oversight

Potential for Improvements in Department of Defense Maintenance Activities Through Better Cost Accounting Systems

Published by the Government Accountability Office on 1971-02-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Potential For Improvements
In Department Of Defense
Maintenance Activities Through
Better Cost Accounting Systems
                             B-159797




BY THE COMPTROLLER    GENERAL
OF THE UNITED  STATES         -         ‘-
                          COMPTROLL!3?      GENERAL     OF   THE      UNlT&D   STATES
                                          WASHINGTON,    D.C.      20546




         B-159797




 /       To the     President       of the Senate     and the
,        Speaker      of the     House    of Representatives


     i           This is our report     on potential    for improvements      in
                                                                                                          \--
         Department      of Defense   maintenance     activities    through better                        ./
         cost accounting     systems.     Our examination        was made pur-
         suant to the Budget      and Accounting     Act, 1921 (31 U.S.C.    53),
         and the Accounting       and Auditing    Act of 1950 (31 U.S.C.    67).

                    The report       identifies       many       inconsistencies            in cost
         accounting        practices        between      various        depot maintenance
         activities      that preclude          optimum         management            in the Depart-
         ment       of Defense.        The Congress            recently       established        a Cost
         Accounting         Standards         Board,     after     concluding        that cost ac-
         counting       standards       were feasible           and necessary             in industry.
         We believe         that similar         standards         are desirable           and neces-
         sary within         the Government.             We plan to work               with the De-
         partment        of Defense        in developing           such standards,

                Copies    of this        report   are being    sent to the Director,
         Office  of Management              and Budget;   the Secretary    of Defense;
         and the Secretaries             of the Army,    Navy,    and Air Force.




                                                                Comptroller             General
                                                                of the United           States
        I
        I   COMPTROLLER
                      GENERAL'S                               POTENTIAL FOR IMPROVEMENTSIN
        1   REPORT
                 TO THECONGRESS                               DEPARTMENTOF DEFENSEMAINTENANCE
                                                              ACTIVITIES THROUGHBETTER COST
                                                              ACCOUNTINGSYSTEMS B-159797

        I

            DIGEST
            ------
        1

            WHYTHEREVIEWWASMADE
                    The Department of Defense (DOD) spends about $7 billion      a year for- depot
                                                     the major overhauling or rebuilding       of
                                                      as made because previous work in this
                                                                          g sstems wern need&
                                                     ~~-~T‘~~~a.~t       ??ef?%%i\deness    and
                                                                                             en _
                                                     ~i.~r~~i"~~"~~~~~~~'-~Ti~ Army, Navy and
                    Air Force all use aircraft    engines and because the annual cost of main-
                    tenance is sizable--exceeding    $300 million.

    I
    I
            FINDINGSAND CONCLUSIONS
                    The cost accounting systems     for depot-level maintenance of aircraft   en-
                    gines differ among the three     services and among various installations
                    within each service, making     impossible any meaningful comparison be-
                    tween facilities  performing    similar work. For example:

                         --The Army and Navy both use job order systems for their cost account-
                            ing, but they use them in different   ways. The Air Force uses a dif-
                            ferent system altogether--one   based on hours of work.  (See pp. 7
                            to 8.)
                         --In engine overhaul, all three services use what is called "exchange
                            material" --rebuilt parts are used in an engine and a trade-in al-
                            lowance is made for the unserviceable  part.   Different costing ar-
                            rangements could result in the Army's showing a cost for exchange
                            material twice that which the Navy and Air Force show. (See ppo 9
                            to IO.)
                         --A considerable quantity of fuel is used in testing engines after
                           overhaul.    The Navy records it as a direct material cost on the job
                           order.    The Amv   :nd Air Force enter fuel as an indirect cost.
                            (See p. 11.)     -

                         --Fringe   benefits, which approximate 30 percent of the labor rate, are
                            listed by the Air Force as indirect  expense. The Army and Navy list
                            the benefits (such as annual and sick leave and Government contribu-
                            tions to life insurance) as an integral  part of the labor cost.
                            (See p0 12.)
*
t
I
            Tear Sheet                                                   FEB. 211971
,                                                      II
     In addition,  all the cost accounting systems embodied some questionable
     practices for accumulating,  allocating,  and reporting maintenance costs.
     {See ch. 3, pp. 16 to 24.)

    Cost accounting systems are essential      tools for management's financial
    control.     Without complete, accurate, and comparable cost information    on
    the $7-billion-a-year    depot-level  maintenance programg DODmanagement
    has little    assurance that its decisions will result in maximum economy
    or effectiveness.


RECOM4ENDATIONS
              OR SUGGESTIONS

    The Secretary of Defense should issue instructions  that will ensure that
    cost accounting systems provide complete, comparable, and accurate in-
    formation on the operations and accomplishments of depot maintenance.
    (See P.27.)

AGENCYACTIONS AND UNRESOLVEDl3SiJES

     DOD has agreed that there are inconsistencies     in cost reporting and has
     stated that many of the deficiencies   set forth in this report will be
     corrected.   Stricter  compliance with applicable   DODdirectives    and in-
     structions  will ensure the desired uniformity    in cost information,   DOD
     believes.

     DOD has agreed that there are some areas in which more explicit       in-
     structions should be issued.    DOD does not believe that a detailed cost
     accounting system should be prescribed for all depot maintenance activ-
     ities because variations  in the activities  make that impracticable.

    GAO believes that, to achieve compatibility       of operations and identify
    areas needing improvement, cost accounting practices should be uniform
    in depots performing like, or similar,      operations,  such as aircraft     en-
    gine maintenance.     Although  it  may not be feasible  to   design one  de-
    tailed cost accounting system to encompass tanks, trucks3 aircraft,
    electronic  items, and all other equipment used by DOD, consistency
    should be achieved to the maximum possible extent for similar-type
    depot-level   maintenance activities.

    Under Public Law 91-379 (August 15, 1970), a Cost Accounting Standards
    Board was established.   The Board is responsible for promulgating cost
    accounting standards designed to achieve uniformity  and consistency un-
    der defense contracts with industry.

    GAO believes that similar  cost accounting standards for maintenance ac-
    tivities  within the Government are also needed and desirable.

    GAOwill continue to work with DOD in improving cost accounting systems
    for depot-level maintenance. Emphasis will be placed on development of


                                      2
     cost accounting standards for application within the Government that
     are comparable to those standards which are to be developed by the Cost
     Accounting Standards Board for industry.


MATTERS
      FORCONSIDERATION
                    BY THE CONGRESS
     This report is furnished to the Congress to advise it of the potential
     for improved efficiency  and economy in DODmaintenance activities  from
     better cost accounting.




Tear Sheer
     I
    I




,
I
                              Contents
                                                                    Pane

DIGEST                                                               1

CHAPTER

        1   INTRODUCTION                                             4

        2   NONCOMPARABLE   METHODSOF ACCOUNTING FOR
            COST                                                     7
               Design differences       in military    cost
                  accounting     systems                             7
               Different    methods for accumulating
                  material   costs                                   8
               Varying methods utilized         to record
                  labor costs                                       11
               Inconsistencies       in costing of indirect
                  expenses                                          13
               Differences     in the extent of overhaul            14

        3   QUESTIONABLECOST ACCOUNTING PRACTICES                   16
               Arv                                                  16
               Nav                                                  18
               Air Force                                            19

        4   CONCLUSIONSAND AGENCYACTION                             25

        5   SCOPE OF REVIEW                                         28

APPENDIX

        I   Explanation    of accounting      terminology           31

   II       Letter   dated June 17, 1970, from Assistant
               Secretary  of Defense (Comptroller)                  33

 III        Principal    officials    of the Department of
               Defense and the military         departments
               responsible      for administration     of activi-
               ties discussed in this report                        46
                       ABBREVIATIONS

DOD   Department   of Defense

GAO   General   Accounting   Office

G&A   general   and administrative
COMPTROLLER
          GENERAL'S                           POTENTIAL FOR IMPROVEMENTSIN
REPORT
     TO THECONGRESS                           DEPARTMENTOF DEFENSEMAINTENANCE
                                              ACTIVITIES THROUGHBETTER COST
                                              ACCOUNTINGSYSTEMS B-159797


DIGEST
------

WHYTHEREVIEWWASMADE
    The Department of Defense (DOD) spends about $7 billion    a year for depot
    maintenance operations-- that is, the major overhauling or rebuilding     of
    military  equipment.   This review was made because previous work in this
    area indicated that improvements in cost accounting systems were needed
    to achieve accurate measurement of the work force's effectiveness     and
    accurate determination   of the costs of equipment repair.   Aircraft  en-
    gine maintenance was chosen for this review because the Army, Navy and
    Air Force all use aircraft    engines and because the annual cost of main-
    tenance is sizable--exceeding    $300 million.


FINDINGSANDCONCLUSIONS
    The cost accounting systems     for depot-level maintenance of aircraft   en-
    gines differ among the three     services and among various installations
    within each service, making     impossible any meaningful comparison be-
    tween facilities  performing    similar work. For example:

         --The Army and Navy both use job order systems for their cost account-
            ing, but they use them in different   ways. The Air Force uses a dif-
            ferent system altogether--one   based on hours of work.  (See pp. 7
            to 8.)
         --In engine overhaul , all three services use what is called "exchange
            material" --rebuilt parts are used in an engine and a trade-in al-
            lowance is made for the unserviceable part.    Different costing ar-
            rangements could result in the Army's showing a cost for exchange
            material twice that which the Navy and Air Force show. (See pp. 9
            to 10.)

