PPV - In General

PPV - Purchase Price Variance, which haunts many people like Permanent Paralytic Virus is now been cracked down to the simplest of understanding.

Purchase Price Variance (normally referred as PPV) in simple words is just the difference between the Standard Cost and the Purchase Cost.

For Instance:

You see an ad in newspaper, Audi Q3 S Edition starting at INR 24.99 Lakhs..!! With a WOW exclamation you make a budget of INR 25.00 Lakhs to buy the car.

With all joy in your heart step into Audi showroom, and to the shock of lifetime you will come to know you have to shed additional 4.00 lakh towards insurance, registration and on and on, to get the car really on the road..!!

This shocking difference of INR 3.99 Lakhs between your planned and actual purchase price of the car is your Purchase Price Variance. This increased purchase cost is –ve PPV.

Not being so pessimistic, there are also instances of +ve PPV, where you are saving on your budgeted amount. The best example would be of buying a mobile phone after making a budget based on best buy price stated in ad.

This can be formulated as below;

Standard Cost – Actual Cost = Purchase Price Variance (PPV)

25.00 Lakhs – 28.99 Lakhs = (3.99 Lakhs)

Isn't this very simple..!! :)

We will add a little on this!

This time you are importing another Audi from US, but learnt from your previous shocking experience, you have made a proper budget of USD 50,000 towards CIF – Cost, Insurance and Freight. Hence, set aside an planned amount of INR 30,00,000 (50,000*60) towards the same at the time of order.

Your brand new Audi has arrived in the port and with all joy ask you bank to pay off the LC (Letter of Credit). Your bank pays of your LC and debits an amount of INR 32,50,000. Surprised by this you ask the bank, reason for deducting INR 32.50 Lakhs in the place of INR 30.00 Lakhs. You learn that this is because ForEx rate at the time of order was 60 INR per USD and now it is 65 INR per USD. You had made a budget based on 60 INR per USD.

This type of variance arises when you are making purchase in foreign currency. The fluctuation in ForEx between the order and actual delivery date results in Foreign Exchange Variance.

This can be formulated as below;

Order Cost – Actual Cost = Foreign Exchange Variance

30.00 Lakhs - 32.50 Lakhs = (2.50 Lakhs)

Standard Cost – Order Cost = Price Variance

30.00 Lakhs - 30.00 Lakhs = 0

Standard Cost – Actual Cost = Price Variance + Foreign Exchange Variance = Total Purchase Price Variance (PPV)

30.00 Lakhs – 32.50 Lakhs = 0 + (2.50 Lakhs) = (2.50 Lakhs)

In real business situation Price Variance and Foreign Exchange Variance is common. 

But, why to analyze this variance, why not consider actual cost as cost and ignore standard cost? Anyway actual cost is final cost..!!

Variance analysis provides a framework for business managers to breakdown the overall performance of an organization, so that each individual element of the business can be isolated and analyzed in turn. 

“There is little to be gained from the next performance if we do not think about the last performance in detail.”

Going further we will learn how this works in SAP..!!