GAO-06-599R Managerial Cost Accounting Practices 

United States Government Accountability Office

Washington, DC 20548 

April 18, 2006 

The Honorable Todd R. Platts 

Chairman, Subcommittee on Government Management, 

 Finance, and Accountability 

Committee on Government Reform 

House of Representatives 

Subject: Managerial Cost Accounting Practices: Department of Health and Human 

Services and Social Security Administration 

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. For example, the Chief 

Financial Officers (CFO) Act of 1990,1

 contains several provisions related to 

managerial cost accounting, one of which states that an agency’s CFO should develop 

and maintain an integrated accounting and financial management system that 

provides for the development and reporting of cost information. Statement of 

Federal Financial Accounting Standards No. 4, Managerial Cost Accounting 

Concepts and Standards for the Federal Government, and the Joint Financial 

Management Improvement Program’s (JFMIP) Framework for Federal Financial 

Management Systems2

 established accounting standards and system requirements 

for managerial cost accounting (MCA) information at federal agencies. The Federal 

Financial Management Improvement Act of 19963 built on this foundation and 

required, among other things, CFO Act agencies to comply substantially with federal 

accounting standards and federal financial management systems requirements. 

In light of the requirements for federal agencies to prepare MCA information, 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 MCA information as well as how 

governmental managers use cost information to support managerial decision making 

and provide accountability. 

 

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. No. 104-208, div. A., § 101 (f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996). 
 GAO-06-599R Managerial Cost Accounting Practices Page 2 

This report summarizes information provided during our briefing to your staff today 

concerning our review of MCA practices at the Department of Health and Human 

Services (HHS) and the Social Security Administration (SSA). This was our third in a 

series of briefings concerning the status of MCA activities at large government 

agencies. Our first briefing covered the status of MCA activities at the Department of 

Veterans Affairs and the Department of Labor.4

 Our second briefing covered the 

status of MCA activities at the Departments of Education, Transportation, and the 

Treasury.5

 The slides from today’s briefing are presented in enclosure I. 

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 measure the occurrences of 

activities and can include, for example, the number of hours worked, units produced, 

claims paid, grants managed, or time needed to perform individual activities. 

Status of Efforts to Implement Managerial Cost Accounting at HHS and SSA 

Similar to issues that surfaced in our earlier reports, we found a need for stronger 

leadership at HHS to promote and monitor the implementation of MCA 

departmentwide. SSA took a strong leadership role in implementing MCA and 

promoting the use of MCA information departmentwide. 

Department of Health and Human Services

According to an HHS official, MCA at the department level was limited to aggregating 

costs from its operating divisions (OPDIV) to prepare the Statement of Net Cost 

(SNC) and did not focus on preparing MCA information for managerial decision 

making. Furthermore, HHS assigned responsibility for MCA implementation at the 

component level to its 11 OPDIVs, which are disparate in mission and focus, but HHS 

did not take an active leadership role to promote MCA or monitor its implementation 

at its OPDIVs. As a result, department officials did not have information about which 

components had and used MCA, and they had to refer to component officials to 

obtain information on the status and application of MCA for their major programs 

and activities. 

Neither of the two components we reviewed—the Centers for Medicare and Medicaid 

Services (CMS), and the Centers for Disease Control and Prevention (CDC)—had an 

MCA system in place at the component level to routinely allocate costs to activities, 

services, and outputs in support of managerial decision making. At the CMS 

Medicare Program division, an activity-based cost system was developed for 

Medicare contractors to report their costs for reimbursement. CMS officials used 

that cost information to compare contractor costs and seek corrective actions when 

 

4

 GAO, Managerial Cost Accounting Practices: Leadership and Internal Controls Are Key to 

Successful Implementation, GAO-05-1013R (Washington, D.C.: Sept. 2, 2005). 5

 GAO, Managerial Cost Accounting Practices: Departments of Education, Transportation, and the 

Treasury, GAO-06-301R (Washington, D.C.: Dec. 19, 2005). 
 GAO-06-599R Managerial Cost Accounting Practices Page 3 

costs were significantly different than anticipated. CDC officials had not yet 

completed an assessment of their MCA needs. 

In the absence of strong leadership to promote and monitor MCA implementation 

across its OPDIVs, HHS management lacks routine access to reliable cost information 

to inform management decisions. This absence also contributed to a difference 

between HHS expectations and the plans of two OPDIVS for implementing an Oracle 

Projects cost accounting module. HHS officials told us that the Unified Financial 

Management System (UFMS), currently under development with implementation 

expected by fiscal year 2008, is to include an Oracle Projects cost accounting module, 

and that the OPDIVs and the Program Support Center (PSC) will incorporate Oracle 

Projects in their planned UFMS implementation and tailor it to meet their needs. 

