilities.
Statement of Federal Financial Accounting Standards (SFFAS) No. 4,  Managerial Cost Accounting Standards states that the objective of the  standard is to (1) provide program managers with relevant and reliable  information relating costs to outputs and activities, (2) provide relevant  and reliable cost information to assist the Congress and executives in  making decisions about allocating federal resources, authorizing and  modifying programs, and evaluating program performance, and (3)  ensure consistency between costs reported in general purpose financial  reports and costs reported to program managers.  The stated purposes  in the standard for managerial cost accounting are:  budgeting and cost control,  cost reimbursement (and setting fees and prices),  making economic choice decisions.
The Federal Financial Management Improvement Act of 1996 (FFMIA)  requires agencies to implement and maintain financial management  systems that comply with federal accounting standards, including  SFFAS No. 4.
The Joint Financial Management Improvement Program (JFMIP) issued  a statement on January 31, 2002, stating that “A key element of financial  planning and evaluation is clear measurement of the full costs of  agencies’ activities during each fiscal year.”
The Bureau has taken steps in recent years to improve its cost accounting  practices.  It better defined the treatment of costs by issuing in 1999 the  Standard Processes of Costing (SPOC) report that clarified and  standardized direct and indirect cost treatment.  In addition, it changed the  basis it uses to distribute some indirect costs to better reflect actual usage.   Also, at the direction of the Department of the Interior, the Bureau will be  implementing Activity Based Costing (ABC), a cost accounting method that  measures the cost of work efforts leading to a specific result.  On January  16, 2002, Interior’s Deputy Secretary sent a memo to all Bureau and office  heads directing them to implement an ABC cost model by fiscal year 2004  (October 1, 2003).  The Bureau’s ABC initiative is discussed in more detail  later in this report.

	The Bureau Lacks Full Cost Information to Support Managerial Decisions

The Bureau does not distribute all the costs it incurs to its specific projects  and activities.  Thus, full cost information is not available for managerial  decision making as envisioned in federal accounting standards and the  President’s management improvement initiatives.
The Bureau’s distribution of costs is driven largely by the need to recover  certain costs.  Its cost accounting system focuses primarily on recovering  costs in accordance with specific project provisions.  It does not identify  the full costs of the Bureau’s activities such as irrigation, M&I water supply,  power generation, recreation, fish and wildlife protection, flood control,  water conservation, and land resource management.  Therefore, complete  information on the cost of the Bureau’s activities is not readily available to  support managerial decisions pertaining to each of the purposes of  managerial cost information described in SFFAS No. 4, Managerial Cost  Accounting Standards.   The standard notes that when full cost  information is made available, analysts and decision makers will have a  comprehensive data source to develop the cost concepts that they need in  their analyses.  However, it recognizes that full cost is not necessary for all  analyses and decisions.
Two large categories of costs—Policy and Administration costs and  Bureauwide program costs—are not distributed to project purposes.   Policy and Administration costs are not distributed to project purposes  because the Bureau’s focus is on cost recovery and legislation specifically  designates these costs to be nonreimbursable as provided by 43 U.S.C. sec.  377.  Bureauwide program costs are generally not distributed to project  purposes for one of two reasons:  either because legislation specifically  designates these costs to be unrecoverable or the Bureau has otherwise  decided not to seek reimbursement for them.   These two undistributed  cost categories totaled nearly $200 million or 21 percent of the Bureau’s  total budget authority for fiscal year 2002.  See appendix III for additional  information pertaining to budgeted amounts for Policy and Administration  and Bureauwide program costs for fiscal years 1997 through 2002.  As  discussed in the next section, we believe that certain of these undistributed  costs may be recoverable.
Because such a large portion (21 percent) of the Bureau’s budget is not  distributed, complete information regarding the total cost of each of the  Bureau’s activities is not readily available.  Bureau managers and external  parties, such as congressional appropriators, do not have information on  the total costs of the Bureau’s main activities at their disposal for decision  making purposes.  For example, it is not possible to analyze what the  Bureau spends on irrigation, M&I water supply, power generation,  recreation, fish and wildlife protection, flood control, water conservation,  and land resource management either currently or over time.
The Bureau’s managerial cost accounting system contrasts sharply with  that of another Department of the Interior organization—the Bureau of  Land Management (BLM).  BLM has already implemented an ABC model,  which contributed to Interior’s previously mentioned decision to  implement ABC departmentwide.  BLM’s model fully distributes costs and  can readily identify, among other things, (1) the full costs of each of its  activities, and (2) what it costs to pursue each of its strategic goals.  BLM’s  system provides detailed information that facilitates external reporting and  can be used for internal purposes such as developing budgets and analyzing  the unit costs of activities and outputs. “ . . . provide the linkage of strategic planning, budgeting, costing and performance  reporting.  It will increase the value we provide to our customers through more efficient  operations and enhance accountability to the Congress and the public (by tying costs to  performance measures).  This approach can provide the Department with an important tool  for managers to monitor and evaluate program performance/results and more effectively  allocate resources.”
The department’s directive to implement an ABC model presents an  opportunity for the Bureau to provide more relevant and reliable cost  information to better meet the needs of decision makers and fulfill each of  the five purposes of the Managerial Cost Accounting Standard.

