Effectively Control and Monitor the Purchase Price Variance

  • by Akhilesh Mittal, Lead Consultant, Infosys Technologies Ltd.
  • July 27, 2010
When a product is procured from multiple vendors, there is often a variance between the actual purchase price and the standard. This variance in purchase price should be recorded, analyzed, and monitored in detail for improved cost control. Understand how to capture the variance in the standard and actual purchase price in the SAP system.
Key Concept
The purchase price variance in the SAP system is mapped to the PRD transaction key for account determination. The general ledger account for the PRD transaction key is determined on the basis of valuation class and valuation area. Hence, there can only be one purchase price variance general ledger account for a material type in a plant. According to standard SAP design, you can map the cost element for the purchase price variance account to a single cost center by plant in CO. This is a limitation if the requirement is to have more detailed cost control for the purchase price variance. However, some innovative thinking and the use of substitution functionality in the SAP system can provide a resolution to record the purchase price variance at a detailed level in CO.

The standard SAP system records purchase price variance as a two-step process during goods receipt and invoice receipt against a purchase order. You normally record the purchase price variance in FI, but you can also configure your SAP system to record it against cost centers in CO for improved cost analysis and control. Cost analysis of the purchase price variance can provide insights about the costliest vendor, seasonal fluctuations in purchase price based on the standard price, and so on.

I will discuss the standard SAP design for purchase price variance based on the standard price technique. (For more about the standard price technique and its counterpart, the moving average price, see the sidebar “Standard Price vs. Moving Average Price.”) I will also discuss the limitations associated with the standard design. Then I’ll show you how to capture the variance against specific cost centers by using substitution functionality. The screenprints used in this article are from an SAP ERP Central Component (SAP ECC) 6.0 system, but this information is valid for previous versions of SAP as well.

The article is categorized under the following headings for ease of explanation and understanding:

  • Master data prerequisite
  • SAP design for purchase price variance
  • Standard SAP design limitation for purchase price variance
  • Substitution rule functionality for purchase price variance

Akhilesh Mittal

Akhilesh Mittal is a lead SAP consultant at Infosys Technologies Ltd. with eight years of consulting and industry experience. He has experience in FI and CO along with exposure to SD. Akhilesh is currently a consultant in the SAP space for a leading organization in the high technology domain. He has a degree in electronics and communication engineering from IIT Guwahati and an MBA in finance and systems from IIM Lucknow.

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