What is a Purchase Price Variance (PPV)?
It is the difference between a unit price billed on an invoice and the unit price referenced on the related Purchase Order.
In some cases, a PPV could be the result of rounding. Especially if unit prices include more than 2 decimal places. PPV can also be the result of price increases imposed by a vendor after a PO has been accessed but before goods are shipped. This is especially the case if a PO covers releases over an extended period.
PPV is not the difference between the total quantity billed and the quantity ordered or the difference between product billed and product not on the order.
How does our company manage Purchase Price Variances (PPV)? Are they being handled per an established procedure? Are the procedures being applied consistently?
For example, the PO unit price might go out 2 decimal places, but the vendor may bill a unit price that goes out 4 decimal places. The resulting PPV may be only a few cents. Is Accounts Payable to send the invoice to the Purchaser to approve the PPV?
The unit price on the PO is $100/ea. for 10 units. The vendor bills a unit price of $100.20/ea. for the 100 units. The PPV is $2.00 for the total amount ordered/billed. Yes, the purchaser should be notified of the pricing difference, but it is very likely the purchaser would approve this PPV anyway. Should the processing of the invoice be delayed for a $2 difference, or .2% of the invoice amount?
Many companies have a PPV Allowable Tolerance equal to a percentage of the invoiced amounts or a maximum dollar amount, whichever is less. Consider $100 or 5%. In the above example, the invoice could be processed without delay since the difference is both less than $100 and less than 5%. However, if the unit price were $106/unit for 10 units and the PO unit price was $100/unit, the PPV would still be less than $100 but it would be more than 5%. The PPV is outside of the allowable tolerance. Does your ERP have the functionality to prevent this scenario from being processed until the PPV is approved by the purchaser? Will the AP Specialist check their math each time or make a judgement call?
Will the PPV, whether approved or within allowable tolerances, be allocated to the correct GL Code and related dimensions? The coding could be different depending on whether the purchase is for inventory, direct non-inventory or in-direct purchases.
Have PPV calculated, identified as allowable or not, approved when needed, and allocated correctly and consistently every time. Consider AP Workflow Automation. Managing PPV is only one of the many benefits such a system that could improve your financial reporting.
Want to learn more? Contact New England Document Systems. They have the experience, and the resources to assist you; from answering your questions about available solutions to helping you to implement the right tool. Contact us to discuss just how much improvement you want to see in your Accounts Payable Operation.
This article is part of New England Document Systems’ partnership with industry experts. This contribution was written by Anne Wheeler of CS Process Flows, LLC. Anne is a Consultant and Project Manager specializing in Accounts Payable processes and systems.