Financial Management

Navy Industrial Fund Has Not Recovered Costs Gao ID: AFMD-93-18 March 23, 1993

The Navy industrial fund provides such services as depot maintenance for ships and aircraft, as well as transportation for its customers, which include military groups, civilian agencies, and foreign governments. For fiscal years 1989 through 1991, the Navy industrial fund activities reported sales of nearly $50 billion. Although some of the fund's activities earned profits, the fund reported overall net operating losses of more than $794 million during this period. The aviation depots and shipyards incurred most of these losses. This report (1) determines why the Navy industrial fund incurred these losses and (2) assesses the appropriateness of fiscal year 1993 pricing practices.

GAO found that: (1) naval aviation depots and shipyards reported losses of $294 million and $591 million, respectively, for FY 1989 through FY 1991; (2) fluctuations in the volume and composition of work had an adverse impact on the Industrial Fund's financial results, since the Navy charged customers for goods and services based on projected workload; (3) the actual direct labor hours charged to work orders for the aviation depots and shipyards were less than the budgeted hours; (4) the prices the Fund charged for various services were not sufficient to recover its estimated costs; (5) defense pricing policies have affected the activities' ability to recover the costs incurred; (6) outdated work standards contributed to the Industrial Fund's inability to generate sufficient revenue to cover its costs; (7) $71 million of unreported incurred costs at the end of FY 1991 were applicable to FY 1991 and prior years; (8) the Department of Defense (DOD) directed Navy Industrial Fund activities to increase FY 1993 prices to eliminate accumulated operating losses by the end of FY 1993; and (9) DOD has recognized the need for a cash management policy for the Defense Business Operations Fund (DBOF) but, as of December 1992, the policy had not been finalized.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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