Inventory costing methods in Business Central, compared
By Emil Björk · Microsoft business apps consultant, Gothenburg
FIFO, LIFO, Average, Standard, and Specific — what each costing method means, and how to choose the right one in Business Central.
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Inventory costing is the bridge between the warehouse (quantities moving) and the general ledger (cost of goods sold posting). Business Central supports five costing methods on each item card. The choice is per item, not per company, so a single company can mix methods deliberately — though most companies pick one default and stick to it.
FIFO (First In, First Out)
Inbound transactions are layered in receipt order; outbound transactions consume from the oldest layer first. FIFO closely tracks the physical flow for most non-perishable goods and produces stable margins in steady-state pricing environments. The most commonly chosen method in BC implementations.
LIFO (Last In, First Out)
The newest layer is consumed first. LIFO matches recent costs against current revenue, which is useful in inflationary environments — but it is prohibited under IFRS and increasingly restricted under local GAAPs, so it's rare outside the US.
Average
Every outbound transaction is costed at the moving weighted average cost of the item at the location at that moment. Easy to explain, smooths price volatility, and avoids cost-layer maintenance. Common for high-volume commodity inventory.
Standard
Each item has a standard cost maintained separately; all postings use the standard. Variances between actual cost and standard land in a purchase price variance account. The right method for manufacturing where production cost should be tracked against engineered standards, and for environments where management wants stable inventory valuation independent of purchase price swings.
Specific
Each individual unit (typically serialised) carries its own cost. The right method for high-value, low-volume serial-tracked goods — luxury watches, used vehicles, custom equipment — where every unit's cost is genuinely different.
The Adjust Cost — Item Entries job
None of the methods produces correct cost of goods sold in real time. Inbound transactions sometimes post after outbound (a sale before the supplier invoice). The Adjust Cost — Item Entries batch routine propagates final landed cost into already-posted outbound entries, reconciling the item ledger and the GL. Run it before period-end, after the cost of goods sold flush, and before financial reporting. Companies that skip it carry inventory misvaluation indefinitely.
Changing method
Once an item has transactions, changing the costing method is not supported. Plan it up front.
Frequently asked questions
Which costing method do most Business Central implementations use?
- FIFO. It tracks physical flow for most non-perishable goods and produces stable margins in steady pricing. Average is common for high-volume commodity stock; Standard suits manufacturing measured against engineered standards; Specific is for serialised high-value units.
Can I change an item's costing method later?
- Not once the item has transactions. The method is chosen per item, so plan it up front — a company can mix methods deliberately, but most pick one default and stick to it.
Is LIFO allowed?
- Business Central supports it, but LIFO is prohibited under IFRS and restricted under many local GAAPs, so it is rare outside the United States.
Why do I need to run Adjust Cost – Item Entries?
- Because no method produces correct cost of goods sold in real time — a sale can post before the supplier invoice. The batch job pushes final cost into already-posted outbound entries and reconciles the item ledger with the general ledger. Run it before period-end and before financial reporting.
Further reading
Related guides
- Inventory and warehouse management in Business CentralHow Business Central tracks items, locations, lots, serials, and warehouse operations — from basic stock to directed put-away and pick.
- Physical inventory orders in Business CentralHow to run a physical inventory count in Business Central — counting periods, physical inventory journals, count discrepancies.
- Item attributes and variants in Business CentralHow Business Central handles product variations — variants for stock-keeping, attributes for searching, and where the model fits and where it doesn't.
- The Business Central planning worksheetHow MRP works in Business Central — the planning worksheet, reordering policies, supply, demand, and the regenerative engine behind it.
- Assembly orders in Business CentralHow Business Central handles assembly orders — assembly BOMs, assemble-to-order vs assemble-to-stock, and when to use assembly vs production orders.
Browse every guide in Business Central or just Inventory & warehouse.
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