Purchase Price Variance
The difference between the price actually paid and the standard or expected price.
Definition
The difference between the price actually paid and the standard or expected price.
Why it matters
PPV shows whether sourcing decisions are landing in the cost base, and highlights unmanaged price drift.
Formula
PPV = (Actual Unit Price - Standard Unit Price) x Quantity Purchased
Example
Standard 4.00, paid 4.20 on 10,000 units: PPV = 2,000 unfavourable.
How to interpret it
Unfavourable PPV is not automatically bad; it may reflect market moves or a deliberate service trade-off. Split market-driven from negotiation-driven variance.
How to improve it
Refresh standards on a schedule, index volatile commodities in contracts, and consolidate fragmented spend.
Common mistakes
Treating PPV as a pure buyer scorecard, which encourages buying cheap material that raises quality and freight cost.
Related KPIs
Frequently asked questions
- How often should standards be reset?
- Usually annually, with mid-year resets for volatile commodities.
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