Testimony 

Before the Subcommittee on Government 

Management, Finance, and Accountability, 

Committee on Government Reform, 

House of Representatives 

United States Government Accountability Office

GAO

For Release on Delivery 

Expected at 2:00 p.m. EDT 

Wednesday, September 21, 2005 MANAGERIAL COST 

ACCOUNTING PRACTICES

Departments of Labor and 

Veterans Affairs 

Statement of Robert E. Martin, Director 

Financial Management and Assurance 

GAO-05-1031T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-1031T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Robert Martin 

at (202) 512-6131 or martinr@gao.gov. 

Highlights of GAO-05-1031T, a report to 

Subcommittee on Government 

Management, Finance, and Accountability, 

Committee on Government Reform, 

House of Representatives 

September 21, 2005

MANAGERIAL COST ACCOUNTING 

PRACTICES AT DEPARTMENTS OF 

LABOR AND VETERANS AFFAIRS 

Departments of Labor and Veterans 

Affairs 

The principal purpose of managerial cost accounting (MCA) is to determine 

the cost of achieving performance goals, delivering programs, and pursuing 

other activities. This allows the organization to assess whether the cost is 

reasonable or to establish a baseline for comparison with what it costs 

others to do similar work. Although the factors analyzed depend on the 

operations and needs of the organization, reliable financial and nonfinancial 

data are critical. Without reliable data, the analysis can be distorted. Strong 

leadership that provides a structure for good controls and assessments of 

system operations helps set the conditions for data reliability. GAO found 

that DOL and VA had different approaches to implementing MCA systems 

and that both had some control weaknesses with respect to the quality of 

certain of the data they used and documenting policy and procedures. 

DOL, under the direction of its Chief Financial Officer, implemented a 

departmentwide MCA system upon which 15 of its 18 component agencies 

built MCA models tailored to meet their respective needs. Component 

agencies continue to refine their models, and DOL is updating its policies 

and procedures to reflect the new system and processes. A formal postimplementation review of the system is not planned, however. While DOL 

has various controls in place over financial data, GAO found that controls 

over nonfinancial data need further attention to ensure reliability. DOL 

officials are taking additional steps to address these issues. 

VA adopted a different approach and does not have a departmentwide 

system. Instead, it has delegated this responsibility to the individual 

components. Of the two largest components, only the Veterans Health 

Administration (VHA) had an operating MCA system. The Veterans Benefits 

Administration had discontinued use of its MCA system in 2003 because of 

system credibility and personnel issues. GAO found that the VHA system 

uses data from nearly 50 feeder systems. Other auditors have raised data 

reliability concerns with respect to certain of these systems. Raising 

concerns about data reliability in one of the VHA systems, the VA Office of 

Inspector General stated that this might be a systemic problem. In addition, 

GAO found that VHA was unable to produce documentation of the system 

readily, which could inhibit efforts to determine whether costs are properly 

assigned. With no MCA system overall at VA, it uses manual cost-finding 

techniques for external reporting. VA’s independent financial statement 

auditor found control weaknesses in this manual process, and VA officials 

stated that documentation of compilation procedures for its Statement of 

Net Costs was not current. 

In the past 15 years, a number of 

laws, accounting standards, system 

requirements, and related guidance 

have emphasized the need for cost 

information in the federal 

government, establishing 

requirements and accounting 

standards for managerial cost 

accounting (MCA) information. 

Among them was the Federal 

Financial Management 

Improvement Act of 1996 (FFMIA), 

which required Chief Financial 

Officers Act agencies’ systems to 

comply substantially with federal 

financial management systems 

requirements and federal 

accounting standards, including 

managerial cost accounting 

standards. 

In light of these requirements, the 

Chairman asked GAO to determine 

how federal agencies generate 

MCA information and how 

government managers use that 

information to support their 

decision making and provide 

accountability. GAO briefed 

subcommittee staff on its work at 

the Departments of Labor (DOL) 

and Veterans Affairs (VA) on July 

15 and issued a report on its 

findings that included 

recommendations on September 2, 

2005 (GAO-05-1013R). 
Page 1 GAO-05-1031T 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to talk about managerial cost accounting 

practices (MCA) at the Department of Labor and Department of Veterans 

Affairs. This topic is all about efficiency, productivity, and the best use of 

resources. Taxpayers expect us to act in their best interests in managing 

their money, and managerial cost accounting can help us to do so. To that 

end, over the past 15 years, a number of laws, accounting standards, 

system requirements, and related guidance have emphasized the need for 

cost information and cost management in the federal government, 

establishing requirements and accounting standards for MCA at federal 

agencies. 

