Inventory costing methods in Business Central, compared

Inventory costing is the bridge between the warehouse (quantities moving) and the general ledger (cost of goods sold posting). Business Central supports five costing methods on each item card. The choice is per item, not per company, so a single company can mix methods deliberately — though most companies pick one default and stick to it.

FIFO (First In, First Out). Inbound transactions are layered in receipt order; outbound transactions consume from the oldest layer first. FIFO closely tracks the physical flow for most non-perishable goods and produces stable margins in steady-state pricing environments. The most commonly chosen method in BC implementations.

LIFO (Last In, First Out). The newest layer is consumed first. LIFO matches recent costs against current revenue, which is useful in inflationary environments — but it is prohibited under IFRS and increasingly restricted under local GAAPs, so it's rare outside the US.

Average. Every outbound transaction is costed at the moving weighted average cost of the item at the location at that moment. Easy to explain, smooths price volatility, and avoids cost-layer maintenance. Common for high-volume commodity inventory.

Standard. Each item has a standard cost maintained separately; all postings use the standard. Variances between actual cost and standard land in a purchase price variance account. The right method for manufacturing where production cost should be tracked against engineered standards, and for environments where management wants stable inventory valuation independent of purchase price swings.

Specific. Each individual unit (typically serialised) carries its own cost. The right method for high-value, low-volume serial-tracked goods — luxury watches, used vehicles, custom equipment — where every unit's cost is genuinely different.

The Adjust Cost — Item Entries job. None of the methods produces correct cost of goods sold in real time. Inbound transactions sometimes post after outbound (a sale before the supplier invoice). The Adjust Cost — Item Entries batch routine propagates final landed cost into already-posted outbound entries, reconciling the item ledger and the GL. Run it before period-end, after the cost of goods sold flush, and before financial reporting. Companies that skip it carry inventory misvaluation indefinitely.

Changing method. Once an item has transactions, changing the costing method is not supported. Plan it up front.