D365 Business Central - Inventory Costing - Average Cost

In Microsoft Dynamics 365 Business Central, inventory costing is a crucial aspect of managing your inventory and understanding your financial position. One of the costing methods available is the Average Cost method. Here’s an overview of how Average Cost works in Business Central, particularly when dealing with carried forward inventory.

Average Cost Overview

The Average Cost method in Business Central calculates the cost of inventory by taking the weighted average of all inventory purchases. When items are sold, the cost of goods sold (COGS) is determined using this average cost.

Key Concepts

1. Average Cost Calculation: The average cost is recalculated whenever a new purchase, sale, or inventory adjustment is posted. This ensures that the inventory value is always reflective of the latest costs.
2. Inventory Valuation: The total inventory value is the average cost multiplied by the quantity on hand.
3. Cost Adjustment: Business Central automatically adjusts costs when transactions are posted. This includes forward and backward adjustments to ensure that the cost is accurately reflected.

Carried Forward Inventory

When dealing with carried forward inventory, the average cost needs to be carefully managed to ensure that costs from previous periods are correctly included in the new period. Here’s how it typically works:

At Period-End

1. Closing the Period: At the end of a financial period, you perform a close to carry forward the inventory balances and costs to the next period.
2. Cost Roll Forward: The average cost of inventory at the end of one period becomes the starting average cost for the next period.

Opening the New Period

1. Beginning Balances: When the new period begins, the carried forward inventory quantities and their associated costs are already in the system as beginning balances.
2. New Transactions: As new purchase and sales transactions are posted in the new period, the average cost is recalculated based on the carried forward inventory plus any new transactions.

Example

Let's illustrate this with a simplified example:

1. Ending Balance of Previous Period:

• Quantity: 100 units
• Total Cost: $500
• Average Cost: $5 per unit

1. New Purchases in Current Period:

• Purchased 50 units at $6 each
• Total Cost of Purchase: $300

1. Average Cost Calculation:

• Total Quantity: 100 (previous) + 50 (new) = 150 units
• Total Cost: $500 (previous) + $300 (new) = $800
• New Average Cost: $800 / 150 = $5.33 per unit

1. Sales in Current Period:

• Sold 30 units
• Cost of Goods Sold: 30 units * $5.33 = $159.90

1. Remaining Inventory:

• Quantity: 150 - 30 = 120 units
• Total Cost: 120 * $5.33 = $639.60

Handling Adjustments and Cost Recalculations

Business Central will periodically run cost adjustment processes to ensure that all costs are correctly posted, especially if there are variances or additional costs (like freight or handling) that need to be applied to inventory items after the fact. These adjustments can be run manually or scheduled to ensure your inventory costs remain accurate.

Important Points

• Cost Adjustment Batch Jobs: Regularly run the "Adjust Cost - Item Entries" batch job to update the average costs based on any new transactions.
• Reporting: Utilize inventory valuation reports to monitor the average costs and the value of your inventory over time.
• Configuration: Ensure your inventory setup in Business Central is configured to use the Average Cost method, and review the costing method settings periodically.

By understanding and managing these processes in Dynamics 365 Business Central, you can ensure that your inventory costs are accurately tracked, and your financial statements reflect the true value of your inventory.

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