The Chief Financial Officers (CFO) Act of 19901

 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 and the systematic measurement of 

performance. The Federal Financial Management Improvement Act of 

1996 (FFMIA)2

 required CFO Act agencies’ systems to comply substantially 

with federal accounting standards and federal financial management 

systems requirements. Federal managerial cost accounting standards,3

which became effective in fiscal year 1997, provide a conceptual 

framework and standards for MCA implementation. The Joint Financial 

Management Improvement Program’s (JFMIP)4

 System Requirements for 

Managerial Cost Accounting,5

 published in 1998, builds upon, and provides 

an approach to implement requirements for cost accounting set forth in 

the CFO Act and federal MCA standards. 

 1

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

2

 Pub. L. No. 104-208, div. A., § 101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996). 

3

 Statement of Federal Financial Accounting Standards No. 4, Managerial Cost Accounting 

Concepts and Standards for the Federal Government. 

4

 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 Officers Council. 

5

 Joint Financial Management Improvement Program, System Requirements for 

Managerial Cost Accounting (Feb. 1998). 
Page 2 GAO-05-1031T 

MCA essentially entails answering a very simple question: How much is it 

costing to do something, be it some extensive overall or program effort or 

the incremental and iterative efforts associated with a project or activity? 

As such, it involves accumulating and analyzing both financial and 

nonfinancial data6

 to determine the costs of achieving performance goals, 

delivering programs, and pursuing other activities. The principal purpose, 

of course, is to assess how much it is costing to do whatever is being 

measured, thus allowing assessments of whether that seems reasonable, 

or perhaps establishing a baseline for comparison with what it costs 

others to do similar work or achieve similar performance. The factors 

analyzed and the level of detail depends on the operations and needs of 

the organization. As cornerstones of this type of analysis, reliable financial 

and nonfinancial data are critical, because if either is wrong the resulting 

analysis can give a distorted view of how well an organization is doing. 

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 how federal agencies generate MCA 

information and how government managers use that information to 

support their decision making and provide accountability. We will be 

looking at 10 agencies in a four-phase study of this issue. DOL and VA are 

the first agencies we reviewed. 

To respond to this first phase of your request, we interviewed officials at 

DOL and VA and reviewed documentation on the status of MCA system 

implementation including successes and obstacles to managerial costing. 

We also reviewed departmental guidance and looked for evidence of DOL 

and VA 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 examined DOL and VA internal 

controls over the reliability of financial and nonfinancial information used 

in MCA. To determine how DOL and VA managers used cost information 

to support managerial decision making and provide accountability, we 

interviewed agency officials, identified examples, and reviewed 

documentation provided by the departments. We briefed your staff on the 

 6

 Nonfinancial data measure the occurrences of activities and can include, for example, 

hours worked, units produced, grants managed, inspections conducted, or people trained. 

7

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

(Washington, D.C.: November 1999). 
Page 3 GAO-05-1031T 

results of our review of these departments on July 15, 2005, and issued a 

report to you highlighting that work on September 2, 2005. 

We found that DOL and VA adopted different approaches for pursuing 

MCA. DOL implemented a departmentwide system upon which 15 of its 18 

component agencies have built MCA models tailored to their respective 

needs. At VA, responsibility for MCA implementation has been vested with 

individual component agencies. I will talk first about DOL and then about 

VA. 

As you know, DOL’s mission is to foster and promote the welfare of our 

country’s job seekers, wage earners, and retirees. 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 initial MCA efforts in the form of pilots in 1999 were unsuccessful. 

Its current efforts were spurred, in part, by its Office of Inspector 

General’s (OIG) findings in 2002 and 2003 that DOL’s accounting system 

was not in substantial compliance with FFMIA because it did not meet the 

accounting standards regarding MCA requirements. The OIG 

recommended that DOL develop a comprehensive departmentwide MCA 

system implementation plan. Although DOL disagreed with the OIG 

conclusions, it did agree to focus more attention on MCA. DOL’s Office of 

the Chief Financial Officer (OCFO) was assigned responsibility for MCA 

development. 

