Optimize Standard Cost Usage and Control from the PPV Variance Drilldown
- by Gaurav Aggarwal, Lead Consultant, SAP S/4HANA Finance, Infosys Limited
- November 11, 2011
Learn how to optimize the tracking of purchase price variance (PPV) in your procure-to-pay business process for better control over its monitoring. Discover the limitations of the SAP ERP Financials system and the different dimensions (e.g., cost component, vendor type, and source of supply) by which you can analyze a PPV.
The purchase price variance (PPV) in an SAP system is a composite variance between the total standard cost and total actual cost incurred to purchase the material. In the standard SAP system, this composite variance related to a document flow can be diverted to a particular general ledger account based on valuation class of the material, any substitution rules, or another criterion. A business can split this composite amount into various sources of supply (e.g., cost component contributing to standard cost) or vendor type (e.g., material vendor or service vendor). Splitting the PPV into various categories can make your PPV recording and reporting flexible. For example, a business can differentiate the freight part variance from its material cost variance. This process helps the business decide to what extent freight contributes to cost by booking variances for freight at the material level. The business can then plan its freight cost and decide which type of service provider (e.g., third-party carrier or internal carrier) is better in terms of freight cost.
In an ideal scenario, if the price is agreed on with the vendor and planned in the system as material cost, there should not be any difference among:
- The prices you have planned (also called standard costs)
- The price included in the purchase order when you place your order with the vendor
- The price included in the invoice by the vendor
An SAP ERP system has a three-way matching functionality in a procure-to-pay process, whereby a goods receipt (GR) is checked with a purchase order (PO) and an invoice receipt (IR) is checked with a goods receipt (GR). If there is any difference, it is a purchase price variance (PPV). This PPV can occur during GR if the PO price differs from the standard cost IR if the actual invoice price differs from the PO price.
Businesses may plan the standard costs for the material, taking into account various components such as material cost, procurement cost, or landing cost. In a normal business flow of PO, GR, and IR, businesses use the standard SAP system as follows:
- When ordering goods, businesses place a PO for such material. This PO covers the entire purchase price of the material for various components (e.g., material cost, transportation cost, or insurance). You find these components in the price conditions for the PO.
- When receiving goods, businesses book the inventory cost at standard cost, and the GR/IR clearing account is booked at the PO price for material and contracted price for delivery cost. Now the standard SAP system calculates the PPV as a single composite figure, regardless of the various cost components a material has, and posts this entire amount to a PPV account. Thus, you can’t differentiate between the material cost and the landing cost when the goods enter stock.
- When receiving invoices, businesses may receive one invoice from the vendor that supplies the goods (i.e., the material vendor) and another invoice from a third-party carrier or internal carrier taking care of transportation (i.e., the carrier) and post separate invoices for each vendor. Both of these invoices are posted with transaction MIRO.
The standard SAP system calculates the PPV for a material vendor (comparing the ordered price for material and the invoice amount) and the PPV for a carrier (comparing planned delivery cost and invoice amount) separately. The limitation of this SAP process is that both PPVs are posted to the same PPV general ledger account using the standard account key PRD. Consequently, businesses cannot analyze how much variance relates to material and how much variance relates to other components (e.g., landing cost). Thus, businesses face difficulty in controlling the variance at the source. If variances are high, then businesses can use this as a basis for negotiation with a carrier.
Would you like to see this full item?