Example: Price and Exchange Rate Differences
Example 1
With the Material Price Analysis
, you can interpret how price and exchange rate differences arise under the category Receipts
.
1 Initial inventory
In Period 1, there is a beginning inventory of 10kg of the raw material cocoa in the warehouse that is valuated with the standard price of 20 Mexican pesos (Mxn).
2 Goods Receipt
In the same period, a purchase order is placed for 20kg of cocoa in the foreign currency US dollars (USD).
The goods receipt of 20 kg of cocoa takes place at a price of 2.1 USD with an exchange rate of 1 USD : 10 Mxn. 20 kg of cocoa costs 42 USD or 420 Mxn. 400 Mxn are posted to the material stock account and 20 Mxn to the price difference account.
3 Invoice Receipt
At invoice receipt a kilogram of cocoa costs 2.2 USD.
The increase in the price of cocao causes price differences to arise, and fluctuations in the exchange rate (at invoice receipt 1 USD is 11 Mxn) cause exchange rate differences to arise. At invoice receipt 20 kg of cocoa costs 44 USD or 484 Mxn. At invoice receipt 22 Mxn are posted to the price difference account and 42 Mxn are posted to the exchange rate difference account.
In the Material Price Analysis, the following values are displayed for Period 1:
Quantity | Preliminary valuation | Price differences | Exchange rate differences | Price* | |
|---|---|---|---|---|---|
1 Initial inventory | 10 kg | 420 Mxn | 0 | 0 | 20 Mxn |
Receipts Procurement 2 Goods receipt 3 Invoice receipt | 20 kg 20 kg 20 kg 0 | 400 Mxn 400 Mxn 400 Mxn 0 | 42 Mxn 42 Mxn 20 Mxn 22 Mxn | 42 Mxn 42 Mxn 0 42 Mxn | 24.2 Mxn 24.2 Mxn 21 Mxn0 |
Other receipts/consumption | 0 | 0 | 0 | 0 | 0 |
Cumulative Inventory | 30 kg | 600 Mxn | 42 Mxn | 42 Mxn | 22.8 Mxn |
Consumption | 0 | 0 | 0 | 0 | 0 |
Ending inventory | 30 kg | 600 Mxn |
*The price is calculated as follows:
(Preliminary valuation + price differences + exchange rate differences)/ quantity = price
Postings:
Postings are made to the following accounts:
No. | Period | Inventory | Price differences | Exchange rate differences | GR/IR clearing account | Vendor account | |||||
|---|---|---|---|---|---|---|---|---|---|---|---|
1 2 3 | 1 | 200 400 | 20 22 | 42 | 420 | 420 | 484 | ||||
The gross invoice amount without tax is calculated as follows: 2.2 USD/kg multiplied by 2.2 USD/kg = 44 USD. The translation is carried out through invoice verification at the current exchange rate: 44 USD multiplied by 11 Mxn/USD = 484 Mxn
The price difference in the local currency Mxn at goods receipt is calculated with the exchange rate at the time of goods receipt: Price difference at goods receipt = price at goods receipt multiplied by goods receipt quantity - standard price multiplied by goods receipt quantity or 20 Mxn = 420 Mxn - 400 Mxn or(2.1 USD/kg multiplied by 10 Mxn/USD-20 Mxn/kg) multiplied by 20 kg = 20 Mxn
The exchange rate difference in local currency Mxn at invoice receipt is the difference between the valuation of the goods receipt with the old and new exchange rates: 42 USD multiplied by ( 11 Mxn/USD – 10 Mxn/USD) = 42 Mxn
The price difference in local currency at the time of invoice receipt is the difference between the invoice amount and the total from the valuation of the goods receipt and the exchange rate: Price difference at invoice receipt = price at invoice receipt - price at goods receipt - exchange rate difference or 22 Mxn = 484 Mxn - 420 Mxn - 42 Mxn. The 22 Mxn is the price difference in purchase order currency, in this case USD, translated at the current exchange rate: 20 kg multiplied by 0.1 USD/kg multiplied by 11 Mxn/USD = 22 Mxn