Calculating and Applying Purchase Price Variance and Exchange Rate Variance

In addition to costing the purchase receipt transactions, the Transaction Costing process (within the Cost Accounting Creation process) calculates variances for material charges and for any existing landed cost charges. The variances are calculated based on the values retrieved by the Landed Cost Extract process from matched and posted vouchers in PeopleSoft Payables.

An exchange rate variance (ERV) occurs when the invoice for the purchased item is in a different currency than the inventory business unit's currency and the exchange rate between the two currencies changes between the time that you enter the purchase order and the time that you voucher the invoice.

Given the costs passed in from the Landed Cost Extract process, variances between the material price, landed costs, and exchange rates are calculated:

• For standard-cost items, two variances can be calculated, purchase price variance (PPV) and exchange rate variance.

  1. The purchase price variance is the difference between the standard costs for the material and landed cost elements and the corresponding actual costs from the matched, posted, and extracted vouchers. Based on the timing of the voucher processing and the Landed Cost Extract process, the PPV could be computed and posted in one or two parts. If the voucher is not available when you run the Transaction Costing process, then the system calculates the difference between the standard cost and the PO price. When the voucher becomes available, then the Transaction Costing process computes the difference between the voucher price (in terms of the exchange rate at PO time) and the standard cost less variances previously recorded.

  2. The exchange rate variance is the change between the exchange rate for material and landed costs on the PO and the exchange rate for material and landed costs on the voucher. This is calculated once the voucher has been matched, posted, and extracted. This is the difference between the amount on the voucher (in terms of the voucher exchange rate to the base currency) less the amount from the PO receipt (in terms of the PO exchange rate).

• For actual-cost items, variances are always applied once the voucher price has been matched, posted, and extracted.

  Putaways and depletions are adjusted for the variances. The cost adjustments are calculated for the difference between the current material and landed costs on the PO and the newly determined material and landed costs from the voucher (that has been matched, posted, and extracted). This adjustment does not break out the ERV separately; it is combined with the price variance. The Transaction Costing process finds the original putaways and updates the on-hand inventory stock and depletion records for the variance. The variance is posted based on the ChartField combinations used on the original entries. If you select the Hold for Final Cost check box on the Cost Profile page and run the Transaction Costing process in mid-period mode, then costing of putaways and depletions is put on hold until the corresponding invoices are matched, posted, and extracted; this eliminates the need for variances. This means that costs are not updated unless all cost components with the same cost element have been fully matched and the MATCH_STATUS_LC flag has been set to zero.) If you run the Transaction Costing process in regular mode, all transactions are costed using the available costs, regardless of the setting of the Hold for Final Cost check box. This means that costs are updated by element for all components with the MATCH_STATUS_LC flag set to zero, even if the flag is not zero for all components with that element.

• For perpetual weighted average items, the price variance and the exchange rate variance are calculated and applied if the Apply Perpetual Average Adjs check box is selected on the Transaction Costing process.

  The price variance is the difference between the PO material and landed costs and the voucher material and landed costs. The exchange rate variance is the difference in the exchange rate between the PO and the voucher. The Transaction Costing process automatically updates the current weighted average unit cost to take into account the price change. Inventory stock is revalued to the new weighted average using these transaction groups: 401 (Wt Avg Updates from AP) and 403 (Wt Avg Cost Updates - ERV). If the variances are based on more item units than are currently in on-hand stock, then the variance is applied proportionally to the on-hand inventory stock and the excess variance is written off using transaction group 405 (Wt Avg Update Writeoffs). This writeoff typically debits an expense account and credits an accrued liabilities account. For example, suppose that 100 units are vouchered and the variances are calculated for the 100 units; however, only 90 units are currently on hand. In this case, only 90 units worth of variance costs are applied to the item's weighted average cost for re-averaging purposes. As a result, 10 units worth of variance costs are written off.

• For periodic weighted average items, no variances are computed for material costs, landed costs or exchange rate variances.

  This method assumes that the invoices have been matched, posted, and extracted within the same period that the PO was entered. When you run the Transaction Costing process, it picks up the invoice costs for putaway and average cost calculations. If the invoice costs are not available, then the PO costs are used but no variance updates the average cost calculations for delayed invoice costs.