Costing in Business Central includes several behind-the-scenes processes that can appear confusing at first. Understanding how costs are calculated and displayed can help users troubleshoot inventory transactions and avoid unnecessary support requests.

This session focuses on common questions related to cost updates, inventory valuation, and differences between FIFO, LIFO, and average costing methods.

Unit cost vs. last direct cost

One of the most common questions is how to update an item's cost when a vendor changes pricing. The Item Card contains two important fields:

• Unit Cost
• Last Direct Cost

A key distinction is that the Unit Cost field always displays the average cost, regardless of the item's costing method.

If the goal is to update the default cost that appears on future purchase orders, users should update Last Direct Cost, not Unit Cost. Last Direct Cost represents the most recent purchase cost and is the value Business Central uses to populate new purchase orders.

FIFO and LIFO costing behavior

When using FIFO (First In, First Out) or LIFO (Last In, First Out), Business Central still displays the average cost in the Unit Cost field.For example:

• Purchase 10 units at $20.
• Purchase 10 units at $25.
• The item's Unit Cost displays as $22.50, which is the average of both receipts.

Although FIFO would normally expect the earliest cost to be used, the Item Card continues to show the average cost. This behavior often causes confusion but is working as designed.

Why sales orders show average cost

When a sales order is created for a FIFO or LIFO item, the cost displayed on the sales line is also the average cost shown on the Item Card. However, this does not mean average cost is ultimately used for inventory valuation.

At posting, Business Central:

1. Initially posts the transaction using the average cost.
2. Creates adjustment entries behind the scenes.
3. Updates inventory valuation to reflect the proper costing method.

The final posted inventory cost aligns with the item's assigned costing method, even though the sales document initially showed the average cost.

Average costing explained

For items using the average costing method, the displayed Unit Cost and inventory valuation are aligned because the system is designed to calculate and use average cost.

For example:

• Purchase 100 units at $20.
• Purchase 100 units at $25.

The average cost becomes $22.50. As sales transactions occur, Business Central applies the calculated average cost to inventory valuation.

A common average costing misconception

Many users assume that average cost is based only on the inventory currently remaining on hand. Business Central does not calculate average cost this way. Instead, average cost calculations are based on all qualifying inbound entries posted on or before a given posting date.

This means:

• Even if lower-cost inventory has already been sold,
• Earlier receipts can still influence the average cost calculation,
• Posted value entries may be updated as additional purchases are invoiced.

Understanding the relationship between posting dates and inventory receipts is important when reviewing historical costing information.

Key takeaways

• Unit Cost always displays average cost, regardless of costing method.
• Last Direct Cost controls the default cost used on new purchase orders.
• FIFO and LIFO items initially display average costs on sales documents.
• Business Central creates adjustment entries to ensure the final inventory cost follows the assigned costing method.
• Average costing is based on qualifying inbound entries by posting date, not simply on remaining inventory.