How much to hold is a separate question: reorder point and safety stock.
Short answer
Business Central supports five inventory costing methods: FIFO, LIFO, Average, Specific and Standard. The method is set on the item card in the Costing Method field — and once entries exist for that item, changing it through standard functionality is effectively impossible.
For Ukrainian statutory accounting the choice narrows immediately: LIFO cannot be used. National accounting standard 9 "Inventories" lists the permitted methods for measuring inventory on disposal — specific identification, weighted average, FIFO, standard cost and retail price. LIFO is not among them.
Mapping BC methods to Ukrainian standards
| Business Central | National standard 9 | Usable in Ukraine |
|---|---|---|
| FIFO | cost of earliest receipts | yes, the most common choice |
| Average | weighted average cost | yes |
| Specific | specific identification | yes, for unique items |
| Standard | standard cost | yes, with mandatory variance analysis |
| LIFO | no equivalent | no |
The retail price method from the national standard is not implemented as a separate costing method in standard Business Central — it is covered through retail accounting configuration or an industry extension.
Worth noting: the standard requires one method for all inventory items with the same purpose and conditions of use. Business Central lets you set the method per item, so the technical freedom is wider than the accounting rule. The policy belongs in your accounting policy document, not in the judgement of whoever creates the item card.
FIFO or Average: how the choice is made in practice
FIFO is the default choice for most trading and manufacturing companies. Cost of sales is tied to specific receipt batches and the balance sheet carries inventory at the most recent prices. In a rising-price environment FIFO produces a lower cost of sales and therefore higher reported profit.
Average smooths fluctuations. It makes sense when batches are homogeneous and indistinguishable to the business: bulk materials, fuel, small components. Two settings matter and are often overlooked:
- Average Cost Calc. Type — calculate the average per item, or separately per item, location and variant. The second is more accurate when prices differ materially between locations.
- Average Cost Period — the averaging window: day, week, month, quarter or year. Shorter periods mean more precise costs and more computation.
Specific is for cases where each unit has its own value: vehicles, equipment, jewellery. It requires serial or lot tracking.
Standard suits manufacturing with an established technology. Cost is fixed at a standard, and the gap between standard and actual accumulates as variances to be analysed separately. It is a powerful management tool but demands discipline: standards must be recalculated, or variances grow until the reporting becomes meaningless.
The main trap: cost adjustment
The most common complaint after go-live is "the cost in the report is not what it should be". Nine times out of ten the cause is not the method but a missing adjustment.
Here is the mechanism: at the moment of shipment the system does not always know the final cost of the batch — freight, customs charges or a late vendor invoice may still be added. So Business Central first posts an expected cost and then recalculates the chain through the Adjust Cost — Item Entries batch job.
Until the adjustment runs, reports show an intermediate picture. The fix is not to run it manually but to automate it: Inventory Setup has an Automatic Cost Adjustment parameter ranging from "never" to "always". Daily recalculation is a workable compromise for most companies; at high volumes it is moved to an overnight window.
Next to it sits Automatic Cost Posting — whether results flow straight into the general ledger. With it switched off, inventory and finance drift apart and the difference has to be hunted down by hand.
Why nobody changes the method after go-live
The Costing Method field is technically editable as long as the item has no entries. After the first transaction, changing it would mean recalculating the entire movement and costing history — which is not a setting change but a project of its own, with reposting and balance reconciliation.
The practical workaround, when the method really must change: create a new item card with the required method, transfer the balance as of a cut-off date and block the old card. The history then splits into two parts, and you live with that in reporting.
The conclusion is straightforward: the costing method is decided before data migration, together with the dimension structure and the chart of accounts. It is one of those parameters where the cost of a mistake is measured in months, not hours.
For everything else that has to be settled before moving data, see our data preparation checklist.
A short decision guide
- Trading, batches matter, prices rising → FIFO.
- Homogeneous materials, batches indistinguishable → Average with a daily or monthly averaging period.
- Unique high-value units → Specific with serial or lot tracking.
- Repetitive manufacturing with stable technology and a need for variance analysis → Standard.
- Any scenario under Ukrainian standards → not LIFO.
The five methods side by side
| Method | How cost is assigned | Best fit | Main risk |
|---|---|---|---|
| FIFO | Oldest units leave first | Perishables, distribution, rising prices | Needs discipline in document chronology |
| LIFO | Newest units leave first | Rarely used; prohibited under IFRS | Not permitted in many jurisdictions |
| Average | Weighted average across the period | Homogeneous stock, raw materials | A late document shifts the average retroactively |
| Specific | The actual cost of the identified unit | Serialised goods, high-value items | Every document must carry lot or serial data |
| Standard | A predetermined cost, with variances posted separately | Manufacturing with stable inputs | Standards need periodic revision or variances become noise |
Two practical notes that decide more projects than the theory. First, the method is set per item, not per company — a distributor can run Average on packaging and FIFO on goods for resale. Second, it cannot be changed once entries exist, because it governs how those entries were valued.
Why your margin looks wrong: cost adjustment
Costing methods only produce correct figures if cost adjustment runs. Until it does, the cost of goods sold on a shipment reflects what was known at posting time, not what the goods finally cost once freight, duty and later receipts were accounted for.
Symptoms of adjustment never running: margin by item group looks atypical, inventory value disagrees with the general ledger, and reports produced on two different days for the same period disagree with each other.
The fix is procedural rather than technical — run adjustment on a schedule before anyone reads a margin report, and always before period close.
Landed cost: the part most companies miss
Freight, customs duty, insurance and handling belong in the cost of goods, not in period expense. Posted as item charges they are allocated across the receipt lines by weight, quantity or value, and the margin you read afterwards is real.
Posted as an expense instead, imported items appear more profitable than they are — sometimes for years, because nothing in a trial balance flags it. For a distributor bringing goods across a border, this single setting frequently matters more than the choice of costing method itself.
FAQ
Can the costing method be changed after go-live?
Is LIFO allowed under Ukrainian accounting standards?
Why does the reported cost differ from what we expect?
Can different items use different costing methods?
What should a manufacturer choose?
Microsoft Dynamics 365 Business Central consultant at NBCS. Explores and documents BC mechanics on a dedicated sandbox.
Still deciding whether the platform fits your business? Start with the Business Central platform guide — the problems it solves, what it covers, and how implementation and migration actually run.