Understanding Variance Pricing
This section discusses:
Variance rates.
Variance pricing.
When a contract is awarded, a contractor can bill and recognize revenue for direct costs, indirect costs, and possibly fees associated with the performance of the contract. To calculate the indirect (overhead) costs associated with a government contract, a contractor utilizes provisional pricing rates. Provisional rates are estimates of actual costs that are incurred throughout the life of the contract. Provisional and rates are regulated and approved by the government, but may be subject to change throughout the life of a contract. Rate changes may be initiated by the government or the contractor. To manage rate changes, PeopleSoft Contracts uses PeopleSoft Project Costing's variance pricing functionality.
When managing government contracts, you may need to define costing, billing, and revenue rates to calculate transaction costs, overhead, and revenue for your contract's rate-based contract lines. PeopleSoft Contracts uses rate sets and rate plans to perform this function. Rate sets enable you to define how specific contract-related transactions are priced for costing, billing, and revenue recognition. Rate plans enable you to combine multiple rate sets together to perform more complex pricing scenarios.
Revenue rates are defined if you have selected the Separate As Incurred Billing and Revenue check box on the contract. If not selected, then revenue rates cannot be applied to the contract and the rates used for billing are also used for revenue recognition.
For government contracts, in addition to setting up rate sets for billing and revenue recognition, you also set up rate sets for costing transactions and calculating overhead amounts. These rate sets are identified by a rate definition type of Cost, or Cost/Billing, and can contain provisional rates.
Note: For rate sets that have a rate definition type of Cost/Billing, Variance Pricing is only applicable to target analysis types that are in the cost analysis group.
When rate changes occur, you may need to adjust rates and pricing retroactively for transactions that have already been billed or used for revenue recognition, as well as apply the new rates to transactions that have yet to be priced or billed. Variance pricing enables you to capture rate changes for your active contracts, and then apply those rate changes to your transactions retroactively for active contract lines. The system calculates the difference between the old and new rate and then applies the difference in rates against historical costs within a specified date range. New transactions are created for the difference in rates.
Variance Pricing Example
Assume that a project has a provisional indirect cost rate of 30 percent. One month the project accumulates an actual direct labor cost of 100 USD and an actual indirect cost of 150 USD. Payroll sends direct and actual indirect costs to PeopleSoft General Ledger, which results in these accounting entries:
|
Account |
Amount |
|---|---|
|
Direct labor cost |
100 USD |
|
Actual indirect labor cost |
50 USD |
|
Cash |
<150 USD> |
Payroll sends direct costs to PeopleSoft Project Costing. PeopleSoft Project Costing calculates the indirect burden cost to the project as follows:
(Actual direct labor × Provisional indirect cost rate) =30 USD
PeopleSoft Project Costing sends the indirect burden cost to PeopleSoft General Ledger, which results in these accounting entries:
|
Account |
Amount |
|---|---|
|
Applied indirect burden cost (labor overhead) |
30 USD |
|
Applied over/under asset |
<30 USD> |
In this example, the actual indirect labor cost is booked to an asset account at the end of the accounting period. The resulting accounting entries are:
|
Account |
Amount |
|---|---|
|
Applied over/under asset |
50 USD |
|
Contra expense |
<50 USD> |
At the end of the year, an evaluation is made to determine if the applied indirect burden cost, based on the provisional indirect cost rate, is in line with the actual indirect cost. In this example, the applied indirect burden cost is 30 USD and the actual indirect cost is 50 USD, which leaves an applied over/under asset account balance of 20 USD.
Based on the account balance, auditors determine that the indirect burden cost should be variance priced. Variance pricing is used to create a retroactive adjustment to align the provisional indirect cost with the actual indirect cost. A new rate 50 percent is used for variance pricing. An indirect cost adjustment is calculated as follows:
((50 percent − 30 percent) × 100 USD) = 20 USD
The final accounting entry from PeopleSoft Project Costing to PeopleSoft General Ledger at year-end posts the result from the variance pricing process, and brings the balance of the applied over/under asset account to zero. The accounting entries are:
|
Account |
Amount |
|---|---|
|
Applied indirect cost (labor overhead) |
20 USD |
|
Applied over/under asset |
<20 USD> |
Variance Pricing Rate Stacking Example
When you make a rate change to a cost rate set that is associated with the a rate plan, after variance pricing generates the variance row, the system prices the new transaction row according to the rate plan associated with the costing rate set that is modified.
