Purchase price variance: when the invoice drifts

Most price rises do not arrive as a letter. They arrive as a number on an invoice that is a little higher than last time, on a line nobody is watching, in a week when the kitchen is busy. Chicken that was agreed at one price is invoiced at a few pence or cents more per kilogram. Cream creeps up. A case of olive oil costs a little more than it did. None of it is announced, and each change on its own looks too small to argue about.

Purchase price variance is the name for that gap: the difference between the price you expected to pay and the price you were charged, multiplied by how much you bought. It is a standard idea in cost accounting, and in a kitchen it is one of the quietest ways food cost rises. A rise of four per cent on a handful of main lines, left unnoticed for a year, can cost more than a month's profit in a small venue.

This guide explains how to calculate purchase price variance, where it comes from, how to track it without an accounts department, and what to do about it, including the conversation to have with a supplier the third time it happens. Every figure in it is an example.

Purchase price variance compares two prices for the same item: the one you agreed, quoted or expected, and the one on the invoice. The difference, multiplied by the quantity bought, is the variance in money.

A positive variance means you paid more than you expected; a negative one means you paid less. The term comes from standard costing, in which every item has an expected cost and every difference is a variance to be explained. Wikipedia's article on variance in accounting covers the wider family of variances. In a restaurant, this one matters because it is the purchase side of food cost, separate from anything the kitchen does with the food once it arrives.

Invoice prices move away from agreed prices for several reasons, most of them innocent.

Only some of these are worth disputing. All of them are worth knowing about, because each changes the cost of the dishes on your menu.

An invented venue agreed a price of 6.40 a kilogram for chicken thighs with its butcher at the start of the year. Six months later, the invoices show 6.65 a kilogram. Nobody was told, and nobody noticed: the line on each invoice looks much like the line before it.

The difference is 0.25 a kilogram, a little under 4 per cent. The kitchen buys about 60 kilograms a week, so the purchase price variance is 15 a week. Over a year, that is 780 on one line.

Now suppose the same quiet drift has happened on ten of the venue's twenty most valuable lines, by similar percentages. The variance across them could easily reach several thousand a year, all of it invisible in the weekly running of the kitchen and all of it showing up as a food cost that is a point or more higher than the menu was costed for.

Purchase price variance affects food cost in a way that portion control and waste reduction cannot touch. The kitchen can do everything right, serving exactly the specified portions and wasting nothing, and still see its food cost rise, because the price of what it buys has moved.

It also undermines your costings. A dish costed at last spring's prices is earning less than you think if the ingredient prices have drifted since. Our guide to plate cost shows how quickly a few small price changes add up on one plate, and our guide to gross profit per dish explains why the cash margin is what suffers.

And it confuses the conversation with the kitchen. A rise in food cost caused by prices looks, on the food cost report, exactly like one caused by waste. Separating the two is only possible if you track prices.

To calculate a variance you need a reference price. Choose one for each line and keep it written down.

The last option is the simplest and catches most drift. Even without any agreement, a change from the previous invoice is worth seeing.

Purchase price variance sounds like an accountant's measure, but a kitchen can track it with a simple spreadsheet and ten minutes a week.

That is enough. You do not need every line, and you do not need to do it daily. You need the lines that matter, checked every week, with the history kept. Our guide to supplier invoices covers how to get invoice prices into one place quickly.

The reference list is the foundation of the whole exercise, and it is worth an hour to set up properly.

Start with three to six months of invoices. For each supplier, list the items you buy, the unit each is invoiced in, how much you bought over the period and what you paid. Sort by spend and take the top twenty to thirty lines across all suppliers. For each, write down the reference price: the agreed price if there is one, otherwise the most recent price you accept as fair, with the date.

Make the units consistent. A price per case and a price per kilogram cannot be compared, and a case whose contents change size will hide a price rise inside a smaller pack. Where pack sizes vary, convert everything to a price per kilogram, litre or item, so that a change of pack is visible as a change of price.

Review the list every few months. New dishes bring new top lines, and some old ones drop out. The list should always describe where your money actually goes.

Weekly checks catch individual differences. A monthly look at the trend shows the pattern behind them.

Once a month, look at each top line's price over the last three to six months. Which lines have risen, and by how much? Which suppliers account for most of the rises? Has anything fallen, perhaps a seasonal item that has become cheaper and could feature more on the menu? Add up the month's total purchase price variance across the list, so you know the size of the price effect on your food cost.

The monthly view is also the right moment to decide on action: which conversations to have with suppliers, which dishes to re-cost, which lines to get quotes for. Doing it once a month keeps price management from turning into a constant background worry.

The best time to catch a price difference is when the invoice is checked against the delivery. Our guide to the goods received note covers the delivery side; the price side is one more column.

For each invoice, look at the lines on your tracking list and compare the price with the reference. A difference can be queried before the invoice is paid, when the supplier is most willing to correct it. After payment, a correction means a credit note, which takes longer and is easier to forget.

Not every difference deserves a phone call. A sensible rule of thumb is to query:

Accept, but note, market-priced items whose prices are expected to move, and small changes on low-value lines. Querying everything makes you a difficult customer; querying the right things makes you a careful one.

