What is Purchase Price Variance (PPV)?

Purchase Price Variance (PPV) is a financial metric that measures the difference between the actual price paid for a product and the standard price that was expected to be paid for that product. It is commonly used in supply chain management to help organizations evaluate the performance of their purchasing processes.

How to Calculate Purchase Price Variance?

The Purchase Price Variance (PPV) formula is as follows:

PPV = (AQ x AP) – (AQ x SP)

• AQ: Actual quantity purchased
• AP: Actual price paid per unit
• SP: Standard price per unit

Here’s an example to help you understand the formula better:

Example

ABC Inc. is a manufacturer of widgets. They have a standard price of $10 per widget, but due to market volatility, they had to purchase some widgets at an actual price of $12 per widget. They purchased 500 widgets. To calculate the PPV, we can use the following formula:

PPV = (AQ x AP) – (AQ x SP)

• AQ: Actual quantity purchased = 500 widgets
• AP: Actual price paid per unit = $12 per widget
• SP: Standard price per unit = $10 per widget

Plugging these values into the formula:

PPV = (500 x $12) – (500 x $10) = $1000

This means that ABC Inc. paid $1000 more than they should have for their 500 widgets, resulting in a PPV of $1000.

Conclusion

Purchase Price Variance (PPV) is an important metric for supply chain management as it helps organizations to evaluate their purchasing processes and identify areas for improvement. By calculating the PPV, organizations can determine how much more or less they paid for a product compared to what they should have paid, and take corrective actions to reduce costs and increase efficiency.

By understanding the PPV formula and how to calculate it, organizations can make informed decisions about their purchasing processes and improve their bottom line.

FAQs

1. What is the Purchase Price Variance formula? The PPV formula calculates the difference between the actual cost of purchasing a product and the standard cost of purchasing that same product.
2. What are the inputs needed for the PPV formula? The inputs required for the PPV formula are the actual quantity purchased, the actual price paid per unit, and the standard price per unit.
3. What does the PPV formula tell us? The PPV formula tells us whether we paid more or less than the standard cost for a product and by how much.
4. Why is the PPV formula important? The PPV formula is important because it helps companies identify potential cost savings opportunities and manage their purchasing costs.
5. Can the PPV formula be used for services as well as products? Yes, the PPV formula can be used for services as well as products.
6. How often should the PPV formula be used? The frequency of using the PPV formula depends on the company’s purchasing needs and goals. However, it is typically used on a regular basis, such as monthly or quarterly.
7. What is a favorable PPV result? A favorable PPV result means that the actual cost of purchasing a product was lower than the standard cost, resulting in cost savings.
8. What is an unfavorable PPV result? An unfavorable PPV result means that the actual cost of purchasing a product was higher than the standard cost, resulting in additional costs.
9. How can a company improve its PPV result? A company can improve its PPV result by negotiating better prices with suppliers, reducing ordering and transportation costs, and improving inventory management.
10. Can the PPV formula be used in combination with other financial ratios and formulas? Yes, the PPV formula can be used in combination with other financial ratios and formulas, such as the gross profit margin and return on investment, to provide a more comprehensive analysis of a company’s financial performance.