Page 1 GAO-05-1013R 

United States Government Accountability Office

Washington, D.C. 20548

A

September 2, 2005

The Honorable Todd R. Platts 

Chairman

Subcommittee on Government 

Management, Finance, and

Accountability

Committee on Government Reform

House of Representatives

Managerial Cost Accounting Practices: Leadership and Internal Controls 

Are Key to Successful Implementation

Dear Mr. Chairman:

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. 

In particular, the (1) Chief Financial Officers (CFO) Act of 1990,1

 (2) 

Statement of Federal Accounting Standards No. 4: Managerial Cost 

Accounting Concepts and Standards for the Federal Government, and (3) 

Joint Financial Management Improvement Program’s (JFMIP) Framework 

for Federal Financial Management Systems2

 established requirements 

and accounting standards for managerial cost accounting (MCA) 

information at federal agencies. The Federal Financial Management 

Improvement Act of 1996 (FFMIA)3

 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 

1

Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).

2

In 2005, JFMIP’s responsibilities for financial management and policy oversight were 

realigned to the Office of Management and Budget, the Office of Personnel Management, 

and the Chief Financial Officer’s Council.

3

Pub. L. 104-208, div. A., § 101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996).
Page 2 GAO-05-1013R 

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 and your interest in financial management and accountability, 

you 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. We provided the results of our study of the Department of 

Labor (DOL) and the Department of Veterans Affairs (VA) to your office in 

the form of a briefing on July 15, 2005. This report summarizes that briefing 

and adds comments from VA that we had not received in time to 

incorporate in our briefing slides. Copies of those slides are presented as 

enclosure I. 

Summary of Results DOL and VA have different strategies to implement MCA information 

systems. DOL implemented a departmentwide MCA system upon which 15 

of its 18 component agencies have built MCA models tailored to their 

respective needs. At VA, responsibility for MCA implementation rested 

with individual component agencies. When we conducted our review, an 

MCA system was in operation at one of VA’s two largest agency 

components. DOL and VA officials cited several existing and planned uses 

of MCA information by component agencies including budgeting, resource 

allocation, financial reporting, and other managerial decision-making 

purposes.

At both agencies, we noted that MCA-related controls needed 

strengthening. Certain control weaknesses, such as not validating 

nonfinancial data and not documenting policy and MCA procedures, could 

limit the reliability of data used by management to analyze costs and to 

make decisions. We made recommendations to DOL and VA to address 

these weaknesses. Both agencies provided written comments on our 

briefing. DOL generally agreed with our report and recommendations. VA, 

however, generally did not agree with our overall conclusions and 

recommendations. After considering VA’s comments, we continue to 

believe our conclusions and recommendations regarding VA are wellfounded and our responses are provided. We have incorporated the 

comments from both agencies as appropriate. A more detailed discussion 
Page 3 GAO-05-1013R 

of our findings, conclusions, and recommendations for each agency 

follows.

Department of Labor DOL’s mission is to foster and promote the welfare of job seekers, wage 

earners, and retirees of the United States. For fiscal year 2005, DOL has a 

budget of approximately $51 billion. It employs nearly 17,000 people at 10 

mission agencies and 8 support agencies.

DOL’s early MCA pilot efforts in 1999 were unsuccessful. Its current efforts 

were spurred, in part, by Office of Inspector General (OIG) findings 

reported as part of its opinion on the department’s 2002 and 2003 financial 

statements that DOL's accounting system was not in substantial 

compliance with FFMIA because it did not meet MCA requirements. OIG 

recommended that DOL develop an implementation plan for a 

comprehensive departmentwide MCA system. DOL disagreed with the 

OIG’s conclusions that its accounting system was not in substantial 

compliance with FFMIA but did agree to focus more attention on MCA. 

DOL’s Office of the Chief Financial Officer (OCFO) was assigned 

responsibility for MCA development. In its 2004 Financial Data Integration 

Improvement Plan, DOL identified MCA as a way to address its most 

pressing management challenges.

DOL’s new MCA system, Cost Accounting Manager (CAM), which became 

operational during 2004, uses commercial software designed to collect and 

analyze agency financial, workload, and labor distribution data. CAM has 

the capability to provide management with information and reports 

concerning the costs (including substantially all direct and indirect costs) 

of performance goals, activities, and outputs. According to DOL officials, 

CAM has the capability to provide integrated performance and financial 

information, trend analysis, benchmarking data, and “what if” analysis. 

Component-specific CAM models were developed by agency and OCFO 

personnel. Models are in place at all 10 mission agencies and 5 of the 8 

support agencies.4

The CAM system became operational in September 2004. Labor’s 

component agencies continue to refine the models to meet their needs as 

they learn about system capabilities while considering additional 

4

The three agencies without MCA models represent approximately 0.1 percent of the 

department’s budget. 
Page 4 GAO-05-1013R 

applications for CAM. In the meantime, DOL’s MCA policy and procedures 

are being updated to reflect newly developed systems and processes. DOL 

officials told us that component-specific cost model reference manuals 

would be disseminated by the end of fiscal year 2005. The manuals are to 

combine, in one resource, descriptions of the CAM methodology, cost 

model assumptions, output catalogues, and activity dictionaries already 

provided for the agencies in various other forms.

Planned systemwide refinements include (1) automating the data 

extraction and import process, (2) integrating budget and performance 

data, and (3) adding programs, activities, and outputs not included in 

baseline models. Though DOL's department-level MCA staff discusses and 

evaluates MCA activities in ongoing forums with component staffs, DOL’s 

plans did not include a post-implementation review (PIR) of the new CAM 

system. A formal PIR would document the evaluation of differences 

between estimated and actual costs and benefits of the CAM system and 

document lessons learned and control process improvements identified to 

assist in planning and implementing future projects.

