Station 6 of 10
Inventory and costing in Dynamics 365 Business Central
What you leave this station with
Separating quantity entries from value entries, calculating the effect of the valuation methods by hand, and running the cost adjustment and proving the numbers moved.
This question has been deferred twice: at the item card in station three, and at cost of goods sold in station five.
It is answered now — and in this product it carries an extra layer most trainees never meet.
The foundation: two ledgers, not one
Every item movement produces two kinds of entry:
- An item entry carrying the quantity, the date, the location and the document.
- A value entry — or several — carrying the money.
The relationship between them is not one to one. A single item entry may accumulate several value entries over time: an initial value at posting, then an item charge a week later, then a cost adjustment a month after that.
Anybody who understands that separation understands why the cost of a sale made two months ago changes — the phenomenon most often misread as a fault.
The measurement first: the difference in numbers
Valuation methods are not understood from their definitions; they are understood by calculating them. Take one movement on one item:
| Movement | Quantity | Unit price |
|---|---|---|
| Opening balance | 200 | 8 |
| Purchase | 100 | 11 |
| Sale | 250 | — |
| Method | The cost calculation | Cost of sales | Remaining stock |
|---|---|---|---|
| First in, first out | (200 × 8) + (50 × 11) | 2,150 | 50 × 11 = 550 |
| Average | 250 × 9 | 2,250 | 50 × 9 = 450 |
| Standard at 9.5 | 250 × 9.5 | 2,375 | 50 × 9.5 = 475 |
The gap between the highest figure and the lowest is 225 on one item and one movement — more than 10 per cent of cost of sales. Multiply it by a thousand items and a full year, then read again any income statement you have ever seen.
A fourth method, named because it deserves naming
The product also offers last in, first out.
Naming it here is obligatory, and warning against it equally so: it is not accepted under the international financial reporting standards. Its presence in the list is not permission to use it, and any company reporting under those standards does not choose it.
That is a point a consultant is expected to know and a user is not.
The layer most trainees never meet
Here is this product’s peculiarity, and the source of the commonest question in its interviews.
Cost does not settle at the moment of posting.
When you sell goods the vendor has not yet invoiced, the system uses an expected cost. When the vendor invoice arrives, or a freight charge is assigned, the real cost changes.
So who repairs the difference? The routine that adjusts the cost of item entries.
It is what “passes” the real cost from the purchase entry down to the sales entries linked to it, producing corrective value entries and their effect in the general ledger.
| State | Cost of sales in your report |
|---|---|
| Before adjustment | A provisional number built on an expected cost |
| After adjustment | The real number after the invoices and the charges |
The setting that governs it decides its schedule: from never to always, by way of daily, weekly and monthly.
The working rule: set it to always in a training environment so you see the effect immediately, and know that many live environments set it to a schedule for performance reasons — and anybody reading a profit report before it has run is reading a number that is not final.
Memorise that sentence in this form: “a profit report before cost adjustment is a provisional report.” It is a sentence said in a meeting.
The average — two decisions that change its number
Anybody choosing the average faces two questions rather than one:
1. An average at the level of what? The item alone, or the item with its location and its variant? The second produces a different average for every warehouse — which is the right answer when the cost of reaching each warehouse differs.
2. An average across what period? A day, a week, a month, or an accounting period. The longer the period, the smoother the average and the further it sits from the last purchase price.
Both decisions are taken once and affect every number after them.
The physical count and its entry
A count compares what is in the warehouse against what is in the system, and the difference is posted as an entry.
The difference is usually not a system error; it is damage nobody recorded, or a shipment that left with no document, or a unit-of-measure mistake.
The product provides inventory periods that can be closed — blocking retrospective posting into a period already counted. It is the item that stops a count changing after it was approved, and most projects leave it off and then discover why it exists.
What you actually do at this station
- Create three items on the three methods, and run the movement above across them literally.
- Calculate the figures by hand first, then compare against the system. The order is deliberate.
- Sell goods that were received and not invoiced, read cost of sales, then post the vendor invoice, then run the adjustment, then read again. That exercise alone justifies the station.
- Assign a freight charge retrospectively to a receipt whose goods have been sold, and prove the cost of the sale changed.
- Run a count with a positive difference and another with a negative one, read the adjustment entry, and write a plausible cause for each.
The three commonest errors
One: reading a profit report before cost adjustment. The number exists and looks reasonable and is not final — the most dangerous class of number there is.
Two: choosing the method without calculating. It gets chosen because it is the default, and a year later somebody asks why the margin is not what was expected.
Three: leaving inventory periods open. Something is posted retrospectively into a month already counted and approved, and the count stops meaning anything.
What the valuation method does to reading a company’s numbers is set out in the Dynamics 365 Business Central guide, and the general logic of inventory and costing — independent of any product — is in the inventory and costing cycle.
The acceptance test for this station
- Explain the difference between a quantity entry and a value entry, and why the cost of an old transaction changes.
- Calculate the example above on paper under all three methods and produce the six numbers with no system.
- Explain the cost adjustment routine in two sentences, and when your report is provisional.
- Name a method present in the product and not accepted under the international standards, and why.
- Run a count with a difference and read its entry, and write three plausible causes for it.
What comes next
You know where the numbers come from and when they settle. The next station gathers them and closes them: the close and the reports — and with them building a financial report with account schedules without a single line of code, the fastest skill that makes you useful in this product specifically.