However, a CMS official said that CMS had not yet analyzed Oracle Projects to 

determine if it will meet CMS’s MCA needs and was uncertain whether CMS would 

use the module. Similarly, a CDC official said that CDC, a pilot site for 

implementation of UFMS, had no plans to use the module for MCA and had not yet 

completed a full assessment of its MCA needs. Without appropriate evaluation of its 

MCA needs and the Oracle Projects cost accounting module, HHS will not know 

whether the module can provide the necessary MCA information. 

Social Security Administration

SSA’s strong leadership promoting MCA and monitoring its usage and 

implementation, aided by a centrally managed organizational structure and fostered 

by legislative requirements, has resulted in routine use of MCA information for 

management decision making. Further, management focused on establishing a 

system of controls to help ensure the reliability of the data used. SSA reported that it 

started using cost information to manage its programs 30 years ago and is continuing 

to improve and expand its financial management efforts. Enhancements to SSA’s 

MCA system, planned for completion in September 2008, are intended to improve the 

quality, consistency, and accessibility of information used by managers and analysts 

throughout SSA. 

SSA officials said that cost information was used for budgeting, resource allocation, 

and managing operations by determining unit costs and production rates, as well as 

SNC preparation. They also said SSA uses MCA information to allocate 

administrative expenses to the Social Security and Medicare trust funds as required 

by law. 

We identified an opportunity for SSA to use MCA to determine the full costs related 

to fees that SSA collects from some states. In 2005, SSA collected $276 million in fees 

from the states for processing claims to state programs that supplement SSA’s 

Supplemental Security Income (SSI) benefits. The original fees were established by 

law with later provisions permitting yearly increases based on the Consumer Price 

Index or other rates for each state as determined appropriate by the SSA 

Commissioner. SSA had not analyzed the costs related to these fees to determine 

whether the states might be under- or overcharged for full SSA costs incurred. 
 GAO-06-599R Managerial Cost Accounting Practices Page 4 

Recommendations for Executive Action 

We are making three recommendations to the Secretary of Health and Human 

Services and one recommendation to the Commissioner of the Social Security 

Administration. 

Recommendations to the Secretary of Health and Human Services

To help ensure that HHS and its OPDIVS and PSC implement and use reliable MCA 

methodologies, we recommend that the Secretary of HHS 

• take an active leadership role to promote the benefits and uses of MCA; 

• direct appropriate department-level officials to develop procedures to monitor the 

implementation of its MCA policy at its OPDIVs and PSC; and 

• direct appropriate officials to evaluate whether the Oracle Projects module will 

provide MCA information to support decision making at HHS, its OPDIVs, and 

PSC. 

Recommendation to the Commissioner of the Social Security Administration

To better understand the relationship of costs and revenues related to fees SSA 

collects for administering state SSI supplementation programs, the Commissioner of 

SSA should direct appropriate officials to study those costs to determine the full cost, 

including the cost of services provided by other entities for the benefit of SSA. 

Agency Comments and Our Evaluation 

We requested comments on a draft of our briefing presentation from the Secretary of 

Health and Human Services and the Commissioner of SSA or their designees. We 

considered and incorporated, as appropriate, the comments we received by e-mail 

from HHS and by letter from SSA. The comment letter from SSA is reprinted in 

enclosure II. 

Comments from the Department of Health and Human Services

HHS provided technical comments and did not respond to our conclusions and 

recommendations to promote MCA, develop procedures for monitoring MCA 

implementation, and evaluate whether the Oracle Projects module will provide MCA 

information to support decision making at HHS. 

HHS suggested we include information about the “green plan” it is developing, stating 

that it will provide better financial information to managers and that the effort will 

include leveraging UFMS projects to provide MCA data. The HHS green plan 

initiative was undertaken in response to the President’s Management Agenda, which 
 GAO-06-599R Managerial Cost Accounting Practices Page 5 

outlined five governmentwide goals to improve federal management, including 

improved financial performance and budget and performance integration. At the 

time of our review, an HHS contractor had interviewed OPDIV representatives and 

conducted benchmarking research to recommend an approach for developing HHS’s 

green plan. The contractor’s plan for HHS, however, did not identify how UFMS 

would be leveraged to provide MCA data. Accordingly, we did not modify our report 

to address this comment. 

Comments from the Social Security Administration

SSA generally agreed with our findings, conclusions, and recommendation to analyze 

the full cost SSA incurs for processing state SSI supplementation claims in order to 

better understand the relationship of those costs to related fee revenues. SSA agreed 

to consider our recommendation when improvements to its workload system for 

employee time, the Time Allocation System (TAS), is implemented, making it easier 

to perform a detailed analysis to determine the full cost SSA incurs for the state SSI 

supplementation programs. 

SSA also stated that the elements of cost in the state SSI supplementation program 

fee and the impact of imputed costs on that fee cannot be readily determined. These 

kinds of determinations, however, are the essence of cost accounting and, as 

suggested by SSA, may be facilitated by implementation of TAS. 

