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Design Details: Change the Costing Method for Items

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In Business Central, you cannot change a costing method for an item after you have included the item in a transaction. For example, after you have bought or sold the item. If an incorrect costing method was assigned to the item or items, you might not discover the issue until you do your financial reporting.

This topic describes how to resolve this situation. The recommended approach is to replace the item that has the incorrect costing method with a new item, and use an assembly order to transfer the inventory from the old item to the new.

Note

Using assembly orders allows the costs to still flow although there are outstanding purchase invoices or shipping charges to post. Additionally, it allows you to undo the conversion and get the quantities of the original items back, if needed.

Tip

To become familiar with the process, we recommend that you start the conversion process with a single item or a small set of items.

About Costing Methods

Costing methods control cost calculations when goods are purchased, received in inventory, and sold. Costing methods affect the timing of amounts recorded in COGS that affect gross profit. It is this flow that calculates COGS. The cost of goods sold (COGS) and revenue are used to determine gross profit, as follows:

gross profit = revenue - COGS

When you set up inventory items, you must assign a costing method. The method can vary from business to business, and from item to item, so it's important to choose the right one. Business Central supports the following costing methods:

  • Average
  • FIFO
  • LIFO
  • Standard
  • Specific

For more information, see Design Details: Costing Methods.

Use Assembly Orders to Change Costing Method Assignments

This section describes the following steps for changing the costing method assigned to an item:

  1. Define a default costing method.
  2. Identify the items that to change the costing method for and renumber them.
  3. Create new items with the old numbering scheme and copy the master data in a batch.
  4. Manually copy related master data from the existing item to the new item.
  5. Determine the inventory quantity to convert from the original item to the new item.
  6. Transfer the inventory to the new item.
  7. Handle inventory quantities that are allocated to demand.
  8. Block the original item from further use.

Define a default costing method

To help avoid future mistakes you can specify a default costing method for new items. Whenever someone creates a new item, Business Central will suggest the default costing method. You specify the default method in the Default Costing Method field on the Inventory Setup page.

Identify the items to change the costing method for and renumber them

You may want to give your new items the same numbers as those they are replacing. To do that, change the numbers of the existing items. For example, if the existing item number is "P1000," you might change it to "X-P1000." This is a manual change that you must make for each item.

Create new items with the old numbering scheme and copy the master data in a batch

Create the new items using the current number scheme. With the exception of the Costing Method field, the new items should contain the same master data as the existing items. To transfer the master data for the item, and related data from other features, use the Copy Item action on the Item Card page. For more information, see Copy Existing Items to Create New Items.

After you create the new items and transfer the master data, assign the correct costing method.

To make the new items fully useful you must manually copy some master data from other areas, as described in the following table.

Area What to copy How to copy it
Inventory Stock-keeping units (SKUs) Check whether a SKU is specified for the original item. If planning parameters have been entered for each SKU card, then you must manually create the SKU for the new item. If the parameters are not specified, you can use the Create Stockkeeping Unit batch job from the Item Card page to create the data.
Item substitutions Check whether any item substitutions are defined for the original item. If there are, transfer that data to the new item. To view substitute items, use the Substitutions action on the Item Card page.
Analysis reports Review the Item Analysis, Sales Analysis, and Purchase Analysis reports. For those that reference the original items you can either create a new analysis report with a reference to the new item (keeping the original analysis report to use as history) or adjust the reports so that they reference the new item.
Standard journals Check whether standard journals reference the original item and transfer that data to the new item when necessary. This information is found on the standard journals, which are available on the item journal.
Sales Sales prepayment percentage Check whether any sales prepayment percentages are defined for the original item and transfer that data to the new item. To view prepayment percentages, on the Item Card page, choose Sales, and then Prepayment Percentages.
Purchase Purchase prepayment percentage Check whether any purchase prepayment percentages are defined for the original item and transfer that data to the new item. To view prepayment percentages, on the Item Card page, choose Purchases, and then Prepayment Percentages.
Warehouse Bin contents Review the bin content defined for the original item. If columns such as as Min. Qty., Max. Qty., Default, and Dedicated have been individually entered then you must manually create bin content for the new item. If they are not, no action is required. Business Central will maintain the records when you register warehouse documents and journals.
Job Job Prices Check whether project prices are defined for the original item and transfer that data to the new item. This information is available on the Project Card page in the Project Details – No. of Prices part on the FactBox pane.
Service Service resource skill Check whether service resource skills are defined for the original item and transfer that data to the new item. To view resource skills, use the Resource Skills action on the Item Card page.
Service item components Check whether components are defined for the original service item and transfer that data to the new item. To view service item components, on the Item Card page use the Service Item action to open the list of related service items, and then choose the Components action.
Production Production BOMs Check whether any production BOMs contain the original item and replace it with the new item. To replace the original item, on the Production BOMs page, choose the Exchange Production BOM Item action.
Assembly Assembly BOMs Check whether any assembly BOMs contain the original item and manually replace it with the new item.

