Costing Methods

During an implementation one of the hardest conversations for a consultant to have with a customer surrounds the choice of Costing Methods.  It is important for customers to understand the different costing methods from a system point of view. 

The costing method chosen will not only determine how the value of your inventory on hand (based on inventory increases) is calculated but also what value posts to your Cost of Sales accounts in the event of a Sale (or inventory decrease).  In Microsoft Dynamics NAV the following costing methods are available:

FIFO - This costing method stands for First-In-First-Out and means exactly that.  Inventory increases are valued at their acquisition cost.  Inventory decreases are valued by taking the value of the first inventory increases, followed by the cost values of the second increase and so on.  This could result in different costs being associated to the same item on an inventory decrease transaction.

LIFO - This costing method stands for Last-In-First-Out and means exactly that.  Inventory increases are valued at their acquisition cost.  Inventory decreases are valued by taking the value of the last inventory increases, followed by the cost values of the second last increase and so on.  This could result in different costs being associated to the same item on an inventory decrease transaction.

Average - Inventory increases are valued at their acquisition cost, however, the Average costing method values the inventory decrease by calculating a weighted average of the remaining inventory on the last day of the average cost period in which the inventory decrease was posted.

Standard - The Standard costing method works almost the same as FIFO, the difference being that the inventory increases are valued at standard cost, which affects the value of the inventory decreases. When purchasing inventory in a standard costing environment, adjustments will be made for any variance in cost between the acquisition cost and the defined standard cost.

Specific - The Specific costing method tracks individual inventory increase transactions that need to be applied to inventory decrease transactions in order for the cost to calculate based on the actual cost of the goods purchased.