Scope and Methodology 

Our methodology was consistent with the one employed in our prior reviews of MCA 

practices.6

 To obtain an understanding of how MCA systems at HHS and SSA 

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 

leadership and commitment to the implementation of entitywide cost management 

practices. Using the Standards for Internal Control in the Federal Government7

 as a 

guide, we identified internal controls over the reliability of financial and nonfinancial 

information used in MCA. To determine how managers use cost information to 

support managerial decision making and provide accountability, we obtained an 

understanding of how HHS and SSA use cost accounting data for budgeting, costing 

services or products, preparation of the Statement of Net Cost, managing contractors’ 

reimbursable costs, and other managerial uses through interviews of agency officials 

and a review of documentation provided by the agencies. 

During our review, we visited HHS headquarters in Washington, D.C., and the SSA 

headquarters in Baltimore. We also visited the headquarters of HHS’s largest 

component—CMS—in Baltimore, and held teleconferences with officials at CDC, a 

 

6

 GAO-05-1013R, 12; GAO-06-301R, 7. 

7

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

D.C.: November 1999). 
 GAO-06-599R Managerial Cost Accounting Practices Page 6 

pilot site for implementation of HHS’s new departmentwide financial management 

system, in Atlanta. 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, independent 

public accountant, and GAO reports regarding MCA activities, systems, and data. The 

agencies provided comments on a draft of this report, which we considered and 

incorporated as appropriate. We performed this work from September 2005 through 

March 2006 in accordance with U.S. generally accepted government auditing 

standards. 

— — — — — 

We are sending copies of this report to the Secretary of Health and Human Services 

and the Commissioner of the Social Security Administration; the Director of the 

Office of Management and Budget; and other interested parties. Should you or your 

staff have any questions on the matters discussed in this correspondence, please 

contact me at (202) 512-6131 or martinr@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs can be found on the last page of this 

report. GAO staff who made major contributions to this report are listed in enclosure 

III. 

Sincerely yours, 

Robert E. Martin 

Director, Financial Management and Assurance 
 GAO-06-599R Managerial Cost Accounting Practices Page 7 

Enclosure I 

April 18, 2006, Briefing 

1

Managerial Cost Accounting Practices

Department of Health and Human Services

Social Security Administration

Briefing to the staff of the Subcommittee on Government 

Management, Finance, and Accountability, Committee on 

Government Reform, House of Representatives

April 18, 2006

2

Table of Contents

• Introduction and Objectives

• Scope and Methodology

• Results in Brief 

• Background

• Department of Health and Human Services

• Social Security Administration

• Conclusions

• Recommendations for Executive Action

• Agency Comments and Our Evaluation
 GAO-06-599R Managerial Cost Accounting Practices Page 8 

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.

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 is the third in a series of briefings concerning the status

of MCA activities at large government agencies. 

• This briefing summarizes our observations at the Department 

of Health and Human Services (HHS) and the Social Security 

Administration (SSA).
 GAO-06-599R Managerial Cost Accounting Practices Page 9 

5

Scope and Methodology

• To determine how MCA systems at HHS and SSA generate 

cost information, we interviewed officials and reviewed 

documentation at the HHS and SSA headquarters and at 

selected HHS component agencies, on

• the status of MCA system implementation; 

• departmental guidance, leadership, and commitment to

the implementation of cost management practices 

entitywide; 

• departmental internal controls to help ensure the 

reliability of financial and nonfinancial information used in 

MCA; and 

• any obstacles to managerial costing.

6

Scope and Methodology

• To determine how HHS and SSA managers used cost 

information to support managerial decision making and 

provide accountability, we interviewed officials at the HHS 

and SSA headquarters and at selected HHS component 

agencies on the use of cost accounting data for 

• budgeting; costing activities, services, or products; 

monitoring operations; and enhancing performance 

measures and operational efficiency;

• preparing the Statement of Net Cost; and 

• any other uses.
 GAO-06-599R Managerial Cost Accounting Practices Page 10 

7

Scope and Methodology

• We visited the HHS headquarters in Washington, D.C., and the SSA

headquarters in Baltimore. We also visited the headquarters of 

HHS’s largest component - the Centers for Medicare and Medicaid 

Services (CMS) - in Baltimore, and held teleconferences with 

officials at HHS’s Centers for Disease Control and Prevention 

(CDC), a pilot site for implementation of a new agencywide financial 

management system, in Atlanta.

• 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), independent public accountant, and GAO

reports regarding MCA activities, systems, and data.

• We performed this work from September 2005 through March 2006 

in accordance with U.S. generally accepted government auditing 

standards. 

8

Results in Brief

• At the department level, HHS did not have a MCA system 

focused on managerial decision making. HHS assigned 

responsibility for MCA implementation to its 11 operating 

divisions (OPDIV), which are disparate in mission and focus, 

but did not take an active leadership role to promote MCA or

monitor its implementation at its OPDIVs. Thus, only one of 

the two component agencies we reviewed used MCA.