Important

If the new costing method is Standard you should enter a value in the Standard Cost field on the Item Card page. You can use the Standard Cost Worksheet page to set the cost shares accordingly. For more information, see Update Standard Costs.

Determine the inventory quantity to convert from the original item to the new item

Note

This step does not consider quantities that are included in unshipped orders. For more information, see Handle inventory quantities that are allocated to demand.

Use a physical inventory journal to produce a list of the quantities in inventory. Depending on the warehouse location setup, use one of the following:

  • Physical Invt. Journals
  • Whse. Phys. Invt. Journals

Both journals can calculate the inventory quantity of the item, including the location, variant, bin, and storage location. For more information, see Count, Adjust, and Reclassify Inventory Using Journals.

Transfer the inventory to the new item

Create and post assembly orders to transfer the cost and inventory quantity from the original item to the new item. Assembly orders can convert one item to another while preserving the costs. This helps ensure that the net totals for the inventory account and COGS are not affected (except when the new costing method is Standard, in which case costs may be distributed to variance accounts). For more information, see Assembly Management.

When creating assembly orders, use the information from the Physical Invt. journal or Whse. Phys. Invt. journal. The following tables describe the information in the reports to enter in the header and lines on the assembly order.

Field Value to enter
Item No. The number of the new item.
Quantity The quantity in physical inventory journal.
NOTE: The quantities calculated by the physical inventory journals does not include the quantities that are on orders that have not yet shipped.
Variant Code The same as in physical inventory journal.
Location Code The same as in physical inventory journal.
Unit of Measure Code The same as in physical inventory journal.
Bin Code The same as in physical inventory journal.

Lines

Field Value to enter
Type Item
No. The number of the original item.
Quantity per 1
Variant Code The same as in physical inventory journal.
Location Code The same as in physical inventory journal.
Unit of Measure Code The same as in physical inventory journal.

Note

An assembly order can handle only one SKU of an item at a time. You must create an assembly order for each combination of SKU that has a quantity in inventory.

Note

For a warehouse location, you might have to create picks before you can post the assembly order. To investigate that, review the setup for picking on the Location Card page. For more information, see Set Up Items and Locations for Directed Put-away and Pick.

Handle inventory quantities that are allocated to demand

Ideally, the inventory for the original item should go to zero after you transfer the inventory quantities. However, there can be outstanding orders, worksheets, and journals (see the table below) that still require a quantity of the original item. The quantity could also be blocked by a reservation or item tracking.

Example There are 1000 pcs. in inventory, and 20 pcs. are reserved for a sales order that has not yet shipped. In that case, you might decide to keep the 20 pcs. in the old item so that you can fulfil the outstanding order.

Note

There are functional areas that can affect the quantity, as listed in the table below, so it can be tricky to find the correct amount. To be safe, using the example above, you can choose to keep 100 pcs. and transfer the remaining 900 pcs. instead. Another way to do it would be to process the documents and journals so that only a manageable few remain. Yet another alternative is to transfer the entire quantity to the new item and then transfer some of it back to the original item using the assembly order.

The following table lists functional areas where there might be outstanding quantities.

Area Where to look for outstanding quantities
Sales Sales documents, including orders, return orders, invoices, quotes, blanket orders, and CR/Adj notes
Inventory Item journals, reservations, item tracking, and standard cost worksheet
Purchase Purchase documents, including orders, return orders, invoices, quotes, blanket orders, and CR/Adj notes
Planning Requisition worksheet, planning worksheet, and order planning
Warehouse Transfer orders, warehouse shipments, warehouse journals, and warehouse picks, put-aways, and movements, internal picks and put-aways, and bin creation worksheets
Assembly Assembly documents, including orders, return orders, and blanket orders
Jobs project planning lines and project journal lines
Service Service documents and service contracts
Production Production orders (planned, firm planned, and released)

Block the original item from further use

When the inventory for the original item is zero, you can block the item to prevent it fom being used in new transactions. To block the item, on the Item Card page, turn on the Blocked toggle. For more information, see Block Items from Sales or Purchasing.

Summary

Changing the costing method on items that have been used in transactions is a process, and not a standard action in Business Central. You can use the steps described in this topic as a template for the process.

The process can be time consuming because there are several manual steps. However, taking the time to complete it will minimise the impact of mistakes on your general ledger.

We recommend the following:

  1. Assess the feasibility of the process by taking one, or maybe a few, representative items through the entire process.
  2. Consider contacting an experienced partner who can help you with the process.

See Also

Design Details: Costing Methods
Overview

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