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Last updated on 2024年9月3日

What are the common causes and risks of purchase requisition budget variances?

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Purchase requisitions are documents that request the approval and allocation of funds for a specific purchase. They are essential for managing budgets, controlling spending, and ensuring compliance with policies and contracts. However, sometimes the actual cost of a purchase may differ from the estimated cost in the purchase requisition, resulting in a budget variance. In this article, we will explore some of the common causes and risks of purchase requisition budget variances, and how to prevent or minimize them.

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1 Cause 1: Price fluctuations

One of the most common causes of purchase requisition budget variances is price fluctuations. This can happen due to changes in market conditions, supply and demand, exchange rates, taxes, tariffs, or discounts. For example, if you request a purchase requisition for 100 units of a product at $10 per unit, but the price increases to $12 per unit by the time you place the order, you will have a positive budget variance of $200. Conversely, if the price decreases to $8 per unit, you will have a negative budget variance of $200.

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SIDDHARTH SWAIN

Business Development Rep @ Gigfactory | Computer Science Engineer | NMIMS Alumnus
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Common causes of purchase requisition budget variances include inaccurate cost estimates, unexpected price fluctuations, changes in project scope, errors in requisition processing, and delays leading to rush orders with higher costs. Risks associated with these variances include overspending, project delays, reduced profitability, and strained supplier relationships.

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Jassim Alampara CIPS

Procurement Consultant @ Alambaar | Co Founder @ The Founder's Story | Cost Savings Expert | Procurement Audit & Training | Cross Industry Benchmarking | Procurement Transformation Specialist |
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Price fluctuations occur due to market dynamics , changes in supply and demand , currency fluctuations or supplier pricing strategies. When prices deviate from initial budget estimates , it can lead to variances between planned and actual expenses. Risks associated with such variances include budget overruns , impacting financial plan, delayed procurement processes , affecting project timelines , and potential strain on supplier relationships due to renegotiations or adjustments.

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Shikha .

Experienced Supply Chain Leader | Driving Operational Excellence & Strategic Efficiency | Expert in Supply Chain Strategy & Collaborative Leadership ?? #SupplyChainManagement #OperationsExcellence #TeamLeadership
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Budget variances in purchase requisitions often come from wrong estimates, sudden price changes, bad planning, or data entry mistakes. These issues can lead to overspending, delays, and misaligned financial goals, which can mess up budgeting and procurement.

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2 Risk 1: Over- or under-spending

The risk of price fluctuations is that they can lead to over- or under-spending, which can affect your cash flow, profitability, and budget performance. If you have a positive budget variance, you may end up spending more than you planned, which can reduce your savings or increase your debt. If you have a negative budget variance, you may end up spending less than you planned, which can affect your quality, quantity, or timeliness of delivery. Either way, you may have to adjust your budget or seek additional funds to cover the difference.

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Jeremy Jacobs

Buyer
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One of the most common issues I’ve encountered regarding budget or stock variance has been related to miscommunication of quantities via improper unit of measure conversions or changes. Automating the conversions to ensure the vendor and internal departments are consistently working with the unit of measure they are familiar with goes a long way. I prefer keeping the unit of measure static to reduce the possibility for these errors which cause over- or under- spending and non-optimal stock levels.

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3 Cause 2: Scope changes

Another common cause of purchase requisition budget variances is scope changes. This can happen due to changes in specifications, requirements, quantities, or delivery dates of the purchase. For example, if you request a purchase requisition for a software license for 50 users, but the vendor informs you that the license is only valid for 25 users, you will have to request a new purchase requisition for the additional users, resulting in a positive budget variance. Alternatively, if you request a purchase requisition for a service contract for 12 months, but the project is completed in 10 months, you will have a negative budget variance.

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Jhony Jimenez

Master en Comercio Internacional, Compras Internacionales, Logística Internacional, Procesos Aduaneros a Nivel Internacional, Control de inventario, Incoterms, Soporte Tecnologico,Controles de Calidad.
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When talking about Technological purchases, it is expected to be a surprise that some items would be out of stock because of stopped production or an update from the factory; that′s why it is essential to have more than one option in what product we will be purchasing in Technological products.

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4 Risk 2: Non-compliance or delays

The risk of scope changes is that they can lead to non-compliance or delays, which can affect your reputation, relationships, and contracts. If you have a positive budget variance, you may have to obtain new approvals, negotiate new terms, or pay penalties for breaching the original agreement. If you have a negative budget variance, you may have to cancel or return unused items, request refunds, or lose opportunities for future purchases. Either way, you may have to deal with unhappy stakeholders, vendors, or customers.

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María del Puerto Martín Rey
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According to my experience, if the supplier communicates in advance that they have a delay, it is crucial to start looking for an alternative as soon as you know, otherwise your own production can get affected. However, you can cancel the order if you are not communicated this delay in advance, or you think twice before making a purchase to this supplier. Another option could be to agree with them a possible compensation for this and try to purchase with a big lead time.

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5 Cause 3: Human errors

A third common cause of purchase requisition budget variances is human errors. This can happen due to mistakes in calculations, data entry, approvals, or communication. For example, if you request a purchase requisition for 10 laptops at $1,000 each, but you accidentally enter $100 instead of $1,000 in the system, you will have a negative budget variance of $9,000. Similarly, if you request a purchase requisition for a travel expense of $500, but you forget to include the tax of $50, you will have a positive budget variance of $50.

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María del Puerto Martín Rey
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If you have experience on the sector, you know about prices, so you can tell the supplier if the value is high or low in comparison with the last purchases. There should be enough honesty between companies.

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6 Risk 3: Audit issues or fraud

The risk of human errors is that they can lead to audit issues or fraud, which can affect your integrity, accountability, and security. If you have a negative budget variance, you may have to explain the discrepancy, correct the error, or face disciplinary actions for negligence or misconduct. If you have a positive budget variance, you may have to justify the excess, return the surplus, or face legal actions for misappropriation or embezzlement. Either way, you may have to undergo an audit, investigation, or litigation.

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Jassim Alampara CIPS

Procurement Consultant @ Alambaar | Co Founder @ The Founder's Story | Cost Savings Expert | Procurement Audit & Training | Cross Industry Benchmarking | Procurement Transformation Specialist |
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Audit issues surface if internal controls are weak or if there is a lack of oversight in the procurement process , potentially leading to compliance violations or financial misstatements. Also instances of fraud could occur if there is inadequate segregation of duties or if there are loopholes in the approval process , allowing for unauthorized purchases or inflated expenses to go undetected.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Nathan Champion, PMP, ASM, CSSBB

Caring for our Veteran and Project Management Community | Strategic Plan Portfolio Manager Driving Organizational Change with Hybrid Methodologies | Sacramento Career Event Organizer | Top Program Management Voice
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A technique is to complete a statistical analysis of the delta between PR and actual cost to determine the standard deviation and the overall likelihood for increased costs. This can be included in the organizations planning and tracked as a metric over time to determine if the organization is getting better or worse at meeting the allocated budgets for purchase requisitions.

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What are the common causes and risks of purchase requisition budget variances?

1

2

3

4

5

6

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1 Cause 1: Price fluctuations

2 Risk 1: Over- or under-spending

3 Cause 2: Scope changes

4 Risk 2: Non-compliance or delays

5 Cause 3: Human errors

6 Risk 3: Audit issues or fraud

7 Here’s what else to consider

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