JAN 16 2002

Memorandum

In the Department's Plan for Citizen-Centered Governance, the Secretary outlined a vision for effective program management that implements the President's Management Agenda. Very important in implementing this vision is the availability and use of accurate cost information. The President's governmentwide management initiatives - competitive sourcing, improving financial performance, integrating budget and performance, increasing electronic government, and managing human capital - all require quality cost information.

One very effective tool in understanding and managing costs is Activity Based Costing (ABC). ABC is a cost accounting method that measures the cost of work efforts leading to a specific result. We will implement ABC throughout the Department over the next two years. The successful transition to ABC will provide the linkage of strategic planning, budgeting, costing and performance reporting. It will increase the value we provide to our customers through more efficient operations and enhance accountability to the Congress and the public (by tying costs to performance measures). This approach can provide the Department with an important tool for managers to monitor and evaluate program performance/results and more effectively allocate resources.

The Bureau of Land Management (BLM) is currently using ABC successfully. ABC is a proven costing methodology, and we can learn from BLM's experience. In moving forward to implement ABC, we should be guided by the following principles:

1. Involve senior management to ensure that we actually implement ABC across the Department according to the indicated schedule;
     
2. Define clearly the goals/objectives of programs, and the activities that comprise these programs so that cost can be measured appropriately and linked to performance goals;
     
3. Follow managerial cost accounting standards established for the Federal government by the Federal Accounting Standards Advisory Board;
     
4. Ensure ABC cost -information comes from the bureau's accounting records so that there is no debate about the source of underlying financial data;
     
5. Ensure classification of costs reflect the actual use of resources and not just the tracking of available budgetary resources;
     
6. Ensure the business processes subject to ABC are the important ones to measure from a bureau's perspective;
     
7. Ensure that the bureaus do not attempt to subject so many business processes to ABC that the process becomes unwieldy; and
     
8. Tie the Department's strategic plan outcomes to performance measures and the budget using ABC as a tool.

I am asking each bureau to begin this process. We have established a target to implement two bureaus, Minerals Management Service and the Office of Surface Mining by October 1, 2002. The remaining bureaus and offices will be required to implement ABC by October 1, 2003. Other bureaus and offices should implement ABC pilots in FY 2002 in order to facilitate implementation in FY 2004.

This is a very important initiative to the Secretary and the Department. Lynn Scarlett, Assistant Secretary - Policy, Management and Budget will oversee the effort along with Scott Cameron, Deputy Assistant Secretary - Performance and Management. I am asking for your support in this important initiative.

cc:    Bureau CFOs
        Performance Management Council
        Bureau Budget Officers

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