• An HHS official told us that the department-level focus is on 

aggregating costs for external financial reporting, not MCA. 

• HHS officials told us that the Unified Financial Management 

System (UFMS), currently under development, is to include 

an Oracle Projects cost accounting module.
 GAO-06-599R Managerial Cost Accounting Practices Page 11 

9

Results in Brief

• SSA management took a strong leadership role in 

developing, promoting, and implementing the benefits and 

use of managerial cost accounting policies and procedures 

departmentwide. 

• Further, management focused on establishing a system of 

controls to help ensure the reliability of the data used. 

• SSA reported that it started using cost information to manage

its programs 30 years ago and is continuing to improve and 

expand its financial management efforts.

10

Results in Brief

• The use of cost information varied between HHS and SSA. 

• An HHS official said that HHS used cost information at 

the department level to prepare the Statement of Net 

Cost (SNC). At CMS, in addition to compiling program

costs for the SNC, officials used cost information to 

compare contractor costs and seek corrective actions 

when costs were significantly different than anticipated.

• SSA officials said that cost information was used for 

budgeting, resource allocation, and managing operations 

by determining unit costs and production rates, as well as 

SNC preparation. We also identified an opportunity to 

use MCA in determining the full cost related to certain 

fees that SSA collects.
 GAO-06-599R Managerial Cost Accounting Practices Page 12 

11

Results in Brief

• To address our findings, we made three recommendations to 

HHS and one recommendation to SSA. We received 

comments by e-mail from HHS and by letter from SSA on a

draft of this briefing. We considered and incorporated the 

comments, as appropriate.

12

Background

• The Chief Financial Officers (CFO) Act of 1990 calls for the 

development and reporting of cost information and the systematic

measurement of performance. The FASAB 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 

accounting standards and requirements for MCA at federal 

agencies.1

• The Federal Financial Management Improvement Act of 1996 

builds on the foundation provided by the CFO Act and includes 

requirements for CFO Act agencies to comply with federal 

accounting standards and for the agencies’ systems to comply 

substantially with, among other things, federal financial 

management systems requirements.

1 In 2005, JFMIP’s responsibilities for financial management and oversight were realigned to OMB, the Office of Personnel Management, and the Chief Financial Officer’s Council.
 GAO-06-599R Managerial Cost Accounting Practices Page 13 

13

Background

• MCA involves accumulating and analyzing financial and 

nonfinancial data to allocate costs to organizational pursuits, such 

as performance goals, programs, activities, and outputs in support 

of managerial decision making. The data analyzed depend on the 

operations and needs of the organization. 

• Financial data include the costs of all activities associated with a 

given output, including direct and indirect costs.

• 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

activities.

14

HHS

Background

• HHS’s mission is to enhance the health and well-being of 

Americans by providing for effective health and human services and

fostering advances in sciences underlying medicine, public health,

and social services.

• HHS has 11 OPDIVs that are disparate in mission and focus. 

These include CMS, its largest OPDIV, and CDC, a pilot OPDIV for

implementation of a new agencywide financial management 

system. In addition, the HHS Program Support Center (PSC)

provides business services for the OPDIVs and HHS departmental 

offices.

• In fiscal year 2005, HHS had approximately 67,400 employees and 

reported net outlays of about $581 billion. 

• HHS awarded a reported average of 74,000 grants totaling more 

than $230 billion annually from fiscal years 2001 through 2004. As 

the largest grant-awarding agency in the federal government, HHS 

manages grant programs funding basic and applied science, child 

development, and other health and social services.
 GAO-06-599R Managerial Cost Accounting Practices Page 14 

15

HHS

Background

• CMS had approximately $484.3 billion (83 percent) of HHS’s

reported fiscal year 2005 net outlays, and administered Medicare, 

Medicaid, and other programs. 

• CMS had approximately 4,750 employees in fiscal year 2005

and did most of its work through third-party contractors. There 

were 42 Medicare contractors in 2005. CMS and its Medicare 

contractors process over 1 billion Medicare claims annually. 

The contractors submit an annual budget to CMS for 

administrative costs and throughout the year file reports to draw 

down budgeted funds. At year-end, the contractors file a final 

report on costs incurred. CMS also provides the states with

matching funds for Medicaid benefits. 

• CDC works in the United States and abroad to address public 

health issues. It had approximately 9,400 employees and, with

fiscal year 2005 net outlays of about $5.9 billion, represented about 

1 percent of HHS’s fiscal year 2005 net outlays.

16

HHS 

MCA Systems in Place

• HHS management did not actively support MCA implementation.

• HHS had issued a policy on MCA at components, but it had not 

monitored component compliance.

• Department officials did not have information about which 

components had and used MCA, and they referred us to 

component officials to obtain information on the status and 

application of MCA to their major programs and activities.

• According to an HHS official, MCA at the department level was 

limited to aggregating costs from the OPDIVs to prepare the SNC 

and did not focus on managerial decision making.

