Howdy, I'm back with another post, this time I'm covering inventory costing methods in Dynamics 365 Finance and Operations (D365 F&O). And yes, I know... two finance posts in one week! And yes, there's a dad joke waiting for you at the end—so stay tuned!
Weighted Average Cost Method
This technique helps to even out price variations over time, resulting in a more stable unit cost.
How It Works:
Total Cost Calculation: Add up the total cost of all inventory purchases.
Total Units Calculation: Add up the total number of units purchased.
Average Cost per Unit: Divide the total cost by the total units.
Formula:
Advantages:
Provides a stable cost per unit, which is helpful for financial reporting.
Easy to calculate and understand.
Reduces the impact of price volatility on inventory valuation.
Disadvantages:
May not reflect the most current cost of inventory.
Can be less accurate in rapidly changing markets.
Moving Average Cost Method
This method reflects the most recent cost changes in your inventory valuation.
How It Works:
Initial Calculation: Start with the cost and quantity of the existing inventory.
New Purchase: When new inventory is purchased, add the cost and quantity to the existing inventory.
New Average Cost: Recalculate the average cost per unit by dividing the updated total cost by the updated total quantity.
Formula:
Advantages:
Reflects the most current cost of inventory.
More accurate in fast-moving and price-sensitive markets.
Helps in maintaining up-to-date inventory valuation.
Disadvantages:
Can be complex to manage, especially with frequent purchases.
More computationally intensive, requiring continuous updates.
Weighted Average vs. Moving Average in D365 F&O
In D365 F&O, both methods are supported and can be configured based on your business requirements. Here’s a quick comparison to help you decide which method might be best for your organization:
Use Weighted Average When
Stability is Key: You prefer a stable and consistent inventory cost over time.
Simpler Calculations: Your business operations favor simpler, less frequent calculations.
Less Price Fluctuation: Your market experiences relatively stable prices.
Use Moving Average When
Accuracy is Crucial: You need your inventory valuation to reflect the latest market conditions.
Frequent Transactions: Your business handles frequent purchases and sales, making it essential to update costs continuously.
Dynamic Pricing: Your market experiences significant and rapid price changes.
Implementation in D365 F&O
Firstly, I heard your feedback that I should include print screens. I haven't figured out how to properly do that in this Wix editor so if anyone has any tips, I am all ears (not literally). Implementing these methods in D365 F&O involves setting up the inventory model group with the appropriate costing method. Here's a brief overview:
Weighted Average Cost Setup:
Go to Inventory management > Setup > Inventory > Item model groups.
Create a new item model group or modify an existing one.
Set the Inventory model field to Weighted average.
Moving Average Cost Setup:
Follow the same path as above.
Set the Inventory model field to Moving average.
Dad's (or mom's) Grilling Costing Analogy
It's the summer months so let's make a grilling analogy. You're outside grilling both hamburgers and steaks and for the purposes of this analogy (any maybe real life), let's assume there's no sides to this meal, only steaks and hamburgers. The Weighted Average method would be like mixing up the cost of all the burgers and steaks we bought for the month, and then figuring out an average cost per meat item. This smooths out the price differences over time.
On the other hand, the Moving Average method is like adjusting the average cost of your meat each time you make a new grocery trip. If you bought some expensive steaks last week, your average cost per meat item will go up immediately.
Dad Joke Time!
Why can’t you hear a pterodactyl go to the bathroom? The P is silent.
Bonus dad joke:
Why don’t skeletons fight each other?
They don’t have the guts!
As NSYNC and JT always say... bye, bye, bye
Dynamics Dad
One critical thing that is missing in your setup steps for moving average is the fallback methodology which is super important in case a transaction has a zero cost. Maybe another blog for another day?
Have you tried to ask copilot for help with add graphics to Wix? I did, here is what I found: Wix Blog: Adding Media to a Blog Post | Help Center | Wix.com :)