What is PPV (Purchase Price Variance)? - Formula, Calculations

The price variance is the difference between the price at which a good or service is expected to be sold and the price at which it is actually ... Search erp-information.comContactThepurchasepricevarianceisthevariancecreatedbytheactualpricepaidtoavendorformaterialcomparedtothestandardcost.WhatisPPVorPurchasePriceVaria... xToviewthisvideopleaseenableJavaScript,andconsiderupgradingtoa webbrowserthat supportsHTML5videoWhatisPPVorPurchasePriceVarianceItcansignificantlyimpactyourbottomline,soit’sessentialtounderstandhowtocalculateitandwhatfactorsaffectit.ThisblogpostwilldiscusswhatPPVisandhowtocalculateit.We’llalsolookatsomefactorsthatcaninfluenceitandrelatedterms.WhatisPPV?Thepurchasepricevariance(PPVfinance)isthedifferencebetweenthepurchasepriceandtheactualcostofagoodorservice.Itisalsoknownaspurchasepricevarianceanalysis.Itisusedtomeasurehowmuchacompanyspendsongoodsandservices.Whydoesitmatter?Forbusinesses,itcanaffectyourbottomlineandprofitability.Itisalsovitalforinventorymanagementbecauseyouwanttopurchaseitemsattherightamountnottohavetoomuchortoolittlestockonhand.HowtodothePPVcalculation?Tocalculatepurchasepricevariance,youneedtoknowthepurchaseprice,theactualcost,andthequantitypurchased.purchasepricevarianceformulais,PPV=(purchaseprice–actualcost)/purchasepriceForexample,ifacompanybuysofficesuppliesfor$100buttheactualcostisonly$80,thePPVwouldbecalculatedas($100–$80)/$100=20%.Thismeansthecompanyspent20%moreonofficesuppliesthanneeded.Thegeneralmodelforcalculatingaquantityvarianceis:Quantityvariance=(standardquantity–actualquantity)Thiscalculationtellsyouhowmuchtheactualquantityofproductsdiffersfromthestandardquantity.Theresultisexpressedintermsofdollarsorpercentages.Thisinformationcanbehelpfulwhentryingtoidentifyreasonsfordiscrepancies.Forexample,ifthepurchaseorderstatedthat500widgetswereordered,butonly450werereceived,thequantityvariancewouldbe(-50).FactorsthatcanimpactPPVFactorsthatcanimpactitinclude:Purchasequantity–ifthebuyerordersalargeamountofproductthanexpected.Purchaseprice–ifthepurchasepriceishigherorlowerthanexpected.Purchasedate–ifitisearlierorlaterthanexpected.ShippingTerms–FOB(freeonboard)orCIF(cost,insurance,andfreight)canaffectwhichpartyisresponsibleforanyvariationincost.Vendordiscounts–ifthebuyernegotiatesadealwiththevendor,thatcausesvariance.Taxes–differenttaxratesinotherstatescancauseittovary.Productquality–iftheproductisofalowerorhigherratethanexpected,thiswillalsoaffectit.It’sessentialtobeawareofthesefactorstomakeinformeddecisionsaboutyourspending.ExamplesofPPVinactionExample1Forexample,ifacompanyorders100gadgetsatapurchasepriceof$10perwidget,buttheactualcostofthegadgetis$11perwidget,thevariancewouldbe($10–$11)/100=-$0.1or-10%.Thecompanyspent10%morethanitshouldhaveonthewidgets.Example2Ifacompanyorders100gadgetsatapurchasepriceof$10perwidget,buttheactualcostofthegadgetis$9perwidget,thevariancewouldbe($10–$9)/100=$0.1or10%.Thecompanysaved10%onthepurchasepricebyorderingthegadgetslowerthanexpected.TipsforminimizingpurchasepricevarianceComparepricesbeforemakingapurchaseNegotiatepriceswithsuppliersOrdersmallerquantitiestoavoidoverbuyingUsepurchaseorderformstotrackordersandensureaccuracyMakesureyouunderstandtheshippingtermsofyourpurchaseCheckforsupplierdiscountsStayup-to-dateonmarketpricesKeeptrackofpurchasepricesovertimeFAQsWhatisthepricevariance?Thepricevarianceisthedifferencebetweenthepriceatwhichagoodorserviceisexpectedtobesoldandthepriceatwhichitisactuallysold.Manyfactorscaninfluencepricevariance,includingavailability,demand,seasonality,andweather.Inaddition,insomecases,pricevariancecanbecausedbymarketmanipulationorfraud.HowdoyoucalculatepurchasepricevarianceinSAP?TocalculatePPVinSAP,youneedtofollowthesesteps:1.Firstly,youneedtoidentifythepricevariancesforeachpurchaseorder.2.Todothis,comparethepurchaseorderpricewiththestandardpurchaseprice.3.Then,calculatethedifferencebetweenthetwoamounts.4.Finally,multiplythisdifferencebythepurchaseorderquantity.Whendoesthefavorablecostvarianceoccur?Thefavorablecostvarianceusuallyoccurswhenthepurchasepriceislowerthantheactualcost.Whatisdirectmaterialspricevariance?Directmaterialspricevariance(DMPV)isthevariancebetweentheactualpurchasepriceofmaterialsandthestandardcost.Thisvariancecanbepositiveornegative,dependingonwhetherthepurchasepricewashigherorlowerthanthestandardcost.Itiscalculatedbysubtractingthestandardcostofmaterialfromtheactualpurchasepriceofthematerial.DMPV=(actualpurchaseprice–standardcost)Thiscalculationwillhelpyouunderstandhowmuchmoneywassaved(orlost)duetopurchasepricefluctuations.It’simportanttonotethattheDMPVincludesonlythedirectmaterialsinaproduct,notindirectmaterials.ConclusionPPVisthedifferencebetweenthepurchasepriceandtheactualsellingpriceofaproductorservice.Thiscalculationconsidersdiscounts,rebates,allowances,andotherdeductionsfromthepurchaseprice.Understandingpurchasepricevarianceisessentialformakingsoundbusinessdecisionsaboutpricingandinventorymanagement.You'llalsolike:CostofERP(HowMuchDoesERPCostandWhatInfluenceit)WhatIsaPurchaseOrder(PO)?-Types,Formats,TemplatesDeliveryPerformanceExplained:Measures,KPIs,andHowto…WhatareGrossRequirements?(3mainCharacteristics)WhatisActualCost?(Calculation,Formula,andExamples)WhatareNetRequirements?-calculationsandexamplereportthisadreportthisadreportthisadABOUTUSComprehensive,unbiasedandauthenticinformationaboutEnterprisesoftwaresystems.ContactUsPrivacy©2007-2022ERPInformationxx