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Accounts Payable & Receivable › Purchase Orders & 3-Way Matching

How do you handle price variances between PO and invoice in inventory accounting?

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Answer

When the invoice price differs from the PO/standard cost, the difference is a purchase price variance (PPV). Under standard costing, inventory is booked at standard and the variance posts to a PPV account analyzed by procurement. Under actual costing, the difference adjusts inventory/GR-IR. PPV highlights buying performance and pricing errors.
PO/standard $25, invoice $27, qty 100:
  PPV = (27-25) x 100 = 200 unfavorable -> Dr PPV 200.
Real-world example A consistent unfavorable PPV on one material flags that contract prices weren't updated in the system.

Common follow-ups: What is purchase price variance? | How does standard vs actual costing differ here?

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All 21 Purchase Orders & 3-Way Matching questions