	The Bureau Does Not Recover All Reimbursable Costs

While cost information is important for a variety of managerial purposes, as  discussed above, it is particularly important to the Bureau in executing  water delivery contracts and in setting rates to accomplish its cost recovery  requirement.  However, even though its cost accounting system has  focused primarily on cost recovery, the Bureau is not recovering all  reimbursable costs associated with operating its projects.
The Bureau’s authority to determine which costs to charge customers is  governed by general provisions of reclamation law, project and program  specific legislation, and specific provisions of contracts the Bureau enters  into with water users.   The costs of activities related to power and water  supply are generally recoverable; however, the Bureau does not recover  certain of these costs.
OMB Circular A-25, which provides guidance for federal agencies to use in  setting fees to recover the full costs of providing goods or services, defines  full costs as all direct and indirect costs of providing the goods or service.   This definition is consistent with that contained in federal accounting  standards.  The federal accounting standards define the full cost of an  entity’s output as “the sum of (1) the costs of resources consumed by the  segment that directly or indirectly contribute to the output, and (2) the  costs of identifiable supporting services provided by other responsibility  segments within the reporting entity, and by other reporting entities.”   Applying the definitions of “full cost” used in OMB Circular A-25 and  federal accounting standards indicates that the full cost of the power and  water supplied by Bureau projects includes all direct and indirect costs  incurred in providing these services.  All costs directly or indirectly  benefiting the Bureau’s projects should be recovered, except where  specifically precluded by law.
Some Bureauwide program costs are not being recovered, even though the  programs either directly or indirectly benefit the Bureau’s projects and are  not expressly precluded from recovery by specific legislation.  Bureauwide  programs are comprised of about 30 programs (the number can vary from  year to year) that undertake a variety of activities that support the Bureau’s  projects, involve coordinating with others, or provide technical and  financial assistance to others.  Programs include dam safety, land resource  management, technical assistance to states, and O&M program  administration.  The programs are administered by the Commissioner's  Office and/or the regional offices and are intended to be "bureauwide" in  scope and benefit the overall Bureau mission.
Bureauwide programs are funded with two appropriations:  “Policy and  Administration” and “Water and Related Resources.”  The language of the  “Policy and Administration” appropriation provides that it is made  nonreimbursable as provided by the Fact Finders Act.  The “Water and  Related Resources” appropriation contains no express prohibition on  reimbursement.  Because the “Policy and Administration” appropriation is  legislatively precluded from recovery, we limited our analysis in table 1 to  Bureauwide programs funded through the “Water and Related Resources”  appropriation.  Table 1 shows, for each Bureauwide program, (1) the  amount appropriated for fiscal year 2002 from the “Water and Related  Resources” appropriation, (2) whether the Bureau recovers the costs,  (3) which programs have specific legislation exempting them from  recovery, and (4) whether the program provides direct or indirect project  benefits, or both.
The shaded items in table 1 represent costs that (1) are not currently  recovered (or are only partially recovered) and (2) directly or indirectly  benefit specific projects.  In our opinion, these costs should be reviewed to  determine whether they may be recovered in accordance with current law.   Examples of these costs include the following.
Environmental and Interagency Coordination program, which involves  participating in activities with other agencies and public groups on  water-related issues.  Work proposed for fiscal year 2002 included  working with other agencies to develop methods to evaluate  environmental, social, and economic impacts associated with existing  and future water resource programs; providing information to public  groups; and reviewing other agency environmental compliance  documents to determine the possible impact on current and future  Bureau activities (indirect benefits).
Environmental Program Administration program, which involves  activities the Bureau undertakes to ensure compliance with  environmental law, policy, and initiatives.  Work proposed in fiscal year  2002 was related to assuring compliance with the Endangered Species  Act, the National Historical Preservation Act, and the National  Environmental Policy Act (indirect benefits).
Examination of Existing Structures Program, which provides for the  review of Bureau facilities with respect to public safety, emergency  management, and efficient energy and water management practices.   Our review of the program found that these inspections are related  directly to Bureau projects and facilities, some of which provide water  for irrigation and M&I purposes (direct benefits).
General Planning Activities program, which involves funds used to  accomplish various water resource management initiatives and other  activities.  Work proposed for fiscal year 2002 included maintaining and  developing hydrologic models; coordinating with other federal, state,  and local agencies; coordinating on wastewater reuse activities; and  responding to congressional and public inquiries regarding planning  activities (indirect benefits).
Negotiation and Administration of Water Marketing Program, which  involves the administration of repayment contracts that the Bureau  holds with entities to which water is delivered.  A representative of the  Bureau’s Commissioner’s Office told us that only two regions fund these  activities through this program and the long-term goal is to have these  regions use other reimbursable funds for these activities which would  result in charging these costs to water customers (direct benefits).
Reclamation Law Administration Program, which involves Bureau  inspections to ensure that entities contracting for water delivery are in  compliance with the Reclamation Reform Act of 1982.  Bureau activities  are focused upon ensuring that water districts, individual contractors,  and individual water users are in compliance with the act.  The Bureau  conducts inspections and audits to ensure this compliance.  Program  costs are consequently directly related to the provision of water to  districts, contractors, and users (direct benefits). “The cost and expense after June 30, 1945, of the Office of the Commissioner in the District  of Columbia and, except for such cost and expense as are incurred on behalf of specific  projects, of general investigations and of nonproject offices outside the District of  Columbia, shall be charged to the reclamation fund and shall not be charged as a part of the  reimbursable construction or operation and maintenance costs.”
The Fact Finders Act exempts from recovery the cost of “general  investigations” and “nonproject offices” that are not incurred on behalf of  a specific project. The Bureau treats many Bureauwide program costs as  precluded from recovery under the Fact Finders Act even though some  directly or indirectly benefit a specific project or projects.  In our opinion,  the Fact Finders Act does not preclude recovery of costs when they are  incurred directly or indirectly on behalf of a specific project or projects.   These include the shaded programs identified in table 1.  In our opinion  such costs should be distributed to projects and the appropriate amount  recovered through water delivery contracts and rates charged to project  beneficiaries, unless specifically exempted by legislation.

