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How purchase price variance is calculated in A/P

Adapted from the Macola® accounting technical note "How are PPV entries calculated in A/P?" (document 00.678.671), updated by Leahy Consulting in June 2018.

The purchase price variance account is hit whenever the purchase order, the receiver and the A/P voucher disagree. Which PPV account, when, and whether a PPV should arise at all depends mostly on the costing method set in I/M Setup.

The three costing methods, and the three accounts

Macola® supports Standard Cost, Average Cost and Last Cost. Average and Last behave identically as far as PPV is concerned, so everything below that says Average applies to Last too.

There are three PPV accounts:

Account Where it is defined
PPV Cost Material Cost Type/Location file, by the item's cost type and location. Non-inventoried items default from the Inventory Account in I/M Setup
PPV Quantity The same
PPV Suspense P/O Setup only

From release 7.5.103, the Inventory, PPV Cost and PPV Quantity accounts can be changed while keying the items on a purchase order, and the values keyed override the defaults.

Standard costing

Under standard costing a PPV arises in three places.

At receiving. If the cost of the item being received differs from the item's standard cost in the Item/Location file, a PPV is created when the receiver is entered. The account hit is PPV suspense, from P/O Setup, and it appears on the I/M Distribution to G/L report.

At vouchering. Entering the voucher reverses PPV suspense and posts the PPV Cost account from the Material Cost Type/Location file. Non-inventoried items use the inventory asset account from I/M Setup — unless the PPV account was overwritten during P/O line entry, in which case the keyed account is used.

When the voucher differs from the receipt. If the invoice quantity or cost differs from the received quantity or cost, another PPV posts using the PPV Cost and PPV Quantity accounts from the Material Cost Type/Location file, or from the Inventory Account in I/M Setup for non-inventoried items.

What suspense is for

Enter a purchase order for 2 units of an item with a standard cost of $500 — $1,000. Enter the receiver for 2 units at $400 each. The I/M distribution to G/L reads:

Account DR CR
Inventory $1,000
Receivings accrual $800
PPV suspense $200

Inventory takes $1,000 because 2 units at the $500 standard is $1,000. Receivings accrual takes the $800 actually received. The $200 goes to suspense. Assuming no accounts were changed during P/O entry, inventory and receivings accrual came from the Material Cost Type/Location file and PPV suspense from P/O Setup.

Voucher it for the same $800 and the A/P distribution reads:

Account DR CR
Receivings accrual $800
A/P liability $800
PPV suspense $200
PPV cost $200

That clears suspense and moves the amount to a real PPV Cost, since the end result is $200 away from the $1,000 standard.

Now voucher the same order for $900 instead:

Account DR CR
Receivings accrual $800
A/P liability $900
PPV cost $200
PPV suspense $200
PPV cost $100

The $200 credit to PPV Cost appears in the New A/P section of the distribution to G/L report next to the A/P liability. The $100 debit appears under Expense Distributions, because it is the result of the price changing during voucher entry. The net PPV Cost is $100 — $1,000 at standard against $900 actually vouchered.

That is the case for the suspense account. The real variance was $100, not $200, and suspense held the amount until the true figure was known.

Beyond this, the only other way standard costing produces a PPV is on the A/P side, when the voucher differs from the quantity received, the amount received, or both. Depending on the case, PPV Cost, PPV Quantity or both are hit.

Average and last costing

Two differences. PPV suspense is never calculated, and the I/M side produces no PPV entry at all.

  • A PPV arises only when the cost of the item received differs from the cost on the A/P voucher.
  • The account comes from PPV Cost and PPV Quantity in the Material Cost Type/Location file for inventoried items, or from I/M Setup for non-inventoried items.

Enter an order for 2 units at $50 each and receive 3 at $55 each. The I/M distribution reads:

Account DR CR
Inventory $165
Receivings accrual $165

No PPV, as described above. Now enter a voucher in A/P for $240, changing the quantity from 3 to 4 on the second screen of voucher entry:

Account DR CR
Receivings accrual $165
A/P liability $240
PPV cost $20
PPV quantity $55

Why it is worth getting right

The PPV accounts absorb every change in cost and quantity between receiving and vouchering. They matter in financial reporting, and the accounts they draw from are set in files most people rarely open. If a PPV balance looks wrong, the first two things to check are the Material Cost Type/Location record for the item's cost type and location, and whether the accounts were overridden on the purchase order line.

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