Calculate Average Cost in Microsoft Dynamics 365 Business Central
Sometimes, our customers want to know how Business Central calculates an item’s average cost. We provide a simple example to illustrate how this calculation is applied to inventory.
Microsoft explains how it calculates Average Cost as follows:
- Determine the cost of the item at the start of the average cost period.
- Adds the sum of the inbound costs that were posted during the average cost period. These include purchases, sales returns, positive adjustments, and production and assembly outputs.
- Subtracts the sum of the costs of any outbound transactions that were fixed-applied to receipts in the average cost period. These typically include purchase returns and negative outputs.
- Divides by the total inventory quantity for the end of the average cost period. Excludes inventory decreases that are being valued.
The calculated average cost is then applied to the inventory decreases for the item (or item, location, and variant) with posting dates in the average cost period. For inventory increases that are fixed-applied to inventory decreases in the average cost period, Business Central forwards the calculated average cost from the increase to the decrease.
| Date | Entry Type | Quantity | Unit Cost | Total Cost |
| 1/1/2025 | Positive Inventory Adjustment | 10 | $20.00 | $200.00 |
| 1/1/2025 | Purchase Receipt | 20 | $25.00 | $500.00 |
| 1/1/2025 | Sales Shipment | -15 | $23.33 | -$350.00 |
| 1/1/2025 | Closing Entry | 15 | $23.33 | $350.00 |
In this example, we look at the daily average cost of an item in inventory. We begin the day on January 1 with ten items costing $20.00 each. We add another 20 items at $25.00 each, making a total value of items in inventory of $700.00 for 30 items (or an average cost of $23.33 per item). This average cost is applied to the Sales Shipment (decrease) of 15 items, leaving 15 items in inventory at an average cost of $23.33 each for a total value of $350.00.
| Date | Entry Type | Quantity | Unit Cost | Total Cost |
| 1/2/2025 | Opening Entry | 15 | $23.33 | $350.00 |
| 1/2/2025 | Purchase Receipt | 30 | $20.00 | $600.00 |
| 1/2/2025 | Sales Shipment | -10 | $21.11 | -$211.11 |
| 1/2/2025 | Closing Entry | 35 | $21.11 | $738.89 |
On January 2, we have an opening balance of $350.00 (15 items at $23.33 each). We have a Purchase Receipt for 30 more items (increase) at $20.00 each and a total cost of $600.00. The inventory now stands at 45 items and a value of $950.00 for an average cost of $21.11 per item (950/45).
This cost of $21.11 per item is applied to the Sales Shipment (decrease) and to the remaining inventory at the end of the day: 35 items at $21.11 per item for a total inventory value of $738.89.
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