• The official also stated that MCA implementation for grants to states

and other entities posed difficulties since HHS did not have access 

to state systems to obtain grant cost information.

• The reported average $230 billion annual grants awards was 

about 40 percent of HHS’s fiscal year 2005 net outlays.
 GAO-06-599R Managerial Cost Accounting Practices Page 15 

17

HHS 

MCA Systems in Place

• According to HHS’s MCA policy issued in 1998, determining the 

cost of an agency’s specific programs and activities is essential for 

effective management of government operations. Each OPDIV is 

responsible for implementing MCA in accordance with its specific

needs. 

• Each OPDIV should determine the appropriate detail for its cost 

accounting processes and procedures, and accumulate and

report the cost of its programs and activities on a regular basis 

for management information purposes. 

• At the department level, the Secretary and assistant secretaries

should be informed of the costs and revenues of each OPDIV 

segment so that they can report the net cost of operating the 

department. 

18

HHS 

MCA Systems in Place

• HHS MCA policy also states that MCA should be a fundamental 

part of the financial management system and, to the extent 

possible, should be integrated with other parts of the system.

• HHS is currently implementing a new financial management 

system, UFMS, a COTS-based Oracle software package, which is 

expected to replace outdated systems by fiscal year 2008. Plans

for UFMS include a module – Oracle Projects – which can be used

for cost accounting.

• An HHS official told us that the OPDIVs and PSC will incorporate 

Oracle Projects in their planned UFMS implementation and tailor it 

to meet their needs. However, a CMS official told us CMS was 

uncertain whether it would use the Oracle Projects cost accounting module for MCA. Similarly, a CDC official said that CDC had no 

current plans to use the module for MCA and had not yet completed 

a full assessment of its MCA needs.
 GAO-06-599R Managerial Cost Accounting Practices Page 16 

19

HHS 

MCA Systems in Place

• HHS believes that UFMS will provide relevant, reliable, and timely financial information to support decision making and cost-effective 

business operations at all levels of HHS. 

• In 2004, we reported that UFMS implementation was at risk of not

fully meeting one or more of its cost, schedule, and performance

objectives, and we made 34 recommendations related to the lack of

disciplined processes, security controls, and human capital issues.2

• In response, HHS reevaluated the UFMS implementation 

schedule and delayed UFMS implementation at CDC, a pilot OPDIV for UFMS implementation, until April 2005.3

• We will review actions HHS has taken on these 

recommendations as part of our normal audit follow-up process.

2 GAO, Financial Management Systems: Lack of Disciplined Processes Puts Implementation of HHS’ Financial System at Risk, GAO-04-1008 (Washington, D.C.: Sept. 23, 2004). 3 GAO, Financial Management Systems: HHS Faces Many Challenges in Implementing Its Unified Financial Management System, GAO-04-1089T (Washington, D.C.: Sept. 30, 2004).

20

HHS 

MCA Systems in Place

• Material weaknesses in internal control can result in inaccurate

data, which may adversely affect any decision based on these data. 

• In fiscal year 2005, HHS’s auditors noted that it continued to 

have serious weaknesses in financial systems and processes. 

Because of system limitations, many OPDIVs recorded 

numerous entries outside of the general ledger system and 

employed intensive manual procedures to prepare the year-end 

financial statements.

• That year, CMS’s auditors noted a material weakness related to

reviewing and processing managed care payments, a lack of 

documentation and procedures to determine the eligibility of 

managed care providers, and a lack of a comprehensive 

methodology in implementation of a new payment system.

• According to an HHS official, the implementation of UFMS will 

address these concerns. UFMS implementation is scheduled to be 

complete in fiscal year 2008.
 GAO-06-599R Managerial Cost Accounting Practices Page 17 

21

HHS 

MCA Systems in Place

• CMS headquarters did not have a MCA system in place to routinely allocate costs to activities, services, and outputs in support of

managerial decision making. 

• CMS officials used cost-finding techniques to prepare the SNC 

for external reporting. This was accomplished by allocating indirect costs to its three operating divisions based on annual 

surveys of labor hours worked.

• A CMS official told us the agency has not yet analyzed Oracle 

Projects to determine if it will meet its MCA needs.

• At the CMS Medicare Program division, an activity-based cost 

(ABC) system was developed for Medicare contractors to report 

their costs for reimbursement. It took cost data from the 

contractors’ accounting systems; distributed the costs among activities (e.g., paying claims); and provided CMS managers with

fully loaded costs of contractor products, services, and activities.

22

HHS 

MCA Systems in Place

• Medicare Program division officials noted that certain controls exist 

to help ensure the reliability of contractors’ financial and 

nonfinancial data: 

• Reviews by CMS of costs and activities self-reported by

Medicare contractors, to check for reasonableness of the data. 

• Reconciliation of Medicare contractors’ self-reported cost data 

to their budgeted amounts and interim expenditure reports.