DOL’s CAM obtains financial information from its core accounting system, 

while nonfinancial information, such as labor distribution and performance 

data, is obtained from other sources. Various controls over financial data 

are in place. These include (1) annual audits of financial statements, which 

are prepared from the same core accounting system data that is used by 

CAM and which have had unqualified opinions from 1997 through 2004; (2) 

reconciliations of the CAM to the general ledger system; and (3) quarterly 

attestations by component agencies’ senior officials concerning the 

adequacy of internal controls, the accuracy of transaction recording, and 

regulatory compliance as they relate to the quarterly financial closing and 

reporting practices.

According to DOL, the process of building and updating the MCA models 

includes the review of nonfinancial data, such as labor distribution and 

performance data, by supervisors, line managers, senior managers, and 

program administrators. However, DOL acknowledges that controls over 

nonfinancial labor distribution and performance data need further 

attention. In its fiscal year 2004 performance plan, DOL identified the 

validation of such data as one of its challenges. Nonfinancial data is 

equally important as financial data in determining reliable managerial cost 

information because it provides the basis for allocating costs to various 

programs, activities, or outputs. Unreliable nonfinancial data will result in 

unreliable cost allocations. At DOL’s largest component agency, the 
Page 5 GAO-05-1013R 

Employment and Training Administration, the OIG noted high error rates in 

grantee-reported performance data. In 2004, the OIG also raised concerns 

about DOL using those data for decision making. DOL officials responded 

that they were implementing additional data validation systems to address 

these issues. Currently, the OIG is assessing how it will audit CAM data in 

the future.

DOL’s component agencies are focusing on further refining their respective 

models to help manage programs and resources more effectively. Even 

though CAM was implemented only recently, DOL agencies identified many 

uses for CAM data. For example, DOL officials said they have begun to use 

CAM data to identify and analyze (1) program costs across regions; (2) 

comparative costs of grant management activities by type of grant; (3) full 

administrative costs related to the development of policies, regulations, 

and legislative proposals; (4) unit costs of training and employment 

programs; and (5) budget justifications and resource allocations.

Department of 

Veterans Affairs

VA’s mission is to administer laws that provide health care, financial 

assistance, burial benefits, and other services for veterans, their 

dependents, and their beneficiaries. For fiscal year 2005, VA’s total budget 

authorization is about $67 billion. Its two largest component agencies, in 

terms of budget and staff size, are the Veterans Health Administration 

(VHA) and the Veterans Benefits Administration (VBA). Its third and 

smallest agency is the National Cemetery Administration (NCA). With over 

193,000 employees, VHA is VA’s largest component. VHA provides a broad 

spectrum of medical, surgical, and rehabilitative care to veterans. VBA has 

about 13,000 employees who process claims for VA benefits. NCA employs 

about 1,500 people and provides direction and oversight for 120 cemeteries.

By design and policy, VA does not have an entitywide MCA model. 

According to department officials, each of the VA agencies has 

independently built a cost accounting system for identifying, accumulating, 

and assigning the costs of its outputs, though VBA discontinued use of its 

system in 2003. Officials told us that VA’s financial management priority 

has been the removal of a material weakness that was identified by 

independent auditors and related to the lack of an integrated financial 

management system at the department. VA also stated that having a fully 

operational MCA model at each component is important to VA’s decision 

making. 
Page 6 GAO-05-1013R 

VA has published cost accounting policy and guidance that delegate 

implementation responsibility to component agencies. The VA officials we 

interviewed, however, could not identify examples of proactive 

department-level leadership to ensure implementation of MCA at 

component agencies. In the absence of effective department-level 

leadership, the extent of current MCA implementation and use varied at 

VHA and VBA.

VHA uses the Decision Support System (DSS) for MCA. According to VHA 

officials, DSS models significant VHA cost flows and activities. DSS 

facilitates cost and workload analyses of VHA’s locations, programs, 

activities, and individual patients. It obtains data from 49 feeder sources, 

including the VA’s Financial Management System general ledger and VHA’s 

Veteran’s Health Information Systems and Technology Architecture 

(VistA).5

 DSS includes direct and indirect costs for VA hospitals and 

supporting organizations.

DSS was used to generate cost information to support internal budgeting; 

resource allocation; performance measurement; fee reviews; and cost 

findings for programs, activities, and outputs. For example, officials told 

us that a chief pharmacist’s request for additional funds for high-cost 

providers and drugs used at a VA hospital was supported by a DSS analysis 

of the local pharmacy costs for that location.

DSS is also used to compare the costs among the hospitals to determine 

where services can be provided at the lowest cost. In one case, this kind of 

DSS information analysis was used in the decision-making process to 

consolidate inpatient psychiatric services. DSS is also used to determine 

the costs of services provided for individual customers, as DSS records 

allow information to be tracked for individual patients. VHA officials 

informed us that the extent and nature of DSS’s use for management 

decision making varied from one medical facility to the next because of 

different levels of training among medical facility staff.

The completeness and accuracy of the data in DSS depend on the quality of 

data from the feeder systems. Financial information included in DSS is 

subject to controls that help ensure data reliability. VA officials told us that 

they periodically reconcile DSS to the general ledger system and provided 

an example of such a reconciliation. Audits of VA’s annual financial 

5

 VistA is VHA’s nonfinancial workload information system for hospitals. 
Page 7 GAO-05-1013R 

statements, which are based on the same financial information that feeds 

DSS, have resulted in unqualified opinions for fiscal years 1999 through 

2004.

However, both the independent auditor and the OIG have raised concerns 

about the quality of data from DSS nonfinancial feeder systems, such as 

VistA. In their fiscal year 2004 management letter, the independent 

auditors noted an increasing shortage of information technology (IT) staff 

supporting VistA applications and related network infrastructures at the 

medical centers. The independent auditor concluded that “[t]his loss of 

human capital and knowledge in the IT organizational structure places VA’s 

information and its processing capabilities at risk.”

In August 2004, the OIG reported that most of the legacy systems, such as 

VistA, at VA’s Bay Pines Medical Center contained inaccurate data. The 

OIG further stated that this might be a systemic problem throughout VHA. 