	Conclusions

Program managers, the Congress, and others need relevant and reliable  cost information to facilitate budgeting and cost control, performance  measurement, cost reimbursement, program evaluation, and economic  choice decisions.  However, the Bureau’s emphasis on reimbursable costs  and cost recovery has left a large portion of its budget—about 21 percent in  fiscal year 2002---undistributed to the Bureau’s projects and activities.
Therefore, complete information on the costs of the Bureau’s activities is  not available to aid managerial decision making.  The current departmental  cost accounting initiative presents an opportunity for the Bureau to  reevaluate its decisions regarding cost distributions and to make readily  available information to support not only cost recovery but also the full  range of managerial needs.
In addition to providing more complete cost information for decision-  making purposes, the Bureau also has the opportunity to improve its cost  recovery efforts by beginning to recover the costs of all programs that  directly or indirectly benefit projects, including those related to nonproject  offices and investigations.  Reclamation law provides that the Bureau  recover the costs of certain reimbursable activities, including irrigation,  M&I water supply, and power generation.   Federal policy requires that the  full costs incurred by the federal government in providing services be  recovered from the beneficiaries of those services, unless the recovery of  such costs is legislatively precluded.  However, the Bureau does not  recover all costs that benefit specific Bureau projects, even though its cost  accounting is focused primarily on cost recovery.