Step 1: In this example, assume that you have defined a rate plan as follows:
|
Rate Set |
Basis |
Analysis Type |
Source Type |
Category |
Sub Category |
Rate Amount |
Target Analysis Type |
Target Sub Category |
|---|---|---|---|---|---|---|---|---|
|
PROV1 |
Original |
PAY |
LABOR |
ENG |
DIR |
.50 |
PRV |
FRING |
|
1.20 |
PRV |
OVH |
||||||
|
PROV2 |
Target |
PRV |
LABOR |
% |
OVH |
.30 |
PRV |
G&A |
|
FRDP1 |
Original |
PAY |
LABOR |
ENG |
DIR |
.60 |
FRD |
FRING |
|
1.30 |
FRD |
OVH |
||||||
|
FRDP2 |
Target |
FRD |
LABOR |
% |
OVH |
.40 |
FRD |
G&A |
|
BIL1 |
All |
PAY |
LABOR |
ENG |
DIR |
1.0 |
BIL |
|
|
PRV |
% |
% |
% |
1.0 |
BIL |
|||
|
REV1 |
All |
PAY |
LABOR |
ENG |
DIR |
1.0 |
REV |
|
|
FRD |
% |
% |
% |
1.0 |
REV |
Step 2: A 1,000 USD payroll transaction is entered with the following criteria:
|
Analysis Type |
Source Type |
Category |
Sub Category |
Amount |
|---|---|---|---|---|
|
PAY |
LABOR |
ENG |
DIR |
1,000 USD |
Step 3: The system prices the transaction row using the rate plan defined in Step 1. The results of the process are as follows:
|
Analysis Type |
Resource Type |
Resource Category |
Resource Sub Category |
Foreign Amount |
Resource ID |
Resource ID From |
Factor from Rate Set |
|---|---|---|---|---|---|---|---|
|
PAY |
LABOR |
ENG |
DIR |
1000 USD |
10001884 |
10001884 |
|
|
PRV |
LABOR |
ENG |
FRING |
500 USD |
10001885 |
10001884 |
.50 |
|
PRV |
LABOR |
ENG |
OVH |
1200 USD |
10001886 |
10001884 |
1.20 |
|
PRV |
LABOR |
ENG |
G&A |
360 USD |
10001887 |
10001884 |
.30 |
|
FRD |
LABOR |
ENG |
FRING |
600 USD |
10001888 |
10001884 |
.60 |
|
FRD |
LABOR |
ENG |
OVH |
1300 USD |
10001889 |
10001884 |
1.30 |
|
FRD |
LABOR |
ENG |
G&A |
520 USD |
10001889 |
10001884 |
.40 |
|
BIL |
LABOR |
ENG |
DIR |
1000 USD |
10001890 |
10001884 |
1.0 |
|
BIL |
LABOR |
ENG |
FRING |
500 USD |
10001891 |
10001884 |
1.0 |
|
BIL |
LABOR |
ENG |
OVH |
1200 USD |
10001892 |
10001884 |
1.0 |
|
BIL |
LABOR |
ENG |
G&A |
360 |
10001893 |
10001884 |
1.0 |
|
REV |
LABOR |
ENG |
DIR |
1000 USD |
10001894 |
10001884 |
1.0 |
|
REV |
LABOR |
ENG |
FRING |
600 USD |
10001895 |
10001884 |
1.0 |
|
REV |
LABOR |
ENG |
OVH |
1300 USD |
10001896 |
10001884 |
1.0 |
|
REV |
LABOR |
ENG |
G&A |
520 USD |
10001897 |
10001884 |
1.0 |
Step 4: After the transaction has been priced and processed through to PeopleSoft Billing and PeopleSoft General Ledger, a rate change occurs in the second provisional rate set (PROV2) which changes the rate from .30 to a new rate of .50. To perform variance pricing, you must access the rate set PROV2, and enter the new rate of .50 on the Rate Variance History page. When you run variance pricing the system creates a new variance row for the difference between the old rate and the new rate. The newly created row is as follows:
|
Analysis Type |
Resource Type |
Resource Category |
Resource Sub Category |
Foreign Amount |
Resource ID |
Resource ID From |
Factor from Rate Set |
|---|---|---|---|---|---|---|---|
|
PRV |
LABOR |
ENG |
G&A |
240 USD |
10001900 |
10001884 |
.50 |
The system then continues pricing the new row according to the rate plan defined in Step 1 above. This results in the following new billing row:
|
Analysis Type |
Resource Type |
Resource Category |
Resource Sub Category |
Foreign Amount |
Resource ID |
Resource ID From |
Factor from Rate Set |
|---|---|---|---|---|---|---|---|
|
BIL |
LABOR |
ENG |
G&A |
240 USD |
10001907 |
10001884 |
1.0 |
Whenever you make a change to a cost rate using the variance pricing functionality, and the rate set is part of a rate plan where rate stacking is defined, the system prices the new variance price row from the point where the change was made on down.