According to that report, VHA officials concurred with the OIG and agreed 

to take corrective action.

Since DSS has 49 feeder sources, including VistA, the independent auditor 

and OIG findings raise concerns about the quality of nonfinancial data in 

DSS. Inaccurate nonfinancial data could skew cost calculations and any 

resulting managerial decisions.

The VHA Decision Support Office was unable to readily produce 

documentation of the mechanism used to assign indirect costs to cost 

objects in DSS. The lack of readily available system documentation could 

inhibit efforts to determine whether such costs are properly assigned and 

precludes an opportunity to provide guidance for employees using the 

system, especially new employees.

At VBA, use of its Activity Based Costing (ABC) system was discontinued 

in March 2003 because of the loss of key personnel and the lack of 

credibility among some managers concerning the indirect cost distribution 

methodology, a central part of ABC systems. At the time of our review, 

VBA was not funding or promoting MCA. During our review, we suggested 

that VA implement an appropriate MCA approach at VBA. Subsequently, 

VBA’s CFO stated that VBA would seek funding in its 2007 budget request to 

develop cost accounting capabilities to support measurement goals.
Page 8 GAO-05-1013R 

Concerning NCA, VA officials, advised us that NCA uses ABC. However, 

because of NCA’s relatively small size (less than 1 percent of VA’s 2005 

budget authority), we did not review its MCA processes.

With no MCA system at the department level, VA used manual cost-finding 

techniques to accumulate cost information used for department-level 

external financial reporting and budgeting. While manual cost finding 

techniques are useful and appropriate in certain situations, they also have 

drawbacks such as the time and effort required to prepare results and to 

readjust results for appropriate changes, with the accompanying inherent 

risk of errors. Accordingly, they are not recommended as a surrogate for 

an automated cost accounting system when one is warranted. VA’s 

independent financial statement auditor reported control weaknesses in 

the agency’s manual process to prepare its annual Statement of Net Costs 

for fiscal year 2004. VA uses Excel spreadsheets to prepare its Statement of 

Net Costs. A consequence of using this process is that end-of-year auditor 

adjustments and edits can cause the roll-up process to be reperformed and 

thus be burdensome, time-consuming, and error prone. Also, VA officials 

told us that the documentation of its Statement of Net Cost compilation 

procedures, needed to help ensure the process is completed as designed, 

was not current. The Office of Management and Budget (OMB) 

requirement to prepare the Statement of Net Cost by responsibility 

segment can be satisfied by, and is an effective use of, a reliable, 

agencywide cost accounting system.

Conclusions Leadership and strong internal controls are necessary for the successful 

implementation and operation of MCA. We found that DOL’s recent efforts 

to implement CAM were significantly boosted by its departmental 

leadership. At the same time, maximizing CAM’s contribution to improved 

management will require continuing improvements to system data 

reliability, system documentation, and assessments of system 

effectiveness.

At VA, implementation and continuation of MCA practices were largely 

abandoned at its VBA component. Also, while the DSS system is in place at 

VHA, documentation of system processes and controls and other auditors’ 

concerns about the quality of nonfinancial data require attention in order to 

enhance the reliability of information for managerial decision making. 

Having a MCA system in place at all of VA’s significant component agencies 

could facilitate the automation and integration of the agency’s Statement of 
Page 9 GAO-05-1013R 

Net Cost preparation process with its other financial management systems, 

which would reduce the risk of errors and improve efficiency.

Recommendations for 

Executive Action

We are making recommendations to the Secretaries of the Departments of 

Labor and Veterans Affairs.

In order for DOL to develop MCA information sufficiently reliable for 

ongoing managerial decision-making, leveraging the substantial efforts 

already undertaken by the agency, we recommend that the Secretary of 

Labor direct the Chief Financial Officer of the Department of Labor to:

• Continue steps to verify the accuracy of nonfinancial data used for MCA 

and assess related internal controls over nonfinancial data quality to 

help ensure data reliability.

• Complete the planned update of MCA policies and procedures to ensure 

that department-level guidance is comprehensive and current.

• Complete the compilation and dissemination of component-specific 

CAM reference materials so that the documentation is in a consolidated 

resource that is readily available to system users, managers, and 

auditors.

We also recommend that the Secretary of Labor direct appropriate 

personnel to perform and document a post-implementation review of CAM 

to evaluate whether managerial cost information meets organizational 

objectives and users’ needs. This review should also determine and 

document the extent to which managers use CAM-generated data in 

managing day-to-day operations. 

To help ensure that VA components implement and use reliable MCA 

methodologies, we recommend that the Secretary of Veterans Affairs direct 

appropriate department-level officials to exercise more effective leadership 

and oversight in order to:

• Develop, implement, and operate an appropriate MCA system at VBA to 

improve managerial decision-making.

• Periodically validate the nonfinancial data used by VHA’s DSS team for 

MCA and assess related internal controls.
Page 10 GAO-05-1013R 

• Document the DSS processes and controls for assigning indirect costs 

to cost objects to help ensure that costs are properly assigned.

• Provide adequate numbers of properly trained staff at field locations to 

administer DSS to maximize system availability and utilization.

In an effort to reduce the risks of errors and delays inherent with manual 

processes, we also recommend that the Secretary of Veterans Affairs direct 

appropriate VA officials to:

• Further automate the Statement of Net Cost preparation process.

• Update the Statement of Net Cost compilation procedure 

documentation.

Agency Comments and 

Our Evaluation

DOL generally agreed with our findings and recommendations and 

provided technical comments. In contrast, VA did not agree with our 

overall conclusions and four of our recommendations and provided their 

rationale for their positions as well as technical comments. We considered 

and have incorporated both agencies’ comments, as appropriate.

Although DOL agreed with the thrust of our recommendation to perform a 

PIR on its CAM system, it claimed to have already fulfilled the intent of a 

PIR by performing various separate evaluative activities in ongoing forums. 

