The Effects of Costing Methods on Valuing Inventory

Posted on: January 10, 2023 | By: Jim Bertler | Microsoft Dynamics Business Central

In Business Central, there are several costing methods that can be used to value inventory. Each method has a different effect on inventory values when prices are increasing or decreasing. In this blog post, we will discuss the effect of three common costing methods on valuing inventory in Business Central: First In, First Out (FIFO), Last In, First Out (LIFO) and Standard Cost.

First In, First Out

FIFO is a costing method that assumes that the first items to be received are the first items to be sold. In Business Central, FIFO can be set up by using the “FIFO” option in the “Costing Method” field on the inventory item card. When using FIFO, Business Central will use the cost of the oldest items in inventory to determine the cost of goods sold. As a result, FIFO will lead to lower cost of goods sold and higher gross profit margins when prices are increasing, but higher cost of goods sold and lower gross profit margins when prices are decreasing.

Last In, First Out

LIFO is a costing method that assumes that the last items to be received are the first items to be sold. In Business Central, LIFO can be set up by using the “LIFO” option in the “Costing Method” field on the inventory item card. When using LIFO, Business Central will use the cost of the most recent items in inventory to determine the cost of goods sold. This results in higher cost of goods sold and lower gross profit margins when prices are increasing, but lower cost of goods sold and higher gross profit margins when prices are decreasing.

Standard Cost

Standard Cost is a costing method that allows the user to set a fixed cost for an item, regardless of the price at which the item was purchased. In Business Central, Standard Cost can be set up by using the “Standard” option in the “Costing Method” field on the inventory item card. With this method, the effects of price changes on valuing inventory will not be considered, and the cost of goods sold will always be the same.

In summary, different costing methods in Business Central can result in different valuations of inventory. FIFO and LIFO will result in opposite effects on inventory values when prices are increasing or decreasing. Standard Cost doesn’t consider the effect of price changes in valuing inventory. It’s important for companies to understand the advantages and disadvantages of each method and choose the one that best suits their needs and goals. Additionally, Business Central provides useful functionalities to evaluate the impact of different costing methods on inventory values, like simulations and scenarios, which allows the users to easily compare the results of each method and making a better decision.

Next Steps

Logan Consulting, a proud partner of Microsoft, specializes in helping clients identify and implement the methods and solutions that will best optimize their unique businesses. To learn more about how we can help transform your company, contact us today.

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