Newbie - how to handle purchase price variance in retail inventory

Hello, I'm hoping to start an online retail business and have been studying accounting, however most text books don't delve into real world situations deeply. I trying to figure out the best way to handle the situation where the price of inventory goods on my PO doesn't match the Invoice price we receive from the vendor. I know this is call a "purchase price variance" but my questions are:

1) Is it required to track this variance? I think it's wise to do so since I can then determine if this particular vendor is always charging me more (or less) and if I should continue to use this vendor.

2) From the above I would imagine the ppv needs to be tracked by vendor and not just a generic account or assessing a vendor would be hard to do correct?

3) I know a PO does not impact the financials since it's only a "request" for goods and no money has changed hands at this point so how does this non-impact document relate to the actual invoice which does effect the financials since it's a payable ?

4) Most accounting text books I'm looking at teat this variance in the environment of manufacturing and standard costing and not retail so how to handle this in retail. Also, I'm planning on using the FIFO perpetual costing method, does this make a difference?

Any guidance on how to handle the PPV and accounts I should be setting up will be greatly appreciated.

Thanks

J
Reply to
hdjim69
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"hdjim69" wrote

There's no accounting requirement to do so. For your business it's not necessary if you are handling the books.

The only reason to bother to know is in if they are overcharging you or billing for prodicts not delivered. Otherwise your PO pricing isn't gospel to their invoice, as you can easily not have the correct per-item cost in your records.

It doesn't, so tracking it in a small business is not a priority.

Now, you need to know what your cost is, so you can price accordingly, anything beyond that is wasting time, and time is money.

It doesn't get into the retail environment, at least not at the locally owned and locally operated business.

Retailers like Wal-Mart probably have that data, and more (the variance between what their PO said, the amount on the invoice, and the amount they end up paying), but like I said, for small businesses, you're wasting time, and lots of it.

What will you do with that data?

If you can answer that, then you'll know if you need to bother. Once you know if you need to bother, you'll know how to best structure your books and accounting controls.

Reply to
Paul Thomas

Ok here is some real world examples.. we are a large company, but the individual locations we have are not. Location orders product for resale using a PO. When the product is received at the location they update the PO for the receipts. Our system tracks each delivery made to the location for all product. So if a 100 of an item is order but shipped increments of 25, we would track the 4 deliveries. They can receive more or less than what is ordered.

When I receive the invoice for posting, I access the PO and match the items invoiced to the received PO. Our policy is if there is pricing variance I cannot post if it is more than $5. If there is, I refer it back to the manager to update the item pricing. We want the price per item in our system. The POS module will calculate COGS on a per item basis. Variances if not corrected hit general COGS.

TK

Reply to
TKnTexas

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