How Business Central Costing Actually Works (and Why It’s the First Thing You Should Understand) Part 1

If you’re implementing Microsoft Dynamics 365 Business Central and your eyes glaze over when someone says “costing,” you’re not alone.

I’ve worked with so many clients—many first-time ERP buyers, QuickBooks survivors, or spreadsheet warriors—who all assumed Business Central costing was just a number you stick on an item and forget about.

Then month-end rolls around.

Inventory is wrong, margins are weird, COGS doesn’t match, and someone (usually the CFO) starts yelling about $10 parts showing up with $200 costs.

Seriously, it’s OK.  We’ll work through it.  I’m a self professed inventory nerd and love a good costing problem.  

Business Central costing is powerful—but it’s not forgiving.

When it works, you get real time inventory tracking, accurate financials, clean inventory, and a system your team can trust. Everything you had hoped your shiny new ERP would give you.

When it doesn’t? You get audit nightmares and a whole lot of “what just happened?”

This is the first in my series on inventory costing.   I’ll break down the real story of how costing works in Business Central, why it matters, and what you need to have in place before things go sideways.  There’s a lot to cover so it will be either 6 or 8 posts – I’m still deciding where to draw the line.

What Is Business Central Costing?

Costing is the engine behind three critical things in your system:

1. Inventory Valuation – What’s sitting in your warehouse (and what it’s worth).
2. Cost of Goods Sold (COGS) – What you spent to produce or purchase what you sold.
3. Gross Margin Accuracy – The number every exec tracks—even if they don’t always understand how it’s calculated.

But Business Central doesn’t use a single “cost field” to track these things. It uses a layered structure of ledger entries, costing methods, and background processes that all work together. That’s where the confusion starts—and where the magic happens.

The 3 Entry Types That Drive Business Central Costing

Business Central inventory transactions (like receipts, invoices, or production output) creates three types of entries that drive the entire costing process:

1. Item Ledger Entries (ILEs)

I tell all my clients “ledger entries” is just a fancy accounting term for history. However, it’s really more than that. Think of the item ledger entries as the “what, how many, and when.”   They tell us what happened, how many, and on which date. They track physical movements (inventory in, out, or adjustments).

2. Value Entries

The entries, while related to the item ledger entries are the “how much”. Every Value Entry ties to an item ledger entry and represents a cost. One item ledger entry can have multiple Value Entries that will roll up to form the true cost. Various types of value entries could be:  initial expected cost, actual cost after invoicing, landed costs, and any later adjustments.

3. General Ledger Entries (G/L Entries)

This is the final resting place for all things also known as where things hit your books. Item ledger entries and value entries are a part of the inventory subledger. The subledger rolls up to hit the general ledger. Your Inventory, COGS, WIP, and variance accounts all live in the general ledger. Making sure the subledger and general ledger are in balance is critical but more on that later.  

Key takeaway: If your inventory value or COGS is off, it usually traces back to missing or misaligned Value Entries—not a typo in the G/L. Too many accountants react by making an entry directly to the balance sheet inventory accounts. Wait! Do not do that.  You’ll make your subledger and G/L out of balance.  We’ll have a whole post on how to correct these entries.   

Timing Matters: Why Posting Dates and Inventory Periods Are So Critical

Here’s where Business Central costing throws people off: you can post transactions out of order.

• You ship product on March 30
• You invoice it on April 3
• You receive the vendor invoice on April 10 (with a price change)

That timing causes cost adjustments across months, which may not be what your accountants want to see.

This is why Inventory Periods exist—they give you control over what can post and when. You can:

• Lock down backdating after period close
• Force teams to post in the correct period
• Prevent unexpected adjustments to prior months

Pro tip: Always close Inventory Periods after you reconcile for the month. And yes, you should be reconciling. Every. Single. Month.

The Cost Adjustment Process: Your New Best Friend

The “Adjust Cost – Item Entries” job is the heart of Business Central costing.

• It ensures that actual costs are calculated and updated
• It flows changes to any related outbound entries (like sales or consumption)
• It keeps inventory valuations up to date
• It fixes those $10 parts showing up as $200 on the P&L

Run it regularly. Automate it if you can. And always run it before month-end close.

Then follow it up with “Post Inventory Cost to G/L” to make sure your financials reflect the changes.

More to come on this process.

Base Setup for Business Central Costing: What You Must Get Right

Before we even talk about costing methods, reconciliation, or manufacturing, let’s talk about the setup that drives everything:

• Inventory Posting Groups
• Inventory Posting Setup
• General Posting Setup
• Automatic Cost Posting
• Expected Cost Posting to G/L

If these aren’t configured correctly, your inventory won’t tie out. Period.

We’ll dig into posting groups next week, but here’s the headline: this is a team sport. Accounting and operations must work hand in hand to assure this is perfect for your organization.   Don’t let your implementer just copy-paste the Cronus demo data. You won’t be happy.

Common Business Central Costing Mistakes I See All the Time

Here’s what trips up most companies:

• Ignoring expected vs actual cost behavior
• Not running Adjust Cost regularly
• Backdating invoices after closing inventory
• Incorrect or inconsistent posting group setup
• No process for reviewing Value Entries
• Using standard cost with no variance handling

And the big one?

Thinking the system will just “figure it out.”

Business Central is powerful, but it’s not magic. You have to teach it how your business works.

What’s Coming in the Business Central Costing Series

This post is just the foundation. Over the next few weeks, we’re diving deeper into each piece of the puzzle.

Here’s the updated lineup but I fully reserve the right to mix it up a bit.

1. How Business Central Costing Actually Works ← You’re here!
2. Mastering the Business Central Inventory Posting Setup Process
3. The 5 Costing Methods in Business Central and When to Use Each
4. How to Reconcile Inventory to the G/L Like a Pro
5. How to Fix Inventory Costing Errors Without Nuking Your Financials
6. How Manufacturing Costing Works in Business Central (and Why It’s Different)

You’ll get practical how-tos, real-life examples, and a little storytelling (because who doesn’t love an ERP horror story with a happy ending?).

Final Thoughts: You Don’t Have to Be a Costing Expert—But You Do Need to Ask the Right Questions

If you made it this far—congrats. You already know more than 90% of users who dive into Business Central without a costing strategy.

Here’s what I want you to remember:

• Business Central costing is layered, logical, and can be unforgiving
• Your setup and timing directly impact your financials
• Understanding Item, Value, and G/L Entries is the key to decoding cost behavior
• A good process beats heroics every time

If you’re responsible for inventory, finance, or implementation—you need to understand this. And you’re in the right place to do it.

Follow along for the rest of the series. I’ll help you untangle the details, one post at a time.   

You’ve got this. And if it still feels overwhelming? You’re not doing it wrong—this stuff is just complicated.

But with the right guidance, it becomes manageable. Even (dare I say it)… kind of satisfying.

Wanna learn more? Check out my post on using non-inventory items.

This is Part 1 of the Inventory Costing Series – See the rest!

Mastering Business Central Inventory Posting Setup Process – Part 2

Inventory Costing Methods in Business Central: FIFO, Average, Standard and More – Part 3

Manufacturing Costing in Business Central: Understanding Standard Costs and Variance Reporting – Part 4

From Chaos to Control: Business Central Inventory Reconciliation – Part 5

Inventory Adjustment Account in Business Central: Causes, Fixes, and Best Practices – Part 6