Purchase price variance, shortened to PPV, is the difference between the actual unit price paid for a purchased material or item and its standard unit price, multiplied by the actual quantity purchased. The name says where the difference is isolated: at the point of purchase in a standard cost system, rather than later, when the material is issued to production. It is unfavorable when the price paid exceeds standard and favorable when it comes in below.
A material-price standard is a pre-established measure, expressed in monetary terms, of the price of material, and a material-quantity standard is the same kind of measure, expressed in physical terms, of the quantity of material (section 9904.407-30 of the Cost Accounting Standards). Those are the two per-unit measures a material cost is built from, and the meanings of standard cost and of a variance against it are set out in budgeted.
The Formula and Its Terms
Purchase price variance = (actual unit price - standard unit price) x actual quantity purchasedThe actual unit price is what the invoice charges per unit. The standard unit price is the material-price standard set in advance for that item. The actual quantity purchased is the quantity received in the period, not the quantity issued to production.
A Worked Example
Say a manufacturing client buys one raw material on a standard cost system that recognizes price variances at purchase, and the month produces the figures below.
Standard unit price $4.00 per pound
Actual unit price paid $4.30 per pound
Actual quantity purchased 12,000 pounds
Price difference 4.30 - 4.00 = $0.30 per pound
Purchase price variance 0.30 x 12,000 = $3,600 unfavorable
Material cost at standard 4.00 x 12,000 = $48,000
Actual purchase cost 4.30 x 12,000 = $51,600
Check 51,600 - 48,000 = $3,600Raw materials enter inventory at the standard figure and the difference sits in a separate variance account, so nothing downstream of the purchase carries the price move. Quantity is held constant across the calculation, which is what makes the answer a statement about price alone.
When the Variance Is Recognized
Material-price standards may be used and their related variances recognized either at the time purchases of material are entered into the books of account, or at the time material cost is allocated to production units (section 9904.407-50 of the Cost Accounting Standards). That choice decides what the raw materials ledger holds. Recognize at purchase and inventory carries material at standard from receipt, with the price move stripped out before anything is issued. Recognize at issue and purchases enter at actual, so the ledger holds real prices and the variance surfaces only when material reaches a production unit.
The first route carries a grouping requirement. Variances recognized at purchase shall be accumulated separately by homogeneous groupings of material, and the examples the standard gives of such a grouping are one whose prices are all expected to fluctuate in the same direction and at substantially the same rate, and one whose items are held for use in a single production unit yielding homogeneous outputs. A plant-wide purchase-price variance account holding materials whose prices are expected to move at different rates fails that test (section 9904.407-60 of the Cost Accounting Standards, illustration (d)). Those criteria bind contractors with covered government contracts. Outside that scope they are not mandatory, but the timing choice they set out is still one a standard cost system has to make.
Where the Balance Goes at Period End
The variance is not a period charge by default. Where price variances are recognized at purchase, the variances of each homogeneous grouping shall be allocated at least annually to items in purchased-items inventory and to the production units receiving items from that grouping, and insignificant variances may instead be included in appropriate indirect cost pools for allocation to applicable cost objectives (section 9904.407-50 of the Cost Accounting Standards). The balance is spread back across what is still on hand and what has already moved through production, so part of it can reach cost of goods sold on the income statement while part of it stays in inventory.
The tax rule pushes the same way. Proper use of a standard cost method requires that a taxpayer reallocate to property a pro rata portion of any net negative or net positive overhead variances and any net negative or net positive direct cost variances, apportioned among the property to which the costs are allocable (Treasury Regulation 1.263A-1(f)(3)(ii)). The same subsection then carries a significance release, worded as the one that excuses an insignificant burden adjustment from allocation in costing overheads. A purchase price variance is a direct cost variance rather than an overhead one, so it is the reallocation half of that rule that reaches it.
A standard nobody has revisited is one ordinary cause of a variance that runs the same direction month after month. The condition GAAP puts on standard costs, that they be adjusted at reasonable intervals to reflect current conditions, sits in 2-way variance analysis alongside the overhead split into budget and volume variances, which purchase price variance sits outside as a materials variance.
What Purchase Price Variance Is Confused With
The Materials Quantity Variance
Price and quantity are separate pre-established measures, so the total materials variance carves into two pieces that answer different questions. Purchase price variance holds quantity at actual and asks what the price did. The materials quantity variance, also called the usage variance, holds price at standard and asks what consumption did. Once a price variance has been allocated to a production unit it may be combined with the material-quantity variance into a single material-cost variance for that unit (section 9904.407-50 of the Cost Accounting Standards), which is how the two stop being distinguishable on a report.
A Procurement Savings Number
Procurement teams often read the same figure as a savings or buyer-performance measure. That is a management use of the number rather than its costing meaning, and the benchmark is a forecast: the standard’s own illustration sets a material-price standard from the average purchase prices expected to prevail during the calendar year (section 9904.407-60 of the Cost Accounting Standards, illustration (a)). A favorable figure can mean the forecast was set high, or that material was bought in a larger lot or earlier than the production plan required. Because the variance is struck on the quantity purchased, buying ahead enlarges it without changing what the units consumed in the period actually cost.
Common Questions
The same measure under a looser name. Purchasing price variance, purchase price variance and PPV all name the price difference on material bought, multiplied by the quantity purchased.
What you paid per unit, minus what you planned to pay per unit, times how many units you bought. It says nothing on its own about how much material the work actually used.
Every price variance has one shape: the gap between an actual rate and a standard rate, multiplied by the actual quantity that rate applied to. For material the quantity is the amount purchased, which gives PPV. Run the same subtraction on a labor-rate standard against hours worked and it gives the labor rate variance, and those per-unit standards are set out in budgeted.
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