PO Price Variance - PO received using wrong currency

This procedure is used to correct situations in which an item is received into inventory at the wrong price due to using an incorrect currency during receiving.  This procedure details the steps required in order to process the vendor invoice for the item, and it also lists the steps to be followed in order to correct the average cost of the inventory item.  The steps listed in this document should be performed as soon as possible once an error has been discovered in order to minimize the damage to sales margins and other data that can be affected by incorrect inventory costs.

Accounts Payable Department

 The accounts payable department needs to accomplish the following tasks.

      Clear the receiving transactions associated with the bad receipt out of the Unvouchered Inventory Account (tag the receiving transactions).  This step is complicated by the fact that the AP system will only allow you to tag transactions that are in the same currency as the invoice which is being processed.

      Input the vendor invoice using the correct currency and amount so that the invoice can be processed and paid.

The following steps are used during accounts payable invoice processing to accomplish these tasks.

      Select the Accounts Payable Invoice Entry program from the menu.  Select the vendor used to process the incorrect receipt and change the currency to the currency used for the incorrect receipt.  Enter the invoice number using a value similar to but not equal to the actual vendor invoice number (i.e. if vendor invoice is 44339 use 44339-adj).  Tag the receiving transactions that were processed in the wrong currency and press the SAVE key.  This will create a distribution line for the amount of inventory received and it will clear the receiving transactions out of the Unvouchered Inventory account.  Verify that the AP invoice total matches the distribution line and save the invoice.

      Enter an accounts payable credit memo using the same vendor and currency that were used in step one.  Enter the invoice number using a value similar to but not equal to actual vendor invoice number or invoice number used in step one (i.e. 44339-adj2).  Distribute the invoice amount to the P.O. Price Variance account.  The amount of the credit memo should be the same amount that was entered in step one except that it should be entered as a negative amount).  The credit memo offsets or cancels out the invoice entered in step one.

      Enter the actual vendor invoice into the accounts payable system using the correct currency and invoice amount.  Distribute the inventory portion of the invoice to the P.O. Price Variance account.  Charge any freight or other amounts to the appropriate accounts (i.e. freight expense, etc.).

Inventory Control Department The inventory control department should perform the following tasks.

      Determine the correct cost for the affected inventory items.  Use the information provided by the accounts payable department, or the information from the vendor invoice to determine the correct cost for each item.  In most cases, the correct cost may be the same as the price shown on the vendor invoice divided by the exchange rate for the currency used on the invoice and PO.   In some cases, you may have had a large quantity on hand for an item before receiving it at an incorrect price.  If this is the case, and the old and correct new costs are different, the new average cost can be determined by looking at the transaction just prior to the receiving error.  The cost and quantity prior to the error, plus the correct cost (in local currency) and quantity received, divided by the new quantity on hand, equal the new cost.  The quantity on hand prior to the error should include the total on hand quantity for the item in all inventory locations in the current division (this amount is stored in the Ref_Qty field of each the receiving transactions).

      Use the Change Average Cost feature in the Inventory Master program to change the cost of the affected inventory items to the correct value determined in step one.  Use the POPRICE adjustment code to make sure the item cost adjustments offset the amounts posted by accounts payable.  The change to the inventory valuation caused by the adjustments will be automatically posted by the system to the inventory and the PO Price Variance accounts.

Note:  In the current (275 and later database revisions) versions of Stream II, Inventory Average Cost Adjustments are posted online and no manual posting or journal entries are required.  The operator is prompted to select an adjustment code when processing a cost adjustment and this code determines the GL account that each adjustment is charged to.   In earlier versions of the system, the average cost adjustments were not posted online and a report was used to determine the amount of the journal entry that needed to be posted for the cost adjustments.

PO Price Variance Wrong Currency, Detailed Example

The following example illustrates the above procedures.  This example assumes there was no quantity on hand for the affected item before the bad receipt was processed.

Qty 10 of an Item is received at $150.00 CAD (Canadian Dollars) instead of at the correct price of $150.00 USD (United States Dollars).  The system processing the receipt has a local or house currency of CAD.  The exchange rate in use for USD when the receipt is processed is .67419 (i.e. one CAD is equal to .67419 USD).  Based on this information, the correct cost for the item is 150/.67419 = 222.49 CAD

The entry made by the system to record the receipt is as follows.

Inventory      1500 CAD     

Unvouchered Inventory       1500 CAD

When attempting to enter the invoice, the operator determines the receipt was processed in the wrong currency and that they are unable to tag the receiving transactions using the currency from the vendor invoice.

