1. Product Costing and Manufacturing Accounting Implementation Guide
  2. Purchase Price Variance

Purchase Price Variance

For purchased items, a purchase price variance (PPV) results when the standard cost differs from the actual purchase price. If you use extra costs on purchased items, the total standard cost might differ from the A1 (material) cost. This difference is the material burden cost.

When you receive a purchase order, the system updates the accounts payable account using the price on the purchase order. The system updates the inventory account with the standard item cost from the F4105 table. Any difference between the two costs is made up of PPV and material burden. PPV is the difference between the frozen A1 cost and the purchase order cost.

Material burden cost is the difference between the total standard cost from the F4105 table and the A1 cost:

  • PPV = (A1 cost) − (purchase order unit cost)

  • Material burden cost = (total standard cost) − (A1 cost)