Purchase Price Variance

The unit cost of a line item on an AP voucher can sometimes differ from the unit cost of the associated line item on the originating purchase order.

The Purchase Price Variance (PPV) is the difference between the purchase order line unit cost of an item and the unit cost entered on the associated line item on the AP voucher.

The following purchase order line types can generate a PPV:

• Item
• Blanket Order
• Capital Equipment
• Description

An increased unit cost results in a positive variance and a decreased unit cost results in a negative variance.

Causes of PPV

The causes of PPV can include:

• A difference between the actual cost of an item and its current market value
• A shortage of a specific item which has driven up costs
• Increased shipping costs
• Changes to purchasing volumes
• Revised vendor cost structure

PPV Calculation

The following fields are used to calculate PPV:

• Unit Price - from the AP voucher line.
• Unit Cost - from the purchase order line.

Unit PPV

Unit PPV = Unit Price - Unit Cost with Options.

Total PPV

Total PPV = Unit PPV x Quantity Vouchered.

The following is an example of how PPV is calculated:

The original purchase order line is for a quantity of 100 items with a unit cost of $111.00.

The invoice is received and the associated AP voucher is created.

When the AP voucher line is created, the AP voucher Line Unit price entered is $114.00.

The Unit PPV is $3.00.

The Extended PPV (Unit PPV x Quantity) is $300.00.

The associated payable invoice (PIN) displays the new price of $114.00.

The PIN will debit the AP Liability account in the GL account and will credit the Accounts Payable (AP).

PPV Journals

When a matched AP voucher with PPV is pushed to Accounting, a PPV journal is created that reflects the unit cost changes for accounting purposes. A PPV journal can be created for any of the purchase order line types listed above.

Tracking Purchase Price Variance

You can track PPV Purchase Price Variance when purchases are complete to enable you to detect and assess pricing issues.

The PIN will debit the AP Liability account in the GL account and will credit the Accounts Payable (AP).

A journal entry will be created to post to the PPV to the Accounting GL account.

The account listed as the AP liability in the GL accounts will be debited if the invoiced price is above the purchase order price or credited if the invoiced price is below the purchase order price.

The offset will go to the GL account listed in the GL accounts table for PPV.

When the items are received into inventory the following journal entries are created:

• Debit the Inventory GL inventory.
• Credit the GL account listed in the GL accounts for AP liability. (for this example - $111 x Quantity).

Overriding the AP Voucher Period

When an AP voucher is created, its accounting period is calculated from its creation date. The AP voucher period can be overridden manually and the revised period will carry over to:

• The associated purchase invoice
• The PPV journal.

This ensures that all documents related to the transaction are reported in the correct period.