	Recommendations

We recommend that the Secretary of the Interior direct the Commissioner,  Bureau of Reclamation, to:  Enhance the Bureau’s managerial cost accounting so as to provide more  complete cost information that facilitates managerial decision making  and fulfills each of the five purposes of the Managerial Cost Accounting  Standards.   This would include distributing Policy and Administration  and Bureauwide program costs to the appropriate projects and activities  and could be accomplished in conjunction with the Department of the  Interior’s current cost accounting initiative.
Review the Bureauwide programs and recover the costs of those that  either directly or indirectly benefit projects, unless cost recovery is  prohibited under current law.   Where it is determined that cost recovery  is prohibited, this would include documenting the specific legal basis  and rationale for the determination.

	Agency Comments and Our Evaluation

The Department of the Interior provided written comments on a draft of  this report.  The comments are reproduced in appendix II and summarized  and addressed below.  Interior concurred with our recommendation to  recover the costs of Bureauwide programs that either directly or indirectly  benefit projects, unless cost recovery is prohibited under current law.   Interior stated that, as part of ongoing action on a previous report, it will  review Bureauwide programs and issue, by March 31, 2004, directives for  those programs that will address, among other things, whether the  associated costs are recoverable.
We are encouraged by Interior’s comment and look forward to seeing the  results of its review.  However, we note that the referenced action on the  previous findings has been slow.  For example, in comments on a draft of  the May 31, 2000, report, Interior stated that it would work with the  Solicitor’s office to determine whether it could recover costs identified in  the report.  In July 2002, in the course of our work on the current review,  we inquired about the status of the Solicitor’s review and were told that the  Solicitor’s input had not yet been requested.  We believe it is important to  note that while the previous report related only to unrecovered indirect  costs, our work during this review identified unrecovered costs related to  activities that benefit projects both directly and indirectly, as shown in  table 1.  Since the Bureau devotes significant resources to the Bureauwide  programs and we have now identified costs that directly benefit projects  but are not recovered from project beneficiaries, we believe that taking  timely action to implement this recommendation is important.
Interior did not concur with our recommendation to distribute Policy and  Administration and Bureauwide program costs to projects and activities;  however, its comments in doing so were contradictory.  Interior did not  concur with the recommendation, but stated that it would explore doing as  we recommend as part of its implementation of a departmentwide ABC  system in fiscal year 2004.   We believe that implementing this  recommendation is critical if, as stated in its comment letter, Interior plans  to implement the recommendation to recover the costs of Bureauwide  programs because these programs consist of activities that directly or  indirectly benefit projects.  In our opinion, distributing these costs would  facilitate appropriate cost recovery.  Interior’s major comments in  nonconcurring with this recommendation are synopsized below, along with  our responses.
Interior’s first major comment was that the current cost accounting system  already meets all of the cost accounting standards’ objectives and purposes  and, due to the latitude allowed under the standards, is in compliance with  the standards.  Interior further states that our finding that the Bureau lacks  full cost information to support managerial decisions is misleading.  The  primary focus of our review was not to narrowly assess compliance with  the standards but, rather, to determine whether the Bureau identifies and  distributes for management purposes all the costs it incurs in operating its  projects and administering its programs.   This included determining the  Bureau’s primary focus with respect to the purposes of managerial cost  information as delineated in the standards--budgeting and cost control,  performance measurement, cost reimbursement, program evaluations, and  economic choice decisions.  We found that the Bureau, because of its focus  on cost reimbursement, does not distribute a large portion of its budget (21  percent for fiscal year 2002) and, thus, complete information on the costs  of the Bureau’s activities is not available to aid decision making.  It is not  misleading for us to note that distributing these costs would provide more  complete cost information that would be useful for resource allocation  decisions, cost analysis and management, and program and performance  measurement.
