Microsoft Dynamics 365 Business Central has established itself as a robust and flexible ERP solution for small and medium-sized businesses in Latin America that seek to automate their accounting, logistics, and finances without taking on the complexity of corporate platforms such as Finance & Operations.
One of the pillars of its functionality is inventory management and, within it, the correct accounting valuation of stock, which is fundamental for complying with IFRS and optimizing business profitability.
Valuation Methods Available in Business Central
In Business Central, inventory valuation is configured per product (or per item), by selecting the costing method. These are the methods natively supported by the system:
Available Method | Technical Description | Allowed by IFRS |
FIFO | The first recorded cost is assigned to the first item sold | ✅ |
Average | The cost is averaged after each entry (moving average) | ✅ |
Standard Cost | A fixed value is defined for each item, with variance recording | ✅ |
Specific Identification | The exact cost of each unit is assigned, by serial number or lot | ✅ |
LIFO | Obsolete / only available in older versions or specific localizations | ❌ (prohibited by IFRS) |
Important: in IFRS environments, such as Colombia and the Dominican Republic, LIFO must not be used, even if it is available in certain localizations or legacy versions.
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Configuring the Valuation Method in Business Central
The method is selected on the product card:
Path:Warehouse > Items > Item Card > “Costing Method” Field
Once the method is selected, it cannot be directly modified if the item has already had accounting entries. If a change is necessary, it is recommended to:
- Block the original item.
- Create a new item with the correct method.
- Transfer existing stock if applicable, with the appropriate accounting adjustments.
Specific Considerations for Each Method
FIFO
- The system automatically calculates which entries should be assigned to each outbound transaction.
- Compatible with lot management and expiration dates.
- Ideal for companies with perishable products, such as agribusiness or pharmaceuticals.
Average
- Recalculates the average cost after each entry.
- Does not depend on the date of previous entries.
- Recommended for businesses with high turnover, such as hardware stores, electrical distributors, spare parts importers.
Standard Cost
- Requires defining the cost of each product in advance.
- Differences between the actual cost and the standard are posted as cost variances, facilitating efficiency analysis.
- Useful for simple production processes or companies that require rigid budgeting.
Specific Identification
- Requires managing serial numbers or lots.
- Each entry is assigned directly to its respective outbound transaction.
- Used in sectors where each unit has a particular value: technology, medical equipment, automobiles, etc.
Integration with Accounting and IFRS Compliance
Business Central is designed so that inventory cost is automatically reflected in the general ledger, complying with the principles of:
- Matching of revenues and costs (recognition of cost at the time of sale).
- Realistic valuation of current assets (fair value of inventory).
- Full traceability of accounting entries.
In each sales, consumption, or adjustment transaction, the system automatically generates the corresponding accounting entry based on the configured method.
Key Recommendations for Implementation in LATAM
- Choose the correct method when releasing the product: this decision is critical and must be made after a joint analysis of logistics, accounting, and taxation.
- Avoid using methods incompatible with IFRS (such as LIFO): even if some localizations allow it, it must not be used in Colombia or the Dominican Republic.
- Enable tracking by lot number or serial number when using specific identification: this ensures traceability and regulatory compliance in regulated sectors.
- Periodically review standard costs and perform variance adjustments: especially important in inflationary environments or with high dependence on imported inputs.
- Periodically reconcile inventory and accounting: to avoid differences between accounting and physical balances that could generate audit observations.
Technical Conclusion
Business Central allows SMEs in Colombia and the Dominican Republic to manage their inventories in a professional manner, in accordance with international standards, and with clear traceability between physical operations and accounting effects. Its modular approach allows starting with a simple scheme (for example, average or FIFO), and scaling towards more sophisticated models such as standard cost or lot tracking, as business complexity grows.
Functional Restrictions in Choosing the Costing Method in Business Central
The choice of costing method in Business Central is not a trivial parameter, as it is directly linked to the way the system generates:
- Automatic accounting entries
- Calculation of cost of goods sold
- Inventory valuation on the balance sheet
- Margin and profitability analysis
Once a product has had accounting entries associated with inventory (receipts, issues, adjustments, or consumptions), its valuation method cannot be changed directly. This is one of the main restrictions that every implementer or advanced user must know.
Where is the Costing Method Defined?
The method is configured on the item card:
Path in Business Central:Warehouse > Items > Item Card > “Costing Method” Field
The available options are usually: FIFO, Average, Standard Cost, Specific Identification. In some localizations or older versions, LIFO may appear, but it must not be used in IFRS environments.
What Happens if the Item Already Has Entries?
