Costing Methods

The inventory costing method you choose defines the way NetSuite calculates the cost of items. For example, how inventory costing calculations are handled for costs associated with buying the same item at different purchase prices over a certain period.

NetSuite provides the following inventory costing methods:

Average – 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.
First-In, First-Out (FIFO) – The first goods purchased are assumed to be the first goods sold. Therefore, the ending inventory consists of the most recently purchased goods. This method is useful to track different shipments of similar products.
Group Average – This costing lets you track one average cost for an item across multiple locations within a defined group. For more information, see Group Average Costing.
Last-In, First-Out (LIFO) – The last goods purchased are assumed to be the first goods sold. Therefore, the ending inventory consists of the first goods purchased.

Note:
Last-In, First-Out (LIFO) is not available in the NetSuite Australia (AU) edition.
Specific – The exact cost of a serial or lot number entered into the system.
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. For more information, see Lot Numbered Items.
Standard – This costing lets you track standard costs for items and to track variances between these expected costs and actual costs. For more information, see Standard Costing.

In NetSuite, average costing is the default inventory costing method. If inventory levels are negative, NetSuite uses the last purchase price as the inventory costing method.

Important:

After you save the costing method on the item record, it cannot be changed.

The item cost calculated by each costing method vary as shown in the following example. Monday, you buy 20 calculators at $10 each and place them in inventory. Tuesday, you buy 20 calculators at $15 each and place them in inventory. Wednesday, you sell 5 calculators to a customer. The recorded cost of the calculators is calculated based on the costing method as follows:

FIFO

The 5 calculators post a cost of $10 each because that is the cost of the first calculators added to inventory.

LIFO

The 5 calculators post a cost of $15 each because that is the cost of the last calculators added to inventory.

AVERAGE

The 5 calculators post a cost of $12.50 because that is the average cost of all calculators in inventory.

This is calculated as [(20 x $10) +(20 x $15)] /40 =12.5.

STANDARD

Using standard costing, the receipt cost is fixed.

Monday, you buy 20 calculators at $10 each and the standard cost is $11. The item received has a unit cost of $11 and purchase price variance is generated for -$1 for each item being received.
Tuesday, you buy 20 calculators at $15 each and the standard cost is $11. The item received has a unit cost of $11 and the purchase price variance is generated for $4 for each item being received.
Wednesday, you sell 5 calculators to a customer. The recorded cost is $11.

Group Average

See Group Average Costing Use Cases.

Lot Numbered

See Lot Numbered Items.

When Item Cost Is Calculated

Using any costing method, the cost for items is calculated based on the cost shown on the transaction that brings the item into inventory.

For example, you use Advanced Receiving and the workflow Purchase Order > Item Receipt > Vendor Bill. The item cost NetSuite uses is the cost shown on the item receipt.

The time of costing is affected if you change the cost used for an item. For example, you enter an item receipt showing one cost. Later, the bill from the vendor shows another cost. If you change the cost on the vendor bill, item costing is not updated. The costing sources the receipt that brought the items into inventory. Therefore, you must update the cost that appears on the item receipt to update the item costing.

Any variance between the receipt and the bill appears in the Accrued Purchases account. If there are closed periods between the original receipt with the incorrect rate and the current date, an inventory adjustment is required. Use an inventory adjustment worksheet in the current period, and post to the adjustment account Accrued Purchases. If you choose to reopen the old periods and edit the receipt to match the bill, it does affect your past financials. It may cause a recalculation of inventory costs from that point forward.

When Item Cost Is Calculated

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