Inventory costing is a critical component of inventory control, especially for manufacturing businesses where accurate cost allocation directly impacts production efficiency and financial reporting. Beyond just material costs, inventory costing encompasses incidental fees like storage, administration, and market fluctuations. The method used to assign these costs affects a company’s reported income and inventory value on their financial statements, making it a key strategic decision for manufacturers.NetSuite provides the following inventory costing methods:
- First-In, First-Out (FIFO) – The first goods purchased are assumed to be the first goods sold. In simplest terms, FIFO costing allows you to track the cost of an item/SKU based on its cost at purchase order receipt, and apply this cost against each shipment of the item until the receipt quantity is exhausted. The system determines the cost by creating a FIFO cost layer when you receive a purchase order, and selecting the oldest eligible FIFO cost layer when you ship an order. With FIFO, the ending inventory consists of the most recently purchased goods. This method is useful to track different shipments of similar products.
- Last-In, First-Out (LIFO) – Unlike FIFO, LIFO is used when the last products added to a company's inventory list are the first to be sold, which means the earlier inventory stays in stock. This means that the ending inventory consists of the first goods purchased. Businesses, such as grocery, drug and convenience stores, with a wide range of products with expiration dates tend to use LIFO. Newer items would likely be priced higher with older items decreasing in value.
- Average – Average cost is one of the most commonly used costing method. Manufacturing, pharmaceutical and fuel companies are examples of business types that use a weighted average to track inventory. Costing is calculated as the total units available during a specific date range. The units are then divided by the beginning inventory cost plus the cost of additions to inventory. Average is the moving average method.
- Standard – This costing lets you track standard costs for items and to track variances between these expected costs and actual costs. With standard costing, users in manufacturing and procurement can quickly identify cost-saving opportunities by tracking these variances by category.
- Group Average – This costing lets you track one average cost for an item across multiple locations within a defined group. Group average costing is available only when you have enabled the Multi-Location Inventory feature. Group average costing is available for inventory items and assembly items.
- Lot Numbered – Lot items track the purchase, stock, and sale of a group or quantity of items. It assigns a specific number to the group or quantity. As the name suggests, the lot-numbered costing method is only available to lot-numbered inventory items. With this method, the inventory value is maintained per lot number per item per location. Inventory will be valued according to the purchase price per lot number and the gross profit can be different when a sale depletes inventory from each lot number.
- Specific Cost - This method is only available with Serialized Inventory items. It assigns an exact cost per each serial or LOT number entered into the system. Similar to the lot-numbered costing method, the inventory value is maintained per serial number per item per location.
As we can see, NetSuite offers a range of inventory costing methods, each with its advantages. For manufacturing businesses in particular, methods like Average Costing and Standard Costing play a pivotal role in accurately tracking production costs and managing variances, helping to ensure inventory values are precise and reflect real-time financials. Choosing the right method can greatly impact your bottom line. You can learn more about how to choose the most appropriate costing method by scheduling a free consultation with out inventory experts.
