Stock Valuation Method - Purchase Price Variance
This document explains the standard stock valuation method used by BCE.
Purpose of this Document
This document informs BCE users of:
- How the BCE standard stock valuation works.
- How documents update stock valuation
- How stock values are posted to the chart of accounts
Stock Valuation Method – Purchase Price Variance
BCE supports a standard stock valuation method that includes purchase price variance (PPV)
This approach requires stock items to be setup with an agreed unit cost that is stored in the field labelled ‘Material Cost’.
BCE uses the material cost as the standard value for each stock item until it is explicitly changed by editing and revaluing the stock item.
The method takes the view that the standard stock value is not just representative of the actual cost of a stock item from your suppliers, but should factor in all associated business costs for the acquisition and handling of the stock item.
Regardless of the unit price paid to your supplier, BCE compares the value paid with the material cost stored on the stock item. Any difference between these values is treated as purchase price variance.
- A stock items material unit cost is £100.00
- We purchase a quantity of 10 items from our supplier whose unit price is £83.00
- On document store, the stock value increased by £1000.00 in the balance sheet
- The difference of £170.00 is posted to PPV located in the P&L as a direct cost
The balance posted to the PPV account is represented as an overhead cost to the business. Users may choose to manage this account in respect of carriage, shipping or other charges and journal to the respective accounts on a periodic basis.
In summary, the concept of a constant material cost provides for a more accurate method of stock valuation and a more predictable allocation of cost for manufacturing.
Stock Items - Unit Price
For each stock item, a ‘Unit Price’ can be setup for the preferred supplier and for two alternative suppliers.
When creating purchase documents for the preferred or alternative suppliers, when entering the stock item BCE will use the selected supplier’s unit price on the document line.
This allows stock items to be set up to use by the agreed unit prices when buying stock from the preferred suppliers by default.
However, when a purchase document is saved, regardless of the suppliers purchase unit price used, BCE will posts the material cost value from the stock item to the stock value in the chart of accounts.
- The preferred supplier’s unit price of £85.00 is used on document lines when purchasing this item from this supplier. This ensures the agreed purchase price is used for this supplier.
- The system will always post the value stored in ‘Material Cost’
- If there is a difference between the supplier’s unit price and the material cost, the difference is posted to PPV
Note: If required the material cost value can be set to use the same unit price as the preferred supplier.
Summary - Document Posting
The following document types post to the following chart of account codes:
Post the stock item’s ‘Material Cost value to stock value (MSTOCK)
Any difference between the line price and the material cost is posted to purchase price variance (PPV)
Post the sales value to sales revenue (DEFSAL)
Post the stock item’s ‘Material Cost’ posts from stock value MSTOCK to cost of sales (MSTKCOST)
Note: The cost of sale value uses the material cost not the actual supplier’s unit price
Stock Adjustments (in/Out)
Stock adjustments in and out
Posts between stock value MSTOCK and stock adjusted MSTKADJ