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Energizing cost accounting: Marine Corps financial managers conduct a thorough analysis of cost accounting processes in order to create accurate, reliable, and relevant financial information.

Start talking about Cost accounting to most people, and you get a "deer in the headlight" look, a large yawn, or a quick end to the conversation. Let's face it; most people don't get excited about the subject. "Cost accounting," you say, "isn't that why we have accountants on the payroll? Accountants worry about those details, not us financial managers and comptrollers. Don't we have enough to worry about, justifying our funding and keeping the commander happy?"

Certainly, we comptrollers and financial managers have a lot on our plates today. We are constantly fighting the battle for money. But more and more, the reality of justifying funds means we must understand and articulate what the program costs and what benefits we get for that money. Yes, that's right--our knowledge and use of cost collection and cost accounting will either make us or break us.

The private sector well appreciates cost issues and relationships because of competition and the need to ensure ultimate profitability. Businesses turn labor, material, plant, and equipment into a product or a service sold to customers. Do it better and cheaper than other businesses, and you make money; don't do it as well as your competition, and you lose money and ultimately go out of business.

"Okay," you say. "That's great for a major corporation, but we're in the Department of Defense. We have missions: We put steel down range and get the bad guys. We protect life, liberty, and the pursuit of happiness."

That is all true, but consider the fiscal realities that impact our funds. The cost of Defense transformation, new weapons, requirements for more military personnel, and the continuing pressure to reduce the cost of the "tail" to increase funding for the "tooth" will affect our future funding levels.

Reality Drives the Train

This is not a temporary condition. In the years ahead, pressure to reduce Defense spending will intensify, driven by the rising cost of interest on the national debt as well as larger social security and health care outlays. The Comptroller General, the Honorable David M. Walker, predicts a dramatic rethinking--and scaling back--of much that the government does within a projected period of austerity perhaps never seen before. (1) General Michael W. Hagee, the Commandant of the Marine Corps, summed it up in the following statement: "The Marine Corps is a combat force, not a business. To be successful, however, we need to support warfighting excellence with well-managed business processes that are both effective and efficient." (2)

Being effective and efficient is the goal of the President's Management Agenda. Getting there is driven, in part, by the Statement of Federal Financial Accounting Standards (SFFAS), Number 4, "Managerial Cost Accounting Concepts and Standards for the Federal Government." Compliance requires the collection of financial information that is meaningful, measurable, comparable, and associated back to the budget. In becoming compliant, the installation commander or program manager is able to answer such questions as the following:

* What does the program cost?

* What did the taxpayers get for their money?

* When the program is compared or benchmarked to similar programs, is it efficient and effective in supporting our warfighting efforts?

Sounds like basic cost-accounting principles....

Developing the Cost Analysis Process

For cost information to have any relevance, data must be measured and collected in the same way for the same things, regardless of Command. In doing this, financial information provided to leadership becomes reliable and comparable for decision making. Cost data are collected by the creation and use of financial or fiscal codes. All transactions entered into an accounting system are linked with fiscal codes that identify organization, appropriation, and the purpose for which the funds were executed. Fiscal codes provide "meaning" to the recorded numbers by identifying who, what, and why funds were executed.

To facilitate cost analysis for its bases and installations, the Marine Corps invested in an activity-based cost (ABC) system to provide greater visibility of cost and outputs. Cost is categorized into 36 macro processes that identify the services that installations provide in support of the operating forces. These processes became known as our Installation Business Model. The initial execution data processed into the ABC models are from the Marine Corps' accounting system, called SABRS (Standard Accounting, Budgeting, and Reporting System).

We ran into one small problem with ABC and SABRS: We were not collecting the cost in SABRS by the approved processes as defined for ABC. Imagine that--we forgot to look at how we were coding "stuff" in the accounting system. Since we needed local interpretation of cost to link accounting data with the business processes, we failed to achieve consistency. Left unchecked, this situation would have reduced dramatically the accuracy and relevance of our ABC models for enterprise analysis of installation costs. Fortunately, we solved this issue by redesigning the SABRS fiscal codes to link execution data directly to the ABC processes. We accomplished the data mapping conversion to ABC processes using the Fund Code (FC) and the Budget Execution Sub-Activity Code (BESA).

The FC in SABRS is used as a short key to identify and link the appropriation, subhead, budget line number, activity/sub-activity group, and program element number (PEN). We placed renewed emphasis on the proper use of the FC for source transactions. This gave us high assurance that funds supporting all base programs were categorized to the proper program element level. Now six of the ABC processes are directly populated with cost data from the PEN level--Environmental, Safety, Communications, Family Services, Child Care, and Facilities Sustainment/Restoration. The other 30 processes are linked to PENs that identify facilities services and other base operation support (OBOS).

