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Understanding Average Costing in Microsoft Dynamics 365 Business Central

Jun Wang Profile Picture Jun Wang 4,078 Super User
 Understanding Average Costing in Microsoft Dynamics 365 Business Central
In the complex world of inventory management and accounting, understanding the valuation of your stock is crucial for accurate financial reporting and strategic decision-making. Microsoft Dynamics 365 Business Central offers a sophisticated approach to inventory valuation, one of which is the Average Costing method. This blog delves into the nuances of Average Costing within Business Central, providing insights into its functionality, benefits, and how it can be leveraged for effective inventory management.

 What is Average Costing?
Average Costing, often referred to as the moving average cost method, is an inventory costing method where the cost of goods sold and ending inventory values are determined based on the average cost of all items in inventory. Essentially, it calculates a new average cost whenever a purchase occurs by dividing the total cost of goods available for sale by the total quantity available for sale.

 How Does Average Costing Work in Business Central?
Business Central implements Average Costing seamlessly, ensuring that businesses can track their inventory costs accurately over time. Here’s how it works:
1. Continuous Recalculation: Whenever a purchase is made, Business Central recalculates the average cost of the item, taking into account the newly purchased inventory. This recalculated average cost then impacts the valuation of the subsequent sales.
2. Impact of Transactions: Every time you buy, sell, or adjust the inventory, the system automatically adjusts the average cost, reflecting the most recent information.
3. Valuation Reports: Users can generate reports that detail the average cost calculations, providing transparency and aiding in financial analysis and decision-making.
4. Integration with Accounting: The average cost updates are reflected in the general ledger entries, ensuring that the financial statements are always aligned with the latest inventory valuations.

 Benefits of Using Average Costing
- Simplicity: It’s straightforward to implement and understand, making it suitable for businesses that prefer an uncomplicated approach to inventory valuation.
- Consistency: Provides a consistent method for inventory valuation, which is particularly useful in fluctuating market conditions.
- Financial Accuracy: Helps maintain accurate cost of goods sold and inventory valuations, which are crucial for reliable financial reporting.

 Best Practices for Implementing Average Costing in Business Central
- Regular Monitoring: Regularly review the average cost calculations and related financial entries to ensure accuracy.
- Inventory Reconciliation: Periodically reconcile your physical inventory counts with the inventory records in Business Central to maintain data integrity.
- Educate Your Team: Ensure that key personnel understand how the average costing method works and its impact on financial reporting.
Average Costing in Microsoft Dynamics 365 Business Central offers a streamlined and effective way to manage inventory costs. By understanding and implementing this costing method, businesses can achieve a more accurate reflection of their inventory value and make more informed financial decisions. Whether you are a small enterprise or a large corporation, the average costing method integrated within Business Central can be a pivotal tool in your financial management arsenal.

Remember, the choice of the costing method depends on your business model, inventory types, and financial reporting needs. Therefore, it’s essential to evaluate your specific business requirements and consult with a Business Central expert to ensure that you’re leveraging the system to its fullest potential.