What Is Purchase Price Variance (PPV)?
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- Purchase price variance (PPV) is the difference between the price a business actually pays for purchased items and their standard cost, multiplied by the quantity received. It is used with standard costing. Calculated as actual price minus standard cost, a positive result means the business paid more than the standard cost, and a negative result means it paid less.
Also called: PPV
How it works
Purchase price variance (PPV) compares what you paid on a purchase with the standard cost set for that item, so purchasing and finance can see how far real prices move from plan.
In the federal Cost Accounting Standards, Standard 407 (48 CFR 9904.407) sets criteria for using standard costs for direct material and direct labor. It defines the building blocks for that standard:
- Standard cost: any cost computed with the use of pre-established measures.
- Material-price standard: a pre-established measure, expressed in monetary terms, of the price of material.
- Variance: the difference between a pre-established measure and an actual measure.
Oracle and Microsoft documentation turn that into a formula. Oracle Purchasing calculates purchase price variance as the quantity received multiplied by the difference between the purchase order price and the standard cost. Microsoft's Business Central documentation writes variance as actual cost minus standard cost.
PPV = (actual purchase price - standard cost) x quantity received
Not every system uses that sign. Oracle's JD Edwards documentation writes PPV the other way round, as the frozen A1 cost minus the purchase order unit cost, so check which convention your ERP uses. Oracle notes that its Purchase Price Variance Report is appropriate only for organizations using Inventory and standard costing.
When PPV is recorded
- Oracle: Inventory records purchase price variance on delivery into a subinventory, and Work in Process records it on delivery into a job or repetitive schedule.
- Business Central: the standard cost for the variance is fixed when you invoice the inventory increase. If the actual cost changes later, for example because you post an item charge, the variance updates.
- Cost Accounting Standard 407: material-price variances may be recognized either at the time purchases of material are entered into the books of account, or at the time material cost is allocated to production units.
Price variance vs. quantity variance
Standard 407 separates a material-price standard, the price of material, from a material-quantity standard, a pre-established measure of the quantity of material. PPV tracks price. Where a material-price variance is allocated to a production unit, the standard allows it to be combined with the material-quantity variance into one material-cost variance.
This is general information, not accounting advice.
Example
A pump manufacturer sets a standard cost of $12.00 for a valve.
- Order 1: 500 valves at $12.60. PPV = ($12.60 - $12.00) x 500 = $300. The plant paid $300 more than standard.
- Order 2: 500 valves at $11.70. PPV = ($11.70 - $12.00) x 500 = -$150. The plant paid $150 less than standard.
Business Central's own example works the same way: an item bought for 90.00 against a standard cost of 100.00 gives a purchase variance of -10.00, and a later item charge of 20.00 raises the actual cost to 110.00 and the variance to 10.00.
On Shopify
Shopify holds cost data on both sides of a purchase:
- Purchase orders: you can create purchase orders in the Shopify admin to record the commercial agreements that you make with your suppliers. A purchase order lists the products, quantities, costs, payment terms, and supplier details for an order.
- Cost per item: a product pricing detail you can add to track your business operating costs and profits.
The standard costs and variance postings described above are ERP costing features in Oracle and Business Central.
How Uncap helps
Uncap Connect is a Shopify-to-ERP integration app. The ERP stays the system of record, and Connect keeps Shopify in sync with it rather than replacing it.
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Frequently asked questions
What is PPV purchase price variance?
PPV, or purchase price variance, is the difference between the price paid for purchased items and their standard cost, multiplied by the quantity received. Paying $12.60 for 500 valves with a $12.00 standard cost gives a purchase price variance of $300.
What is the purchase price variance formula?
The purchase price variance formula is (actual purchase price - standard cost) x quantity received. Oracle Purchasing describes it as the quantity received multiplied by the difference between the purchase order price and the standard cost.
What are the main causes of variance?
A purchase price variance appears whenever the actual cost of a purchase differs from its standard cost. That happens when the supplier's price differs from the standard, or when later costs land on the purchase: in Microsoft's Business Central example, posting an item charge raises the actual cost and changes the variance.
