What Is Purchase Price Variance (PPV)?
Also known as: PPV, purchase price variance accounting
Definition
Purchase price variance is the difference between the standard cost of a purchased item and the actual price paid, multiplied by quantity. A positive or negative balance in the PPV account shows how purchasing costs compare with plan.
Purchase Price Variance (PPV) Explained
Companies that use standard costing carry inventory at a fixed standard cost. When a purchase order is received or invoiced at a different price, the inventory stays at standard and the difference goes to a purchase price variance account. If the standard is 10.00, the PO price is 10.40 and 1,000 units are received, the PPV is 400 unfavorable.
The timing of the posting depends on the ERP setup. Many systems record PPV at goods receipt using the PO price, then adjust for any invoice price difference at invoice verification. In SAP, the price difference account is posted through account determination when the price control is S (standard), for example during MIGO receipt or MIRO invoice posting. Business Central records purchase variance against the item with standard costing, and NetSuite posts PPV on bill entry for standard cost items. Items on average or FIFO costing do not produce PPV because inventory value moves to the actual price.
Analysts split PPV into price change, currency effect, freight differences and quantity breaks. A persistent unfavorable PPV usually means the standard is stale, a supplier raised prices, or buyers purchase off-contract. A persistent favorable PPV may mean the standard was set too high.
Reporting by buyer, supplier and commodity is the usual way to use PPV, but it can reward the wrong behavior if buyers chase low price over quality and delivery.
Why It Matters
- It is an early indicator of supplier price inflation hitting margins before the next cost roll-up.
- Large unexplained PPV often points to errors in PO pricing, unit of measure or exchange rate.
- It affects reported gross margin directly when standards are not updated in time.
- Auditors look at PPV and its clearing at close to test inventory valuation.
In Practice
A standard-cost item has standard 10.00. A buyer places 5,000 units on a PO at 10.40, and the invoice also shows a 0.05 per unit freight surcharge outside the PO. Receipt posts 200 of PPV (5,000 x 0.40) at receipt. The invoice difference of 250 posts to PPV or an invoice price variance account, giving total unfavorable PPV of 450, which the finance team reviews against the next standard update.
Frequently Asked Questions
What is the purchase price variance formula?
PPV = (actual price - standard price) x quantity purchased. A positive result is unfavorable because you paid more than standard.
Does average costing have PPV?
No. With average or FIFO costing, inventory is valued at actual purchase price, so no price variance account is needed.
Where does PPV appear on the financial statements?
It normally sits in a variance account in cost of goods sold, or in inventory when capitalised, depending on the company policy and period-end treatment.
Related Terms
Standard Cost
Standard cost is a predetermined per-unit cost for material, labor, and overhead, set in advance and used to value inventory and transactions. Differences between standard and actual are captured as variances that isolate where cost deviated.
Three-Way Match
A three-way match is the accounts payable control that compares the purchase order, the goods receipt, and the supplier invoice on quantity and price before releasing payment, ensuring a company pays only for what it ordered and actually received.
Landed Cost
Landed cost is the total cost of bringing purchased goods into inventory, combining the supplier price with freight, insurance, customs duty, tariffs, brokerage, and handling, so inventory is valued at what the material truly cost to acquire.
General Ledger
The general ledger is the central accounting record of a business, where every financial transaction posts as balanced debits and credits against accounts in the chart of accounts, producing the trial balance behind all financial statements.
Goods Received Not Invoiced (GRNI)
Goods received not invoiced, also called GRNI or GR/IR, is the accrued liability for items received into stock for which the supplier invoice has not yet been matched or posted. It is cleared when the invoice is verified.
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