The 5 Costing Methods in Business Central
Posted on: December 14, 2022 | By: Jim Bertler | Microsoft Dynamics Business Central
Business Central is a great application for companies looking to have greater visibility and control over their financials. The ERP solution comes equipped with many different modules to help users gain greater insight into company data as it pertains to financial.
Specifically, in today’s blog post we are going to take a closer look at costing methods in Business Central.
Costing methods are a necessary part of managing inventory. These methods help to figure out whether an actual or a budgeted value is capitalized and used in the cost calculation. They also have an impact on how a cost flow is recorded.
Business Central supports 5 different costing methods:
- FIFO: This method assumes that the first items placed in inventory are sold first and defines an item’s unit cost as the actual value of any receipt of the item. This method is best for businesses that have stable product costs, as well as businesses who sell items that have a limited shelf life.
- LIFO: This method assumes that the last items placed in inventory are sold first and defines an item’s unit cost as the actual value of any receipt of the item. It is not commonly used because it can aid companies in depressing profit.
- Average: This method assumes that all inventories are sold simultaneously and defines an item’s unit cost by calculating the average unit cost at each point in time after a purchase. This is most useful for businesses that have unstable product costs, or in environments where inventories are mixed together and cannot be differentiated, like chemicals.
- Specific: An item’s unit cost is defined as the exact cost at which the particular item was received. This is particularly useful in the production of easily identifiable items with fairly high unit costs, items that are subject to regulation, as well as items with serial numbers.
- Standard: An item’s unit cost is predefined using an estimation, and when the actual cost is realized later, the standard cost has to be adjusted to the actual cost using variance values. This is popularly used in business environments where cost control is critical, and in repetitive manufacturing to aid in valuing the costs of direct material, direct labor, and manufacturing overhead.
Selecting the right costing method is crucial in ensuring that profits are maximized and accurately depicted. Business Central explains and outlines the different costing methods in easy-to-understand detail and can be a great resource for companies hoping to improve their accuracy in financial reporting.
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