5 Things You Need to Know About Purchase Price Variance and How to Calculate It
One of the most important metrics in any business is its Purchase Price Variance (PPV). It’s a measure of how much money you save or lose buying goods on the open market. A PPV calculation can help you make smart decisions when it comes to purchasing inventory, and it’s important to understand precisely how it works. In this blog post, we’ll take a closer look at PPV and discuss why it’s so important. We will also cover five things you need to know about calculating PPV and give a step-by-step guide for understanding how to calculate PPV accurately.
What is Purchase Price Variance?
Purchase price variance (PPV) is the difference between the actual cost of goods purchased and the budgeted cost of those goods. The PPV formula is:
(Actual Cost of Goods Purchased – Budgeted Cost of Goods Purchased) / Actual Quantity Purchased
For example, if a company has a budgeted cost of $1,000 for 100 widgets, and the actual cost of purchasing 150 widgets is $1,500, the PPV would be:
($1,500 – $1,000) / 150 = $0.50
This means that the company’s widgets cost 50 cents more than what was budgeted for each widget. To calculate the total impact of PPV on a company’s bottom line, multiply the PPV by the total number of units sold. In this example, that would be:
$0.50 x 150 = $75
So in this case, purchase price variance has increased the company’s costs by $75.
How to Calculate Purchase Price Variance
In order to calculate the purchase price variance, you will need to know the following:
The standard price of the item you are buying
The actual price of the item you are buying
The quantity of the item you are buying
Once you have this information, you can calculate the purchase price variance by taking the difference between the standard price and the actual price, and multiplying it by the quantity.
For example, let’s say you are buying 1,000 widgets at a standard price of $10 per widget. However, when you go to purchase them, you find that they are actually selling for $11 per widget. In this case, your purchase price variance would be $1,000 (the difference between $10 and $11 multiplied by 1,000 widgets).
What Causes Purchase Price Variance?
There are a number of factors that can cause purchase price variance (PPV). The most common cause is changes in the market price of the goods or services being purchased. This can be due to inflation, supply and demand, or other economic factors.
Another common cause of PPV is differences in the quality of the goods or services being purchased. For example, if you purchase a lower quality product than what was originally specified, this will likely result in a higher PPV. Similarly, if you purchase a higher quality product than what was originally specified, this will likely result in a lower PPV.
Finally, another common cause of PPV is errors in the original purchase price calculation. This could be due to incorrect data being used, miscalculations, or simply human error. If the purchasing department does not have accurate records of the prices paid for previous purchases of similar items, it can be difficult to accurately calculate the current purchase price.
How to Reduce Purchase Price Variance
If you want to reduce your purchase price variance, there are a few things you can do. First, you can negotiate with your suppliers for better prices. You can also look for ways to reduce the cost of materials and shipping. Finally, you can streamline your purchasing process to make it more efficient.
Conclusion
We hope this article has helped to shed some light on purchase price variance and how it can affect your business. By understanding the concept of purchase price variance, you are able to more effectively plan for budget fluctuations that occur with changing prices. Additionally, by learning how to calculate this type of variance, you will have an easier time staying within budget and making informed decisions about when and where to make purchases.