         --A considerable quantity of fuel is used in testing engines after
            overhaul.    The Navy records it as a direct material cost on the job
            order.    The Army and Air Force enter fuel as an indirect cost.
            (See p. 11.)

         --Fringe benefits,   which approximate 30 percent of the labor rate, are
            listed by the Air Force as indirect  expense. The Army and Navy list
            the benefits (such as annual and sick leave and Government contribu-
            tions to life insurance) as an integral part of the labor cost.
             (See p. 12.)


                                       1
   In addition, all the cost accounting systems embodied some questionable
   practices for accumulating, allocating,  and reporting maintenance costs,
   (See ch. 3, pp. 16 to 24.)

   Cost accounting systems are essential      tools for management's financial
   control.     Without complete, accurate, and comparable cost information    on
   the $7-billion-a-year    depot-level  maintenance program, DODmanagement
   has little    assurance that its decisions will result in maximum economy
   or effectiveness.


RECOMMENDATIONS
            ORSUGGESTIONS
   The Secretary of Defense should issue instructions  that will ensure that
   cost accounting systems provide complete, comparable, and accurate in-
   formation on the operations and accomplishments of depot maintenance.
   (See p.27.)


AGENCY
     ACTIONSANDUNRESOLVED
                       ISSUES
   DOD has agreed that there are inconsistencies     in cost reporting and has
   stated that many of the deficiencies   set forth in this report will be
   corrected.   Stricter  compliance with applicable   DODdirectives    and in-
   structions  will ensure the desired uniformity    in cost information,   DOD
   believes.

   DOD has agreed that there are some areas in which more explicit       in-
   structions should be issued.    DOD does not believe that a detailed cost
   accounting system should be prescribed for all depot maintenance activ-
   ities because variations  in the activities  make that impracticable.

   GAO believes that, to achieve compatibility     of operations and identify
   areas needing improvement, cost accounting practices should be uniform
   in depots performing like, or similar,    operations,   such as aircraft   en-
   gine maintenance.     Although it may not be feasible to design one de-
   tailed cost accounting system to encompass tanks, trucks, aircraft,
   electronic  items, and all other equipment used by DOD, consistency
   should be achieved to the maximum possible extent for similar-type
   depot-level   maintenance activities.

   Under Public Law 91-379 (August 15, 1970), a Cost Accounting Standards
   Board was established.   The Board is responsible for promulgating cost
   accounting standards designed to achieve uniformity  and consistency un-
   der defense contracts with industry.

   GAO believes that similar  cost accounting standards for maintenance       ac-
   tivities  within the Government are also needed and desirable.

   GAOwill continue to work with DOD in improving cost accounting systems
   for depot-level maintenance.  Emphasis will be placed on development of


                                    2
   cost accounting standards for application within the Government that
   are comparable to those standards which are to be developed by the Cost
   Accounting Standards Board for industry.


MATTERS
      FORCONSIDERATION
                    BY THECONGRESS
   This report is furnished to the Congress to advise it of the potential
   for improved efficiency  and economy in DODmaintenance activities  from
   better cost accounting.
                                CHAPTER 1

                             INTRODUCTION

       Management of any organization          relies upon timely,       ac-
curate,    and reliable     information   concerning      the accomplish-
ments and the costs of its activities.               Accounting    systems,
which are tools of management, are an important                source of
this information.       Becauseofthe      increased emphasis given
by management to detailed         costs of the activities        of orga-
nizational    elements and their production           or output,    numerous
typesofcost      accounting     systems have been designed to pro-
vide this information.          An explanation     of accounting     systems
and terminology      is set forth in appendix I.

         In Government, as in business, properly         designed and
implemented cost accounting           systems are of vital    importance
to management in its effort          to control   costs.   The complexi-
ties of production       and the volume of transactions        involved
in maintaining      today's weapons systems have become so so-
phisticated      and so numerous that high-speed and high-capacity
automatic data processing          systems are needed to provide
timely and accurate information            to management to assist in
fulfilling     this responsibility.

       The cost accounting   systems     used by the depot mainte-
nance activities    of the military      departments are the spe-
cialized   subsystems intended to       provide accurate and reli-
able cost information     concerning     these operations.

       In August 1963 DOD issued Instruction          7220,14, "Uniform
Cost Accounting    for Depot Maintenance,"        which set forth a
uniform cost accounting       structure   for depot maintenance op-
erations.    This instruction      emphasized the need for a uni-
form cost classification       structure    to provide a framework
for assembling and reporting         cost data on depot maintenance
operations   throughout    DOD.

       In October 1968 DOD issued Instruction     7220.29 (super-
seding 7220.14),    "Uniform Depot Maintenance Cost Accounting
and Production    Reporting System," reemphasizing      the need for
a uniform cost accounting    system.   Both of these instruc-
tions prescribed    a broad uniform cost classification


                                    4
structure      for recording       and reporting      cost data for depot
maintenance.        The principal      objective      of these instructions
was to provide for the accumulation,                recording,    and report-
ing of comparable information             on the cost of operations          and
the accomplishments         of depot maintenance activities             in rela-
tion to weapons systems supported and items overhauled or
repaired.        The instruction      stated that such information          was
needed by management to (1) measure productivity,                    (2) develop
performance and cost standards,              (3) direct     management em-
phasis,     (4) review depot maintenance accomplishments                 in re-
lation    to planned programs, (5) review the use made of facil-
ities   supporting      weapon systems, (6). compare costs between
depots and contract         sources for the same type of work, and
(7) provide a catalog of maintenance capability                   that would
show where duplication           of capacity     existed and would indicate
actual and potential          areas for interservice         maintenance sup-
port.

      DOD has estimated     that about one third of its annual
expenditures    for operating    programs is for the maintenance
of equipment by the military        departments.      Depot-level  main-
tenance, which comprises major overhaul or rebuilding             of
equipment at military     depot facilities       or under commercial
contract,    accounts for annual expendiiures         of about $7 bil-
lion.     The performance of in-house depot-level         maintenance
is accomplished at 89 separate facilities           located through-
out the world,

      A review of the validity      of maintenance cost data was
undertaken because of the importance of accurate,       complete,
and comparable cost data in managing the DOD maintenance
program.     Aircraft   engines were selected as the area for re-
view because of their commonality among the military         depart-
ments and because of the amount of funds expended for their
maintenance,       For our review, we selected the J-79-15/8    en-
gines which were used by both the Navy and the Air Force in
the F-4 aircraft,      and the T-53-13 engine which was used by
all military     departments in various helicopters,    The fol-
lowing data for fiscal       year 1969 is applicable to the five
audit sites included in our review:




                                       5
     Total reported     cost of depot mainte-
       nance activities                         $728,801,623
     Maintenance of all engines:
          Number of                                    13,629
          Reported maintenance cost              242,024,672
     Maintenance of J-79-15/8,
       T-53-13:
          Number of                                     3,417
          Reported maintenance cost               50,847,827

The scope of our review    is shown on page 28.




                                 6
                                 CHAPTER 2

         NONGOMPARABIE
                     METHODSOF ACCOUNTING FOR COST

       The methods used by the Army, Navy, and Air Force to
account for costs incurred       in the overhaul of aircraft                en-
gines include many inconsistent         practices       which result        in
noncomparable cost data.        At  the  five    maintenance        activities
included in our review, different           cost accounting          systems
were used by each of the military          departments and different
methods were followed      to determine material,           labor, and in-
direct   costs.   The  cumulative    effect     of   these    differences,
in our opinion,    precludes meaningful         comparisons of cost
data between activities      performing       identical.      or similar
work.    We believe such comparisons would provide management
greater assurance that its decisions would result                   in the
greatest   economies and most effective          operations.

DESIGN DIFFERENCES IN
MILITARY COST ACCOUNTING SYSTEMS

      The cost accounting systems used by the three military
departments to accumulate the costs for the overhaul of air-
craft engines have been independently   designed and do not
provide comparable data for the results   of operations.    A
brief description  of each department's  cost accounting  sys-
tem is presented below.

Army and Navy

       The Army and Navy systems are both job order types of
cost systems which contain many similarities.            The principal
difference   is that in the Navy system costs are recorded to
job orders for individual     engines while the Army accumulates
costs for all engines of the same type against one job order
for a year.    Therefore,   the Navy arrives    at the cost to
overhaul an engine when it closes the job order upon comple-
 tion of the overhaul of that engine.        The Army periodically
prorates a portion    of the costs accumulated to the engines
completed at the end of a period and then retires           the com-
pleted job orders at the end of the fiscal         year.    Other dif-
ferences between these systems pertaining         to specific    costs
elements are discussed later in this report,


                                        7
Air   Force

       The standard process type of cost accounting          system
used by the Air Force is more complex than the job order
systems of the Army and Navy. The Air Force system has
been designed around the use of a standard nu&ber of labor
hours to perform each task of the overhaul operation,               Ac-
tual costs incurred       are accumulated by the various organiza-
tional   elements--divisions,       branches, work centers,     units,
and subunits --of the Maintenance Directorate          at the Air
Force depot.     The costs assigned'to       completed engines are
computed periodically         on the basis of established    labor-hour
standards.

       Labor costs are accumulated at the work centers and
compared periodically       with standard costs for the tasks
completed to determine effectiveness             ratios   for the work
centers.      The labor cost to overhaul an engine is computed
by adjusting     the predetermined      standard cost for labor up-
ward or downward by the effectiveness              ratio.    Therefore,
the validity     of end-item overhaul costs computed under such
a system is, to a large degree, dependent upon the correct-
ness of the established        standards.      Indirect     costs also are
accumulated at the organizational           level and are allocated
to end-item costs in a manner similar              to that used in al-
locating    labor costs.

