serve to resolve the present conflict of views. Moreover, while I find it difficult to ascribe validity to the so-called incremental cost approach in the sense you have used the term, I likewise am not prepared to endorse the flat "use" principle of cost allocation as it is applied in the cost ascertainment system.

In an effort to approach in the most constructive manner the general problem of cost accounting and financial administration which your inquiry presents, I am led to suggest the following broad course of action for your consideration: (a) Aggressive continuation of your present program of revamping the basic accounting system of the Department, with special emphasis on developing a basic accumulation of cost data in a manner designed to make it useful to management for evaluating performance on a responsibility concept; and (b) working with appropriate committees of Congress to develop an authoritative and definitive set of assumptions from which bases of allocations may be drawn for application to such cost data in determining the cost of the various classes of service for ratemaking purposes. This will provide a service to management not now accomplished by the cost-ascertainment system and will be an appropriate outgrowth of the dynamic program you are now pursuing which has already brought about many significant improvements in accounting for the Post Office Department. I am sure you know that we in the General Accounting Office will be more than glad to continue our cooperative work with your Department in these constructive endeavors.

Sincerely yours,

(Signed) LINDSAY C. WARREN, Comptroller General of the United States.

APPENDIX 3

Hon. Toм MURRAY,

COMPTROLLER GENERAL OF THE UNITED STATES,
Washington, March 16, 1956.

Chairman, Committee on Post Office and Civil Service,
House of Representatives.

DEAR MR. CHAIRMAN: This is in reply to your request of March 14, 1956, for our opinion concerning the validity and soundness of the approach used by the Post Office Department in the tables included under the heading "Application of the Cost Ascertainment Report to Postal Ratemaking," at the beginning of the 1955 cost-ascertainment report. In the tables included in this section a formula is applied to the allocated costs for the various classes of postal service developed by the Department's cost-ascertainment system to arrive at revenue goals for such classes of service and related recommendations for rates.

The formula is explained as being based on studies of an internal post-office committee and reduces to composite mathematical percentages the relative weight which the Department considers should be applied to its allocated cost data to give what it regards to be appropriate recognition to certain "intangible" elements, not reflected in its cost allocations, in the establishment of revenue goals. These "intangible" factors are not completely identified, but are explained as including such factors as "(1) the value of priority given to any one class of mail or service, (2) the relative values of the various services to the public, and (3) the relative intrinsic values of the items handled." We also understand that recognition is given in the formula to "ability to pay."

The Post Office Department points out that the cost-ascertainment system distributes its expenditures by accounting and statistical means to each class of service on the basis of its use of the postal facilities and personnel. In doing this it, in effect, regards each class of service as of equal importance for costallocation purposes in that it does not attempt to reflect any differential for any class of service for the intangible factors, except to the extent that such factors may be reflected in the "use" of personnel and facilities.

It is, of course, generally recognized that the establishment of rates or prices is a much broader question than the development of costs. Costs on whatever basis determined cannot be expected to become automatic indicators of rates because of the necessity for the consideration of other factors, many of which are intangible in nature and do not lend themselves to accounting treatment. However, the practices adopted and the bases used in the preparation of cost data should be responsive to basic policy to the extent that Congress, as the responsible body, lays down such policy. This observation stems from the fact that any

system of cost allocation is necessarily based on certain given assumptions and only to the extent that there is agreement as to the responsiveness of the assumptions to the policies involved can there be expected to be agreement as to the validity of the resulting data.

In the absence of a definitive policy on the part of the Congress, we are unable to express an opinion as to the validity and soundness of the approach of the Post Office Department in terms of a predetermined legislative standard. For example, if the Congress were to adopt the premise that the postal service is to be self-supporting, then ability to pay becomes a basic factor for its consideration. Whether this factor should be treated separately or be included along with other intangible factors in arriving at a composite "allowance for intangible factors," as shown in the 1955 cost ascertainment report, is still another matter for congressional consideration.

In the circumstances, we believe the Post Office Department has followed a logical course by presenting a proposal which sets forth its revenue objectives and explains the premises underlying the data submitted. With this material before it, the Congress can review the data submitted in the light of the premises on which it is based and arrive at a course of action deemed to be in the public interest.

Sincerely yours,

JOSEPH CAMPBELL, Comptroller General of the United States.