When looking at Dynamics 365 costing methods, it’s critical to review how the inventory costing methods affect the cost of goods sold. Instead of using historical data to build inventory value or determine cost of goods sold, a standard cost is instead assigned to an item that is approximately its value and any deviations from that value is reported as a variance.

Standard Costing in Dynamics 365

In Business Central, the standard costing method in Dynamics 365 and standard cost is set on the Costs & Posting FastTab of the Item Card:

The standard costing method in Dynamics 365 can be set up to default for new items on the Inventory Setup Page:

Costing Concepts in Business Central

Business Central separates inventory transactions into two general types:

• Inbound Entries which establish the cost basis for inventory held on the balance sheet
• Outbound Entries where cost flows to the income statement as cost of goods sold

Examples of Inbound Entries are:

• Positive Adjustments
• Purchases
• Output

Examples of Outbound Entries are:

• Negative Adjustments
• Sales
• Consumption

Business Central keeps two ledgers to track inventory:

• Item Ledger Entries which tracks item quantity entries
• Value Entries which tracks inventory value entries

Value Entries are created to support each Item Ledger Entry. The inventory value can be seen on the Item Ledger Entry by adding together the Cost Amount (Expected) and Cost Amount (Actual) fields. Drilling down on either field will open the Value Entries Page.

A separate ledger is needed to track inventory value because there are several factors that can change inventory value, such as revaluations, freight charges or other landed costs, and any difference between expected and actual invoicing costs. All changes to an item ledger entry’s value are tracked as Value Entries.

As soon as an item is brought into inventory, the cost basis is determined. When it leaves inventory, the system leverages the costing method to determine the cost of the outbound entry by applying the inbound entry to the outbound entry.

Standard Cost Flow Example in Business Central

When a pair of sunglasses is purchased on 4/6/2021 for $100 in Business Central:

• An item ledger entry is created to track the increase in quantity
• A value entry is created to track the value of the item ledger entry
• A vendor ledger entry is created to track the payable
• The following accounts are hit in the general ledger:
  • Inventory Posting Group: Inventory Account
  • General Posting Group: Direct Cost Applied Account
  • General Posting Group: Purch. Account
  • General Posting Group: Purchase Variance Account
  • Vendor Posting Group: Payable Account

Note: Some users choose to set the Direct Cost Applied and Purch. Account to the same account to avoid an ever-increasing debit balance in one account that offsets an ever-increasing credit amount in another account.

Item Ledger Entry

Value Entry

Vendor Ledger Entry

General Ledger Entries

In order to demonstrate the flow of cost through the system using standard costing method in Dynamics 365, additional sunglasses are purchased on the following days for the following amounts:

Running the inventory valuation report for Item 1010 on 4/14/2021 gives the following inventory valuation for the balance sheet:

If a pair of sunglasses is sold on 5/1/2021, the following entries will be made:

• An item ledger entry is created to track the decrease in quantity
• A value entry is created to track the value of the item ledger entry. Value is determined based on the costing method. In this case, it will be the Standard costing method; therefore, the cost will be the standard cost that was set on the Item Card
• A customer ledger entry is created to track the receivable
• The following accounts are hit in the general ledger:
  • Inventory Posting Group: Inventory Account
  • General Posting Group: Cost of Goods Sold
  • General Posting Group: Sales Account
  • Vendor Posting Group: Receivables Account

When the Sales Order is created, it will bring in the Standard Cost:

The value populated in the Unit Cost ($) field for the Item is used as an initial expected cost for the value for Cost of Goods Sold. If the Unit Cost field were inadvertently updated to something other than the standard cost, the costing method would be applied upon posting. When the document is posted, the system will immediately adjust the cost to apply the correct Standard Cost valuation if Automatic Cost Posting is toggled On (“True”) and Automatic Cost Adjustment is set to a value other than Never in Inventory Setup.

Otherwise, the cost will be adjusted when the Adjust Cost – Item Entries process is manually run by an end user or by a scheduled job process. It is recommended to manually run Adjust Cost – Item Entries process as a part of month-end close to ensure any pending cost adjustments are posted in the appropriate period.

Item Ledger Entry

Value Entry

Customer Ledger Entry

General Ledger Entries

Running the Inventory Valuation report as of 5/1/2021 will show that it is now $105 less:

The Inventory – Cost Variance report can be used to review variances from standard cost:

Standard Costing Concept Question

The following purchases are made in the standard costing method in Dynamics 365 Business Central for an item:

Standard Costing Quiz