Prerequisites

NetSuite Setup Requirements

Required features and configuration for inventory costing functionality.

Required Features

Setup › Company › Enable Features
Feature Location Purpose
Inventory Items & Inventory subtab Basic inventory tracking
Lots & Serial Numbers Items & Inventory subtab Required for Lot/Serial costing
Multi-Location Inventory Items & Inventory subtab Track inventory across warehouses
Advanced Inventory Items & Inventory subtab FIFO, Group Average, advanced features
⚠️ Costing Method Lock

Once an item has inventory transactions, its costing method cannot be changed. Plan carefully before initial setup. To change methods, you must zero out inventory, change the method, then re-enter inventory.

Key Navigation Paths

Task Navigation Path
Default Costing Method Setup > Accounting > Accounting Preferences > Items/Transactions subtab
Item Costing Method Lists > Accounting > Items > [Edit Item] > Costing Method field
Inventory Valuation Report Reports > Inventory > Inventory Valuation
COGS Report Reports > Financial > Cost of Goods Sold
Inventory Cost Template Setup > Accounting > Inventory Cost Templates
Standard Cost Update Transactions > Inventory > Update Standard Costs
Cost Revaluation Transactions > Inventory > Adjust Inventory Cost

Costing Method by Item Type

Method Item Types Module Required
Standard Inventory, Assembly Basic Inventory
Average Inventory, Assembly Basic Inventory
FIFO Inventory, Assembly Advanced Inventory
LIFO Inventory, Assembly Advanced Inventory
Lot Lot Numbered Inventory Lots & Serial Numbers
Serial Serialized Inventory Lots & Serial Numbers
Group Average All Inventory Advanced Inventory

SuiteAnswers References

Topic Article ID Title
Overview 42871 Inventory Costing Methods Overview
Standard Cost 43156 Standard Costing and Variance Analysis
Average Cost 42893 Average Cost Method Explained
FIFO/LIFO 44521 FIFO and LIFO Costing Setup
Lot Costing 45672 Lot Number Costing
Group Average 48923 Group Average Costing Method
Cost Adjustment 43891 Adjusting Inventory Costs
💡 Choosing a Costing Method
  • Manufacturing: Standard Cost (variance tracking)
  • Wholesale/Distribution: Average Cost (simplicity) or FIFO (GAAP preferred)
  • Retail: Average Cost (simplicity)
  • Pharmaceutical/Food: Lot Costing (traceability required)
  • High-Value Items: Serial Costing (individual tracking)
Section T.1

Costing Methods Overview

NetSuite supports multiple inventory costing methods. The choice of method affects financial statements, tax liability, and operational reporting.

Standard Cost
Predetermined cost with variance tracking. Best for manufacturing.
Average Cost
Weighted average of all units. Smooths cost fluctuations.
FIFO
First In, First Out. Matches old costs to current sales.
Lot/Serial Cost
Specific identification. Tracks actual cost per unit.
Group Average
Average cost by location/bin. Location-specific costing.

Costing Method Decision Flow

flowchart TD
    A[Choose Costing
Method] --> B{Industry &
Requirements}

    B -->|Manufacturing| C[Standard Cost]
    B -->|Distribution| D[Average or FIFO]
    B -->|Perishables| E[FIFO]
    B -->|High-Value Serial| F[Lot/Serial Cost]
    B -->|Multi-Location| G[Group Average]

    C --> H[Track Variances:
PPV, Production]
    D --> I[Simple Costing,
Stable Margins]
    E --> J[Oldest Cost First,
Lower COGS in Inflation]
    F --> K[Actual Cost per Unit,
Full Traceability]
    G --> L[Location-Specific
Average Cost]

    style A fill:#0ea5e9,stroke:#0284c7,color:#fff
    style B fill:#fef3c7,stroke:#f59e0b,color:#1a1a1a
    style C fill:#8b5cf6,stroke:#7c3aed,color:#fff
    style D fill:#0ea5e9,stroke:#0284c7,color:#fff
    style E fill:#22c55e,stroke:#16a34a,color:#fff
    style F fill:#f97316,stroke:#ea580c,color:#fff
    style G fill:#ec4899,stroke:#db2777,color:#fff
    style H fill:#a78bfa,stroke:#8b5cf6,color:#fff
    style I fill:#7dd3fc,stroke:#0ea5e9,color:#1a1a1a
    style J fill:#86efac,stroke:#22c55e,color:#1a1a1a
    style K fill:#fdba74,stroke:#f97316,color:#1a1a1a
    style L fill:#f9a8d4,stroke:#ec4899,color:#1a1a1a
⚠️ Important: Method Cannot Be Changed

Once transactions are recorded for an item, the costing method cannot be changed. Choose carefully during implementation. You can have different methods for different items, but each item is locked to its method once posted.