While discussions among CAM users and the department-level CAM team 

can provide insight about CAM use and its benefits, a PIR has a formal 

structure that includes documenting the validation of the estimated 

benefits and costs of information systems and the lessons learned to 

provide effective management practices for broader use. We believe that a 

comprehensive PIR undertaken in accordance with OMB Circular No. A130, Management of Federal Information Resources, documents the 

activities performed and their results in a report that would be available for 

the benefit of current and future stakeholders. We modified the language 

regarding the form and documentation required for a PIR to be more 

explicit but made no change to our recommendation.

VA disagreed with our recommendation that it exercise more effective 

departmental leadership to help ensure the implementation of appropriate 

MCA methodologies at VA components. VA stated that, by design and 

policy, it had not implemented a department-level cost accounting system 

because of “broad differences in size, mission, and need” of its constituent 
Page 11 GAO-05-1013R 

agencies. It said that its MCA system was not meant to be the sole source 

in making management decisions but, rather, was to be “used in 

conjunction with other factors in determining how resources are utilized.”

We agree that entities should design their systems to meet their mission 

and operation needs. Our concern is that departmental leadership has not 

effectively encouraged VBA to implement an appropriate alternative 

system since VBA discontinued using its ABC system. A more proactive 

department-level effort is needed to promote effective MCA at VA’s 

constituent agencies to improve informed managerial decision making and 

accountability. Presently, VBA, which provides a broad spectrum of nonmedical services and benefits to veterans and their families, does not utilize 

a MCA system to support decision-making.

VA also disagreed with our recommendation that it periodically validate the 

nonfinancial data used for MCA and periodically assess the related internal 

controls over nonfinancial data quality. VA stated that it had established a 

standardized and comprehensive audit guide identifying the audits that 

should be done to address data reliability. While providing guidance is of 

significant importance, solely establishing comprehensive audit guides 

does not ensure that the guides are followed or that the procedures are 

completed. The department should obtain assurance that the audits are 

conducted and that the data extracts are reconciled to feeder systems. 

Further, to establish MCA data reliability, the department should have 

ongoing procedures in place that test and establish the reliability of the 

data in the nonfinancial feeder systems.

VA disagreed with our recommendation that it document the DSS 

processes and controls for assigning indirect costs to cost objects. VA said 

that it documents processes and controls for assigning direct and indirect 

costs to cost objects and that its guidance for assigning direct and indirect 

costs is updated yearly. This is not what we found when we visited officials 

with the VHA Decision Support Office. During our audit, VA officials were 

unable to produce documentation of its processes used to assign costs to 

cost objects.

VA also disagreed with our recommendation that it take steps to ensure 

that enough IT staff are onboard in field locations to administer DSS. Their 

response was that such an approach was unnecessary, since very few, if 

any, IT staff are involved in the hands-on operation of DSS. They believe 

that providing written and on-the-job technical training for its financial and 

clinical personnel on the technical portions of DSS is sufficient. However, 
Page 12 GAO-05-1013R 

the lack of IT staff with appropriate skills increases the risk that 

information systems and processing capabilities will fail or will be 

unreliable. We believe it is essential that sufficient well-trained IT staff be 

available for the administration and maintenance of all systems from which 

financial and nonfinancial data are derived for use in DSS throughout VHA.

Lastly, VA agreed with our recommendation that it further automate its 

Statement of Net Cost preparation process and update its compilation 

procedure documentation. VA said that it would continue to look at and 

implement, where appropriate, mechanisms to streamline these processes. 

To this end VA indicated that it had an initiative under way to automate the 

preparation of its consolidated financial statements. This is also to include 

the establishment of a financial data warehouse. We applaud these efforts. 

If successfully implemented and linked to the financial reporting 

compilation processes, the financial data warehouse and automated 

compilation procedures should reduce the time, burden, and risk of errors 

inherent in VA’s current compilation efforts.

Scope and 

Methodology

To enhance our understanding of how MCA systems at DOL and VA 

generate cost information, we interviewed officials and reviewed 

documentation on the status of MCA system implementation and the 

related obstacles to managerial costing. We also examined departmental 

guidance and looked for evidence of the DOL and VA leadership and 

commitment to the implementation of entitywide cost management 

practices. Using the Standards for Internal Control in the Federal 

Government6

 as a guide, we examined DOL and VA internal controls over 

the reliability of financial and nonfinancial information used in MCA. To 

determine how DOL and VA managers use cost information to support 

managerial decision making and provide accountability, we obtained an 

understanding of how DOL and VA use cost accounting data for budgeting, 

costing services or products, preparation of the Statement of Net Cost, and 

other managerial uses through interviews of agency officials and a review 

of documentation provided by the departments.

During our review, we visited DOL and VA headquarters in Washington, 

D.C. We interviewed officials about their MCA activities at the 

departmental level, at selected DOL component agencies, and at VA’s two 

6

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999).
Page 13 GAO-05-1013R 

largest component agencies — VHA and VBA. When possible, we 

corroborated information obtained in interviews with agency documents 

such as policies, procedures, system descriptions, and flowcharts. We also 

reviewed prior OIG and GAO reports regarding MCA activities, systems, 

and data. We requested comments on a draft of our briefing presentation 

from the Secretaries of Labor and Veteran’s Affairs or their designees. We 

received written comments from the Chief Financial Officer of the 

Department of Labor and the Deputy Secretary of Veterans Affairs and 

incorporated their comments as appropriate. Their comments are 

reprinted as enclosures II and III, respectively. We performed this work in 

accordance with U. S. generally accepted government auditing standards 

from March through June 2005.

