Inventory Costing in Business Central: Methods, Cost Adjustment and the G/L
By Kaspar Kasper, Founder & Senior Solution Architect· 5 min read
Inventory costing is where operations and finance meet in Business Central. Every receipt, shipment, consumption and adjustment creates value entries, and the costing method on the item decides how those values flow into cost of goods sold and inventory on the balance sheet. Getting it right means margins you can trust. Getting it wrong usually shows up as an inventory valuation report that will not tie to the G/L.
Costing is set per item
The Costing Method field sits on the item card. Different items can use different methods.
| Method | How cost flows | Typical fit |
|---|---|---|
| FIFO | Outbound entries take the cost of the oldest open inbound entries first. | Most distributors; perishable or dated stock; the most common choice. |
| Average | Outbound entries are valued at the average cost for a period you define. | Commodities and items with frequent price changes where FIFO layers add little value. |
| Standard | Items are valued at a predefined standard cost; differences post as variances. | Manufacturers who want stable product costs and variance analysis. |
| Specific | Cost follows the exact serial or lot that is shipped. | High-value serialized items such as equipment or vehicles. |
| LIFO | Outbound entries take the cost of the newest inbound entries first. | Rarely used; only where your accounting policy specifically requires it. |
Average cost settings
If you use Average, two settings in Inventory Setup matter:
- Average Cost Period: day, week, month, quarter, year or accounting period.
- Average Cost Calc. Type: whether the average is calculated per item, or per item, location and variant.
Both should be agreed with your accountant before the first transaction, because they change how every outbound entry is valued.
Standard cost in practice
Standard costing gives manufacturers a fixed cost per item for quoting and margin analysis.
- Standard costs are maintained in the Standard Cost Worksheet, rolled up from BOMs and routings.
- They are applied with Implement Standard Cost Changes, which revalues inventory on hand.
- Purchase price and production differences post as variance entries, which finance then reviews.
The discipline is in updating standards on a regular cycle, typically yearly or when material prices move significantly.
Cost adjustment: the step that ties everything together
When an item is sold before its final cost is known, for example before the purchase invoice arrives or before freight is assigned with item charges, Business Central values the sale at the cost known at that time. Adjust Cost – Item Entries later goes back through the item ledger and forwards the corrected cost to every outbound entry that used those receipts.
- Receipt postedGoods received, cost not yet final
- Item soldValued at the cost known at that time
- Final cost arrivesPurchase invoice, or freight assigned with item charges
- Adjust Cost – Item EntriesForwards the corrected cost to every outbound entry that used those receipts
- Post Inventory Cost to G/LValue entries reach the general ledger
In Inventory Setup you choose how this happens:
- Automatic Cost Adjustment runs adjustment as entries are posted. Convenient, but it can slow posting in high-volume companies.
- Scheduled adjustment, running Adjust Cost – Item Entries as a job queue entry overnight, is what we recommend for most companies with meaningful volume.
- Automatic Cost Posting controls whether value entries post to the G/L immediately. If it is off, you run Post Inventory Cost to G/L yourself.
- Expected Cost Posting to G/L posts receipts that are not yet invoiced to interim accounts, so the balance sheet shows goods received not invoiced.
Reconciling inventory to the G/L
At month-end, after cost adjustment and posting, the inventory valuation should match the inventory accounts in the G/L. Business Central gives you the Inventory Valuation report and the Inventory – G/L Reconciliation page to compare the two. Differences usually trace back to one of a handful of causes:
- Cost adjustment or Post Inventory Cost to G/L has not been run.
- Manual journal entries were posted directly to inventory accounts.
- Inventory posting setup sends some combinations of location and item group to the wrong accounts.
- Opening inventory was migrated with a different value than the opening G/L balance.
Choosing a method
- Use FIFO as the default unless you have a specific reason not to.
- Consider Standard for manufactured items if you want stable costs and variance reporting, and have the discipline to maintain standards.
- Use Specific only for serialized, high-value items where each unit's cost genuinely differs.
- Agree Average settings with your accountant before using it.
- Whatever you choose, schedule cost adjustment and make the inventory-to-G/L reconciliation part of every close.
Costing design is part of our manufacturing and distribution implementations. If your inventory valuation and G/L drift apart every month, talk to an architect.
Frequently asked questions
Can I change an item's costing method after go-live?
Not easily. Once an item has ledger entries the costing method generally cannot be changed easily, so settle it per item during design.
Should I turn on Automatic Cost Adjustment?
It is convenient, but it can slow posting in high-volume companies. For most companies with meaningful volume we schedule Adjust Cost – Item Entries as an overnight job queue entry instead.
Why does my inventory valuation not match the G/L?
Usually because cost adjustment or Post Inventory Cost to G/L has not run, manual journals were posted to inventory accounts, inventory posting setup routes some combinations to the wrong accounts, or opening inventory was migrated at a different value than the opening G/L balance.
What does Expected Cost Posting to G/L do?
It posts receipts that are not yet invoiced to interim accounts, so the balance sheet shows goods received not invoiced.
