1. Using Supply Chain Cost Management
  2. Variance Absorption

Variance Absorption

The Match Option selected on the purchase order schedule is used to calculate the variances. If the option is set to Order, the invoice is matched to the purchase order, and if set to Receipt, the invoice is matched to the receipt.

Difference between the invoice and the purchase order or receipt amounts is the invoice price variance. If the invoice is in a currency different from the ledger currency, the exchange rate fluctuations can cause a change in the Payables liability in the ledger currency. This variance is known as the exchange rate variance (ERV).

Depending on the match option, the exchange rate variance is calculated as:

  • If the option is set to Order, the currency conversion rate on the purchase order is used to calculate the exchange rate differences.

  • If the option is set to Receipt, the currency conversion rate on the receipt is used to calculate the exchange rate differences.

The variance is recorded in the accounted currency (ledger currency). The currency amount entered remains the same if the vendor sends the invoice for the same amount.

If the match option is set to Order, then all the invoices apply to all the receipts for a corresponding purchase order and the variances are fully absorbed. If the match option is set to Receipt, the invoice applies to specific receipt for a corresponding purchase order.

You can also exclude the ERV recorded on payables invoices in Receipt Accounting and Cost Accounting transactions. This prevents the impact of ERV on inventory valuation when receiving purchase orders with inventory, expense, and work order destinations. For all cost methods, you can exclude ERV for item costs and inventory valuation. Some of the benefits of excluding ERV are:

  • Adhere to regulatory requirements for inventory valuation by classifying ERV as a period expense that's recorded in the period it's incurred.

  • Ensure accurate unit item costs and inventory valuation.

You must enable the profile option Ignore Invoice Exchange Rate Variances for Inventory, Expense, and Work Order Destination Purchases (ORA_CMR_IGNORE_AP_ERV_TERV) to exclude ERV.

If enabled, any exchange rate variance distributions lines will be ignored from receipt and cost processing and where applicable, such lines won't be interfaced to Projects.

Note: Consigned purchase orders aren't impacted by this profile option.

If you want to ignore all invoice variances from impacting acquisition costs of an item, you can use the profile option Ignore Invoice Variances for Inventory Destination Purchase Orders (ORA_CMR_IGNORE_AP_INV_VAR_ALL)

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