• Review by independent public accountants of the operational 

effectiveness of internal controls and reviews of Medicare

contractor account receivable balances.

• Documentation of the ABC system used by the Medicare 

contractors.
 GAO-06-599R Managerial Cost Accounting Practices Page 18 

23

HHS 

MCA Systems in Place

• Additionally, the HHS OIG audits CMS’s Medicare 

contractors to determine the allowability of costs claimed 

for reimbursement. For example, we identified 39 OIG 

audits of CMS’s Medicare contractors reported in fiscal 

year 2005. While these audits are a control mechanism, 

they also have raised issues about costs claimed.

• Specifically, these audits uncovered issues related to 

the allowability of Medicare contractor pension costs, 

overhead, and severance and terminations costs.

24

HHS 

MCA Systems in Place

• CDC officials said that it does not have a MCA system in 

place and noted that prior to fiscal year 2005, CDC used a 

cost allocation system (METIFY) to help determine indirect 

program costs. Officials said they stopped using the system 

in fiscal year 2005 when indirect costs were separately 

budgeted.

• In addition, though department-level officials said

components were expected to use the Oracle Projects cost 

accounting module when they implement UFMS, CDC 

officials said that CDC had no current plans to use the 

module for MCA, and had not yet completed a full 

assessment of its MCA needs.
 GAO-06-599R Managerial Cost Accounting Practices Page 19 

25

HHS 

MCA Systems in Place

• A document provided by HHS noted that the nature of some 

grant programs posed challenges and obstacles to 

successfully implementing MCA:

• There is inherent difficulty in tracking performance of and 

obtaining information on mandatory grants, which 

account for 85 percent of HHS’s annual grant funds 

disbursed. 

• Grant-making OPDIVs expressed concern about a 

number of grant management issues, including data lags 

from grantees and the inability to verify and validate data.

26

HHS 

Use of MCA Information

• According to HHS officials, while they had no MCA system in 

place at the department level for managerial decision making, 

they used cost-finding techniques to support budget 

formulation, and they aggregated cost information from CMS, 

CDC, and other OPDIVs to prepare the HHS SNC.

• CMS Medicare contractors used a Medicare ABC system to 

report their costs for reimbursement. 

• CMS officials used the reported cost data to analyze 

contractor performance and compare unit costs of 

activities. Officials said, in some cases, they would seek corrective action if costs were higher than the national average for contractors, or they would transfer 

subsequent contracts to better-performing contractors.
 GAO-06-599R Managerial Cost Accounting Practices Page 20 

27

SSA

Background

• SSA’s mission is to advance the economic security of the nation’s 

people through shaping and managing America’s Social Security 

programs. The programs include Old-Age and Survivors Insurance,

Disability Insurance, and Supplemental Security Income (SSI).

• SSA also does work to support other programs and entities, such 

as the Medicare program at HHS and, in some states, state 

supplementation of SSI. 

• In fiscal year 2005, SSA reported annual operating expenses of 

approximately $10.2 billion and employed approximately 65,000 

people. SSA’s reported total net outlays, including benefit 

payments, were more than $561 billion in fiscal year 2005.

• SSA’s organization is centrally managed with a nationwide network 

of over 1,500 offices, which includes field offices, regional offices, 

teleservice (800-Number) centers, and program service centers.

28

SSA

MCA Systems in Place

• SSA management promoted the benefits of MCA and 

monitored its implementation.

• For example, SSA’s Commissioner committed to better 

integrating financial and budget data for decision making in her opening message of the agency’s 2004 performance and accountability report.

• The status of MCA system conversion to the Managerial Cost Analysis System (MCAS) is tracked as a monthly performance indicator. 

• SSA has implemented a cost system with a unified structure 

for its focused line of programs that collects cost data from its 

nationwide network of offices.
 GAO-06-599R Managerial Cost Accounting Practices Page 21 

29

SSA

MCA Systems in Place

• According to SSA officials, SSA’s basic cost allocation policy for allocating direct and indirect costs to Medicare programs was 

established about 1965. 

• SSA background documentation provided to us noted that SSA’s 

departmentwide MCA system, the Cost Analysis System (CAS), was first put in use in 1976.

• SSA officials said that the agencywide CAS measures costs on 

a full-cost basis, except for those expenses incurred by other

agencies for SSA’s benefit, such as certain postretirement 

costs paid by OPM.

• According to SSA documents, the system integrates data from 

payroll, work measurement, accounting, and other

management information systems, and assigns costs to the 

specific workloads and later to funding sources. 

• Since 1987, SSA has tracked productivity improvement, and has 

current productivity improvement goals of 2 percent per annum.

30

SSA

MCA Systems in Place

• To better integrate data and systems for decision making, 

management is in the process of implementing MCAS, a new 

second-generation MCA system. SSA officials expect that MCAS 

will be implemented by September 2008. It is intended to:

• Eliminate several legacy systems and integrate with a new data 

warehouse – the Social Security Unified Measurement System 

(SUMS) – for operational, performance, and nonfinancial data.

