What is invoice price variance?
Invoice price variance, or IPV, is the difference between the unit price a supplier billed and the unit price you agreed, multiplied by the quantity on the invoice. In the procure-to-pay process, the agreed price comes from the purchase order or the agreement behind it, such as a price list. A positive IPV, described as unfavorable, means the supplier billed more than agreed; a negative, favorable one means it billed less. Read line by line, IPV is the plainest measure of whether a supplier is holding to what was agreed.
How do you calculate it?
You work it out for each invoice line: the invoiced unit price minus the agreed unit price, times the quantity invoiced. Use the price that applied on the date of supply, after any signed amendment, because a contract amended in August establishes a different price for an August delivery than the original document. Then keep the lines apart, since an invoice total can hide a large gap on one line behind a small one going the other way.
- Find the agreed price
- Subtract it from the billed price
- Multiply by the quantity
- Keep each line apart
How is invoice price variance different from purchase price variance?
Purchase price variance, or PPV, compares the price you paid or ordered at with a standard cost your company set in advance, so it measures buying against budget. IPV compares the invoice with the order or agreement, so it measures the supplier’s billing against what you both accepted. A buyer can negotiate a price above standard, which appears as PPV, while the supplier invoices exactly that price, leaving the IPV at zero. Some systems use the names loosely, so confirm which prices a report compares.
Worked example: a price list at Ferrygate
Ferrygate Plumbing & Heating is an invented company, one of the Demo companies Ressura uses to show its checks, and every figure below is made up for the example. It is a plumbing and heating contractor that buys from Cascade Pipe & Supply under an agreed price list.
The price list sets $4.85 a foot for type L copper tube, $0.92 a foot for one-inch PVC pipe and $14.60 for a brass ball valve. One invoice bills 300 feet of copper at $5.10, 800 feet of PVC at $0.92 and 24 valves at $14.25.
- Copper: $5.10 less $4.85 is $0.25 a foot over, and on 300 feet the IPV is $75.00, unfavorable.
- PVC: billed at the agreed price, so the IPV is nothing.
- Valves: $14.25 less $14.60 is $0.35 under, and on 24 valves the IPV is $8.40, favorable.
At the agreed prices the invoice should come to $2,541.40, and it asks for $2,608.00, so the net IPV is $66.60. The ledger usually shows that net figure, which understates the credit the supplier owes Ferrygate. The copper line is $75.00 over and should be disputed in full, while the valves are a separate $8.40 billed under the agreed price, worth recording because the supplier may correct it later, but never subtracted from the overcharge.
How is IPV booked in the accounts?
When goods are received before the invoice, many companies record the receipt at the agreed price, as a cost and a liability for goods received but not yet billed. When the invoice arrives, the entry clears that liability at the agreed amount, records the full invoice in accounts payable, and puts the difference in a price variance account. Had Ferrygate accrued the receipt that way, the invoice would clear $2,541.40, record $2,608.00 owed to Cascade, and post $66.60 as variance. A company that values stock at a standard cost usually keeps that variance account, while one that records items at actual cost may add the difference to the item’s cost instead.
Either way, booking the variance records the overcharge without recovering it; only a dispute with the supplier does that, which is why the line figures matter more than the variance account’s balance.
When should you look at IPV?
Review it on every invoice before payment, because a discrepancy identified beforehand is corrected with a revised invoice, while one discovered afterwards means requesting a refund. Federal agencies hold suppliers to a similar discipline: the Prompt Payment rule, 5 CFR Part 1315, requires a proper invoice to state the price and quantity of what was supplied, and has agencies return an improper invoice within seven days, naming every defect that prevents payment. If your system lets small variances through automatically, set that tolerance on purpose, since a few cents on a line you buy every month repeats on every invoice. For the full comparison, including fees, quantities and escalation clauses, see how to check supplier invoices against agreed prices, and for the signs of a pattern, how to tell if a supplier is overcharging you.
How can Ressura help?
Ressura’s Procure-to-Pay Module checks every unit price on an invoice against the price your agreement sets for that item on that date, applying amendments from their start dates. It also watches for price drift, a supplier’s price for the same item moving between invoices with no amendment, notice or new agreement behind it, and shows any gap in dollars with the arithmetic beside it, so you can take the line, the agreed price and the difference straight to the supplier.