Purchase price variance

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Purchase price variance
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Purchase price variance (PPV) is a difference between standard catalogue price of materials and a price on the received invoice which should be paid to the supplier [1]. Concept is able to be found in areas such as purchasing and production departments. According to Termini "this metric governs how much the company is to spend for materials in support of ongoing operations, whether is be for conversion into products or for company's own consumption like [2]:

  • office suppliers,
  • production materials,
  • maintenance materials,
  • outside serviced."

Genesis of PPV

PPV comes from a lack of complete information about future occurrences, due to the fact that budgeting for forward purchases is made at the end of every year. Purchasing and Accounting set prices of material basing on former cost, arising them by up to 2 % [3]. Upcoming fluctuation, for instance, gasoline or raw material prices will increase total prices what is quite unpredictable [4]. Nicholas S. Katko suggest that "in some cases, determining the purchase price variance is difficult". For example, commodity which often change their price and suppliers may change prices without warning. The main impetus is to clarify processes and diminish time without production what improves standards and helps in maintaining quality [5]. PPV in a longer period contributes to free competition, as a consequence of looking for lover prices. It develops new manufacturing, targets, and ideas [6].

Purchase price variance formula

Purchase Price Variance= "(Budget input price - Actual input price)x Actual quantity purchased" [7]

Importance of PPV

We can distinguish PPV's impact between good called favorable and bad, literally named unfavorable. The first one can be used, when we have spent less money or resources than standards assumed. In opposite, favorable impact occurs in a situation when standard was not reached. Moreover, PPV is a very useful metric to gauge in terms of how successfully the production department works [8]. Furthermore, PPV can press negative influence on quality of production due to cutting costs [9].

Footnotes

  1. Hamilton S. 2003, p.335
  2. Termini M. J. 2007, p.117
  3. Termini M. J. 2007, p.21
  4. Sollish F. 2005, p.20
  5. Katko N. S. 2013, p.111
  6. Burton T. T. 2012, p.180
  7. Balakrishnan R. 2008, p.328
  8. Smith D. 1999, p.59
  9. Davis E. 2012, p.302

References

Author: Maria Kucz

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