      Material      cost is accumulated by work center in which
the material      is used; howeveqwhen the end-item cost is
computed, the material         cost accumulated by the work center
is distributed       on the basis of standard labor hours appli-
cable to completed units of the specific           item being repaired.
This distribution       practice   results  in recording   material
costs to functions       that do not use material      and distorts
the amount of cost chargeable to a type of engine overhaul.
This matter is commented upon in chapter 3, page 21, of
this report.

DIFFERENT METHODSFOR ACCUMULATING
MATERIAL COSTS

       The recorded cost of material   represents   a substantial
portion   of the total  cost to overhaul an aircraft    engine.
For example, material    costs account for over 40 percent of

                                    8
the recorded costs for overhauling          J-79 engines.    Certain
material    can be identified     with specific    engines, and its
costs can be accumulated and sho-wn as part of the costs to
overhaul or repair that engine.           Other material   is identifi-
able only to programs or general groupings of engines which
necessitates     allocations    of these costs to the overhauled
engines.     We found that different        methods of accumulating
and recording     these material     costs were being used by the
military    departments.      Some examples of these differences
are discussed below.

Exchange material

      Each of the maintenance activities       reviewed used mate-
rial   in the engine overhaul process which it categorized             as
"exchange material."      This consists    of serviceable       compo-
nents or parts used to replace unserviceable           components
which are removed from engines and turned in to the supply
organization   for repair under other maintenance programs.
The material   cost for these items is accumulated by charg-
ing the supply catalog price for the serviceable            items be-
ing issued and allowing     a credit   adjustment    (trade-in)     for
the unserviceable    items being returned     to supply.        The dif-
ference would be the exchange cost which is charged to the
overhauled engine or to the engine overhaul program and
which, in theory,    is intended to represent      the cost to over-
haul the replaced component.

      The Army uses two different      methods to accumulate costs
for exchangeable items.      Under  one  method, the latest   re-
corded cost to repair     the type of unserviceable    component%
removed from the aircraft     engine(s)   being overhauled is used
as the material    exchange cost.    Under the second method,
when a recorded cost for repair is not available,         40 percent
of the acquisition    price of the component is used as the
material  exchange cost.

     In contrast to the Army methods, the Navy and Air
Force accumulate the costs for exchangeable items, using
20 percent of the acquisition price of the component.

     The effect of the different methods of costing exchange
items can be demonstrated by assuming that the Army, Navy,
and Air Force exchange identical items valued at $1,000.

                                    9
The cost shown for alacing this item on an engine would be
$200 in the Navy and Air Force.        In the Army, it could be
$400 if no recorded cost to repair was available          or it
could be the recorded cost to repair         the component.     Conse-
quently,    a comparison of material     costs for engine over-
haul in the Army with material       costs for overhaul of the
same engine in the Navy or the Air Force could reveal a
significant    difference   although there might be no difference
in the material      used by the overhaul facilities.

Missing      components

        The military  departments do not follow uniform methods
or procedures concerning the treatment         of costs for mate-
rial replaced because various components are missing from
aircraft    engines when they are received for overhaul.          The
Army installation     and one Navy installation     included in our
review recorded the cost of serviceable         components used to
replace missing components on engines being overhauled as
material    costs.   The other Navy installation      and the Air
Force depots did not include the cost of replacing           these
missing components in the engine overhaul costs.,

     Our analysis  at the Navy installation  that excluded the
costs of missing components showed that, during the 8 months
ended May 31, 1969, about $289,000 of material   was issued
to replace missing parts.

Allocation      of material    costs
     The procedures followed    in costing certain    other mate-
rial which was not readily    and economically   identifiable  to
any specific  engine differed   significantly.

        At one Navy facility,    these material       costs were col-
lected separately     and then allocated      to overhauled engines
and to repaired     engines in an arbitrary      3 to 1 ratio.      An-
other Navy facility      charged the same kind of material          costs
directly    to the benefiting    engine program--either        overhaul
or repair.     These  charges   were  then  distributed     equally   to
the individual    engines in process within         that program,

      The Army activity        and one Air Force activity    also
charged such material         costs directly to the benefiting

                                       10
engine program.    Their procedures differed     from the second
Navy activity   above in that no distribution      of material
charges was made to individual     engines within    the program.

      The other Air Force activity           had still another proce-
dure for distributing       material     costs to overhaul and repair
programs.    Material     was first    charged to individual     engine
components that were applicable           to multiple  programs.    Then,
on a component-by-component          basis, these costs were distrib-
uted to the various overhaul and repair programs in the
ratio of standard labor hours in each overhaul and repair
program to total      standard labor hours in all programs.

Costing   engine   fuel

       The cost of fuel used in the testing      of engines is also
treated differently     in the accumulation    of costs.    After an
engine has been overhauled or repaired,        it is tested to en-
sure that operating     requirements  such as thrust and fuel
consumption meet the performance standards.         If an engine
does not meet all the standards,      it requires   adjustment    and
retesting.     This process results   in the use of a consider-
able quantity    of engine fuel at the depot facilities.         The
Navy records the cost of this fuel as material          cost to in-
dividual   job orders.    However, the Army and Air Force re-
cord it as an indirect      expense.

VARYING METHODSUTILIZED TO
RECORDLABOR COSTS

      Different  methods were followed,   also, in the accumula-
tion of labor costs.     Various labor rates were utilized,
and fringe benefits    and overtime premium pay were accumu-
lated and recorded differently.      These inconsistencies  are
discussed below.

Labor rates

        In the Army and Air Force, the rates used in the de-
velopment of labor costs represent    the estimated    annual
average hourly rate of pay computed for each work center.
The difference    between this rate, which is referred     to as
a standard or average rate, and the actual payroll       rate is
identified    as the labor variance and is included as a part
of indirect   expenses.   The Navy develops its labor costs
through the use of the actual payroll      rates for the workers
performing   the maintenance tasks.   Therefore,     no variance
amount exists   to be included as indirect     expenses in the
Navy,

Fringe     benefits

         Fringe benefits--  such as annual and sick leave and
Government contributions       to life   insurance,    health insur-
ance, and retirement--which       approximate     30 percent of the
labor rate,     are included as labor costs at Army and Navy
facilities.      The Air Force includes      these fringe    benefits
as a part of its indirect       expense.     The difference     in these
methods can be illustrated       by the following      example.

         If a labor rate were $4 per hour, the Army and Navy
         would include about $5.20 ($4 plus $1.20 for fringe
         benefits)  as the cost of labor for each hour worked.
         The Air Force would show $4 per hour as its labor cost,
         and the $1.20 would be recorded as indirect    expense.
         Therefore,   in comparing labor costs for similar   main-
         tenance tasks or engines,    the Army and Navy would show
         a labor cost that would be about 30 percent higher
         than the labor cost shown by the Air Force.

Overtime     premium pay

      Overtime premium pay is the differential        paid to an em-
ployee for working in excess of the normal hours.           The Army
and Navy include overtime premium pay in labor costs, while
the Air Force includes   it in indirect     expenses.     The follow-
ing example illustrates    this difference.

         Using the labor rate of $4, as above, cost of labor for
         eachovertimehour     worked would be shown as follows.
         The Army and Navy would include $7.20 as labor costs,
         (l-1/2   times the labor rate plus 30 percent of base
         labor rate for fringe benefits).     The Air Force would
         consider $4 as labor cost and $3.20 as indirect      expense.




                                    12
INCONSISTENCIES IN COSTING OF
INDIRECT EXPENSES

      Costs which cannot be identified        readily    with an over-
hauled or repaired    item are normally     shown as indirect       ex-
penses.    These expenses are generally       classified     as either
production   overhead expenses or general and administrative
(G&A) expense s and are allocated       to units of production.
We noted inconsistencies       in the types of costs included in
both categories    of indirect    expenses.

Production    overhead

        Those costs considered as production          overhead varied
significantly     among the military       departments.      The Air Force
considered all costs,       other   than  material    and  labor  costs,
which originated     within    the maintenance facility        as produc-
tion overhead expense.         The Army and Navy considered some
of the costs originating        within   the maintenance facility        as
production    overhead but excluded others.           Other types of
costs, such as the fringe benefits           and overtime premium dis-
cussed previously,      were also considered differently          by the
services.

       The above differences      are illustrated      by the ratios     of
production    overhead expenses to direct         labor expenses.       For
periods within     the secondhalfof       fiscal   year 1969, these
ratios   approximated    175 percent,     90 percent,     and 60 percent
for the Air Force, Army, and Navy, respectively.               These dif-
ferences are not indicative        of the actual variances        in the
costs to perform like functions         but are rather the results
of the inclusion      or exclusion   of different      types of costs
in the production      overhead of each service.          When such vari-
ations exist in the ratios        of categories      of costs, it is
impossible,    without   voluminous   analysis,      to make meaningful
comparisons of the costs incurred by different              organizations
to overhaul or repair like items.

