How costing in Business Central works, method by method

The five methods for costing in Business Central

Every item carries its own Costing Method: FIFO, LIFO, Average, Specific or Standard. FIFO and LIFO value each outbound entry from the oldest or newest receipt. Average works out a blended cost for the period. Specific follows the exact serial or lot you picked. Standard holds a fixed cost and posts any difference as variance.

Choose the method before you post the first transaction. Once an item has ledger entries, a change is restricted and usually means a revaluation. Distributors often settle on FIFO or Average. Manufacturers commonly pick Standard for produced items. Specific suits high value goods that you track by serial number.

Setup pages that drive costing in Business Central

Open Inventory Setup first. Automatic Cost Posting decides whether each item transaction posts to the general ledger at once or waits for a batch job. Automatic Cost Adjustment decides how often costs are corrected. Average Cost Calc. Type sets whether the average is held per item, or per item, location and variant.

Next comes Inventory Posting Setup. Each combination of location and inventory posting group points to an inventory account there. General Posting Setup then supplies the cost of goods sold, direct cost applied and variance accounts. A missing combination is the most common reason a shipment or receipt refuses to post on day one.

Why the Adjust Cost batch job matters for costing in Business Central

Sales often ship before the purchase invoice for the same goods arrives. The shipment posts at the cost known at the time. Real cost shows up later. The Adjust Cost - Item Entries batch job then forwards that later cost to every outbound entry it affects. That includes transfers, assembly output and production consumption.

You can run the job from the job queue every night, or let Automatic Cost Adjustment handle it as entries post. A nightly run suits busy databases. Either way, run it before any valuation report. An unadjusted item shows a margin that is simply wrong.

From value entries to the general ledger

Each item ledger entry records quantity, and one or more value entries record money. Value entries are what reach the general ledger. With Automatic Cost Posting switched off, you run Post Inventory Cost to G/L to move them across. Most teams do this during the period end close.

Landed cost, such as freight and duty, comes in through item charges on a purchase invoice. You assign them to the receipt lines they belong to. Standard cost items live in the Standard Cost Worksheet. For stock already on hand, book a change in value through the Revaluation Journal, so the difference stays visible.

Keeping costing in Business Central reconciled

The Inventory Valuation report gives the subledger value. The Inventory to G/L Reconcile report compares it with the inventory accounts. Run both at period end. Differences usually trace back to journals posted straight to an inventory account. So turn off Direct Posting on those accounts, and the problem mostly disappears.

Negative inventory is the other regular culprit, because a shipment with no receipt behind it has no real cost to take. Inventory periods also block backdated item postings. If your numbers have already drifted, our consultants can trace the entries and correct the setup behind them.

Questions about costing in Business Central

Which costing method should a distributor use?

Most distributors choose FIFO or Average. FIFO matches how stock physically moves and gives a clear cost for each receipt. Average smooths price swings, and it is easier to explain when many small purchases arrive at different prices. So the right pick depends on how your buyers work. Talk it over with your accountant before you set costing in Business Central.

Can I change the costing method on an existing item?

Business Central restricts the change once an item has ledger entries, and some switches are not allowed at all. The usual route is to plan the change with your accountant and revalue the stock on hand. Then set the new method on the item. Test the whole sequence in a sandbox first, so you can see the effect on your valuation report.

What does Adjust Cost - Item Entries actually do?

It finds inbound entries whose cost changed after the goods were shipped or consumed. Then it forwards the corrected cost to the related outbound entries. It also updates the unit cost on the item card. So your margins and valuation reports reflect the invoiced cost, not the first estimate. Run it before every period end.

Do different items need the same method?

No. You set the Costing Method for each item, so purchased components can use FIFO while manufactured items use Standard. Item templates help here. They apply the agreed method and posting groups whenever someone creates a new item in a given category. That keeps costing in Business Central consistent as your item list grows.

Why does my inventory account not match the valuation report?

The usual causes are manual journals posted straight to the inventory account, value entries not yet posted to the general ledger, or a cost adjustment that has not run. Work through those three in order. Then you normally find the difference quickly. Run the Inventory to G/L Reconcile report to see which items cause it.

More guides on costing in Business Central

Costing in Business Central touches purchasing, stock and the ledger at once. These pages go deeper into the fields and services that sit closest to the costing setup described above. Use them to check each item, each posting group and each report, so your stock value always agrees with the balance sheet. For the product detail, see Design details: costing methods on Microsoft Learn.