Costing Metho: Nav 2018/ Business Central

The costing method determines if an actual or a budgeted value is capitalized and used in the cost calculation. Together with the posting date and sequence, the costing method also influences how the cost flow is recorded. The following methods are supported in Microsoft Dynamics NAV:

Costing method	Description	When to use
FIFO	An item’s unit cost is the actual value of any receipt of the item, selected by the FIFO rule. In inventory valuation, it is assumed that the first items placed in inventory are sold first.	In business environments where product cost is stable. (When prices are rising, the balance sheet shows greater value. This means that tax liabilities increase, but credit scores and the ability to borrow cash improve.) For items with a limited shelf life, because the oldest goods need to be sold before they pass their sell-by date.
LIFO	An item’s unit cost is the actual value of any receipt of the item, selected by the LIFO rule. In inventory valuation, it is assumed that the last items placed in inventory are sold first.	Disallowed in many countries/regions, as it can be used to depress profit. (When prices are rising, the value on the income statement decreases. This means that tax liabilities decrease, but the ability to borrow cash deteriorates.)
Average	An item’s unit cost is calculated as the average unit cost at each point in time after a purchase. For inventory valuation, it is assumes that all inventories are sold simultaneously.	In business environments where product cost is unstable. When inventories are piled or mixed together and cannot be differentiated, such as chemicals.
Specific	An item’s unit cost is the exact cost at which the particular unit was received.	In production or trade of easily identifiable items with fairly high unit costs. For items that are subject to regulation. For items with serial numbers.
Standard	An item’s unit cost is preset based on estimated. When the actual cost is realized later, the standard cost must be adjusted to the actual cost through variance values.	Where cost control is critical. In repetitive manufacturing, to value the costs of direct material, direct labor, and manufacturing overhead. Where there is discipline and staff to maintain standards.

The following image shows how costs flow through the inventory for each costing method.

Costing methods differ in the way that they value inventory decreases and if they use actual cost or standard cost as the valuation base. The following table explains the different characteristics. (The LIFO method is excluded, as it is very similar to the FIFO method.)

	FIFO	Average	Standard	Specific
General characteristic	Easy to understand	Based on period options: Day/Week/Month/Quarter/Accounting Period. Can be calculated per item or per item/location/variant.	Easy to use, but requires qualified maintenance.	Requires item tracking on both inbound and outbound transaction. Typically used for serialized items.
Application/Adjustment	Application keeps track of the remaining quantity. Adjustment forwards costs according to quantity application.	Application keeps track of the remaining quantity. Costs are calculated and forwarded per the valuation date.	Application keeps track of the remaining quantity. Application is based on FIFO.	All applications are fixed.
Revaluation	Revalues invoiced quantity only. Can be done per item or per item ledger entry. Can be done backward in time.	Revalues invoiced quantity only. Can be done per item only. Can be done backward in time.	Revalues invoiced and un-invoiced quantities. Can be done per item or per item ledger entry. Can be done backward in time.	Revalues invoiced quantity only. Can be done per item or per item ledger entry. Can be done backward in time.
Miscellaneous	If you back-date an inventory decrease, then existing entries are NOT reapplied to provide a correct FIFO cost flow.	If you back-date an inventory increase or decrease, then the average cost is recalculated, and all affected entries are adjusted. If you change the period or calculation type, then all affected entries must be adjusted.	Use the Standard Worksheet window to periodically update and roll up standard costs. Is NOT supported per SKU. No historic records exist for standard costs.	You can use specific item tracking without using the Specific costing method. Then the cost will NOT follow the lot number, but the cost assumption of the selected costing method.