• Update and expand upon the CAS system and, when 

integrated with SUMS, provide more detailed management 

information to meet changing business requirements.

• Help address outstanding audit findings which noted a lack of 

policies, procedures, and documentation concerning the 

collection, review, and reporting of information for some

individual performance indicators.
 GAO-06-599R Managerial Cost Accounting Practices Page 22 

31

SSA

MCA Systems in Place

• A component of the MCAS/SUMS project is the development of the Time Allocation System (TAS). SSA 

documentation noted that: 

• TAS is intended to gather employee time from

workload information drawn directly from an 

individual’s computer terminal, as work is being performed. 

• The new system is expected to enhance the accuracy of employee time from workload data, which under the 

existing CAS system is based on extensive sampling procedures.

• The need for labor-intensive work sampling procedures would be reduced or eliminated.

32

SSA

MCA Systems in Place

• SSA’s system of internal control includes: 

• Demonstrated tone at the top setting SSA’s values, 

competence, philosophy, and operating style. 

• Documented policies and procedures. 

• Financial data integration that includes edit checks and 

variance analysis to help ensure data quality. 

• Routine monitoring and assessment of performance and 

financial information. 

• Annual audits of financial statements, which resulted in 12 

consecutive years of unqualified audit opinions, and an

unqualified auditor’s opinion on internal controls over financial 

reporting for fiscal year 2005 (SSA was the only CFO Act 

agency to receive positive assurance on the adequacy of 

internal controls over financial reporting for fiscal year 2005).
 GAO-06-599R Managerial Cost Accounting Practices Page 23 

33

SSA

MCA Systems in Place

• SSA’s system of internal control also includes regular internal 

review of financial and feeder systems by a contractor for the Office 

of Financial Policy and Operations. According to SSA documents, 

this review program: 

• Tests key systems within a 5-year cycle. 

• Uses GAO’s Federal Information System Controls Audit Manual

(FISCAM) methodology.

• Identifies system weaknesses and unresolved findings from

past reviews and recommends system improvements. 

• For example, in a June 2004 CAS review report, auditors 

recommended improvements in certain documentation, report 

distribution, and general computer controls. While 

management considered the risks associated with CAS to be 

low because the conversion to MCAS is under way, officials 

told us management nonetheless took corrective action on

most recommendations.

34

SSA

Use of MCA Information

• SSA uses MCA information to allocate administrative 

expenses, as required by law, to

• SSA trust funds (e.g., Old Age and Survivors Insurance, Disability Insurance);

• HHS administered trust funds (e.g., Medicare Health 

Insurance and Supplementary Medical Insurance), which according to SSA officials, account for about 15 percent of SSA’s administrative expenses; and 

• general funds (e.g., SSI).
 GAO-06-599R Managerial Cost Accounting Practices Page 24 

35

SSA

Use of MCA Information

• According to SSA documents and SSA officials, MCA data 

from CAS are also routinely used to: 

• Determine unit costs and production rates for various 

time periods. 

• Track workload output, such as transactions processed and pending. 

• Measure actual performance against planned and past 

performance. 

• Assist with budget formulation and execution and the 

development of the Service Delivery Budget – the 

Commissioner’s multiyear plan to improve productivity and fiscal stewardship – which aligns costs and work 

years with overarching performance goals in SSA’s 

strategic plan.

36

SSA

Use of MCA Information

• SSA uses MCA to facilitate recovery of full cost for 

reimbursable activity, such as earnings records requests from 

pension funds and individuals. However, SSA has not 

analyzed the costs related to fees that it charges to states for

processing state supplementation claims to determine 

whether the states might be under- or overcharged for full 

SSA costs incurred.4

• The original fees were established by law with later 

provisions permitting yearly increases based on the 

Consumer Price Index or a different rate as the 

Commissioner of SSA determines is appropriate for each 

state.

4 In fiscal year 2005, SSA collected $276 million in SSI fees from the states. As provided by authorizing legislation, $151.2 million of this amount went to the Department of the Treasury.
 GAO-06-599R Managerial Cost Accounting Practices Page 25 

37

SSA

Use of MCA Information

• SSA expects that implementation of SUMS/MCAS will 

improve the quality, consistency, and accessibility of 

information used by managers and analysts throughout SSA 

by:

• Capturing and counting work more consistently across 

the agency. 

• Improving documentation controls over the workload data 

generation and calculation processes.

• Providing, down to the local manager level, valid 

productivity information and more comprehensive 

information about the full cost of work activities. 

• Minimizing manual data collection and inputs.

