In this video, you will learn exactly when and what accounting entries are posted by ERP systems such as SAP ERP and Oracle Financials for recording of Purchase Price variance.
You will learn the definition or meaning of purchase price variance. You will also learn what is standard costing and the two steps involved in recording purchase price variance journal entries in the system. Most of the times, these entries are automatically posted. However, in order for the system to work properly, standard cost for the material purchased needs to be maintained in the system. A price for the Purchase Order need to be entered as well. This is usually done by the Purchasing manager or Purchasing agent. The first step in recording Purchase Price variance is when the material is received. Usually the material is received either at the same time or before the invoice is received. However, the invoice is usually entered by the Accounts payable officer after some time. Therefore, the ERP system posts two purchase price variance entries; one at the time of recording of receipt in the system, and second, at the time of recording the invoice.
At the time of recording goods receipt (GR), the purchase price variance is calculated by comparing the standard cost of material with the price entered in the Purchase Order. At the time the invoice is entered in the system, the system has the actual invoice price. So at this time another purchase price variance is recorded by comparing the price in the Purchase Order and the price entered from the vendor invoice.
On a net basis, the purchase price variance is really the difference between standard cost of the material and the actual invoice price of the material. Remember, that in a standard costing system, inventory is always maintained at standard cost, while any differences between the standard cost and purchase order price or invoice price are recorded to the income statement through a variance account which is usually called the purchase price variance or PPV account.
Hope this clarifies the confusion around accounting for PPV, specially when it is done by ERP systems automatically such as SAP ERP, Oracle Financials and other ERP systems.
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