We are sending this report to the Secretaries of Labor and Veterans Affairs; 

Director, OMB; and other interested parties. Should you or your staff have 

any questions on the matters discussed in this correspondence, please 

contact me on (202) 512-6131 or by e-mail at MartinR@gao.gov. Contact 

points for our Offices of Congressional Relations and Public Affairs can be 

found on the last page of this report. Key contributors to this assignment 

were Jack Warner, Paul Begnaud, Lisa Crye, Dan Egan, Barbara House, 

Jerrica Kahle, Paul Kinney, Lisa Knight, Miguel Lujan, James Moses, Lori 

Ryza, Glenn Slocum, and Bill Wright.

Sincerely yours,

Robert E. Martin

Director, Financial Management and Assurance

Enclosures - 3
Page 14 GAO-05-1013R 

Enclosure 1

1

Managerial Cost Accounting Practices

Department of Labor

Department of Veterans Affairs

Leadership and Internal Controls Are Key to Successful Implementation

Briefing to the Subcommittee on Government Management, 

Finance, and Accountability, Committee on Government 

Reform, House of Representatives

July 15, 2005
Enclosure 1

Page 15 GAO-05-1013R 

2

Table of Contents

• Introduction and Objectives

• Scope and Methodology

• Results in Brief

• Background

• Department of Labor

• Background

• MCA Systems in Place

• Uses of MCA Information

• Department of Veterans Affairs

• Background

• MCA Systems in Place

• Uses of MCA Information

• Conclusions

• Recommendations for Executive Action

• Agency Comments and Our Evaluation
Enclosure 1

Page 16 GAO-05-1013R 

3

Introduction and Objectives 

• Authoritative bodies have promulgated laws, accounting 

standards, system requirements, and related guidance to 

emphasize the need for cost information and cost 

management in the federal government: 

• Congress

• Federal Accounting Standards Advisory Board (FASAB)

• Joint Financial Management Improvement Program 

(JFMIP)

• Office of Management and Budget (OMB)

• In light of these requirements, you asked us to determine 

the extent to which federal agencies develop cost 

information and use it for managerial decision making.
Enclosure 1

Page 17 GAO-05-1013R 

4

Introduction and Objectives

• The objectives of our review were to determine how

• federal agencies generate managerial cost accounting 

(MCA) information and 

• government managers use cost information to support 

managerial decision making and provide accountability.

• This briefing covers the results of our review at the 

Department of Labor (DOL) and the Department of Veterans 

Affairs (VA).

• This is the first in a series of briefings concerning the status

of MCA activities at large government agencies.
Enclosure 1

Page 18 GAO-05-1013R 

5

Scope and Methodology

• To determine how MCA systems at DOL and VA generate 

cost information, we interviewed officials and obtained 

documentation on

• the status of MCA system implementation; 

• departmental guidance, leadership, and commitment to 

the implementation of cost management practices 

entitywide;

• departmental internal controls ensuring the reliability of 

financial and nonfinancial information used in MCA; and 

• obstacles to managerial costing. 

•
Enclosure 1

Page 19 GAO-05-1013R 

6

Scope and Methodology

• To determine how DOL and VA managers use cost 

information to support managerial decision making and 

provide accountability, we interviewed officials and obtained 

documentation on

• the use of cost accounting data for budgeting and costing services or products, 

• preparing the Statement of Net Cost, and 

• any other uses.
Enclosure 1

Page 20 GAO-05-1013R 

7

Scope and Methodology

• During our review, we visited DOL and VA headquarters in 

Washington, D.C., and interviewed officials about their MCA 

activities at the department level, at selected DOL 

component agencies, and at VA’s two largest components. 

• When possible, we corroborated information obtained in 

interviews with agency documents such as policies, 

procedures, system descriptions, and flowcharts. We also 

reviewed prior Office of Inspector General (OIG) and GAO 

reports regarding MCA activities, systems, and data. 

• We performed this work from March through June 2005 in 

accordance with U.S. generally accepted government 

auditing standards. 
Enclosure 1

Page 21 GAO-05-1013R 

8

Results in Brief

• DOL and VA adopted different strategies to implement 

MCA.

• DOL implemented a departmentwide MCA system upon 

which 15 of 18 component agencies have built MCA 

models tailored to their respective needs.

• At VA, responsibility for MCA implementation rested with

individual component agencies, and at the time of our 

review an MCA system was in operation at one of VA’s two 

largest agency components. 
Enclosure 1

Page 22 GAO-05-1013R 

9

Results in Brief

• DOL and VA officials cited existing and planned uses of 

MCA information by component agencies for budgeting, 

resource allocation, financial reporting, and other 

managerial decision-making purposes. 

• MCA-related internal controls need strengthening at both 

DOL and VA. Certain control weaknesses, such as not 

validating nonfinancial data and documenting policy and 

procedures, could limit the reliability of data used by 

management to analyze costs and make decisions.

• We received and incorporated comments from DOL, as 

appropriate. We did not receive comments from VA in time 

to evaluate and present them in this briefing. We made 

recommendations to both agencies to address our 

findings.
Enclosure 1

Page 23 GAO-05-1013R 

10

Background

• The Chief Financial Officers (CFO) Act of 1990, Statement 

of Federal Financial Accounting Standards No. 4: 

Managerial Cost Accounting Concepts and Standards for 

the Federal Government, and JFMIP's Framework for 

Federal Financial Management Systems establish

requirements and accounting standards for managerial cost 

accounting information at federal agencies.1

• The Federal Financial Management Improvement Act of 

1996 (FFMIA) builds on the foundation provided by the CFO 

Act and requires CFO Act agencies' systems to comply 

substantially with federal accounting standards and federal 

financial management systems requirements.

1 In 2005, JFMIP’s responsibilities for financial management and oversight were transferred to 

OMB, OPM, and the Chief Financial Officer’s Council.
Enclosure 1

Page 24 GAO-05-1013R 

11

Background

• MCA is the accumulation and analysis of financial and 

nonfinancial data resulting in the allocation of costs to units 

of activity, outputs, or programs. 

• Nonfinancial data measure the occurrences of activities and 

outputs to which costs are assigned.