General and administrative
expenses

      In determining the various costs to be included in G&A
expenses, Air Forcemethods again significantly    differed
from those of the other services.    The Air Force considered

                                     13
only those costs originating           on the base complex outside
the maintenance activity         as G&A expenses.      These costs are
referred   to as station     support cost and include the cost
of police,    fire protection,       and such headquarters1       costs
as the commander's office,          planning,   personnel,    controller,
and data processing      services.       On the other hand, the Army
and Navy included costs originating            both within    and outside
the maintenance complex in their G&A expenses.                For example,
at one Navy facility,       station     support costs represented
only about 30 percent of the C&A expense.              The other 70 per-
cent of C&A expense was for cbsts originating              within    the
maintenance facility      which the Air Force would have included
in production     overhead.
       Although the Army and Navy prorated their G&A expenses
to overhauled engines, the Air Force did not consfstently
include G&A expenses in engine overhaul cost,               However, cur-
rent Air Force regulations,         not implemented at the time of
our review, require       Air Force activities      to include G&A ex-
penses as a part of the costs to overhaul engines in future
reports,     Even upon full     implementation,     the G&A expenses of
the Air Force will not be comparable to those of the other
services    because of the differences        in the makeup of the
costs considered as G&A expenses,,          The  inclusion    or exclusion
of certain     categories    of costs from G&A expenses makes com-
parisons,    without analysis and reconstruction           of the costs,
impracticable.
DIFFERENCES IN THE EXTENT
OF OVERHAUL

       Aircraft     engines are generally  stored and shipped in
specially      designed and constructed   metal containers.     These
containers,      known as cans, are designed for a specific      en-
gine type to maintain engines in a controlled          state of
preservation       during storage and shipment.

     At the two maintenance activities      within the Navy and
one of the sites within     the Air Force, we found that the en-
gine overhaul process and corresponding      cost accumulation
was accomplished under a "can to cants concept.      The "can to
can" concept encompasses the total accumulation       of appli-
cable overhaul costs from the time the can is opened and
the unserviceable    engine is removed from the can until      it
has been overhauled,    preserved,  and recanned.   On the other

                                    14
hand, the Army maintenance activity    and one Air Force main-
tenance activity  do not operate under this concept.      They
excluded from the engine overhaul costs,     the costs incurred
for the uncanning and depreservation    of the unserviceable
engines as well as the preservation    and canning of the over-
hauled engines.  Therefore,    costs of the overhaul process
at the various facilities   would not include costs for the
same tasks andmeaningfulcomparisons     would be precluded.




                               15
                                -@iPTER 3

            QUESTIONABLE COST_ACCOUNTING
                                   ---   PRACTICES

       The cost accounting        system for depot maintenance activ-
ities     as set forth in DCD Instruction          7220.29,   should be
designed to (1) provide the basis for determining               the quan-
tity and total      cost of completed end items identified           with
weapons support systems and (2) account for and identify                 all
elements of cost incurred          in the performance of depot main-
tenance, including       indirect     cost associated    with support
functions     and the related      general and administrative       cost of
the activity.     '

       We found that each of the five maintenance activities
included in our review followed certain           cost accounting
practices    which, in our opinion,       were not in accordance
with the above principles.          We found questionable     account-
ingapractices     in the accumulating      of cost elements,     in the
methods of allocating      indirect    costs, and in the reporting
of the accumulated maintenance costs.           The practices      consid-
ered questionable      are described below.

ARMY

        Certain costs incurred   in performing  aircraft engine
overhaul were either     excluded from the engine overhaul pro-
gram or misallocated     to specific  job orders within  the pro-
gram; therefore,     the reported cost of engine overhaul was
distorted.

Failure   to accumulate     and allocate    cost

       We found that certain         costs for contractual     services
and military      labor were not being included in tRe cost of
overhauling      aircraft     engines at the Army Aeronautical        Depot
Maintenance Center,           Certain engine components, such as
fuel controls       and booster pumps, were being overhauled by
commercial contractors          on contracts    awarded by the U.S. Army
Aviation     Systems Command. These components were shipped di-
rectly    from the Center's maintenance shops to the applicable
contractors,      bypassing the system for costing exchange ma-
terial   previously       discussed.     (See p. 9.)   Therefore,    the


                                     16
Center did not include any cost for the overhaul of these
components in its accumulation of material  costs.

      Despite the fact that the Center recorded the military
man-hours and related    costs in total,     these costs, which
were paid from the military      personnel appropriations,
were not allocated   to specific     job orders.    Therefore,  the
overhead costs applicable      to the job orders accomplished
during fiscal   year 1969 were understated       by about $258,000
for the unallocated   military    labor.

      Both of these areas were brought to the attention     of
local officials,    and action was taken to include the costs
for components repaired commercially     in the engine program.
Also, Center officials    advised us that the costs for mili-
tary labor would be included in the engine overhaul costs
in fiscal   year 1970.

Improper cost transfers  between
iob orders and engine programs

      In April 1969 the Center performed an Engine and En-
gine Components Cost Realignment Study to compare the over-
haul costs of engines and engine components to the cost es-
timates upon which the overhaul workloads were based.     This
study revealed that, of 144 overhaul job orders,    44 were in
excess of their cost estimates by about $5 million.

       As a result    of the above study, over $4 million     in ma-
terial    costs were transferred   from job orders with cost
overruns to job orders having underruns.         These transfers
were made without analysis of the recorded costs to deter-
mine the validity      of the cost overruns and underruns and
without regard for the integrity       of the recorded cost in-
 formation.     Estimated and recorded costs were thereby ad-
justed into agreement by this transfer       of costs,

        Center officials    informed us that the cost transfers
were made because the recorded costs were considered          to be
erroneous and that the cost estimates,        which were based on
historical       cost data, were considered to be valid.    This in
itself     indicates   to us that the recorded cost information
is not considered valid by the very people who are


                                  I7
acculnulating    and supposedly using it.        The continued prac-
tice of adjusting        recorded costs to agree with estimated
costs would distort         the cost of operations    and comparisons
of costs with those of other activities            would not be mean-
ingful.     Any future attempted uses, such as cost estima-
tions,   trend analyses,       and efficiency   measurements, would
result   in distortions.

NAVY

       We identified     accounting practices  at Navy locations
                     . .
which, in our opinion,       prevented full disclosure   of costs
applicable    to the performance of depot maintenance.

Labor and material charges
inconsistent for modifications

       We found that costs of modification      kits used during
the engine overhaul were not charged to the engine overhaul
program,    However, the labor costs necessary to perform
these modificationswerecharged         to the engine overhaul pro-
gram. Although we did not determine the dollar         signifi-
cance of the excluded costs, a review of the contents of
nine modification    kits being applied to J-79-8B engines
during overhaul disclosed      that the value of the kits ranged
from $3 to $1,003 per kit.        Although this procedure is per-
missible   under DOD Instruction      7040.25, dated September 1,
1966; in our opinion,      both labor and material   costs relat-
ing to modification      of engines during overhaul should be
accounted for on the same basis to the greatest        extent pos-
sible.

Erroneous allocation  of
charges to iob orders

       Our review at one Navy maintenance activity  disclosed
that labor costs applicable   to completed job orders were
included in the uncompleted job orders for overhaul of
similar   items.  In the Navy, job orders are closed; that
is, no more costs are charged to them; when the engine
overhaul has been completed.           Cannibalization       practices1
are often used to expedite engine overhauls,               but no costs
for the cannibalized       serviceable    items are included in the
job order for the engine being overhauled.               Subsequently,
the costs for repairing        the replaced unserviceable           items are
arbitrarily    charged to open job orders for similar               engines.
Likewise,    because of delays in processing of documentation
under the exchange material         procedures,     costs for the ex-
 changed items are often included in job orders that are
 subsequently   closed and the related        credits     (trade-ins)      are
applied later to open job orders for similar                engines.
These practices     result    in the distortion       of individual      job
order cost data since these costs are not applicable                   to the
 engine job orders so charged.          For the period January 4,
 1969, through June 14, 1969, about $322,000 of costs were
 charged to other than the applicable           job orders.

AIR FORCE

      The standard cost accounting    system used by the Air
Force to compile engine maintenance costs has one major
characteristic   which precludes meaningful    comparison with
cost results   of the Army and Navy--that   is, the system is
not designed to accumulate actual costs by end item.

       In addition,   our review of the methods used to accumu-
late and report the costs to overhaul engines at the two
Air Force facilities      disclosed     (1) weaknesses in review and
control    of labor standards,      (2) unrealistic     allocation    of
actual material     costs, and (3) inconsistencies          in reporting
maintenance costs,       Therefore,    the individual      engine over-
haul costs reported by the Air Force are, in our opinion,
unreliable    and do not provide a basis for meaningful            cost
comparisons with other DOD activities.              The weaknesses
noted are discussed below.


1The removal of components or parts from engines being over-
 hauled and their use on other engines to complete or con-
 tinue the overhaul process without delay.




                                       19
Weaknesses in review and
control. of labor standards

      We found that many labor standards in         use at the &%a-
homa City Air Materiel     Area were outdated,      unsupported,   and
based on informal   estimates.    In addition,      management had
exercised   little control   over the validity      of %abor stan-
dards or in se%ecting those labor standards          to be reviewed.

        Labor standards are used to evaluate the effectiveness
of the labor force and as a basis for the a%%ocation of ma-
terial      and overhead costs to end items.         Consequently,   in-
correct      standards would necessarily     distort    work center ef-
fectiveness       ratios   and statements of end-item maintenance
costs e Incorrect        standards could result      in (1) erroneous deci-
sions in regard to in-house or contractor             maintenance,   (2)
improper reimbursement         for maintenance performed for other
activities,       or (3) unwarranted actions involving        persome%
or facility       changes.

       The Air Force, because of continually    changing condi-
tions,    considers a labor standard which has been in exis-
tence for over 2 years to be out-of-date.       Our review of
the labor standards for the J-79 engine disclosed       that most
labor standards had not been reviewed within the 2-year pe-
riod.     We were advised, in fact,   that many of the labor
standards were obtained in 1965 when the overhaul, of the
J-79 engine was transferred     to the QJslahoma City Air Mate-
riel Area.      We were advised also that supporting   documenta-
tion often was missing or incomplete at the time of this
transfer.

