About unit cost calculation

Article
08/29/2024

Each item has a unit cost that is calculated based on the company's costing method and other factors. As a rule, with the Standard costing method, the Unit Cost field value is based on the standard cost for the item. For all other costing methods (FIFO, LIFO, Specific, and Average), the unit cost is calculated based on the average unit cost across a period of time.

When is the unit cost field updated for item

The chosen costing method influences when the Unit Cost field is updated.

When the costing method is set as Standard, the Unit Cost field is updated whenever the standard cost is changed, and users can't edit the Unit Cost field. For more information, see About Calculating Standard Cost.

If the costing method is FIFO, LIFO, Specific, or Average, then the Unit Cost is updated in the following cases:

When the item is cost-adjusted, automatically or by an Adjust Cost task.
During the posting of purchase invoices, output, or positive adjustment if one of the following conditions is true:
- The net invoiced quantity of the item changes from negative or zero to positive.
- The current unit cost is zero.

If one of these conditions is true, then the Unit Cost field is updated with the value in the Last Direct Cost field on the item card.

Note

The Unit Cost field is not updated if the current unit cost is higher than zero and the new unit cost is zero. A unit cost of zero is considered an exception from regular business. Therefore, the current unit cost is retained to provide the last known, relevant value. This exception applies even if the existing inventory has been revalued to zero.

In the Unit Cost field on the item card, you can drill down to view the history of transactions that the average cost of units on hand is calculated from in the Average Cost Calc. Overview window.

Impact of unit cost field on purchases and sales

How the contents of the Costing Method field influence the unit cost calculation for purchases and sales is described in more detail in the following sections.

Unit cost calculation for purchases

When you purchase items, the value in the Last Direct Cost field on the item card is copied to the Direct Unit Cost field on a purchase line or to the Unit Amount line on an item journal line.

What you select in the Costing Method field influences how Business Central calculates the contents of the Unit Cost field on the lines.

Costing method FIFO, LIFO, Specific, or Average

Business Central calculates the contents of the Unit Cost (LCY) field on the purchase line or the contents of the Unit Cost field on the item journal line according to the following formula:

Unit Cost (LCY) = (Direct Unit Cost – (Discount Amount / Quantity)) x (1 + Indirect Cost % / 100) + Overhead Rate

Costing method Standard

The Unit Cost (LCY) field on the purchase line or the Unit Cost field is filled on the item journal line by copying the value in the Unit Cost field on the item card. By using costing method set as Standard, this value is always based on the standard cost.

When you post the purchase, Business Central uses the unit cost from the purchase line or item journal line to the purchase item invoice entry. You can see it on the entry list for the item.

All costing methods

The unit cost from the source document line is used to calculate the contents of the Cost Amount (Actual) field, or if applicable, the Cost Amount (Expected) field that relates to this item entry, regardless of the costing method of the item.

Unit cost calculation for sales

When you sell items, the unit cost is copied from the Unit Cost field on the item card to the sales line or the item journal line.

When you post, the unit cost is copied to the sales invoice item entry, and it can be seen on the entry list for the item. Business Central uses the unit cost from the source document line to calculate the contents of the Cost Amount (Actual) field, or if applicable, the Cost Amount (Expected) field in the value entry related to this item entry.

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