In addition, although stating that its system meets the cost accounting  standards’ objectives and purposes, Interior also stated that it plans to  continue enhancing the system to “more fully satisfy each of the five  purposes” of the standards.  Such enhancements were precisely what we  had in mind in recommending that the Bureau distribute Policy and  Administration and Bureauwide program costs so that more complete  information on the costs of the Bureau’s activities would be available to  decision makers both within and outside the Bureau.  We believe that  implementing our recommendation would aid the Bureau as it seeks to  “more fully satisfy” the standards’ purposes by providing the Congress,  executives, and managers with better and more complete information and  analysis on resource utilization and the costs of activities and outputs.
Moreover, we believe that the nonconcurrence with our recommendation  to distribute Policy and Administration and Bureauwide program costs  contradicts the intent of Interior’s departmentwide effort to implement the  President’s Management Agenda.  The Deputy Secretary’s January 16, 2002,  memo cited in our report emphasizes the importance of cost information in  implementing the President’s Management Agenda and specifically  identifies ABC as Interior’s vehicle for understanding and managing costs.   The Deputy Secretary’s memo states that  “ABC is a cost accounting  method that measures the cost of work efforts leading to a specific result.”
To implement its cost accounting initiative, Interior has created an  interagency work group.  In discussing how to integrate budgeting and  performance and improve cost reporting, the work group wrote that ABC is  a management tool that attempts to ensure that an organization’s  expenditures, including direct and overhead costs, are allocated to  products or services in order to identify the cost to the organization of  delivering those products or services.  The work group further wrote “ABC  will facilitate understanding the full cost (direct and indirect) of  performance by understanding what drives the cost of work processes…  This approach helps assess the efficiency of performance, in dollar terms.   It requires detailed accounting for all expenditures and permits aggregating  the information at different levels to suit various decision making  purposes.”   The Bureau will not be able to assess the efficiency of its  performance in delivering products and services in such a manner without  distributing the costs of its Policy and Administration and Bureauwide  program activities.
The second major comment by Interior was that the Bureau’s cost  accounting system provides the necessary information for program  management and full cost information for external reporting.  We disagree.   The full costs of the Bureau’s projects, programs, and activities are not  reported.  As we state in the report, the cost accounting system focuses  primarily on cost recovery.  It does not identify the full costs of the major  activities undertaken by the Bureau in accomplishing the primary purposes  of its water projects, such as irrigation, M&I water supply, power  generation, recreation, fish and wildlife protection, flood control, water  conservation, and land resource management.
As a result, the full costs of, for example, operating the Central Valley  Project, the Examination of Existing Structures Program, or the various  activities associated with operating and maintaining a facility are not  known.  In addition, the Bureau does not report the full costs of  Bureauwide programs in either its annual report or budget documents.  To  report the full cost of Bureauwide programs, the Bureau would need to  include the costs funded through the Policy and Administration  appropriation because many of these programs use Policy and  Administration funds to pay the employees who administer the Bureauwide  programs.
The Bureau does report total costs, in aggregate, by Government  Performance and Results Acts (GPRA) responsibility segment.  However, it  does not distribute all of the Policy and Administration costs to its  responsibility segments.  For example, for fiscal year 2000, the Bureau  made Policy and Administration one of its GPRA responsibility segments  instead of distributing those costs to the other responsibility segments that  Policy and Administration supports.  The other responsibility segments  were: (1) Water and Energy Management and Development, (2) Land  Management and Development, (3) Fish and Wildlife Management and  Development, (4) Facilities Operations, and (5) Facilities Maintenance and  Rehabilitation.  Since the Bureau did not distribute the Policy and  Administration costs, it did not report the full costs of the other  responsibility segments because the Policy and Administration  appropriation funds activities that support the administration of the other  segments.
For fiscal year 2001, the Bureau changed the GPRA responsibility segments  to the Commissioner’s Office and its five regional offices.  The Policy and  Administration costs were distributed to each of these six offices, with the  Commissioner’s Office accounting for over 60 percent of the Policy and  Administration costs.  However, since it made the Commissioner’s Office a  responsibility segment and did not distribute its costs to the five regional  offices, the Bureau did not report the full cost of the regional offices  because the Commissioner’s Office supports the regional offices.