      We examined labor standards for seven components of
the J-79 and found that the supporting      data were incomplete
or still  not available   in the majority   of instances.     Fur-
thermore,   supporting  documents indicated   that a majority     of
the labor standards in use and covering over 80 percent of
the production   man-hours were not based on time and motion
studies.

      We found also that specific   standards were reviewed by
the app%icable engineering   section primarihy  on request by
production   personnel.  We were advised that the engineering


                                   20
section   did not have sufficient  personnel       to make routine
studies   of established labor standards.

      Current reporting  procedures do not provide for the
comparison of actual labor experfence          to the established
standards for individual    operations.        Standards are not
compared to actual experience below the work center level.
A work center involves from 150 to over 700 people and pos-
sibly hundreds of operations     and standards.          Comparison of
the accumulated standards and actual labor hours at the
work center level does not identify         those individual      labor
standards where major variances      exist,      therefore,   appropri-
ate action cannot be taken.

Unrealistic   allocation
of material   costs

      The Air Force system is so designed that material
costs accumulated by work center are allocated          to all work
centers on the basis of standard labor hours established
for the items repaired.    Thus, material    costs are allocated
to work centers in which no material      is used.      Subsequently,
these allocated  material  costs are prorated      to the produc-
tion program on the basis of standard hours to overhaul or
repair the items included in the program.        These prorations
are intended to distribute   material   costs from the work
centers where they have been accumulated to the various
maintenance programs at the maintenance activity.             The
maintenance programs are the major overhaul and minor re-
pair of engines as well as component repairs         referred     to
as management items subject to repair.
                                  c
       By comparing the June 1969 material         cost distribution
relative     to the J-79 compressor rotors by work center com-
puted by the Air Force on a standard-hour           basis with a GAO
distribution      based on actual materials    usage, we found that
the distribution      based on standard hours resulted         in misal-
location     of material    costs to work centers.      The distribu-
tion of material      costs   to work centers  is as follows.
                     Distribution
                     --               to Work Centers

                                      Actual usage       Standard hour
     Work
     --.--- center                      (note a)           proration

Disassembly                             $       -           $ 7,898
Parts overhaul                                 3,984          6,294
Subassembly                                 28,741           18,251
Machining and welding                       --                   282

    Total                               $32,725             $32,725
                                         --
aGAO computed.

      This computed material cost is then distributed           to the
maintenance programs on the basis of standard hours            appli-
cable to the various programs.

               Allocation    to Maintenance Program
              after Distribution     to Work Centers

                                      Allocations
                                         based on        Allocations
                                      actual usage          based on
        Program                          (note a)       standard hours

J-79-15 major overhaul                  $17,081            $12,936
J-79-15 minor repair                      1,647              1,263
J-79-17 major overhaul                    4,012              2,972
J-79-17 minor repair                      1,751              1,439
Management items sub-
   ject to repair                            8,234          14,115

    Total                               $32,725            $32,725

aGAO computed.

        Had the distribution        of material  costs been based on
actual usage, J-79 engine           overhaul cost would have been
significantly    greater.

      The above illustrations,  in our opinion,   clearly        show
that the Air Force method results   in the misallocation          of
material  costs to maintenance programs.    For example,         on


                                       22
the basis of our computed usage, we estimated    that the ma-
terial   costs for the J-79-15 major overhaul programs were
understated    by about 32 percent.

Inconsistencies   in reporting
maintenance costs

       Different   reporting   systems used by the Air Force
maintenance facilities       show widely varying unit costs ap-
plicable     to the same output.       We identified  four reports at
the Oklahoma City Air Materiel          Area with four different
costs to overhaul J-79-15 engines during the same time pe-
riod.     The reported costs for overhaul of the J-79-15 en-
gines for two reporting       periods,    December 31, 1968, and
June 30, 1969, are as follows:

               End Item   Maintenance      Industrial        Organic
               Product         cost        Fund Cost       Maintenance
                 cost       S-rY             of Sales      Cost Report
                Report      (note a>       Statement         (note a)

                                 December 31, 1968

Labor cost     $ 5,422       $ 6,059        $ 4,852          $ 6,079
Material
  cost           9,398            9,678        9,222            9,411
Exchange
  material          397             121                              155
Overhead
  cost           9,599           10,622        8,554          10,763
G&A expense

     Total     $24,816       $26,480        $22,628          $26,408

aGAO computed unit costs using Air        Force-reported     total
 cost and units completed.




                                    23
                End Item    Maintenance     Industrial        Organic
                Product          cost       Fund Cost       Maintenance
                  cost        Summary         of Sales      Cost Report
                 Report       (note
                               _--    a>    Statement         (note a>

                                   June 30, 1969

Labor cost      $ 7,064       $ 6,228        $ 5,620          $ 5,597
Material
  cost           17,421         12,751          6,960          10,844
Exchange
  material          267            269                                319
Overhead
  cost           13,259         11,325          9,659          10,323
G&A expense        -                                            2,557

     Total      $38,011       $30,573        $22,239          $29,640

aGAO computed unit costs using Air         Force-reported     total
 cost and units completed.

        Each of the four reports    resulted    from different     meth-
ods of cost distribution       and showed significant      variances
in all the elements of the cost to overhaul J-79-15 engines.
The reporting     of four different   costs to overhaul the same
item during the same time period can only confuse and con-
tribute    to-the lack of confidence      in the reported cost data.

      We believe that overhaul costs should be accumulated
in such a manner that differences      between the various re-
ports are readily     reconcilable  and that the reports  iden-
tify  those significant     factors of cost which result  in dif-
ferences from other reports.




                                   24
                                  CHAPTER4

                    CONCLUSIONSAND AGENCYACTION

        The benefits  to be obtained from the use of comparable
cost information     on the operations    and accomplishments      of
similar    or like depot maintenance activities       have long been
recognized by DOD. GAO agrees with the stated philosophy
of DOD and believes     that the accumulation      on a consistent
basis of comparable cost data for maintenance expenditures,
which amount to $7 billion      annually,   is needed if manage&
ment is to be provided with data that can be used to make
decisions which will result      in more efficient     maintenance
operations.

      We believe that DOD, while recognizing      the benefits  of
a sound cost accounting      system, has not provided adequate
control  or instruction    in sufficient  detail  to accomplish
the objective    it promulgated in DOD Instructions    7220.14
and 7220.29.

         Our review of the validity      of the cost accounting             data
at the five DOD maintenance facilities               included in our re-
view disclosed many inconsistencies              in the methods and pro-
cedures followed       (see ch. 2), as well as questionable               prac-
tices used (see ch. 3) in the present cost accounting                       sys-
terns. The inconsistencies         and questionable        practices      fol-
lowed in compiling the data on costs of over $240 million
for the overhaul of aircraft         engines at these sites are so
numerous that the use of the cost data by management as an
effective      means of financial    control       is precluded.        There-
fore the use of the recorded and reported data for meaning-
ful comparisons of program costs or of cost elements between
facilities      is compromised,     We believe that, to assist man-
agement in the decisionmaking         process and to identify             those
areas warranting      additional    management emphasis, the systems
and methods used by +he military           departments to account for
costs of like activities         and operations        should be revised to
ensure the comparability,         compatibility,        and reliability        of
reported     cost data accumulated on a consistent             basis.




                                       25
       We recognize that it may not be feasible       to design one
detailed    cost accounting    system to encompass all of the var-
ious types of equipment, such as tanks, trucks,          aircraft,
and electronic      items, used by DOD. We believe,     however,
that consistency       in cost accounting standards and practices
for similar     types of depot maintenance activities       is a worth-
while objective       and that DOD should strive   to obtain this
objective    to the greatest    extent possible.

         We previously    recognized    the necessity       and desirability
of applying uniform cost accounting              standards to negotiated
defense contracts       in a report dated January 19, 1970,
(B-39995(1)).        The Congress subsequently          established      a Cost
Accounting Standards Board (Public Law 91-379 dated Au-
gust 15, 1970) which was given the responsibility                   for promul-
gating cost accounting         standards designed to achieve unifor-
mity and consistency         in cost principles       followed     by defense
contractors.       We believe that the need exists for a similar
effort    within   the Government.        In this connection we intend
to continue to work with DOD in accomplishing                  improvements
in the cost accounting         systems used by depot maintanance ac-
tivities.       Emphasis will be placed on establishing               cost ac-
counting standards for application            within     the Government
which are comparable to those standards which are to be de-
veloped by the Cost Accounting Standards Board for industry.




                                       26
Agency Comment

        In our draft  report to the Secretary   of Defense, we
proposed that more definitive      instructions  be issued for
the design of a depot maintenance cost accounting        system
and that steps be taken to ensure the implementation         of a
system which would provide for the consistent       accumulating,
recording,    and reporting  of comparable information    on the
results    of depot maintenance activities.     We proposed also
that this system account for all costs incurred        in the per-
formance of depot maintenance and provide for relating
these costs to weapons or support systems.

        In replying    to our draft report,       the Assistant       Secre-
tary of Defense, Comptroller          (see app. II),      agreed that
there were some areas in which more definitive                 instructions
should be prescribed,but        he did not agree that a detailed
cost accounting       system should be prescribed         for all depot
maintenance activities,         The-Assistant       Secretary     believes
that the operations        and organizations      of depot maintenance
activities      are too varied to prescribe         a detailed      cost ac-
counting system to record the results             of operations.         We
feel that,      to achieve compatibility       of operations        and to
identify     those areas where needed improvements in efficiency
are warranted,      cost accounting     practices      and procedures
should be uniform in depots performing              like and similar        op-
erations,      such as aircraft    engine maintenance.

