Choosing the right inventory costing method in Business Central is crucial for accurate financial reporting and informed decision-making.
This guide explores three primary options: LIFO, Average Costing, and Standard Costing for inventory management costing highlighting their suitability for different business scenarios and considerations for successful implementation.
Inventory Costing Methods in Inventory Management
Choosing the right costing method in Business Central can significantly impact your profitability and tax liability. Business Central offers three primary options:
LIFO:(Last In, First Out)
LIFO works best in industries with rapidly increasing costs and businesses prioritising tax efficiency. It's particularly effective for products with short shelf lives.
Success with LIFO requires careful configuration of item cards, strategic cost adjustment schedules, and regular monitoring of value entries. The key is maintaining a balance between tax efficiency and operational clarity.
Average Costing
Average costing provides the perfect balance for high-volume operations and products with volatile costs. In average costing, you have to carefully set up average periods and implement the right monitoring thresholds.
Regular cost adjustments keep your valuations accurate while maintaining operational simplicity.
Standard Costing: Predictable Operations
Standard costing is used often in manufacturing environments and situations requiring a stable cost basis for planning.
The implementation requires careful calculation of initial standard costs, supported by well-structured variance accounts and regular review procedures. Success depends on establishing clear update procedures that balance stability with accuracy.
Method | Description | Best Suited For | Considerations |
LIFO (Last-In, First-Out) | Assumes the most recently acquired items are sold first. | Industries with rising costs, businesses prioritizing tax efficiency, products with short shelf lives. | Requires careful cost adjustments, may not accurately reflect actual inventory flow. |
Average Costing | Calculates the average cost of all units in stock. | High-volume operations, products with volatile costs. | Requires accurate average period calculations, regular cost adjustments. |
Standard Costing | Uses predetermined costs for each item. | Manufacturing environments, situations requiring a stable cost basis for planning. | Requires careful initial cost calculation, regular variance analysis and cost updates. |
Reduce Costs & Increase Efficiency
Successful businesses leverage Business Central's real-time capabilities through perpetual inventory systems.
Every transaction, from receiving to shipping, instantly updates your inventory. The impact? A 47% reduction in stockouts and a 12% improvement in inventory accuracy based on our analysis.
Configure your system to trigger alerts when inventory levels hit predetermined thresholds. Set these thresholds based on historical demand patterns and lead times, not feelings.
Top performers customise their reorder points by season and location, achieving optimal stock levels while minimising carrying costs.
Cycle Counting
Forget annual physical counts. Implement cycle counting programs that continuously verify and correct your inventory levels. With this, you would make a lot of difference in your inventory management.
The most successful businesses divide their inventory into ABC categories based on value and velocity, then count A-items weekly, B-items monthly, and C-items quarterly.
Create dedicated cycle count journals in Business Central and assign specific staff responsibilities. Use variance reports to identify patterns and address root causes.
Advanced Warehouse Configuration
Your warehouse setup can make or break your operation. The most successful implementations start with a detailed analysis of product flow.
Configure your picking strategies based on product velocity - high-volume items should be easily accessible, while slow-movers can occupy less premium space.
Implement directed put-away and picking to optimise worker movements. Set up zones that match your operation's natural workflow. Use bin rankings to ensure your most efficient storage locations are utilised first.
Cost Management That Actually Works
Effective cost management goes beyond choosing a costing method. Implement regular cost adjustments and reviews to maintain accuracy.
Set up automatic cost posting to ensure all inventory-related costs are captured correctly.
The key is creating a system that maintains accuracy without requiring constant manual intervention.
Configure your standard costs carefully if you're using that method. Include not just the purchase price but also typical freight, handling, and overhead costs.
Review and update these standards quarterly to prevent significant variances.
Demand Planning and Forecasting
Transform your demand planning through Business Central's forecasting capabilities. Import historical sales data, analyse seasonal patterns, and create baseline forecasts.
But don't stop there - supplement system forecasts with market intelligence and planned promotions.
Set up separate forecasts for different product categories and locations. Use the forecast worksheet to fine-tune predictions and incorporate business intelligence.
Reporting and Analytics Mastery
Your success depends on having the right information at the right time. Configure custom dashboards showing key metrics like inventory turns, carrying costs, and service levels.
Set up automated reports for inventorying, slow-moving items, and stockout incidents.
Use Power BI integration to create visual analytics that highlights trends and opportunities. The most successful businesses review these metrics daily and make data-driven adjustments to their inventory strategies.
Next Steps for Implementation
Success in inventory management requires more than just knowing best practices - it requires systematic implementation. Start by assessing your current operations against each of these areas. Identify your biggest opportunities for improvement and create a phased implementation plan.
At Onpoint, we specialise in Microsoft Dynamics 365 Business Central implementations, providing tailored solutions to address your unique inventory management challenges.
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