Definition
Difference between actual and standard procurement prices.
In detail
Purchase Price Variance (PPV) is the difference between the actual purchase price and the standard cost. The standard price is volume-weighted and already bakes in expected price increases, so favorable and unfavorable PPV tend to offset within the year and annualize toward zero — it is mostly driven by the calendar timing of purchases, not by the procurement team's actual cost control. Danaher's JIT accounting course asks directly whether PPV is a true measure of procurement and answers "no." Unlike total cost analysis, PPV only focuses on price and does not include hidden costs such as quality and delivery. Its output is a variance report that can be used for financial analysis, but it should not be used as a procurement performance metric.
Example in practice
When the procurement department negotiates with suppliers and the actual purchase price is lower than the standard price, a favorable PPV is generated. For example, if a part's standard cost is 10 yuan and the actual purchase price is 9 yuan, PPV is -1 yuan (favorable). The finance department calculates PPV monthly and analyzes the reasons for variances, but that "favorable" reading is not proof of procurement performance — the standard price is already volume-weighted and includes expected price increases, so PPV mostly reflects when the purchase happened. If large-volume purchases are made to pursue favorable PPV, it may lead to inventory buildup. Therefore, companies need to evaluate based on inventory turnover and total cost to avoid short-sighted behavior.