Purchase Price Variance Calculator
Answers the Question
How much more have we paid than industry standards?
Calculator for Purchase Price Variance
What Is the Purchase Price Variance?
Under capitalism, many suppliers compete with each other in order to attract customers. One of the methods employed in competitive markets is price modification. This is doubly true in commoditized marketplaces. The higher the purchase price variance, all things being equal, the lower the profitability for your project.
Why Is it Important?
- Many businesses live and die by their cost structures. Small differentials in the cost of input prices may result in wild swings in expected margins. At the extreme, businesses may not be able to earn a profit, should the cost of their inputs rise significantly. By keeping a strong focus on how much their costs are rising above standard rates, firms will know whether they should look for new suppliers, change their methods of production, or exist a market entirely.
Formula(s) to Calculate Purchase Price Variance
- PURCHASE PRICE VARIANCE = (ACTUAL UNIT COST - STANDARD UNIT COST) * ACTUAL QUANTITY PURCHASED
Common Mistakes
- Taking numbers at face value. Sometimes significant savings over overspending may indicate a difference in quality or characteristics between the items being purchased and the standard exemplars of that class.
- Assuming that a standard cost is representative for what is reasonable at the time and in the place of purchase. Some products may experience significant price fluctuations depending upon season, aggregate demand, changes in fashion, and a slew of other shifts in demand.
Also Known As
- PPV