The third major comment by Interior was that distributing Policy and  Administration and Bureauwide program costs would not improve decision  making because these costs are not recoverable, are not controllable by  project and program managers, and should not be aggregated with program  and activity costs because these costs are not appropriated and budgeted  to project-level activities.  We disagree.  The purposes for which managerial  cost accounting information is used are different than those for financial  and budgetary accounting information and public policy decisions  regarding cost recovery that are made through the legislative process.   While managerial cost accounting should be integrated with financial and  budgetary accounting, it is different in that cost accounting information is  developed and tailored to facilitate decision making by program managers,  executives, and external stakeholders such as Members of Congress.   These decisions often relate to one or more of the purposes delineated in  the cost accounting standards, one of which addresses cost recovery.  To  meet these needs, managerial cost accounting may employ data produced  by the financial and budgetary accounting process as well as nonfinancial  or programmatic data, such as units of output.
We understand Interior’s point that Policy and Administration and some  Bureauwide programs have been legislatively excluded from cost recovery.   However this does not mean that these costs should be excluded from  distribution and analysis for the purpose of managerial decision making.   The Congress, executives, managers, and others need cost information in  determining how effectively and efficiently resources are being used,  irrespective of whether the costs are recovered.   Both the Bureau’s  customers and the public have an interest in assuring that resources are  used effectively and efficiently and that the costs can be linked to results  and outcomes. “For performance measurement or other purposes, some entities may want to make a  distinction between controllable and uncontrollable costs with respect to an individual  responsibility segment or a cost center.  The full cost information need not interfere with  this distinction.” “Ultimately, most costs are controllable at a certain level of activity by the entity.  If some of  them are not controllable at a lower level of the organization, they may very well be  controllable at a higher level.  Each segment should concern itself with the costs that are  assigned to it on a cause-and-effect basis.  These costs are often incurred because of a  segment’s demand and use of services from other segments or entities.  Although the  service-receiving segment has no control over the efficiency in producing the service, it can  influence the costs by changing the demand for the service.  For an entity’s top management,  full cost reporting provides it with an overview of how the entity’s various costs, including  the general and administrative costs, are incurred and assigned to the entity’s segments.   The full cost reporting also makes the entity’s top management aware of the costs of  services that it receives from other entities.  The management can closely review those  costs and determine whether actions are needed to control them.” “…as a principle, full cost should include the costs of all resources applied to a program,  activity, and its outputs, regardless of funding sources.”
Interior’s fourth major comment was that implementing our  recommendation would require changes to the Bureau’s accounting system  that would not be cost effective.   We are not aware of any formal Bureau  analysis that has determined what system changes would be required nor  the cost effectiveness of any changes.  However, any changes would be to a  detailed cost accounting system the Bureau already has in place and that  already accounts for most of its direct and indirect costs.  In addition, we  are recommending that any changes be done in conjunction with the  implementation of the department’s cost accounting initiative.  The  department’s interagency work group has recognized that some system  modifications will be necessary for each of Interior’s bureaus.  It formed a  subgroup to identify contractors that the department’s bureaus may already  be working with or are considering working with in implementing ABC  with the intent of maintaining consistency and trying to pool resources  across the department.
Moreover, system costs did not stop the BLM from distributing all of its  costs and making changes to its cost accounting system as it implemented  ABC.  BLM’s implementation of ABC is in part what prompted Interior to  implement ABC department wide.  Although BLM and the Bureau have  different missions and outputs, ABC is not a mission-dependent cost  accounting system and it is being used in both the private and public sector  by a wide range of businesses and federal agencies. BLM’s implementation  of ABC resulted in its identifying activities and producing unit cost  information for 131 outputs and tying these amounts back to its Statement  of Net Costs (full costs).
We will send copies of this report to appropriate House and Senate  Committees; interested members of the Congress; The Honorable Mitchell  E. Daniels, Jr., Director, Office of Management and Budget; and other  interested parties.  This report will also be available free of charge on  GAO’s home page at http://www.gao.gov.  We will also make copies  available to others upon request.
Please call me at (202) 512-9508, or Rob Martin, Assistant Director, at (202)  512-6131 if you or your staff have any questions.  Major contributors to this  report are listed in appendix IV.

