Ideal pricing can keep a company in its stable position in the market. A low or too-high pricing scheme can make a company suffer severe losses and bring down the company's reputation.
SAP leverage ideal solutions like Purchase Price Variance (PPV) for determining a pricing plan suitable for a company's price-challenging circumstances. In this article, we will highlight how schemes like PPV in SAP help businesses set a price for products maintaining a strategic principle to their real-time market pricing.
What is Purchase Price Variance (PPV)?
Setting the ideal price for a product is the state of balancing. If companies choose a low-pricing strategy for any product, it is not always a model since they might experience booming sales without turning a profit with this product.
It is a say, "How much a consumer is ready to pay for a product has very little to do with the price of the, but it can mean a lot with how much they value the product or service they will buy," by Eric Dolansky, Associate Professor of Marketing at Brock University in St. Catharines, Ont. It clearly illustrates the need for proper planning and pricing solution for companies before they set ideal product prices.
Purchase Price Variance (PPV) is the difference between the baseline price (standard price); and the actual price consumers pay to receive a particular item or service.
In setting prices, customers should consider that the quality of the purchased product is not different and that the quantity of the product bought and the speed of delivery do not affect the purchased price variance rate.
Here, the actual price refers to the price any company spends for that product. While the standard (baseline) purchase price indicates the price that procurement experts believe the company will pay for the product during the planning or budgeting scheme.
Why is Purchase Price Variance Important?
Often companies face the highest management dilemma when their management and planning team set prices for a new product, usually resolved by cost theology and suspicion. Thus an ideal calculation and knowledge of standard purchase price variance are critical for most companies, specifically companies dealing with product manufacturing and delivering goods.
An in-depth understanding of the variance in products and services pricing also renders visibility into the efficacy of cost-saving approaches. With the ideal pricing using PPV, companies can target mass audiences and customers, highlighting success in their procurement initiatives.
However, PPV helps a business to plan and optimize in setting the ideal price for products and services. It enables companies to estimate whether they are turning a profit or loss when purchasing products. It eventually causes a significant impact on the company's overall finances.
For instance, if the actual price a company produces for a product is lower than the baseline price, it indicates a positive PPV. Similarly, some plans may drop the PPV. If companies target to take risks that incur higher total expenses in the long run, they can implement such schemes. Thus, companies should understand all these impacts while effectively painting a picture of a procurement strategy.
There are two types of variances, namely favorable and unfavorable purchase price variances. Businesses must understand that an unfavorable purchase price variance does not always imply procurement process issues. Digging deep into the business data to extract insights into the internal and external causes of price variance can help companies understand the cause of the price variance.
How is Purchase Price Variance calculated?
Users can use the formula given below to calculate the purchase price variance for products and services, which is simple to use:
PPV = (actual price paid − standard price) × actual quantity
Where the actual price is the price the company pays while purchasing the product or service, while the baseline or standard price is the price set for the material purchased during the previous year or last accounting course, and the actual quantity refers to the product quantity.
Examples of PPV in action:
Let us consider two example of Purchase Price Variance where the first one illustrates PPV on the purchase is a favorable variance and the second is for an unfavorable variance.
Under favorable variance conditions:
A company's department needs to upgrade its desktops for several team members. The company buys 20 new desktops from a known supplier in its preferred dealer network and acquires a volume pricing discount that drops the purchased rate from $1,500 to $1,200 per unit.
Thus, their standard price for the desktops is $1,500 × 20 units = $30,000, and the actual cost becomes $1,200 × 20 units = $24,000.
Thus, the PPV on the purchased desktops will be $6000 and is a favorable variance of 20 units. Since the baseline price is higher than the actual price, the PPV is a gain of six dollars.
Under unfavorable variance conditions:
When a company has to pay more for a product, they face this unfavorable variance condition. For instance, a company wants to purchase a particular spare part for manufacturing, but the cost of the spare parts rises to $2.5 per unit.
Earlier, it was $2 per unit, but the demand for spare parts caused the price to jump. The company needs 100 spare parts. This results in a baseline price of $200 × 100 units = $20,000 and the actual price of $250 × 100 units = $25,000. Thus, the PPV is $5000, and since the actual price is higher than the baseline price, the PPV is a loss of five dollars.
How to Reduce Purchase Price Variance?
Usually, when companies try to undercut their product or service pricing, they undergo a race-to-the-bottom strategy which becomes the only way to improve the cost efficiency of their business. To optimize the value of the product or service, companies must offset cost savings with value creation in real-time to face such challenges.
A business should keep updating the data on contract prices to reduce the Purchase Price Variance while purchasing the products. Contract management is a technique for managing procurement contracts and purchases with consumers, dealers, or business partners.
Therefore, companies can improve their effectiveness by sharing their historical data, with the product or service prices and suppliers' margins passed on to the buyer.
PPV tcode in SAP:
Here is a list of the top transaction codes for PPV in SAP:
- SM30 - Call View Maintenance - defines Basis - Table Maintenance Tool
- MIGO - Goods Movement, for MM - Inventory Management
- OBYC - C FI Table T030 - for FI Basic Functions
- KE5Z - Profit Center: Actual Line Items, for EC - Profit Center Accounting
- /SMB11/FI00 defines PPV by Vendor/Material
- KEU5 - Perform act. cost-ctr cost transfer, for CO - Profitability Analysis
- CKM3 - Material Price Analysis, defines CO - Actual Costing/Material Ledger
- MIRO - Enter Incoming Invoice - for MM Invoice Verification
- OMR6 - Tolerance limits: Inv.Verification, defines MM - General Functions
- S_P99_41000255 - IMG Activity: SIMG_HUMGLPppvHUP, for LO - Handling Unit Management
- OBBP - C FI Maintain Table T001 (OPVAR), for FI - Basic Functions
- CK11N - Create Material Cost Estimate, for CO - Product Cost Planning
- FRC1 - Maintain Cost Element -> FM Act Asgt, for PSM - Funds Management
- OB52 - C FI Maintain Table T001B, defines FI - Basic Functions
- OBBO - C FI Maintain Table T010O, defines FI - Basic Functions
- OB29 - C FI Fiscal Year Variants, for Basis - Business Service Functions
- ME22N - Change Purchase Order, defines MM: Purchasing
PPV, or Purchase Price Variance, became crucial since companies leverage effective decision-making plans for business insights and profitability. We hope this article has curated readers with ideas on Purchase Price Variance, how companies use this scheme for planning and choosing product prices, and its popular transaction codes in SAP.