Inventory Costing Methods in Business Central: FIFO, Average, and Standard

Choosing the right inventory costing method is one of the most consequential decisions in a Business Central implementation — and one of the hardest to change later.

Business Central supports five inventory costing methods: FIFO (First In, First Out), LIFO (Last In, First Out), Average, Standard, and Specific. The costing method is set at the item level and — critically — cannot be changed after transactions have been posted. Getting this decision right before go-live is essential.

FIFO

FIFO assumes that the oldest inventory is sold first. It produces a balance sheet value that more closely reflects current market costs. It's the most commonly used method for distributors and retailers because it's straightforward to explain and audit.

Average Cost

Average cost calculates a running weighted average unit cost as items are received. It smooths cost volatility and is commonly used in manufacturing environments where FIFO tracking is operationally impractical.

Standard Cost

Standard cost uses a pre-defined cost that is periodically updated. The difference between standard and actual cost is tracked as a variance. Standard costing is common in manufacturing environments where production cost analysis and variance reporting are important management tools.

The Decision Framework

The costing method decision should be driven by: industry norms, financial reporting requirements, operational feasibility of tracking actual costs, and management reporting needs. It should also be made in consultation with your external auditor — changing costing methods is an accounting change that auditors scrutinize carefully.