Objectives, Scope, and Methodology

In previous work at the Department of the Interior’s Bureau of  Reclamation, we identified certain reimbursable project costs that were  not being recovered by the Bureau.  Based on this and other work we have  performed at the Bureau, we decided to examine the managerial cost  accounting practices it uses in carrying out its financial management and  cost recovery responsibilities.  Our objectives were to determine whether  the Bureau (1) identifies and distributes for management purposes all the  costs it incurs in operating its projects and administering its programs, and  (2) ensures that recoverable costs are identified and recovered from  customers.
The scope of our review included the Bureau’s managerial cost accounting  practices and the Bureau’s treatment of different types of costs related to  its administration and operation of its projects and the delivery of its  programs.  We conducted our audit work at the Bureau’s Denver, Colorado  office and at its Mid-Pacific region.  For comparative purposes, we also  obtained and analyzed information on the managerial cost accounting  practices, and use of Activity Based Cost accounting information, of the  Department of the Interior’s Bureau of Land Management.
The following sections provide details of our methodologies and any  additional restrictions on the scope of our work.

	Determining Whether the Bureau Allocates All Costs to Projects and Programs

We reviewed relevant legislation, accounting standards, and documents,  including financial management laws such as the Chief Financial Officers  Act of 1990 and the Federal Financial Management Improvement Act of  1996; reclamation law; Federal Financial Accounting Standards; a 1998  Bureau report to the Congress on operations and maintenance activities  and overhead; a 1999 Bureau cost accounting report; and Department of  the Interior and Bureau of Reclamation policies, accounting manuals, and  other cost accounting guidance.  We also reviewed the Bureau’s Strategic  Plan and annual reports to determine how managerial cost information is  used or could be used.  We requested and examined the types of cost  accounting reports produced by the Bureau’s financial accounting system.
To determine how the Bureau distributes both direct and indirect costs, we  reviewed Interior and Bureau policy and procedures for distributing costs  and discussed these policies and procedures with Bureau officials.  In  addition, we interviewed knowledgeable personnel to enhance our  understanding and consulted with Bureau Denver office officials to  develop flowcharts that documented how the Bureau’s costs are  distributed to project purposes.

	Determining Whether the Bureau Identifies All Reimbursable Costs and Recovers Those Costs From Customers

To define the full cost of the services provided by the Bureau, we reviewed  (1) Office of Management and Budget (OMB) Circular A-25, which provides  guidance for use in setting fees to recover the full costs of providing goods  and services and (2) Statement of Federal Financial Accounting Standards  (SFFAS) No. 4, Managerial Cost Accounting Concepts and Standards for  the Federal Government.  OMB Circular A-25 defines full cost as all direct  and indirect costs of providing goods and services and is consistent with  guidance for full cost reporting contained in SFFAS No. 4.  We also  reviewed prior GAO reports pertaining to the Bureau’s cost recovery  practices.
We determined the Bureau’s basis for including or excluding costs from  recovery.  We did not independently verify the Bureau’s legal citations for  specific legislation exempting some programs from cost recovery.  We also  reviewed the Fact Finders Act to determine the limitations it places on the  Bureau’s ability to recover costs.
We identified the budget amounts associated with Policy and  Administration and with each of the Bureauwide programs.  We reviewed  and analyzed Bureauwide programs for funding levels, cost recovery  policies and practices, and the legislative basis for these policies and  practices.  We interviewed Bureau officials responsible for many of these  programs, obtained information on the activities performed in these  programs, and reviewed and analyzed the written descriptions of these  programs.  We provided a summary of our analysis to Bureau officials for  their review and comment.
We conducted our review from November 2001 through July 2002 in  accordance with generally accepted government auditing standards.  We  provided the Department of the Interior and the Bureau of Reclamation  with copies of a draft of this report for review and comment.  Written  comments were received and have been reproduced in appendix II.

Comments From the Department of the Interior

Total Policy and Administration and Bureauwide Program Costs In Comparison to the Bureau’s Total Budget, 1997-2002

	Combined Policy and Administration and Bureauwide programs as percent of total Bureau budget

GAO Contact and Staff Acknowledgments

	GAO Contact

	Acknowledgments

In addition to the individual named above, Brian Eddington and Larry Feltz  made key contributions to this report.

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Summary:
What GAO Found

In a previous report (GAO/AIMD-00-127, May 2000), GAO identified reimbursable project costs that were not being recovered by the Department of the Interior's Bureau of Reclamation. In this report, GAO reviewed the Bureau of Reclamation's managerial cost accounting and cost recovery practices. The Bureau does not currently identify and distribute all of the costs it incurs to its specific projects and activities. These costs are not distributed because the Bureau considers them nonreimbursable and because its cost accounting system is used to capture costs related to reimbursable purposes such as irrigation, municipal and industrial (M&I) water supply, and power generation. While GAO recognizes that the Bureau does not have the authority to recover certain costs, such as those funded through the Policy and Administration appropriation, all of the costs should nevertheless be distributed to the relevant activities to provide information useful in managerial decision making. Because not all costs are distributed, information on the full cost of projects and activities is not readily available to the Congress, program managers, and others to facilitate decision making and the allocation of the federal government's resources.