       The Assistant     Secretary   concurred in our conclusion
that there were inconsistencies          in the depot maintenance
costs currently      being reported.       The Assistant      Secretary
also advised that many of thedeficienciesdisclosed                  in our
report would be corrected         by July 1, 1970, and he assured
us that his office       was making a continuing       effort    to improve
the quality    of the cost accounting        and reporting      system for
depot maintenance,,       He believes    that compliance with DOD
Directive    7410.4, "'Regulations     Governing Industrial         Fund
Operations,"    and DOD Instruction        7220.29, "Uniform Depot
Maintenance Cost Accounting         and Production     Reporting     System,18
will ensure the desired uniformity           in information      of the op-
erations    and accomplishments      of depot maintenance activities.




                                       27
                               CHAPTER 5

                            SCOPEOF REVIEW

      Our review was performed at the Army Aeronautical                De-
pot Maintenance Center, Corpus Christi,             Texas; the Naval
Air Rework Facilities      at North Island,       California,     and
Quonset Point, Rhode Island;          and the Air Materiel       Areas at
Oklahoma City, Oklahoma, and San Antonio,             Texas.     The re-
view included examination        of pertinent     records and discus-
sions with responsible      officials.       In performing     the review,
we evaluated policies,      procedures,      and criteria     of cost ac-
counting systems and made appropriate           tests of the practices
and procedures   followed.

       Because of the magnitude of the entire       DOD maintenance
program, we limited       our review to the cost accounting     ap-
plicable   to the J-79-15/8      engines in the Air Force and Navy
and to the T-53-13 engine in the Army. Procedures and
practices    followed for these engines apply to all other en-
gines overhauled at the sites reviewed.         The fieldwork    on
the matters discussed in this report covered maintenance
operations     and related   cost information  occurring   in fiscal
year 1969.




                                  28
APPENDIXES




   29
                                                             APPENDIX I
                                                                 Page 1

            EXPLAHATION OF ACCOUNTING TERMINOLOGY

Accounting    system comprises the written        records and reports
of the financial      operations    concerning an organization's
activities    prepared in accordance with generally        accepted
predetermined     rules,   standards,   and principles.

Cost accountinp  system is     a subsystem of the accounting     sys-
tem designed to show the      detailed  costs of operations   and
the accumulated costs by      types of products.   Thecostaccount-
ing system is intended to      assist  management in the control
of cost and to aid in the      improvement of operations.

Cost elements are the breakdown of cost information       within
the cost accounting   system into meaningful classifications.
These classifications   are generally material    costs,   labor
costs,  and indirect  expenses, with subclassifications       de-
pendent on the type of activity.

     Material   costs are those for materials  which can be
     readily  identified  as entering  into and becoming a part
     of the overhauled or repaired    product.

     Labor costs are for    labor   performed   which   is    identifi-
     able in production,

    Indirect    expenses are those costs incurred,        with the
    exclusion     of cost identified      as labor and material,
    which are of a general nature and cannot be readily
    identified     with the overhauled or repaired      item.     These
    costs usually      include such items as utilities,       building
    depreciation,supervision,        etc,,   and are normally dis-
    tributed    from an aggregate grouping on the basis of labor
    hours or labor costs.

Job order cost system is a cost accounting       system in which
the elements of costs associated   or identified      with the var-
ious stages of overhaul or repair   are identified       and accumu-
lated for an item or type of product on a record referred
to as a job order.   This system is used when it is practi-
cable to keep a separate record of each product.

Process cost     system is a cost system in which total  costs
and quantities     produced are determined for a set period of


                                    31
APPENDIX I
    Page 2

time and the cost per unit of production    is determined by
averaging the cost over the total. production.     This system
is generally  used when the product is produced by a se-
quence of continuous  operations  for which it is impractical
to record costs by item or type of product.

Standard cost system is an accounting     system which compares
actual costs with estimated costs (standard      costs) of pro-
duction followed   by analyses of the variations     between the
actual and standard costs,     This system may be combined with
either  the job order or process system,

Uniformity     in cost accounting       is the concept which standard-
izes (1) cost terminology,          (2) procedures for consistent
accumulation      and allocation     of cost data, and (3) report
presentation.         It also ensures conformance to a set of gen-
erally   accepted principles        of the cost data accumulated by
individual     activities     or by items or types of products.
Finally,    it  permits     comparisons   that can be relied  on by
management to determine where its attention            should be di-
rected.




                                  32
                                                                      APPENDIX II
                                                                          Page 1


                          ASSiSTANT    SECRETARY     OF DEFENSE
                               WASHINGTON,    D.C.    m301




                                                                  17 JUN 1970
Mr. C. M. Bailey
Director, Defense Division
General Accounting Office

Dear Sir:

      My letter of April 11, 1970 stated that we would provide you with
a complete statement on each deficiency/recommendation   contained in
your draft report, "Potential  for Improvement of Maintenance Procedures
by Expanding the Use of Cost Accounting Data'! and our plans for improve-
ments. (OSD Case #3078)

      The statement on each deficiency/recommendation  is at Enclosure             1
to this letter.    The following paragraphs cover your general recom-
mendation and our plans for improvement.

      We concur that there are inconsistencies          in the depot maintenance
costs currently being reported.          However, many of the inconsistencies
pointed out in your report are the result of difficulty           in complying
fully with existing     instructions     during the transition   period in the
implementation of industrial        funds and the requirement for total costs.
The matters discussed in the report cover maintenance and related cost
information    occurring in Fiscal Year 1969. The Army activity           and the
two Air Force activities       reviewed were in their first     year of operation
under the industrial      fund, which accounts for many of their difficulties.
The industrial    fund concept of operations is quite different         from the
systems previously used and it takes time for the activities            to convert
to the new systems and to fully         implement them and for us to assure
compliance with all the requirements.           Operation under the industrial
fund concept, however, will provide an improved basis for the collection
of costs and production data identified          to items completed and weapon
systems supported.

        We also concur that there are some areas in which more definitive
instructions     should be prescribed.    However, we do not agree that a
detailed cost accounting system should be prescribed for all depot
maintenance activities.      The operations and organizations       of the
activities     are too varied to permit this.   We believe that in the
instances where required that the more definitive        instructions     should
be incorporated in Department of Defense Instruction         7220.20, "Uniform
Depot Maintenance Cost Accounting and Reporting System."


                                         33
APPENDIX II
        Page 2

      My office is making every effort to improve the quality of the cost
accounting and reporting  for depot maintenance and will continue to do so.
We feel that, while there is still   much to be done, we have made much
progress in the past few years.    Your report will provide valuable
assistance in our continued efforts   in this area,

      Our first efforts will be to take action on those deficiencies
pointed out in your report which still    exist. As noted in Enclosure 1,
many of the deficiencies   will be corrected by actions -planned July 1, 1970.
Our actions will consist of specific requests to the Military     Departments
to comply with existing requirements or when required,    issuing changes
to make the requirements of DoDI 7220.29 more definitive.

      We will then follow up with each of the Military       Departments on
their    implementation at depot maintenance activities     of DOD Directive
7410.4, "Regulations Governing Industrial       Fund Operations,"  and DOD
Instruction    7220.29, "Uniform Depot Maintenance Cost Accounting and
Production Reporting System."      Compliance with these documents should
assure the desired uniformity    in information    on the operations and
accomplishments of depot maintenance activities.

      As you know, we have submitted DoDI 7220.29 to the General Accounting
Office for review and approval.    Discussions with members of the General
Accounting Office staff who are reviewing the Instruction     indicate that
they will have some recommendations relative   to this Instruction.

                                       Sincerely,




Enclosure




                                      34
                                                                                                    APPENDIX II
                                                                                                        Page 3

DESIGN DIFFERENCES IN MILITAXY COST SYSTEMS

        GAO: The cost           systems used by the three                 military       departments        to

accumulate       the costs         for the overhaul         of aircraft         engines     have been

independently           designed       and do not provide           comparable         data for the results

of operations.

        OSD: The activities               reviewed      operate      under the industrial              fund.       The

basic      principles      and policies        for     cost accounting          under the industrial

fund are set forth            in DoD Directive            7410.4,       "Regulations       Governing         Industrial

Fund Operations."             Depot maintenance            activities        are also required              by DoD

Instruction        7220.29      to provide      for      accumulation        and reporting         'total        costs'

regardless        of source of funding               and identification              of costs to items

produced       and weapon systems supported.                    Although      the systems         in the military

departments        were independently           designed,         they are required             to conform to

the principles,           policies,       standsrds       and basic       systems features          prescribed

by DOD Directive           7410.4,       which has been approved by the Comptroller                            General,

and the requirements               of DoD Instruction           7220.29.        If     the systems were

properly       implemented,           the cost information           obtained         should provide         comparable

data for the results               of operations.

        We concur that          the validity          of end item overhaul              costs    computed under

the Air Force standard                 cost   system is to a large            degree      dependent         upon the

correctness         of the established           standsrds.          A discussion         of the established

standards        as well     as the treatment            of the elements             of expense by the three

military       departments         sre included         in comments which follow.

DIFFERENTMETHODSFORACCUMULATI:ON OF MXIZRIAL COSTS

EXCHANGEMAlplERyrL




                                                           35
APPENDIX II
    Page 4

          GAO: The Amy costs the latest                      recorded        cost to repair          the component

  being      exchanged      ox, if     no recorded        cost     is available,         405 of the acquisition

  cost of the component.                The Navy and Ai3 Force cost 20s of the acquisition

  price      of the component.