• Nonfinancial data could include, for example, information on 

the number of hours worked; units produced; grants 

managed; inspections conducted; people trained; or time 

needed to perform certain functions – depending on the 

program, agency, or both. 
Enclosure 1

Page 25 GAO-05-1013R 

12

Department of Labor

Background

• DOL’s mission is to foster and promote the welfare of job seekers, wage earners, and retirees of the United States.

• For FY 2005, DOL has a budget of approximately $57 billion and employs approximately 15,000 people.

• DOL consists of 10 mission agencies and 8 support agencies.
Enclosure 1

Page 26 GAO-05-1013R 

13

Department of Labor 

MCA Systems in Place 

• Early MCA pilot efforts in1999 were unsuccessful. DOL’s current efforts were spurred, in part, by 2002 and 2003 OIG findings that 

DOL’s accounting system was not in substantial compliance with 

FFMIA due to not meeting managerial cost accounting 

requirements. OIG recommended that DOL develop a 

comprehensive departmentwide managerial cost accounting 

system implementation plan.

• DOL disagreed and the Secretary attested that the systems were fully compliant. DOL did agree to focus more attention on MCA.

• DOL’s Office of the Chief Financial Officer (OCFO) was assigned responsibility for MCA development. 

• In its 2004 Financial Data Integration Improvement Plan, DOL identified managerial cost accounting as a way to address its 

most pressing management challenges.
Enclosure 1

Page 27 GAO-05-1013R 

14

Department of Labor

MCA Systems in Place

• According to DOL officials, their new MCA system, Cost 

Analysis Manager (CAM), has the capability to identify, 

accumulate, and assign costs (including substantially all 

direct and indirect costs) to outputs. 

• Component-specific CAM models were developed by 

agency and OCFO personnel. Models are in place at all 10 

mission agencies and 5 of the 8 support agencies.2

• DOL officials told us that they had invested approximately 

$2.6 million to date in CAM.

• The Secretary of Labor discussed CAM in meetings with 

agency heads, according to DOL officials. 

2 According to DOL, the three agencies without MCA models represent approximately 0.1 

percent of the department’s budget.
Enclosure 1

Page 28 GAO-05-1013R 

15

Department of Labor

MCA Systems in Place

• CAM uses commercial software designed to collect 

financial, agency workload, and labor distribution data and 

to analyze the data. 

• According to DOL officials, CAM has the capability to 

provide management with

• information/reports concerning the costs of performance 

goals, activities, and outputs and 

• integrated performance and financial information, trend 

analysis, benchmarking data, and “what if” analysis.
Enclosure 1

Page 29 GAO-05-1013R 

16

Department of Labor

MCA Systems in Place

• DOL declared the CAM system operational in September 

2004.

• Components continue to refine the models to meet their needs as they learn about system capabilities and consider 

additional applications for CAM.

• DOL’s MCA policy and procedures are being updated to reflect newly developed systems and processes. 

• DOL officials told us that component-specific cost model reference manuals would be disseminated by the end of 

fiscal year 2005. The manuals will combine, in one 

resource, descriptions of the CAM methodology, cost 

model assumptions, output catalogs and activity 

dictionaries already provided for the agencies in various 

other forms.
Enclosure 1

Page 30 GAO-05-1013R 

17

Department of Labor

MCA Systems in Place

• Planned systemwide refinements include 

• automating the data extraction/import process,

• integrating budget and performance data, and

• adding programs and outputs not included in baseline 

models.

• DOL’s action plans did not include post-implementation 

review (PIR) of the new CAM system. A formal PIR would 

document

• evaluation of differences between estimated and actual 

costs and benefits and

• opportunities for management to extract “lessons 

learned” and improve control processes. 
Enclosure 1

Page 31 GAO-05-1013R 

18

Department of Labor 

MCA Systems in Place

• CAM incorporates financial information from DOL’s core 

accounting system. Nonfinancial information, such as labor 

distribution and workloads, is obtained from other sources. 

• Various controls over financial data are in place. 

• Annual audits of financial statements have resulted in

unqualified opinions from 1997 through 2004. 

• DOL officials provided an example of a reconciliation of CAM to the general ledger system.

• Senior component officials attest in writing to the adequacy of internal controls, accuracy of transaction 

recording, and regulatory compliance on a quarterly 

basis.
Enclosure 1

Page 32 GAO-05-1013R 

19

Department of Labor 

MCA Systems in Place

• According to DOL, in the process of building and updating the 

MCA models, nonfinancial data such as labor distribution and 

performance data are reviewed by supervisors, line managers, 

senior managers, and program administrators.

• Controls over nonfinancial workload and performance data, 

however, need further attention.

• In its fiscal year 2004 Performance Plan, DOL identified 

validation of data as one of its challenges. 

• At DOL’s largest component agency, the OIG noted high error 

rates in grantee-reported performance data, and raised 

concerns about DOL using those data for decision making.

• DOL officials said they are implementing additional data 

validation systems to address these issues.

• The OIG is assessing how it will audit CAM data in the future.
Enclosure 1

Page 33 GAO-05-1013R 

20

Department of Labor

Uses of MCA Information

• Components are focusing on further refining their respective 

models to help manage programs and resources more 

effectively.

• Even though CAM was only recently implemented, DOL 

components identified many uses for CAM data, the results 

of which are expected to lead to more sound managerial 

decisions. For example, DOL officials said they have begun 

to use CAM data to identify and analyze

• program costs across regions; 

• comparative costs of grant management activities, by type of grant; 

• full administrative costs related to the development of policies, regulations, and legislative proposals; 

• unit costs of training and employment programs; and

• budget justifications and resource allocations. 
Enclosure 1

Page 34 GAO-05-1013R 

21

Department of Veterans Affairs

Background

• VA’s mission is to administer laws that provide health care, financial assistance, burial benefits, and other services to 

veterans, their dependents, and their beneficiaries. 