Once a product:
- Has been purchased with accounting impact
- Has been sold or transferred
- Has been inventoried or adjusted
- Has been consumed in production
…it already has entries recorded in the system history, therefore it is not possible to change its costing method.
Attempting to do so generates system validation errors and would compromise the accounting integrity of the data.
Valid Alternatives if the Method Needs to Be Changed
In case the method was incorrectly defined, the correct procedure is:
- Block the original product to prevent new entries.
- Create a new product with the correct costing method.
- Physically transfer the existing stock to the new item, with appropriate accounting and documentary adjustments.
- Update bills of materials (BOM) or cross-references if used in production.
- Notify accounting and auditing of the procedure performed.
This approach allows maintaining traceability and accounting consistency without violating system restrictions.
Additional Considerations
- In regulated environments (for example, pharmaceutical), this type of change may require review by external or internal auditing.
- If generic products are being used for multiple lines, it is worth reviewing whether coding should be separated by cost type (for example, same product in FIFO for sales and in standard for internal production).
- The costing method configuration can also influence valuation reports for DIAN (Colombia) or DGII (Dominican Republic), especially in asset declarations, deductible costs, and returns.
Particularities of the Moving Average Method in Business Central
The average costing method in Business Central technically corresponds to a moving average. This means that the system automatically recalculates the average cost of the product every time an inventory entry is posted. This behavior is very different from a periodic average or one calculated at the end of the period.
Each new entry with a different cost modifies the accumulated average, which is then applied to all subsequent outbound transactions until there is a new entry.
This method is especially useful for SMEs in Colombia or the Dominican Republic that operate with homogeneous products, high turnover, or frequent purchases with variable prices (such as hardware stores, importers, or wholesale distributors).
Operational Logic of the Calculation
When an entry is posted (by purchase, adjustment, or return), Business Central updates the accumulated average cost of the product based on this formula:
New average cost = (previous stock × previous cost + new units × new cost) ÷ total units
This new average cost will automatically be applied to all subsequent outbound transactions until the next entry.
The system also retroactively recalculates outbound entries if they have been left pending valuation (for example, if a sale was made before the purchase was posted).
Technical Requirements and Considerations
Business Central requires that inventory entries be completely posted and valued before the accounting period close. If there are entries without cost, the system may block posting or generate incomplete entries.
This method depends entirely on the chronological order of entries, so it is crucial that purchases, consumptions, and sales are posted without delays and in the correct order.
It is incompatible with individual traceability by lot or serial number, as it is based on a common average cost for all units. If exact traceability is required, Specific Identification must be used.
Period Close and Adjustment
To ensure the correct accounting valuation of inventory, it is recommended to periodically run the “Adjust Cost – Item Entries” process, available at:
Item Cost > Processes > Adjust Cost – Item Entries
This process forces the system to recalculate and close the cost of all transactions for the period, avoiding differences between inventory and the general ledger.
Additionally, it is good practice to run the “Inventory Revaluation” report before the monthly close to validate that there are no products with zero cost or inconsistencies.
Practical Advantages in the LATAM Environment
- Simplifies accounting control when there are multiple suppliers and variability in import prices
- Minimizes deviations by maintaining an average cost base that cushions abrupt changes
- Facilitates accounting reconciliation without the need to identify specific entries
Key Precautions
- In high-inflation contexts, it may underestimate the cost of goods sold, affecting the real margin and generating a higher tax burden
- Should not be used for products with high regulatory sensitivity where unit traceability is required
- Requires rigorous documentary control in purchases and adjustments, to avoid distortions from duplicate or incorrectly valued entries
Managing Standard Cost in Business Central
The standard cost method in Business Central allows valuing inventory and calculating the cost of goods sold using a fixed value previously established for each product. This value is not automatically modified, even if purchases or actual costs change. Instead, differences between the standard cost and the actual cost are recorded as cost variances, enabling detailed efficiency and deviation control.
This methodology is especially useful in manufacturing or structured distribution environments, where there is a known and repetitive cost pattern, such as in free trade zones, assembly processes, cosmetic production, or processed foods.
Initial Configuration of Standard Cost
The standard cost is defined on the product card, in the “Standard Cost” field, only when the assigned costing method is “Standard”. This value must be set before the product has any accounting entries, otherwise a revaluation process will need to be run.
Path to configure:Warehouse > Items > Item Card > Costing Method: Standard > Field: Standard Cost
It is important to consider that this value not only affects inventory, but also the way the system calculates cost when consuming products in production, sales, or adjustments.
Review and Update of Standard Cost
The review of standard cost should be carried out periodically (at least quarterly or semi-annually), especially in contexts with variability in input prices, inflation, or changes in cost structure.
