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The five inventory costing methods in Business Central compared
How cost travels from the warehouse to the ledger
Every inventory transaction creates an item ledger entry for the quantity and one or more value entries for the cost. Value entries carry the money. Sometimes a purchase arrives at one cost and the invoice shows another. Or someone revalues a receipt that a sale already used. Either way, Business Central records the change as additional value entries rather than overwriting the original.
That is why cost adjustment exists, whichever of the inventory costing methods in Business Central you pick. The Adjust Cost - Item Entries batch job works through the applications between inbound and outbound entries and forwards any cost changes to the sales, consumption and transfers that used those receipts. Until it runs, cost of goods sold can rest on expected or outdated costs.
Posting Business Central inventory costing to the ledger
Posting to the general ledger is a separate step. Value entries become G/L entries straight away when Automatic Cost Posting is on in Inventory Setup. Otherwise, they wait until someone runs the Post Inventory Cost to G/L batch job. If adjustment has not run first, the ledger receives the unadjusted figures and the corrections follow later as extra entries.
Expected cost is the third piece. Goods received but not yet invoiced carry an expected cost, and the Expected Cost Posting to G/L setting decides whether that value goes to interim accounts in the meantime. Turning it on gives a truer balance sheet mid-month, in exchange for more entries to reconcile.
Inventory costing setup choices in Business Central
- ✓Automatic Cost Posting: on sends value entries to the G/L as they happen; off leaves them for the Post Inventory Cost to G/L batch job
- ✓Automatic Cost Adjustment: Never, Always, or a period from Day to Year, deciding whether adjustment runs during posting and how far back
- ✓Expected Cost Posting to G/L: posts received but uninvoiced values to interim accounts until the invoice arrives
- ✓Average Cost Period: Day, Week, Month, Quarter, Year or Accounting Period, the window the system uses to work out average cost
- ✓Average Cost Calc. Type: Item, or Item and Location and Variant, which decides whether each warehouse keeps its own average
- ✓Costing Method on the item card: chosen before the first transaction and treated as fixed once the item has entries
A Business Central inventory costing routine that keeps the G/L in agreement
- 1
Schedule cost adjustment
Run Adjust Cost - Item Entries through the job queue, nightly for most companies. Frequent runs keep each batch small and stop month end turning into one long adjustment run.
- 2
Post cost if it is not automatic
With Automatic Cost Posting off, run Post Inventory Cost to G/L after adjustment. Many companies switch automatic posting on to remove this step entirely.
- 3
Compare valuation to the ledger
Run the inventory valuation report as at period end and compare it with the inventory accounts, using the inventory to G/L reconciliation view to find any differences by account.
- 4
Hunt for postings outside inventory
A general journal line posted straight to an inventory account creates a difference the item ledger never sees. Switching off Direct Posting on those accounts prevents it.
- 5
Refresh standard costs if you use them
Use the standard cost worksheet to propose new costs, then implement the change. The resulting revaluation entries move stock on hand to the new standard.
Examples: matching the inventory costing method to the business
Wholesale distributor
Example: a distributor buying the same parts from several suppliers at shifting prices usually picks FIFO, because it follows the physical flow and gives defensible stock values.
- ✓FIFO on purchased items
- ✓Automatic cost posting switched on
- ✓Nightly cost adjustment in the job queue
Make-to-stock manufacturer
A manufacturer assembling finished goods often uses Standard among the inventory costing methods in Business Central. Production variances then appear as their own figures each month.
- ✓Standard on finished and subassembly items
- ✓FIFO or Average on bought-in components
- ✓Standards recalculated at planned intervals
Equipment dealer
Example: a dealer selling serialized machines where each unit costs something different uses Specific, so every sale takes the cost of that exact serial number.
- ✓Serial numbers with specific tracking
- ✓Specific costing on machine items
- ✓FIFO for parts and consumables
Inventory costing questions finance teams ask about Business Central
Can different items use different costing methods?
Yes, the costing method is a field on each item card. One company can value purchased goods on FIFO, manufactured goods on Standard and serialized equipment on Specific. The item's inventory posting group still decides which accounts receive the value. Make sure your accountant agrees with your mix of inventory costing methods in Business Central, because it affects how margins compare across product lines.
Can we change an item's costing method later?
Not with a simple field change once the item has ledger entries. The usual route is to create a new item with the new method, move the stock across and block the old item. That touches open orders, history and reporting, so plan it for a period end. Choosing carefully before the first receipt is far easier.
What happens if we never run cost adjustment?
Cost of goods sold and inventory values drift away from actual costs. Sales keep the cost known at the moment of posting, even when the purchase invoice later arrives at a different price. The general ledger and the inventory valuation report also stop agreeing. Scheduling adjustment in the job queue avoids all of this.
More questions on inventory costing methods in Business Central
Should we switch on Automatic Cost Posting?
For most companies, yes. It posts inventory value entries to the general ledger as transactions happen, which removes a month-end step and keeps the ledger current. Some companies leave it off to control exactly when inventory costs reach the ledger, then run Post Inventory Cost to G/L themselves. Either approach works if you follow the routine every time.
Is LIFO available in Business Central?
Yes, LIFO is one of the five costing methods. It is allowed under US GAAP but not under IFRS, and choosing it has US tax consequences. Treat it as an accounting and tax decision made with your CPA before it becomes a system setting. Business Central calculates it reliably once you make that decision.
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