DOL’s new MCA system, referred to as Cost Analysis Manager (CAM), uses 

commercial software designed to collect and analyze agency financial, and 

labor distribution,8

 and performance data. According to DOL officials, 

CAM can provide management with information and reports concerning 

the costs, including most direct and indirect costs, of performance goals, 

activities, and outputs. They also said that CAM can provide integrated 

performance and financial information, trend analysis, benchmarking data, 

and “what if” analysis. Agency and OCFO personnel developed 

component-specific CAM models. These models are in place at all 10 

 8

 Labor distribution is essentially the number of hours worked pursuing a particular 

performance goal, program, or other activity. 

Department of Labor 
Page 4 GAO-05-1031T 

mission agencies and 5 of the 8 support agencies.9 DOL officials told us 

that the Secretary of Labor had discussed CAM regularly in monthly 

meetings with agency managers to emphasize the importance of MCA 

implementation. 

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

component agencies continue to refine the models to meet their needs. In 

doing so, they learn about system capabilities while considering additional 

applications for CAM. DOL is updating its MCA policy and procedures to 

reflect newly developed systems and processes. DOL officials told us that 

component-specific cost model reference manuals would be distributed to 

components by the end of fiscal year 2005. The manuals will combine, in 

one resource, descriptions of the CAM methodology and assumptions and 

other documentation. 

Planned systemwide refinements include (1) automating the data 

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

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

models. However, a post-implementation review (PIR) of the new CAM 

system was not planned. A formal PIR would document the evaluation 

criteria and differences between estimated and actual costs and benefits 

as well as opportunities for management to extract “lessons learned” and 

improve control processes. 

DOL’s CAM incorporates financial information from its core accounting 

system, while nonfinancial information, such as hours worked on 

particular projects or the number of people trained, is obtained from other 

sources. There are various controls over financial data in place, including 

(1) annual audits of financial statements, which have had unqualified 

opinions beginning with fiscal year 1997; (2) reconciliations of 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. 

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

includes supervisory review of nonfinancial data, such as labor 

distribution and performance data, as well as review by line managers, 

 9

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

department’s budget. Initially, implementing MCA at the three smaller support agencies 

was not deemed a priority because of their small size and the nature of the support services 

they provide. 
Page 5 GAO-05-1031T 

senior managers, and program administrators. Controls over nonfinancial 

labor distribution and performance data need further attention, however. 

In its fiscal year 2004 performance plan, DOL identified validation of such 

data as one of its challenges. In the DOL 2004 Performance and 

Accountability Report, the Inspector General stated that prior year audit 

work identified high error rates in grantee-reported performance data at 

the Employment and Training Administration.10 The OIG also raised 

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

recognize the importance of this type of data to cost analysis and told us 

that they are implementing additional data validation systems to address 

these issues. 

DOL’s component agencies are focusing on further refining their 

respective models to help manage programs and resources more 

effectively. Even though CAM was only recently implemented, 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. 

VA, as I will discuss now, has taken a different approach. 

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. For fiscal year 2005, VA’s net 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 administration is the National Cemetery Administration (NCA). 

With over 193,000 employees, VHA is VA’s largest component. VHA health 

care facilities provide a broad spectrum of medical, surgical, and 

rehabilitative care. VBA has about 13,000 employees who process claims 

for VA benefits. NCA’s staff of about 1,500 provides direction and 

oversight for 120 cemeteries. 

 10 The Employment and Training Administration’s fiscal year 2005 budget authority 

represented nearly 91 percent of DOL’s total. 

Department of 

Veterans Affairs 
Page 6 GAO-05-1031T 

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 the independent auditors related to the lack of an 

integrated financial management system at the department. 

VA did state that having a fully operational MCA model at each component 

was important to managerial decision making. Although VA has published 

cost accounting policy and guidance delegating implementation 

responsibility to component agencies, VA officials we interviewed could 

not identify examples of proactive department-level leadership to ensure 

that MCA systems were in place in the component agencies. Not 

surprisingly, the degree to which MCA had been embraced varied at VHA 

and VBA, the two component agencies we reviewed.11

VHA, VA’s largest component in terms of number of employees, provides 

medical care to our country’s veterans. It should be expected to routinely 

know its cost of care and has a system, referred to as the Decision Support 

System (DSS), for that purpose. 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 VA’s Financial 

Management System general ledger and VHA’s Veteran’s Health 

Information Systems and Technology Architecture (VistA).12 DSS includes 

direct and indirect costs for VA hospitals and supporting organizations. 