If it is necessary to modify the standard cost of a product that already has entries, the inventory revaluation process must be run to accounting adjust the difference between the recorded inventory and the newly defined value.
This process is performed from:Item Cost > Processes > Inventory Revaluation
Here, the product must be selected, the new standard value defined, and the effective application date specified. The system will generate the necessary adjustment accounting entries.
Recording Cost Variances
Business Central generates automatic cost variance entries when:
- The product is purchased at a price different from the standard cost
- Production is posted with components whose actual cost differs from the planned cost
- Inventory is manually adjusted or revalued
These variances are posted to specific accounts defined in the inventory accounting configuration and are fundamental for profitability analysis and budget control.
It is possible to analyze these deviations from the report:Item Cost > Reports > Cost Variance Analysis
This report allows viewing deviations by item, by vendor, or by cost center, facilitating the detection of inefficiencies or chronic deviations.
Key Recommendations
- Define the standard cost based on a rigorous technical and financial study, including raw materials, labor, and overhead costs
- Establish a clear policy for periodic review of standard cost, validated by finance and operations
- Document adjustment processes and maintain traceability in internal and external audits
- Use cost variances as an indicator of operational efficiency, not merely as an accounting result
Valuation with Specific Identification: Lots, Serial Numbers, and Traceability in Business Central
The specific identification method in Business Central allows assigning to each product unit its exact individual cost, based on the price of the corresponding entry. To correctly apply this method, it is essential to use tracking by lot number or serial number, ensuring complete traceability from entry to exit.
This approach is indispensable for sectors where each item has a particular value or where regulations require unit traceability: medical devices, medications, automobiles, technology, industrial equipment, pharmaceutical cosmetics, or functional foods.
Configuring the Costing Method
On the item card, the costing method Specific Identification must be assigned. This configuration must be done before any entries, just as with the other methods.
Path:Warehouse > Items > Item Card > Costing Method: Specific Identification
Enabling Tracking by Lot Number or Serial Number
The system requires that mandatory tracking be configured through an Item Tracking Code, where it is defined whether the product will be tracked by:
- Serial numbers: if each unit is unique (e.g., cell phones, computers, medical instruments)
- Lot numbers: if the units belong to a common lot with homogeneous properties (e.g., medications, cosmetics, chemical products)
Path to create tracking:Warehouse > Setup > Item Tracking Codes
In this card, it is defined whether the lot or serial number will be mandatory in purchases, sales, internal consumption, transfers, or production.
Once this code is associated with the item card, all transactions will require the entry of a lot number or serial number. This ensures complete traceability of the cost associated with each unit.
Accounting Valuation with Specific Identification
When this method is used, each inventory outbound transaction (sale, consumption, adjustment) must directly reference a specific entry through its lot or serial number. The system takes exactly the cost of that entry to record:
- The cost of goods sold
- The inventory accounting entry
- The update of the remaining stock value
There is no average calculation or FIFO logic. Each unit has a unique entry history and cost.
This allows:
- Knowing the margin per unit sold, something critical for high-value products
- Complying with health or customs regulations on traceability
- Validating the complete history in audits or returns
Key Reports and Auditing
From the product card or from accounting entries, the user can trace each serial number or lot, identifying:
- Entry date
- Purchase or production document that originated the receipt
- Sales, consumption, or transfer document that originated the issue
- Exact cost associated with each unit
These data can be consulted from:
Warehouse > Inquiries > Serial/Lot Number TrackingWarehouse > Reports > Item Register
Practical Recommendations
- Do not use this method for low-value or high-turnover products: the operational burden does not justify the level of control
- Ensure the capture of the lot or serial number at all stages: purchase, receipt, production, sale
- Configure strict validation rules to avoid data entry errors
- Integrate with scanners or barcode readers if the data volume is high
Inventory and Accounting Reconciliation: Key Reports in Business Central
In Business Central, inventory is part of current assets and, therefore, its value must be correctly reflected both in the operations modules and in the general ledger. However, this does not always happen automatically if the appropriate adjustment, close, and validation processes are not executed.
One of the most common errors in deficient implementations is assuming that accounting always correctly reflects inventory movements. The reality is that the inventory and accounting modules are integrated, but not synchronized in real time, so it is essential to run periodic reconciliation processes.
