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Costing methods

Overview

In Dynamics 365 Supply Chain Management, several costing methods are available to calculate the cost of items in inventory. These costing methods determine how the cost of goods sold (COGS) and inventory values are calculated.

A product’s costing method is defined through the Item model group set against the released product.

The first five costing methods (FIFO, LIFO, LIFO date, Weighted average, Weighted average date) require an inventory close at the end of each financial period. The inventory close process will match issues (outbound stock) against receipts (inbound stock) to decide the cost to assign to inventory that’s used in manufacturing or sold to a customer.

FIFO – First in first out

With FIFO (first in, first out) costing, it is assumed that the oldest items in stock are the first to be sold. The item’s unit cost is the actual value of any receipt of the item. Therefore, the cost of goods sold is based on the cost of the oldest items (first-in) in inventory.

LIFO – last in first out

With LIFO (Last in, first out) costing, it is assumed that the most recent items in stock are sold first. The item’s unit cost is the actual value of any receipt of the item. The cost of goods sold is based on the cost of the most recent purchases (last-in).

LIFO date – Last in first out date

The LIFO date (last in first out date) method acts like LIFO, if inventory is available. If no inventory is available to settle against, inventory that’s received after the outbound transaction will be matched/settled against the outbound transaction. The order that’s used is last issue, last receipt. The settling process runs in reverse from LIFO – which settles outbound transactions with earliest first. LIFO date acts similarly, unless no inventory is received prior to the outbound transaction, at which point, the remaining, unmatched, outbound transactions are processed in reverse order.

Weighted average

Weighted average costing calculates the cost of items by averaging the cost of all items in stock for the current period. The remaining stock from the prior period is costed in the same way. These two values are added together and divided by the total quantity. This value becomes the average cost used during the inventory close process for all outbound issue transactions during the period. Therefore, this method does not necessarily consider the chronological order of receipts.

Weighted average date

Weighted average date is like weighted average. The difference is that each day of the current period has its own weighted average calculated based on the value of all remaining stock, with receipt on dates prior to and including the date of the outbound transaction. All transactions on a specific day during the period use the same weighted average cost. The system calculates a weighted average each day in a period.

Standard cost

Standard costing uses a predetermined cost assigned to each item in stock. This cost remains fixed for a defined period, regardless of the actual costs incurred during production or purchase. The cost of goods sold is calculated based on this standard cost of the item. Any differences between the standard cost and the actual costs are typically tracked as variances. A price activation process is required to set the cost price to be used in transactions. 

Moving average

Moving average is a perpetual costing method. Moving average costing, like weighted average, calculates the cost of items by averaging the cost of all items in stock. However, when new inventory is purchased, its cost is immediately re-evaluated and added to the running average, which tends to smooth out cost fluctuations over time. The average cost at the time of an issue transaction will be used.

Learning with Microsoft

Further information related to costing methods can be found on Microsoft Learn via the URL below.

Inventory cost methodologies – Training | Microsoft Learn

Inventory costing FAQ – Supply Chain Management | Dynamics 365 | Microsoft Learn