The operator enters an invoice for 1500 CAD to clear the receiving transactions out of the Unvouchered Inventory sub ledger and GL account balance.  The journal entry created by the transaction is

Unvouchered Inventory       1500 CAD

Accounts Payable                        1500 CAD

The operator enters a credit memo (negative AP invoice) for 1500 CAD to offset the invoice entered in the last step.  The amount of the invoice is distributed to the PO Price Variance account as follows.

Accounts Payable               1500 CAD     

PO Price Variance                         1500 CAD

The operator enters the vendor invoice into the system using the amount and currency from the invoice.  The inventory amount from the invoice is charged to the PO Price Variance Account.  Any freight or other charges are distributed to the correct accounts.  The entry made at this point is as follows (note that even when a USD invoice is posted, the system makes the journal entries in Local currency).

PO Price Variance     2224.90 CAD (1500 USD/.67419 exchange rate)

Accounts Payable                        2224.90 CAD

At this point, the balances in the general ledger accounts have been updated as follows (all amounts are in CAD)                     

Inventory      1500.00  Dr.            (from Original receipt)

AP                         1500.00 Cr.    (invoice in CAD)       

                   1500.00 Dr.             (offsetting credit in CAD)

                   2224.90 Cr. (from entering vendor invoice with correct amount and currency)

PO Price Variance    

          1500.00 Cr. (from entering CAD credit memo)

          2224.90 Dr. (from entering vendor invoice with correct amount and currency).

The difference between the correct price for the items in local currency (2224.90) and the value that they were received at in local currency (1500.00) is still sitting in the P.O. Price Variance account.  This amount is a debit of 774.90

If the affected items are still on hand at this point, the cost of the items can be corrected using the Change Average Cost feature available in the Inventory Master program.  If all 10 of the items are still on hand, the operator would select the item in the Inventory Master program, and pick the Change Average Cost option from the Pull Down Menu.  The program would then prompt the operator with the current cost of the item (which would be 150 CAD per unit in house or local currency), and allow the operator to enter the new cost for the item (which would be 222.49 per unit based on vendor price and correct currency).

If the PO Price Variance account is selected during the Average Cost Adjustment process, the system would increase (debit) the inventory value by 724.90 CAD and credit the Price Variance account for the same amount.  This would eliminate the variance amount that was left after AP entry.

If we take the same example and assume that 5 items were sold when the cost of the item was incorrect, the steps are the same, except that the Inventory Cost Adjustment can only be made for the amount of inventory on hand.  In this case, the operator could adjust the 5 units still in stock and post the transaction, but it will not completely clear out the amounts posted to the PO Price Variance account.  The journal entry would be as follows.

Inventory                362.45 Dr.      (222.49 150.00) * 5 units on hand when adj. processed

PO Price Variance               362.45 Cr.    

The remaining balance in the PO Price Variance account (362.45 CAD) is the error in the cost of the goods that have been sold or consumed since the bad receipt was processed.  The PO Price Variance account is treated as part of cost of goods sold.  Therefore, leaving the balance in the variance account has the effect of adjusting the cost of sales in the general ledger to the correct value (i.e. the 362.45 adjustment to the inventory on hand value, plus the 362.45 balance in the variance account match the total amount of the error in receiving).

Note:  There is no supportable way for users to correct invoice lines and inventory transaction activity after items with incorrect costs have been sold, built, used as components, etc.  Even a very experienced system administrator may not be able to perform the necessary steps correctly. The corrections may also cause more problems than they solve, especially if sales have been posted, sub ledgers have already been reconciled, etc.

The procedures in this document fix the inventory on hand values and adjust the general ledger to the correct amounts.  Errors in margins (when margins are shown using average cost) should be adjusted manually on the appropriate reports.  The reports can then be used to back up the differences between the accounts payable postings to the price variance account and the journal entries made to the same account to record average cost adjustments.  The errors on the cost of sales report (when run on average cost) should be roughly the same as the amount left in PO Price Variance (part of cost of sales) after the cost adjustments have been made.

The best way to handle this type of error is to avoid it entirely by checking and fixing bad purchase order prices or currencies before receipt.  This can be accomplished using vendor confirmations and controls in receiving department.  The goal is to ensure that nothing is received if the PO price has not been confirmed).  The current system allows you to display information in the receiving program which indicates whether the PO prices have been confirmed.   If the price and other information on the PO have been confirmed, the operator can receive the PO.  If the PO does not indicate that it has been confirmed, the operator can exit out, check the PO information with the Purchasing department to make sure it is correct and then receive it.


PO Quantity Variance Procedure