Cost Adjustment and Period Close Process
The first step to ensure correct reconciliation is to adjust pending costs. This is done with the process:
Item Cost > Processes > Adjust Cost – Item Entries
This adjustment recalculates the actual cost of all inventory receipts and issues, including:
- Purchases with subsequent invoicing
- Production that has not been fully closed
- Consumptions or sales without assigned cost due to date differences
It is good practice to run this process daily in high-volume companies, or monthly before the accounting close, to avoid incomplete entries or pending movements.
Inventory Reconciliation Report
Business Central offers a specific report to validate that the inventory value matches the accounting balance of the inventory account in the general ledger.
Path:Inventory Reports > Inventory – G/L Reconciliation Report
This report allows:
- Comparing the inventory value by product, group, or warehouse
- Viewing differences between the inventory and accounting modules
- Identifying products with entries without cost
- Analyzing accounting and operational cut-off dates that may not coincide
It is essential that this report be run before the monthly close, especially when working in multi-currency environments or with complex production processes.
Other Analysis and Validation Tools
In addition to the reconciliation report, Business Central offers other resources that help detect problems in the accounting valuation of inventory:
- “Inventory Valuation Summary”: shows the value by product and warehouse, with the applied costing method
- “Items Without Cost Report”: useful for detecting pending entries or incorrectly configured items
- “Revaluation History”: allows auditing manual cost adjustments or standard value changes
- “Item Ledger Entry History”: useful for viewing the exact entries generated by each inventory transaction
All these reports can be exported, filtered, and grouped by dates, warehouses, product groups, or categories, which facilitates their use in audit processes.
Key Recommendations
- Establish a clear inventory and accounting close policy, with defined responsibilities and calendar
- Run the cost adjustment before closing each month, to avoid differences between modules
- Use reconciliation reports as supporting documentation for audits
- Regularly verify that inventory accounting accounts are correctly configured by product posting group
Relevant Operational Limitations of Business Central in LATAM Environments
Although Dynamics 365 Business Central is a powerful and flexible tool for inventory management in SMEs, there are important functional limitations that must be taken into account in implementations in Latin America. These limitations do not prevent operation, but they do require more precise technical planning, additional development, or the adoption of localization extensions to comply with more demanding regulatory and internal control requirements.
1. Does Not Allow Multiple Costing Methods per Warehouse or Variant
Business Central allows assigning a single costing method per product. This represents a restriction in scenarios where:
- The same product is managed with different logic depending on the country, warehouse, or business line
- FIFO is desired for local sales and Average for the export channel
- Standard is desired for finished goods and average for raw materials
This forces the duplication of products and the accounting separation of variants, which complicates management if not planned from the beginning of the project.
2. Limited Management of Mass Revaluations
When it is necessary to review and adjust the standard costs of multiple items, Business Central does not provide a native tool to modify these values in bulk in a controlled manner. This process usually requires:
- Use of configuration templates
- Loading via Excel or interfaces
- Manual review product by product
This can be a bottleneck in industries with a large number of references and high turnover, especially in manufacturing, fashion, or electronics.
3. Lot or Serial Number Tracking Without Advanced Logic
The system offers basic tracking by lot or serial number, sufficient for accounting and fiscal traceability, but limited in terms of:
- Automatic reservation logic by expiration date (FEFO)
- Multiple locations with lot priority rules
- Quality controls or quarantine by lot
- Lot blocking based on health or audit criteria
Companies regulated or with pharmaceutical, cosmetic, or food control requirements will need ISV extensions or custom developments.
4. Need for Localizations to Comply with DIAN and DGII
Business Central does not natively incorporate all local fiscal and accounting requirements of Colombia or the Dominican Republic. For the inventory valuation to be correctly reflected in:
- Income or asset declarations
- Reports required by DIAN or DGII
- Reconciliations with fiscal books
- Auxiliary records required by local regulations
…it is essential to implement a fiscal localization (for example, Go2Latam, Artware, SION, or similar), which enables:
- Official formats
- Mandatory accounting codes
- Fiscal processes aligned with the local tax framework
5. Requires Operational Discipline and Well-Defined Processes
The inventory valuation logic in Business Central depends strictly on the order, quality, and completeness of the entries recorded. This means that:
- Invoices posted out of date can distort the average
- Omissions in lot number assignment invalidate traceability
- Manual adjustments can generate differences if not properly controlled
The tool is solid, but is not tolerant of operational errors, so training and internal documentation are fundamental.
Recommendations to Mitigate These Limitations
- Correctly design item coding from the start, avoiding multiple methods per product
- Implement localizations certified by Microsoft and tested in your country
- Document operational procedures, especially in receiving, invoicing, and adjustments
- Conduct monthly inventory vs. accounting audits to prevent mismatches
- Consider custom developments only when justified by specific regulatory or sector requirements