• In fiscal year 2004, VA had total outlays of $65 billion. Its two largest component agencies, in terms of budget and 

staff size, are the Veterans Health Administration (VHA) and 

the Veterans Benefits Administration (VBA). Its third and 

smallest agency is the National Cemetery Administration 

(NCA).

• VHA has over 193,000 employees and is the largest VA component agency. VHA health care facilities provide a 

broad spectrum of medical, surgical, and rehabilitative care.

VBA has about 13,000 employees who receive and process 

claims for VA benefits. NCA provides direction and 

oversight for 120 cemeteries. 
Enclosure 1

Page 35 GAO-05-1013R 

22

Department of Veterans Affairs

MCA Systems in Place

• By design and policy, VA does not have an entitywide 

MCA model. Each administration has built a cost 

accounting system for identifying, accumulating, and 

assigning the costs of its outputs. However, VBA had 

stopped using its Activity Based Costing system in March

2003.

• According to department officials, VA’s financial 

management priority has been the removal of a material 

weakness that was identified by independent auditors and 

related to the lack of an integrated financial management 

system at the department. 

• VA stated that having a fully operational MCA model at 

each component was important to VA decision making.
Enclosure 1

Page 36 GAO-05-1013R 

23

Department of Veterans Affairs

MCA Systems in Place

• VA has published cost accounting policy and guidance that 

delegate implementation responsibility to component 

agencies.

• VA officials we interviewed, however, could not identify 

examples of proactive department-level leadership or 

coordination to implement MCA at all components or to 

foster an organizational culture conducive to MCA. 

• In the absence of effective department-level leadership, the 

extent of current MCA implementation and use varied at 

VHA and VBA. 
Enclosure 1

Page 37 GAO-05-1013R 

24

Department of Veterans Affairs

MCA Systems in Place

• VHA uses the Decision Support System (DSS) for MCA.

• According to VHA officials, DSS is intended to be a 

comprehensive model of significant VHA cost flows and 

activities, as follows:

• enables cost and workload analyses of locations, 

programs, activities, and individual patients; 

• gets data from 49 feeder sources, including VA’s 

Financial Management System (FMS) general ledger 

and VHA’s Veteran’s Health Information Systems and 

Technology Architecture (VistA); and 

• includes direct and indirect costs for VA hospitals and 

supporting organizations.
Enclosure 1

Page 38 GAO-05-1013R 

25

Department of Veterans Affairs

MCA Systems in Place

• In March 2003, VBA discontinued its use of its Activity Based 

Costing (ABC) system due to loss of key personnel and the 

indirect cost distribution methodology’s lack of credibility with 

some managers. 

• VBA was not funding or promoting MCA at the time of our review.

• During our review, we suggested that VA implement an 

appropriate MCA approach at VBA.

• Subsequently, VBA’s CFO stated that VBA would seek 

funding in its 2007 budget request to develop cost accounting 

capabilities to support performance measurement goals.

• According to VA officials, NCA uses ABC. Because of NCA’s 

relatively small size, we did not review its MCA processes.
Enclosure 1

Page 39 GAO-05-1013R 

26

Department of Veterans Affairs

MCA Systems in Place

• The independent auditor reported control weaknesses in 

VA’s manual process to prepare its annual Statement of Net 

Costs (SNC). VA uses Excel spreadsheets to prepare the 

SNC.

• End-of-year auditor adjustments and edits can cause the roll-up process to be reperformed and thus be 

burdensome, time-consuming, and error-prone. 

• VA officials told us the documentation of its SNC 

compilation procedures was not current.

• The VHA Decision Support Office was unable to readily 

produce documentation of the mechanisms used to assign 

indirect costs to cost objects in DSS. Lack of readily 

available system documentation could inhibit efforts to 

determine whether such costs are properly assigned.
Enclosure 1

Page 40 GAO-05-1013R 

27

Department of Veterans Affairs

MCA Systems in Place

• Financial information included in DSS is subject to controls 

that help ensure data reliability.

• VA officials told us that they periodically reconcile DSS 

to the general ledger system, and they provided an 

example of a reconciliation.

• Annual audits of financial statements have resulted in

unqualified opinions for fiscal years 1999 through 2004. 
Enclosure 1

Page 41 GAO-05-1013R 

28

Department of Veterans Affairs

MCA Systems in Place

• Both the independent auditor and OIG raised concerns 

about the quality of data from DSS nonfinancial feeder 

systems, such as VistA.

• In their fiscal year 2004 management letter, the 

independent auditors noted an increasing shortage of 

information technology (IT) staff supporting VistA 

applications and related network infrastructures at the 

medical centers and concluded that “This loss of human 

capital and knowledge in the IT organizational structure 

places VA’s information and its processing capabilities at 

risk.”
Enclosure 1

Page 42 GAO-05-1013R 

29

Department of Veterans Affairs

MCA Systems in Place

• In August 2004, the OIG found that most of the legacy 

systems at Bay Pines Medical Center contained 

inaccurate data. The OIG further stated that this may be 

a systemic problem throughout VHA. 

• According to the report, VHA officials concurred with the 

OIG’s recommendation and agreed to take corrective 

actions.

• Since DSS has 49 feeder sources, including VistA, the 

above findings from the OIG and the independent auditor 

raise concerns about the quality of nonfinancial data in 

DSS.

• Inaccurate nonfinancial data could skew cost calculations 

and any resulting managerial decisions. 
Enclosure 1

Page 43 GAO-05-1013R 

30

Department of Veterans Affairs

Uses of MCA Information

• With no MCA system at the department level, VA used 

manual cost-finding techniques for external financial 

reporting, and budgeting. 