38

Conclusions

• Strong leadership is needed to implement MCA across 

government. This is true regardless of whether a department 

chooses a departmentwide system or delegates responsibility 

for system development to component agencies. In either 

case, the reliability of the data used will depend on how well 

system implementation is monitored and whether a sound 

system of internal controls is established.
 GAO-06-599R Managerial Cost Accounting Practices Page 26 

39

Conclusions

Department of Health and Human Services

• In the absence of strong leadership to promote and monitor 

MCA implementation across its OPDIVs, HHS management 

lacks routine access to reliable cost information to inform 

management decisions. This absence also contributed to a 

difference between HHS expectations and CDC and CMS 

plans for implementing the Oracle Projects cost accounting 

module. Without appropriate evaluation of their MCA needs 

and the Oracle Projects cost accounting module, HHS will not 

know whether the module can provide the necessary MCA 

information.

40

Conclusions

Social Security Administration

• SSA’s strong leadership promoting MCA and monitoring its 

usage and implementation, aided by a centrally managed 

organizational structure and fostered by legislative 

requirements, has resulted in routine use of MCA information 

for management decision making. Further opportunities for 

MCA could include analysis of costs and revenues related to 

fees for state supplementation. Enhancements to SSA’s 

MCA system, planned for completion in September 2008, are 

intended to improve data precision of its workload sampling 

procedures.
 GAO-06-599R Managerial Cost Accounting Practices Page 27 

41

Recommendations

for Executive Action

Recommendations to the Secretary of Health and 

Human Services

• To help ensure that HHS and its operating divisions implement 

and use reliable MCA methodologies, we recommend that the 

Secretary of Health and Human Services 

• take an active leadership role to promote the benefits and 

uses of MCA; 

• direct appropriate department-level officials to develop procedures to monitor the implementation of its MCA 

policy at its OPDIVs and PSC; and

• direct appropriate officials to evaluate whether the Oracle 

Projects module will provide MCA information to support decision making at HHS, its OPDIVs, and PSC.

42

Recommendations

for Executive Action

Recommendation to the Commissioner, Social 

Security Administration

• To better understand the relationship of costs and revenues 

related to fees for administering state supplementation 

programs, the SSA Commissioner should direct appropriate

officials to study those costs to determine the full cost, 

including the cost of services provided by other entities for 

the benefit of SSA.
 GAO-06-599R Managerial Cost Accounting Practices Page 28 

43

Agency Comments

and Our Evaluation

• We requested comments on a draft of our briefing

presentation from the Secretary of Health and Human 

Services and the SSA Commissioner or their designees. We 

considered and incorporated, as appropriate, the comments 

we received by e-mail from HHS and by letter from SSA. 

• HHS did not respond to our conclusions and 

recommendations to promote MCA, develop procedures for 

monitoring MCA implementation, and evaluate whether the 

Oracle Projects module will provide MCA information to 

support decision making at HHS.

44

Agency Comments

and Our Evaluation

• In its technical comments, HHS said that it is developing a “green 

plan” to provide better financial information to managers, and that 

the effort will include leveraging UFMS projects to provide MCA 

data.

• The HHS green plan initiative was undertaken in response to the 

President’s Management Agenda which outlined five government- wide goals to improve federal management, including improved 

financial performance and budget and performance integration.

• At the time of this review, an HHS contractor had interviewed 

OPDIV representatives and conducted benchmarking research to 

recommend an approach for developing HHS’s green plan. The

contractor’s plan for HHS, however, did not identify how UFMS 

would be leveraged to provide MCA data. Accordingly, we did not

modify our report to address this comment.
 GAO-06-599R Managerial Cost Accounting Practices Page 29 

45

Agency Comments

and Our Evaluation

• SSA generally agreed with our findings, conclusions and 

recommendation to analyze the full cost SSA incurs for 

processing state SSI supplementation claims. SSA agreed to 

consider our recommendation when TAS is implemented, making it easier to perform a detailed analysis to determine 

the full cost SSA incurs for the state SSI supplementation 

programs.

• SSA also stated that the elements of cost in the state SSI 

supplementation program fee and the impact of imputed

costs on that fee cannot be readily determined. These kinds 

of determinations, however, are the essence of cost 

accounting and, as suggested by SSA, may be facilitated by 

implementation of TAS.
 GAO-06-599R Managerial Cost Accounting Practices Page 30 

Enclosure II 

Comments from the Social Security Administration 
 GAO-06-599R Managerial Cost Accounting Practices Page 31 
 GAO-06-599R Managerial Cost Accounting Practices Page 32 
 GAO-06-599R Managerial Cost Accounting Practices Page 33 

Enclosure III 

GAO Contact and Staff Acknowledgments 

GAO Contact 

Robert E. Martin (202) 512-6131 or martinr@gao.gov

Acknowledgments 

In addition to the contact named above, key contributors to this assignment were 

Jack Warner, Assistant Director; Lisa Crye; Dan Egan; Fred Evans; Barry Grinnell; 

Tom Hackney; Barbara House; Paul Kinney; Lisa Knight; James Moses; and Glenn 

Slocum. 

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