How you respond depends partly on whether it is a pattern.

The first time a price drifts, ask about it. A short, friendly message is enough: the price on the invoice is higher than the one you agreed or last paid, is that right? Often it is an error and is corrected, or a supplier price increase that was not communicated and is now explained.

The second time, ask for notice. If prices are going to change, you would like to know in advance, so that you can adjust the menu or look at alternatives. Many suppliers will agree to a notice period, such as thirty days, if asked.

The third time, have a proper conversation. Bring the history: the agreed price, each change, the dates and the total variance over the period. Ask for the agreed price to be honoured, or for a new agreed price with notice of future changes, or for a review of your account. This is the moment to negotiate with suppliers in earnest, and our guide to negotiating with suppliers without volume covers what you can offer in return.

Sometimes the price has gone up for good reasons: the supplier's own costs have risen, the market has moved, or the season has changed. A genuine increase is still worth handling deliberately.

Our guide to putting a menu price increase through quietly covers the last option. What matters is that the decision is made, rather than the increase simply being absorbed because nobody noticed it.

Fish, some meat and much fresh produce are priced by the market and change from delivery to delivery. Purchase price variance on these items is expected, and querying every change would be pointless.

Track them differently. Record the price on each delivery and watch the trend over weeks rather than the change from one delivery to the next. Use the trend to set menu prices, to decide when to change a dish or a supplier, and to time specials around the items that are cheap this week. A market-priced line that is persistently above what other suppliers charge is a different matter, and worth a quote from elsewhere.

Some of the drift on invoices is not on the goods at all. Delivery charges, small-order surcharges, fuel levies and administration fees can appear or rise without notice. They are part of what you pay for the goods, so include them in your tracking.

If a charge appears that you did not agree, query it. If a charge is genuine, consider whether changing how you order would avoid it: larger, less frequent orders that clear a minimum, or a delivery day that suits the supplier's route.

Purchase price variance is most useful read next to your food cost. If food cost rose by a point in a month and purchase price variance explains most of it, the kitchen is not the problem: prices are. If food cost rose and prices did not move, look at the kitchen. Our guide to reading food cost variance includes prices as one of the checks to make before looking at waste and portions.

Report the two side by side in your weekly figures. A line on the food cost report that says "price changes this week: butter up 6 per cent, chicken up 4 per cent" turns a confusing number into an explained one.

In a group, the same item may be bought by several venues, sometimes from the same supplier at different prices. Purchase price variance then has a second use: comparing what each venue pays. Differences between venues on the same item, from the same supplier, are worth questioning, and often lead to a single agreed price for the group.

Keep one reference price per item for the group where possible, and track each venue's invoices against it. A venue that consistently pays more for the same thing is either buying differently or not checking its invoices.

Supplier prices and invoices stay in your own spreadsheet or purchasing tool today: servearound does not hold supplier invoices or track purchase prices. Inventory tracking, for the stock behind the menu, is coming.

What servearound does show is how much of each dish you sell, which tells you which ingredients' prices matter most. The menu report in Analytics gives units sold and revenue for every dish over any range of dates, so a price change on an ingredient in your best-selling dish can be weighed against one in a dish that sells a few times a week. If you would like to see it, get in touch.

It is the difference between the price you agreed or expected to pay and the price on the invoice, multiplied by the quantity bought. It shows how much prices, rather than the kitchen, have moved your costs.

Subtract the agreed price from the invoiced price and multiply by the quantity bought. Do it for your top lines each week, and keep the history.

An agreed or contract price where you have one, the latest quote, the price on your purchase order, or at least the price you paid last time.

Your top twenty to thirty lines by spend. They usually account for most of the money, and tracking them weekly takes about ten minutes.

No. Query changes above an agreed price, rises on top lines without notice, changes above your threshold, unrecognised charges and substitutions invoiced higher. Note the rest.

Track their trend over weeks rather than each delivery's change, and use the trend to set prices, plan specials and decide when to look elsewhere.

Ask for notice the second time, and have a proper conversation the third time, with the price history in hand. Ask for the agreed price to be honoured or for a new agreement with a notice period.

It raises or lowers food cost without anything changing in the kitchen. Reading it alongside food cost shows how much of a change came from prices rather than from waste or portions.

Yes. If a supplier invoices below the agreed price, or a market-priced item becomes cheaper, the variance is in your favour. Record it too: it may be an error that will be corrected later, or a chance to feature a cheaper ingredient on the menu.

No. A simple spreadsheet with your top lines, their reference prices and each week's invoiced prices is enough for most venues.

Purchase price variance is the gap between the price you agreed and the price you were charged, times the quantity bought. It is how food cost rises quietly: in this guide's example, a 0.25 a kilogram drift on one line of chicken cost 780 a year, and drift on several top lines can cost several thousand.

Track your top twenty to thirty lines weekly against a written reference price, check invoice prices before paying, and query the differences that matter. Ask the first time, ask for notice the second time, and have a proper conversation the third time, with the history in hand. Handle genuine supplier price increases deliberately, re-cost the dishes they affect, and read price changes next to your food cost so that prices and the kitchen are never confused.