• Using DSS, VHA generated information to support internal 

budgeting; resource allocation; performance measurement; 

fee reviews; and cost finding for programs, activities, and 

outputs. For example, VA officials told us:

• A chief pharmacist’s request for additional funds at a VA 

hospital was supported by a DSS analysis of the local 

pharmacy’s costs, showing that high-cost providers and 

drugs had to be used at that location. 
Enclosure 1

Page 44 GAO-05-1013R 

31

Department of Veterans Affairs

Uses of MCA Information

• DSS is used to compare the costs among hospitals to 

determine where services can be provided at the lowest 

cost. In one case, DSS information was used in the 

decision process to consolidate inpatient psychiatric 

services.

• DSS is used to determine the costs of services provided 

to individual customers. DSS records allow information 

to be tracked for individual patients. 

• Officials informed us that the extent and nature of DSS use 

for management decision making varied from one medical 

facility to the next because of different levels of training 

among medical facility staff.
Enclosure 1

Page 45 GAO-05-1013R 

32

Conclusions

• Leadership and strong internal controls are necessary for 

successful implementation and operation of MCA. 

• Although DOL’s recent efforts to implement CAM were 

significantly boosted by its departmental leadership, 

maximizing CAM’s contribution to improved management 

will require continuing improvements to system data 

reliability, system documentation, and assessments of 

system effectiveness. 
Enclosure 1

Page 46 GAO-05-1013R 

33

Conclusions

• VA’s department level leadership has been ineffective 

concerning the implementation and continuation of MCA 

practices at VBA. While the DSS system is in place at VHA, 

documentation of system processes and controls and other 

auditors’ concerns about the quality of nonfinancial data 

require attention in order to enhance the reliability of

information for managerial decision-making. Lack of a MCA 

system at all components departmentwide could inhibit 

integration of VA’s SNC preparation process with its other 

financial management systems, a process which could 

reduce the risk of error. 
Enclosure 1

Page 47 GAO-05-1013R 

34

Recommendations

for Executive Action

Recommendations to the Secretary of Labor

1. In response to the OIG’s reported concerns about error 

rates in certain nonfinancial data and DOL’s assessment of 

data validation as one of its 2004 challenges, DOL should 

continue steps to verify the accuracy of nonfinancial data 

used for MCA and assess related internal controls over 

nonfinancial data quality to help ensure data reliability.

2. DOL should complete the update of MCA policies and 

procedures to ensure department level guidance is 

comprehensive and current. 
Enclosure 1

Page 48 GAO-05-1013R 

35

Recommendations

for Executive Action

3. DOL should complete the compilation and dissemination of 

component-specific CAM reference manuals so the 

documentation is in a consolidated resource that is readily 

available to system users, managers, and auditors. 

4. DOL should perform and document a post-implementation 

review of CAM to evaluate whether managerial cost 

information meets organizational objectives and users’ 

needs. This review should also determine the extent to 

which managers use CAM-generated data in managing 

day-to-day operations. 
Enclosure 1

Page 49 GAO-05-1013R 

36

Recommendations

for Executive Action

Recommendations to the Secretary of Veterans Affairs

1. VA should exercise more effective department-level 

leadership to help ensure the implementation and 

continued use of appropriate MCA methodologies at VBA. 

2. To enhance the reliability of data, VA should periodically 

validate the nonfinancial data used for MCA and assess 

related internal controls. 

3. To help ensure that costs are being properly assigned, 

VHA should document the DSS processes and controls

for assigning indirect costs to cost objects.
Enclosure 1

Page 50 GAO-05-1013R 

37

Recommendations

for Executive Action

4. In order to help maximize the utilization of DSS, VHA 

should take steps to ensure that there are adequate 

numbers of properly trained staff at field locations to 

administer DSS. 

5. To reduce the risks of errors and delays from manual 

efforts, VA should further automate the SNC preparation 

process and update SNC compilation procedure 

documentation.
Enclosure 1

Page 51 GAO-05-1013R 

38

Agency Comments 

and Our Evaluation

• We received written comments from DOL on a draft of this 

briefing. DOL generally agreed with our findings, providing 

a number of technical and substantive comments that we 

have considered and incorporated, as appropriate. 

• DOL commented that its agencies have already built 

models on its departmentwide MCA system. We clarified 

our briefing to more fully recognize the implementation 

progress DOL has made.

• DOL highlighted that the three agencies without MCA 

models represent approximately 0.1 percent of the 

department’s total budget. To better indicate the relative 

significance of DOL components that have no MCA 

model, we added that information in a footnote.
Enclosure 1

Page 52 GAO-05-1013R 

39

Agency Comments 

and Our Evaluation

• DOL agreed with our recommendation about verifying 

nonfinancial data and assessing related controls. DOL also 

stated that it recognizes the importance of data quality and 

that it will continue to implement additional procedures as 

necessary, while describing some of the steps it is taking to 

improve nonfinancial data reliability. We clarified our briefing

and our recommendation by recognizing DOL’s ongoing 

efforts to improve those data.

• Agreeing with our recommendation on distributing 

component-specific cost model reference manuals, DOL also 

commented that the agencies have already received, in 

various forms, information to be included in the manuals. We 

clarified our briefing by acknowledging the information DOL 

previously provided to agencies. We also described the 

breadth of the information included in these manuals and 

incorporated in our recommendation, the importance of 

providing that information in a consolidated resource.
Enclosure 1

Page 53 GAO-05-1013R 

40

Agency Comments 

and Our Evaluation

• Although DOL agreed with the thrust of our recommendation 

to perform a PIR of its CAM system, it claimed to have 

already fulfilled the intent of a PIR by performing various 

separate evaluative activities in ongoing forums. However, a 

PIR has a formal structure that includes documenting the 

validation of estimated benefits and costs of information 

systems and the lessons learned to provide effective 

management practices for broader use. We believe that a 

comprehensive PIR undertaken in accordance with OMB 

Circular No. A-130 documents the activities performed and 

their results in a report that would be available for the benefit 

of current and future stakeholders. We clarified our briefing 

regarding the form and documentation required for a PIR but 

made no change to our recommendation.
Page 54 GAO-05-1013R 

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(197004) Page 63 GAO-05-1013R 
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