On March 6, 1986, we testified before the Subcommittee on Legislation and National Security, Committee on Government Operations, on Department of Defense (DOD) efforts to recover nonrecurring costs of major defense equipment sold abroad (see app. I). The hearing focused on problems with the current pro rata system of cost recovery and an alternative approach for improving cost recovery-a flat rate method. Our testimony was based on our review of DODS methodology for calculating the pro rata charge on six major systems. The Arms Export Control Act requires DOD to charge buyers of major defense equipment a proportionate share of nonrecurring research, development, and production costs. In an attempt to comply with the law, DOD has adopted a pro rata system to calculate a charge by estimating total nonrecurring costs and dividing the combined costs by an estimate of the total production quantity of a weapon system. This system does not achieve the objective of the law. All of the pro rata charges we examined were inaccurate in that they were either understated or overstated.