Inventory costing methods

There are so many methods of costing inventory, that it can be a daunting task deciding which best suits your business.

That decision is more often than not limited by the system that you use for inventory control.

Most lower end systems only offer one, and this is generally the weighted or moving average method.

While this will meet the needs of most small businesses, there are businesses, like an art gallery or automobile dealership, that may need to use the other methods.

Let’s start off with recapping the methods of costing inventory.

FIFO

First-in-first-out, or FIFO assumes that the item that comes in first is sold first. The cost of that item is therefore the price that was first paid for it.

LIFO

Last-in-first-out assumes the reverse of FIFO, which means the cost of item sold would therefore be the last price paid for that item.

Weighted/Moving Average

This method takes the average price of the item, total value of the items in stock divided by the quantity, to arrive at the cost of item when sold.

Specific Identification Method

This method involves identifying the cost to each unit of inventory, and is usually used for items that can be uniquely identified. An example would be a painting. Each painting would have a cost associated with it.

Which method do you need?

Sage 300 Inventory Control offers you the flexibility of one, some or all the above.

You are not restricted to one method.

Indeed, with Sage 300 Inventory Control, you can create and use one or more of the above inventory costing methods.

Simply create Inventory Account Sets for each of the methods you need, and then link that account set to the items.

Sage 300 inventory costing options

Inventory costing methods in Sage 300 Inventory Control

The costing method used for an inventory item in Sage 300 is determined by the account set specified in the inventory record.

When you set up an account set, you specify a costing method to use for valuing all items that are assigned to that account set.

Sage 300 Inventory Control values your inventory and determines the cost of goods sold by location.

If you store the same inventory item at more than one location, Sage 300 Inventory Control tracks and costs the item at each location separately rather than costing all the items together.

Inventory Control provides eight costing methods for valuing inventory and determining the cost of goods sold.

  1. Moving average
  2. FIFO
  3. LIFO
  4. Standard cost
  5. Most recent cost
  6. User-specified
  7. Serial
  8. Lot

How is this useful?

You are not limited to one inventory costing method, and depending on the nature of your business, you have the ability to set different costing methods for different categories of inventory.

You could be in the business of selling cars and parts for example.

Where the cars are costed on a Specific Identification Method, each car having it’s own associated cost, the parts could be costed on a FIFO, LIFO or Moving Average method.

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