According to VA officials, DSS was used to generate cost information to 

support internal budgeting, resource allocation, performance 

measurement, fee reviews, and cost analysis 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. They said DSS was also used to compare the costs among the 

hospitals to determine where services can be provided at the lowest cost. 

 11 VHA and VBA accounted for 43 percent and 54 percent of VA’s 2004 budget outlays, 

respectively. 

12 VistA is VHA’s nonfinancial workload information system for hospitals. 
Page 7 GAO-05-1031T 

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. 

VA 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. VA’s 

independent auditor found that some VHA medical centers were 

continuing to use cost data from Cost Distribution Report, an outdated 

cost accounting system, which was replaced by DSS and is not reliable 

because it is no longer maintained. According to the independent auditor, 

the data from these systems were used for a variety of purposes, including 

setting fees, budgeting and cost control, and contracting out decisions.13

As in any MCA system, 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. 

Annual audits of VA’s annual financial statements, which are based on the 

same financial information that feeds DSS, have resulted in unqualified 

opinions for fiscal years 1999 through 2004. However, in its report on the 

audit of VA’s fiscal year 2004 financial statements, the OIG stated that 

extensive efforts were required after the fiscal year end to overcome 

control weaknesses and produce auditable information. The OIG also 

stated that although these efforts resulted in materially correct financial 

statements, reliable information was not readily available during the year. 

These concerns about financial information reliability could extend to DSS 

financial data. 

Further, both VA’s OIG and independent auditor raised concerns about the 

quality of data from DSS nonfinancial feeder systems. 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 also stated that 

this might be a systemic problem throughout VHA. According to that 

 13 This concern was reported to VA management in the IPA’s letter dated November 4, 2004. 

In that letter, the IPA noted that this was a continuing issue that had been previously 

observed. 
Page 8 GAO-05-1031T 

report, VHA officials concurred with the OIG and agreed to take corrective 

action. Since VistA is among the 49 feeder sources for DSS, the 

independent auditor and OIG findings raise concerns about the quality of 

nonfinancial data in that system. 

In addition, in its fiscal year 2004 management letter, the independent 

auditor 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.” As mentioned 

previously, reliable financial and nonfinancial data are both critical in cost 

analysis because if either is wrong the resulting analysis can be distorted. 

The VHA Decision Support Office, which is responsible for operating DSS, 

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. 

VBA, VA’s second largest component, discontinued the use of its Activity 

Based Costing (ABC) system in March 2003 because of the loss of key 

personnel, and because the ABC indirect cost distribution methodology, a 

central part of the ABC system, lacked credibility with some managers. 

Because VBA was not funding or promoting MCA at the time of our 

review, we pointed out to VBA officials the requirements for pursuing 

MCA and highlighted potential benefits of doing so, including some 

examples of using cost information at VHA. Subsequently, according to VA 

officials, the VBA CFO informed them that he would seek funding in VBA’s 

2007 budget request to develop cost accounting capabilities. 

At the department level, VA used manual cost-finding techniques to 

accumulate cost information to prepare the Statement of Net Cost and to 

support budgeting. This process, which uses Excel spreadsheets, can be 

burdensome, time consuming, and error prone when the roll-up process 

must be redone because of end-of-year auditor adjustments and edits. VA 

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

compilation procedures was not current. VA’s independent financial 

statement auditor reported control weaknesses in the agency’s manual 

process to prepare its annual financial statements. 
Page 9 GAO-05-1031T 

In closing, Mr. Chairman, I want to emphasize that strong leadership in the 

departments will be required to implement managerial cost accounting 

across government. This is true regardless of whether the department 

wants a department-wide system or delegates responsibility for system 

development to component agencies. In either case, the leadership will 

need to focus on promoting the benefits of managerial cost accounting, 

monitoring its implementation, and establishing a sound system of 

controls to help ensure the reliability of the data used. 

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. 

VA’s department-level leadership has not taken steps that ensured 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 data require 

attention in order to enhance the reliability of information for managerial 

decision making. 

Our report made recommendations to the Secretary of Labor and the 

Secretary of Veterans Affairs that if fully implemented, should help 

improve data reliability, documentation, and implementation of 

appropriate MCA methodologies. 

Mr. Chairman, this concludes my statement. I would be happy to answer 

any questions you or members of the subcommittee may have. 

For information about this statement, please contact Robert Martin at 

(202) 512-6131 or by e-mail at MartinR@gao.gov . Key contributors to this 

testimony 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. 

Conclusions 

Contact and 

Acknowledgments 

(197010) 
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