            OSD: OSD instructions             provide      that     the amount to be charged                  in the

  case of exchangeable               items installed         auring       overhaul      will     be the stadard
  cost to repair           the item exchanged.             The determination             of the stan&d             cost

  to repair        exchangeables        is the responsibility                of the milit&ry          8epartnents.
  The Army method of charging                 the latest          recorded     cost     is obviously          incorrect

  and the discrepancy           between the 40$ of acquisition                        cost charged by the Army

  and the 20s of acquisition                  cost charged by the Navy and the Air Force would

   indicate      that    someone has erred           in the computation               of the standard          cost to
  repair.        We will     study this       to determine          if there       are valid        differences        in

  the standard          cost to repair        exchangeable          items.

  MISSING 00mmTs                          '
            GAO: The Army installation                 and one Navy installation                   recorded     the

   cost of serviceable           components         used to replace           missing          components on engines

  being       overhauled     as material        costs.       The other        Navy installation           anti the

   Air Force depots          did not include          the cost of replacing                these     missing

   components       in the engine         overhaul       costs.

            OSD: The inconsistency                in application           of costs     for missi_ng cowonents

   appears to result          from a misunderstanding                    of the provisions          of two DoD
   Instructions,         which till       require       clarification.           DoD Instrudion           7220.29

   has as its       goal the collection             and reporting           of total      costs szd provides              for

   reporting       of all    costs     incurred      in the performance               of depot mafntenance,




                                                              36
                                                                                                            APPENDIX II
                                                                                                                Page 5

regardless         of how such costs are financed.                            DOD1 7040.5,          which was approved

by the Comptroller              General,       is oriented            to the financing              of costs.        It

defines      "expense"      type material              and "investment"             type material,            and provides

that    components        classified          as "investment"            type      items are not to be charged

as expense,          although     the cost of maintenance,                      repair,      overhaul,        or rework

of an investment           type item is an expense.                          Under the provisions             of DOD1

7220.29      an investment         type       item used in maintenance                     to replace        a missing

component          should be charged to the job on a statistical                                basis      to permit

accumulation          of total      cost.  DOD1 7'040.5 is currently   being revised and a
                                                                  a
clarification          in this      area is being considered.    We also believe the DOD1

7220.29      can be clarified               and this      will      be considered           as soon as DOD1 7040.5

is revised.

ALLOCATION OFMA!ERIALcOSTS
        GAO: The procedures                  followed       in costing          certain      other      material          which

is not readily           and economically               identifiable           to any specific            engine     differed
significantly.

        OSD: We concur that                  uniform      procedures           should be followed               in costing

of materials.            Our instructions               specify       that     materials       which cannot be

identified          accurately      and economically                to a job will           be treated          as indirect

expense an& there               sre no procedures                authorized      for      allocation        of material

costs      other     than through           the application            of overhead.            However,       we recognize

that      the level      at which the job orders                     are issued        can have an impact on the
costing.           For example,        if    job orders           are issued for           individual        engines,           as

you state          is the case in the Navy activities                          reviewed,       it      would result         in
more material          which      could not be identified                     to the individual             engine        and

the amount of material                 distributed          through          the overhead           application      would




                                                                 37
APPENDIX II
    Page 6
   be larger.             On the other         hand,      if the job order             is issued       for     all     of the

   same type engines             for      a year,       as was being           done by the Army activity,                    much

   more material             could be identified                 to the job and would be treated                       as a

   direct       material       cost.        The Air Force has advised                   that      the improvements

   for      implementation         July       1, 1970 will          identify       the cost of material                 to

   specific         items.      We plan to review                 the material         costing      procedms            in more

   detail       and correct        the deficiencies                reported.

             GAO: The cost of fuel                    used in testing           of engines         is also treated
   differently            in the accumulation                 of costs.        The Ravy records              the cost of

   this      fuel    as a material            cost to individual               job orders.          However,          the Army

   and Air Force record                it     as an indirect             eqense.

             OSD: We will            review     the procedures             in use with           the objective          of

   attaining         consistency            in this      area.

   VARYINGMEYEIODSUTILIZED TOWCORDLKBOR COSTS

   TXBORRATES

             GAO: The Army and Air Force use standsrd                                  or average rates              and include

   the variance            between     actual         pvoll        and labor       distributions             at standard

   rates      as a part        of the indirect                expense.      Navy uses actualpayroU                      rates
   for the workers             performing         the maintenance              tasks     and has no variance.

             OSD:     The use of standard                 or average labor             rates      is permissive          in DODD
   7410.4       in those       cases where the range of actual                         pqr rates       is limited            so

   that      distortion        of costs        is minimal.           Considering          that     s&andard or average
   rates      should be kept under surveillance                           to assure that           variances          from
   actual       are kept to a minimum, we do not consider                               this      to be a significant

   difference         in the systems.




                                                                   38
                                                                                                              APPENDIX IT
                                                                                                                  Page 7

FRINGE BENEFITS

         GAO: Fringe          benefits,          such as annual                and sick leave,        Government

contributions           to life       insurance,          health        insurance,         and retirement,           which

approximate        30s of the labor               rate      are included           as labor       costs      at Army ana

Navy facilities.              The Air Force includes                     these fringe          benefits       as a part

of its       indirect       expense.

         OSD: DODD 7410.4              is very explicit                 that     ihese fringe        benefits         should

be included          in labor       costs.        The Air Force will                 cost fringe          benefits       as a

labor      cost commencing July                1, 1970.

OVERTIME PREMIUM PAY
         GAO: The Army and I?avy include                         overtime         premium pay as labor                costs,

while      the Air      Force considers            it     as indirect            expense.
         OSD: DODD 7410.4              provides          that    overtime         premix        shhallbe      charged          as

indirect       cost,     except      where the overtime                  is worked on a customer                 order
which specifically              authorizes         overtime.             We will      insist      on compliance              tith

the Directive.

INCOlK3IS~CIES              IN COSTING OF INDIRECT EXPENa

         GAO: Those costs              considered           as production            overhead       and general          and

administrative           expenses varied                significantly            between the Air Force                ana
the other        military       departments.

         OSD: DOD1 7220.29                provides        that     indirect        costs       of organizationa;l              units

(shop,       work center)          performing           actual     maintenance         work will          be separately
identifies        from the general               and a&ninistrative                costs       of management s,na

support       organizational           units      serving        the entire          aepot maintenance               activity,

such as personnel,                comptroller,           data processing,             communications,            security,
fire     protection,         and c0~~a.                 This is the most explicit                   definition          of




                                                                 39
APPENDIX II
    Page 8

  production       overhead         and general             and administrative                overhead.          These two

  categories       are maintained              to permit            an equitable        distribution             of overhead.

  Production       expense for a cost centir                          is to be applied           only to work performed

  within    that       cost     center.        General            and administrative            expense is to be

  applied      to all     work performed               by the depot maintenance                   activity.               We will
  review     our Directives               and Instructions               applicable         to this         subject       to determine

  whether      they need to be clarified,                          and, if not,        we will        require         the Services

  to comply with              existing       requirements.               If necessary,          we will         clarify       our
  requirements          on this          subject.

  DZS?FTZENCSSINTREEXTENTOFOVERHAUL
           GAO: Navy and one Air Force                            installation        included        all     costs from the

  time the container               was opened and the unserviceable                            engine was removed

  until     it had been overhauled,                    preserved           and repackaged          in the container.

  One Air Force installation                        ana Army excluded              unpacking       and depreservation

  of the unserviceable                   engine      and preservation              and repacking             the overhauled

  engine.

           OSD: This condition                    results         from different        mission        assignments            in

  the depot maintenance                   and supply         depot operations.                 We concur         that      the

  discrepancy          should be corrected,                  if     feasible,        and will      look       into      the matter.

  QUESTIOXABL;ECOST ACCOUNTINGPFMTICES



  FAILlJRl2 ?iDACCUMUI,ATSANDALLOCA~                               COSTS
           GAO: We found that                 certain        costs for           contractual       services           and military

  labor     were not being               included       in the cost of overhauling                     aircraft           engines,

           OSD: Since the report                     indicates         that      corrective       action        is being         taken

  we will      offer     no comments.               However, we will               follow      up to ensure that                 the

  corrective       action         is taken.
                                                                                                   APPENDIX I.1
                                                                                                        Page 9

WEAPON/SUPPORT
             SYSW COSTING

         GAO: The cost of overhauling               engines was not identified                   to the specific

weapon system the engine            supports.

         OSD: The example given was the T-53-13                       (T-53)     engine which           suppolrts

both the AH-1G (Cobra)           helicopter        and the UH-IH (Huey) helicopter.                         Since

the inception      of the Depot Maintenance                 Accounting         and Reporting        System,          the

cost of repair       of components        for     supply which sxe common to more than one
weapon/support       system has been a problem.                     However,     it     has long been agreed

that     it would not be feasible          to attempt             to charge the costs of repairing

cotmuon components to the weapon/support                     system from which they were removed,

but to the weapon/support            system designated               by the Inventory           Control       Point

based on his estimated           requirements.             The weapon/support              system from which

the component is removed is charged for the cost of the repair                                    through           the

exchange material          procedures.

IMPROPER COST TRANSFERSBETWEENJOBOFEOF,RSAKDENGINEPROGRAM

         GAO: As a result        of a study material                costs were transferred               from job

orders with       cost overruns      to job orders           having     underruns          based on estimated

costs.

         OSD:    The Army has assured            us that     the practice             of transferring         costs
without     documenting      the rationale         for each such transfer                  has been discontinued

and appropriate       implementing        instructions             have been published            dictating          the
responsibility       for    identifying         and evaluating         the rationale           which      supports

the cost transfer.

NAVY

MODIFICATION KITS NOT CXARGEXITo OVERHAULEDEmGINES

         GAO: We found that         modification           kits     used during         the engine        overhaul

were not charged to the engine                  overhaul     program.




