Purchase Price Variance (PPV): Formula, Journal Entries and Causes
Purchase price variance is the gap between what you paid and the standard or expected price. The formula, the journal entries and how to act on it.
Purchase price variance answers a simple question: did we pay what we expected to pay? Every business that sets a standard or budgeted price for what it buys eventually needs that answer, line by line, because a few cents per unit on a high-volume item is the difference between the margin in the plan and the margin in the accounts.
What purchase price variance is
Purchase price variance (PPV) is the difference between the actual price paid for an item and its standard price, multiplied by the quantity purchased. It is measured at the point of purchase, which is what separates it from the materials price variance some costing systems measure at the point of use.
The PPV formula
PPV = (Actual price - Standard price) x Actual quantity purchased
A positive result is unfavourable: you paid more than standard. A negative result is favourable: you paid less.
| Example | Standard price | Actual price | Quantity | PPV |
|---|
| Steel brackets | 10.00 | 10.40 | 1,000 | 400 unfavourable |
| Packaging film | 2.50 | 2.35 | 4,000 | 600 favourable |
| Fasteners | 0.12 | 0.12 | 50,000 | Nil |
The standard price is whatever your costing system treats as the expected cost: a standard cost set at the start of the year, the budgeted price, or the last negotiated contract price. Which one you use matters less than using it consistently, because a variance is only meaningful against a baseline nobody moves after the fact.
PPV and invoice price variance are different things
Two variances are often reported under one name, and separating them is what makes the number useful.
- Purchase price variance compares the purchase order price with the standard price. It is a buying decision: the price the buyer agreed.
- Invoice price variance (IPV) compares the supplier invoice price with the purchase order price. It is a billing outcome: the supplier charged something other than what was agreed.
An unfavourable PPV is a conversation with the buyer or the market. An unfavourable IPV is a conversation with the supplier, and it is exactly what a three-way match is designed to catch before the invoice is paid.
PPV sits between the plan and the purchase order. IPV sits between the purchase order and the invoice.
The journal entries
Under standard costing, inventory is carried at standard, so the variance has to be recognised somewhere when the goods arrive at a different price. Using the steel brackets example (1,000 units, standard 10.00, PO price 10.40):
| Event | Debit | Credit |
|---|
| Goods received | Inventory 10,000 (standard)
Purchase price variance 400 | GRNI accrual 10,400 (PO price) |
| Invoice posted at PO price | GRNI accrual 10,400 | Accounts payable 10,400 |
If the invoice then arrives at 10.55 instead of 10.40, the extra 150 is invoice price variance: debit GRNI 10,400 and IPV 150, credit accounts payable 10,550. The GRNI accrual clears exactly, which is the point. A price difference that is not routed to a variance account is left behind in GRNI as a residue nobody can explain at year end.
Businesses that carry inventory at actual cost (FIFO or weighted average) have no standard to vary from, so they do not book PPV as a separate account. They still benefit from reporting it, by comparing PO prices with the last price paid or the contract price.
What causes purchase price variance
- Market movement. Commodity, energy and freight prices moved after the standard was set. This is the variance nobody controls, and the one most worth forecasting.
- Off-contract buying. Someone bought from a supplier other than the one with the negotiated price, often because it was faster. This is the most controllable cause.
- Order size. Smaller or rushed orders miss volume breaks. Expedite fees and split deliveries show up here too.
- Currency. A foreign-currency purchase converted at a different rate than the one assumed in the standard.
- A stale standard. If every line is unfavourable by the same percentage, the problem is the standard, not the buying.
How to act on it
- Report it by supplier, item and buyer, not as one total. A total hides a favourable commodity swing behind an unfavourable off-contract habit.
- Catch it before the order is placed. Show the expected or last price on the purchase order form and route orders above a variance threshold for approval. A variance discovered at month end is history; one shown at the point of ordering is a decision.
- Keep IPV out of PPV. Match invoices against purchase order lines with a tolerance, so supplier billing errors are disputed rather than absorbed.
- Review standards on a schedule. Annually at minimum, and whenever a variance on one item stays in the same direction for a quarter.
Common questions
Is a favourable purchase price variance always good?
No. A low price can come with longer lead times, lower quality or a minimum order that ties up cash in stock. Read favourable PPV alongside delivery performance and quality returns for the same supplier before celebrating it.
Where does PPV go on the income statement?
Usually within cost of goods sold, as a separate variance line in management accounts. At period end, a material variance may need to be partly allocated to inventory still on hand so that stock is not carried at a cost far from what was actually paid.
What is the difference between PPV and materials price variance?
Timing. Purchase price variance is recognised when goods are bought; materials price variance is calculated on the quantity actually used in production. Recognising it at purchase isolates the buying decision and keeps inventory at standard.
What is a reasonable PPV threshold for approval?
Many teams start with a percentage (for example 5%) combined with an absolute amount, so that a large percentage on a trivial item does not create work while a small percentage on a large order still gets a second look.
The short version
PPV is the actual price minus the standard price, times the quantity bought, and positive is unfavourable. Keep it separate from invoice price variance, route both to their own accounts so the GRNI accrual clears cleanly, report by supplier and buyer rather than in total, and put the expected price in front of the person raising the order, which is the only point at which the variance can still be avoided.