To subdivide the facilities services and OBOS PENs into their associated installation process, we used the organizational element of the BESA in SABRS. A BESA code is entered into SABRS with each source document. Prior to fiscal year (FY) 2005, this code was locally created or established at each installation. Beginning in FY 2005, however, the code became centrally managed and standardized for all installations to reflect the business process that funding supports. Figure 1 identifies the business processes and the two-digit BESA used to represent these processes in SABRS. As a result of this change, the same organizational code is being used throughout the Marine Corps to identify cost to an activity, with a high degree of confidence in the recorded execution data.

The columns in the chart reflect the seven major pillars of activity with their associated business processes. The two-digit code in each box identifies the standard BESA code. All codes begin with the same character within a given pillar. For example, for logistics support, all BESA codes begin with "L."

Refining the Process

By this point in our transformation, we had developed high assurance that costs were being collected to the correct program element and installation business process. We also had high confidence regarding the accuracy of object classes reported from source systems such as the Defense Travel System and the Defense Civilian Pay System (DCPS). An object class identifies cost to major expense areas such as civilian labor, employer-paid fringe benefits, printing, and supply purchase. Using these codes permits cost data to be collected against the correct program element, business process, and element of expense.

This was a good start, but it still did not provide enough visibility into those functions supported within each business process. To identify that level of detail, we decided to use cost account codes (CACs). The CACs provide more detail on the "purpose funds were executed" below the BESA, or process, level.

We took a look at those CACs already established in SABRS and were surprised that they numbered around 3,000. Basically, we had more codes to identify minutia than you can shake a stick at. In trying to be everything for everybody, we forgot the KISS principle (Keep It Simple, Stupid). Although our code structure looked great on paper, it couldn't work in reality because no one using the codes would consistently make the right choices. The question we asked was, What detail is needed to provide meaningful and relevant information to leadership?

We got rid of the non-value-added "junk," paring the list down to 310 CACs for Marine Corps installations. This one change dramatically improved the accuracy and relevance of our financial information. For example, we reviewed the security function and went to six CACs to represent the major functions of security operations and management, investigations, working dogs, brig operations, harbor security, and anti-terrorism/force protection. We found that this limited number of CACs produced a sufficient level of detail for program sponsors and management to identify and explain what is being supposed with their operating funds.

Another change we are making for FY 2007 is the adoption of the U.S. Office of Personnel Management (OPM) civilian series codes as the CACs in DCPS for labor processing. The OPM series identifies the individual skill set of each employee hired by an installation. For example, an 0501 is a financial management analyst; an 0318 is a secretary, etc. This new coding schema will enable us to detail in SABRS the skill requirements needed to perform the processes and will enable future benchmarking of labor support by process throughout all installations.

I can hear it now: "Wait a minute! You just got done saying the CAC provides the purpose--and now you seem to be breaking the rules by using the OPM series as the CAC for civilian labor." True, we are breaking that rule in SABRS, but that is where our ABC model comes into play. We will distribute the labor cost to the processes, via the BESA, so that we can let the ABC model distribute to the purpose or the cost object levels (for example, security operations, investigations, and brig operations) within the ABC model. We plan to use the ABC model to record our metric and measurement data. Measurement information coupled with accurate resource collection will provide our price-per-output data for each business process.

An additional change we plan to effect is standardizing the key of platoon code in our military pay system so that it matches the standardized BESA for those marines assigned to installations. This change will produce a "clean" interface with our ABC model to capture military occupations and costs that support business processes. This innovation, coupled with our other standardized costs inputs, produces a "total resource" picture that reflects the cost of performance and process at all installations.

All the code changes in SABRS, coupled with distribution and metric recording capabilities of our ABC models, are geared to providing the resource inputs for each process, as well as the outcomes and outputs for those processes. With regard to compliance, our execution data will reflect the requirements cited in the President's Management Agenda and the Statement of Federal Financial Accounting Standards, Number 4, and will improve the accuracy, reliability, and relevance of financial information provided to our leadership.

Look for a future article that describes how all these data will be linked seamlessly to our programs and budgets to provide the total resource picture from cradle to grave.


(1) Zeller, Shawn; "The Red Zone," Government Executive, February 1, 2005

(2) Marine Corps Business Enterprise Strategic Plan, 3 November 2004
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Author:Chadwick, John M.
Publication:Armed Forces Comptroller
Date:Jan 1, 2007
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