                                                       41
APPENDIX IS
    Page 10

           OSD: DoD Instruction                  7040.5     provides      that     modification        kits     ace invest-

 ment type items and are not chsrgeable                           as expense.           The instruction            also

 provides       that     when modification                and maintenance          sxe done concurrently                at
 depot      level,      the total       effort      will     be investment          when the costs.for             modifi-

 cation,       including         the cost of investment                 items of equipnt             to be installed,

 are greater           than the costs to perform                 the required          maintenance,           exclusive

 of any modification.                 However,        as discussed         above in the case of replacing

 missing       components,          since DOD1 7220.29            requires         the accumulation            and report-

 ing of total           costs,     the modification             kits     should be costed on a statistical

 basis.       As previously           mentioned,           DOD1 7040.5          is currently       being      revised        and
 the policy           set forth      in the instruction                is under study.            Again,      we point

 out that       this     policy     was approved by the Comptroller                      General       in his approval

 of DoDI '7040.5.

 ERRONiOUSAI;GOCATIONOF CHARGESTD JOB ORDERS
           GAO: At one Navy maintenance                      activity      labor      costs      applicable      to completed

 job orders           are included        in the uncompleted              job orders       for     overhaul       of similar

 items.       Also,      costs for        cannibalized          serviceable          components       are not charged

 to the job order            for the engines being                 overhauled.          Finally,       credits      for

 turn-ins       sre often         applied        to job orders          other     than the one generating                 the

 turn-in.

           OSD: The Navy has advised that                       these     are instances           of non-compliance

 with      existing      instructions            and that     they plan to tighten                control      on the above

 procedures.

 AIR FORCE
 WEAKNESSES
          IN THE REVIEW MD CONTROLOF LABOR STAEDAWS




                                                                  42
                                                                                                             APPENDIX II
                                                                                                                 Page 11

        GAO: We found the labor                      standards            in use are outdated,            unsuirted,
and based on estimates.                     In addttion,              management has exercised                  little           control

over the validity             of labor          standards            or in selecting         those      labor       standards

to   review.

        OSD: The Air Force review                        indicates           that    the GAO finding            is correct.

Subsequent            to the GAO visit,             the Air Materiel                Area has reviewed             all       engine

labor       standards       and has classified                  them propertly.            A program has been

initiated        to review          and upgrade these                  star&r&        to satisfy        an A3.r Force

Logistics         Command requirement                for at least             8C$ coverage         by either             fully

engineered            standards      or by standards                 developed       from accetied         industrial

engineering            estimating       techniques.               Target      date for      completion          of this

program        is October         1970.

TJNREZ&ISTICALLOC~ONOFMA~cOS'fS

        GAO: Air Force's                  allocation           system results          in material.        costs being

allocated        to work centers              in which no material                   is used.         We calculate               the
material        costs      for the J-79-15              major overhaul              programs     were understated

by 38.
        OSD: Improvements                  scheduled           for     i@ementation            July    1, 1970 will
correct        this     deficiency.           !l?he cost of material                 used till        be identified               to

specific         items being          repaired         within        each resource         control       center          and then

summarized to program                  level.

lXOllSlSTEMC!IES IN FEi?ORz?NG-m                                             COSTS

        GAO: Different                reporting         systems used by the Air Force Maintenance

Facilities            show widely         varying       unit         costs    applicable       to the saz~ output.
We identified             Pour reports           at the Air Materiel                 Area containing            four         different

costs to overhaul J-79-1.5                      engines         during       the seme time period.




                                                                     43
APPENDIX Ii
     Page 12

            OSD: We concur,                    however,        as the Air Force has                           pointed        Out,          additiOnal.

  clarification                is needed regarding                  the      content           di          intended         use      of     the

  different        reports.              The     End   Item       Product           Cost       Report            (RCS:      LOG-K65)
                                                                                                                                  reflects
  the standard                cost and projected                 actual           cost to overhaul                      an engine.               These

  data are based on labor                        standards          and material                    standards            and on factors

  for projected                labor     and material             vsriances                input      by accounting0                       The report
  is used by Directorate                        of Maintenance               Management as a basis                           to establish

  engine       sale prices              to customers.               The report               is prepared                 quarterly.

            The Industrial               Fund Cost of Sales Statement                                  is a monthly                 report           locally

  prepared        and used at Air Materiel                          Area level               to evaluate                 the effectiveness

  of sales prices.                     The procedures             for preparing                     this       report       were developed

  locally.             Time did not permit                    evaluation            of these procedures.                             Since the

  report       is for          local     purposes         only      and is not a part                          of any official                      system

  promulgated            by higher             headquarters           directives,                   we do not feel                  that       it        should

  be considered                as an official             report.
            The Maintenance                Cost Summary Report                      (RCS: LOG-C175) is a semi-annual

  report.         It      reports        separately            the actual              material              cost and computed actual
  labor       and overhead              cost for each type of repair                                 (major,            minor,       etc.)           of

  each engine by type,                    model,       series.              All     costs for                the period             are reflected,
  including            that     incurred         on incomplete               items remain5ng                          in work in process.
            The Organic            Maintenance            Cost Report               is the OSD report                       prepared                in

  accordance            with     the requirements                 of DoDI i220.29.

            In summsxy, we agree with                          the GAO that                 a profusion                 of reports             certainly
  contributes            to confusion              and lack of confidence                            in the data.                   However,              we

  also feel            that     there      should still             be a tistindfon                         maintained              between reports




                                                                        44
                                                                                       APPENDIX II
                                                                                           Page 13

designed      for planning      purposes,      such as the ~-65 used for projecting               sales

prices     in advance of work,        versus     reports    used to portray        history   of Co&s

already      incurred.       It pnust be recognized        that   SOBE disparity       is to be

expected      between projections       and history.

         We will   review     the need for reporting         requirenrnts     identified     by GAO,

and till      take appropriate       action    based on this       St&y.




                                                 45
APPENDIX III
     Page 1

     PRINCIPAL OFFICIALS OF THE DEPARTMENTOF DEFENSE

               AND THE MILITARY DEPARTMENTS

       RESPONSIBLE FOR ADMINISTRATION OF ACTIVITIES

                 DISCUSSED IN THIS REPORT


                                           Tenure of office
                                           From             To
                   DEPARTMENTOF DEFENSE

SECRETARYOF DEFENSE:
   Melvin R. Laird                  Jan,      1969    Present
   Clark M, Clifford                Mar.      1968    Jan.    1969
   Robert S, McNamara               Jan,      1961    Feb. 1968
DEPUTY SECRETARYOF DEFENSE:
   David Packard                    Jan,      1969    Present
   Paul H. Nitze                    July      1967    Jan.    1969

ASSISTANT SECRETARYOF DEFENSE:
  (COMPTROLLER):
    Robert C. Moot                  Aug.      1968    Present
    Robert N. Anthony               Sept.     1965    Aug. 1968


                 DEPARTMENTOF THE ARMY

SECRETARYOF THE ARMY:
   Stanley R. Resor                July       1965    Present
UNDER SECRETARYOF THE ARMY:
    Thaddeus R, Beal               Mar.       1969    Present
    David E, McGiffert             July       1965    Feb. 1969

ASSISTANT SECRETARYOF THE ARMY
  (FINANCIAL MANAGEMENT):
     Eugene M. Becker              July      1967     Present




                              46
                                                     APPENDIX III
                                                          Page 2

     PRINCIPAL OFFICIALS OF THE DEPARTMENTOF DEFENSE

               AND THE MILITARY DEPARTMENTS

       RESPONSIBLE FOR ADMINISTRATION OF ACTIVITIES

                 DISCUSSED IN THIS REPORT (continued)


                                         Tenure of office
                                         From            &

                  DEPARTMENTOF THE ARMY (continued)
COMPTROLLEROF THE ARMY:
   Lt. Gen. John M. Wright,     Jr.   Sept.   1970    Present
   Lt. Gen. Frank Sackton             July    1967    Aug. 1970

                  DEPARTMENTOF THE NAVY

SECRETARYOF THE NAVY:
   John H, Chafee                     Jan.    1969    Present
   Paul R. ignatius                   Sept.   1967    Jan.    1969

UNDER SECRETARYOF THE NAVY:
    John W. Warner                    Feb,    1969     Present
    Charles F. Baird                  Aug.    1967     Jan.    1969

ASSISTANT SECRETARYOF THE NAVY
  (FINANCIAL MANAGEMENT):
    Charles A. Bowsher                Dec.    1967    Present


                DEPARTMENTOF THE AIR FORCE

SECRETARYOF THE AIR FORCE:
   Dr. Robert C. Seamans, Jr.         Jan.    1969    Present
   Dr. Harold Brown                   Oct.    1967    Jan.    1969

UNDER SECRETARYOF THE AIR FORCE:
   John L. McLucas                    Mar.    1969     Present
   Townsend Hoopes                    Ott,    1967     Feb. 1969




                                47
APPENDIX III
     Page 3

     PRINCIPAL OFFICIALS OF THE DEPARTMENTOF DEFENSE

               AND TFIE MILITARY DEPARTMENTS

      RESPONSIBLE FOR ADMINISTRATION OF ACTIVITIES

                 DISCUSSED IN THIS REPORT (continued)


                                        Tenure of office
                                        From            To

                DEPARTMENTOF THE AIR FORCE (continued)

ASSISTANT SECRETARYOF THE AIR
  FORCE (FINANCIAL MANAGEMENT):
    Spencer J. Schedler              June   1969    Present
    Thomas H. Neilser                Jan.   1968    June 1969
    Conrad Marks, Jr.                July   1964    Jan.    1968




                                                   U.S.   GAO   Wash..   D.C.
                             48