Use of costing methods
Costing methods are used to determine the unit cost for all outgoing inventory transactions (issues, adjustments, and transfers). The Purchase Order and Order Entry applications reference a company's costing method when creating general ledger entries. These are the different costing methods and their descriptions:
Standard costing method
The application bases inventory cost by the standard cost value specified for inventory items by location.
Average costing method
This is a moving or weighted average cost method. The application combines each purchase with the former inventory balance to determine a new average unit cost. The application bases subsequent inventory issues on the new average cost. With any addition to stock-on-hand, the average cost is recalculated.
LIFO (Last In, First Out)
Inventory cost is based on the newest receiving cost record on file in the Inventory Control application. Records of receiving costs are the result of receipts and adjustments in the Inventory Control application, and the process of receiving items in the Purchase Order application. All additions to inventory create a receiving record at a specific cost in the Inventory Control application.
FIFO (First In, First Out)
The inventory cost is based on the oldest receiving cost record on file in the Inventory Control application. The oldest receipt is the one that gets issued next. The cost of that receipt is the cost used for the next transaction.
I want to use the average or standard cost for financial reporting but need FIFO inventory valuation for tax reporting. How can I get both?
The Inventory Control application lets you select average, standard, LIFO, or FIFO for gross profit and general ledger purposes. If you select either average or standard, the application keeps FIFO active for inventory valuation reporting. If you select standard, the application keeps the average cost for you.