Finances and Business
How Cost Accounting actually works in D365 Finance and Supply Chain Management.
July 22, 2025
Back in college I remember one of my classes was all about costing and how you cost your inventory, they sort of taught me how to do Inventory costing all by hand, using fabricated scenarios of information about XYZ company and such. It is fascinating and I didn't know at the time, how sophisticated software like Microsoft Dynamics 365 Finance, can do this for you.
Inventory valuation is a critical component of financial reporting for any company that manufactures or sells physical products. The value assigned to inventory directly impacts key financial metrics such as cost of goods sold (COGS), gross profit, and net income
Back to the important topic of today's learning, is how does Dynamics 365 Finance & Supply Chain Management adapts the accounting standards for calculating cost. There are different costing methods, we have the commonly used period ones which is the one we are going to exemplify today:
FIFO, LIFO and Weighted Average. For these is really important we run Inventory closes on a periodic frequency as a fiscal period, because the system at that point will reevaluate how to settle your ins and outs and price your costs accordingly. During the period it will use what is called a running average. I have created a quick example so you can visualize how this is shown in the transaction details for a specific item:
Item A
Running Average - 2 Purchase Orders
1 one for $4.00 each another for $3.50 each
Show Inventory Transactions Screen.
Sales Order for 1
FIFO
Closing the Inventory
Show the Transaction Details
Item B
Running Average - 2 Purchase Orders
1 one for $5.00 1 one for $10.00
Sales Order for 1
LIFO
Closing Inventory
Show Inventory Transactions Screen.
Item C
Running Average - 2 Purchase Orders
1 one for $11.00 1 one for $8.00
Sales Order for 1
Weighted Average
Show Inventory Transactions Screen
Sales Order for 1
This is a basic scenario so we grasp the concept of how the system calculates inventory costing for periodic costing methodologies. In our next chapter we will cover standard Costing and Moving Average.