Section T.2

Sample Transaction Set

We'll trace these transactions through each costing method to show the differences. Item: Widget-X with standard cost of $10.00.

Date Transaction Qty Unit Cost Total
Jan 5 Purchase Receipt #1 +100 $10.00 $1,000.00
Jan 15 Purchase Receipt #2 +50 $12.00 $600.00
Jan 20 Sale #1 -80 ? ?
Jan 25 Purchase Receipt #3 +75 $11.00 $825.00
Jan 31 Sale #2 -100 ? ?
Total Purchased
225 units
$2,425.00
Total Sold
180 units
COGS varies by method
Ending Inventory
45 units
Value varies by method
Section T.3

Standard Cost Method

Standard cost uses a predetermined cost ($10.00). Differences between actual and standard are captured as variances.

Standard Inventory Value at Standard Cost
Date Transaction Qty Value
Jan 5 Receipt #1 @ $10 std 100 $1,000
Jan 15 Receipt #2 @ $10 std (actual $12) 50 $500 + $100 PPV
Jan 20 Sale #1 @ $10 std -80 ($800)
Jan 25 Receipt #3 @ $10 std (actual $11) 75 $750 + $75 PPV
Jan 31 Sale #2 @ $10 std -100 ($1,000)
End 45 units @ $10.00 standard 45 $450

GL Impact - Purchase Receipt #2 ($12.00 actual vs $10.00 std)

Standard Purchase Receipt #2
Account Debit Credit
$500.00
$100.00
$600.00
COGS
$1,800
180 units x $10 std
PPV
$175
Unfavorable variance
Ending Inv
$450
45 units x $10 std
ℹ️ Standard Cost Advantage

Standard cost provides consistent COGS regardless of purchase price fluctuations, making gross margin analysis easier. Variances highlight purchasing efficiency and can trigger standard cost reviews.

Section T.4

Average Cost Method

Average cost recalculates the unit cost after each receipt by dividing total value by total quantity on hand.

Average Weighted Average Cost Calculation
Date Calculation Qty Avg Cost
Jan 5 $1,000 ÷ 100 units 100 $10.00
Jan 15 ($1,000 + $600) ÷ 150 units 150 $10.67
Jan 20 Sale: 80 x $10.67 = COGS $853.33 70 $10.67
Jan 25 ($746.67 + $825) ÷ 145 units 145 $10.84
Jan 31 Sale: 100 x $10.84 = COGS $1,083.79 45 $10.84
End 45 units @ $10.84 average 45 $487.88

GL Impact - Sale #1 (80 units @ $10.67 avg)

Average Sale #1
Account Debit Credit
$1,600.00
$1,600.00
$853.33
$853.33
COGS
$1,937.12
$853.33 + $1,083.79
Variance
$0
No variance accounts
Ending Inv
$487.88
45 x $10.84
🎯 Consultant Tip

Average cost is popular for distribution companies because it's simple and smooths out price fluctuations. However, it can obscure the impact of significant price changes on recent purchases.

Section T.5

FIFO Method

FIFO (First In, First Out) sells the oldest inventory first. Each purchase creates a "layer" that's consumed in order.

FIFO Inventory Layers
After Receipt #1 (Jan 5):
Layer 1
100 @ $10.00
100 $1,000
After Receipt #2 (Jan 15):
Layer 1
100 @ $10.00
50 @ $12.00
150 $1,600
After Sale #1 (Jan 20) - Sell 80:
Layers
80 sold @ $10
20 @ $10
50 @ $12
70 $800
COGS: 80 x $10.00 = $800.00 (all from oldest layer)
After Receipt #3 (Jan 25):
Layers
20 @ $10
50 @ $12
75 @ $11
145 $1,625
After Sale #2 (Jan 31) - Sell 100:
Final
100 sold
45 @ $11
45 $495
COGS: 20 x $10 + 50 x $12 + 30 x $11 = $1,130.00

GL Impact - Sale #2 (consuming multiple layers)

FIFO Sale #2
Account Debit Credit
$1,130.00
$1,130.00
COGS
$1,930.00
$800 + $1,130
Variance
$0
No variance accounts
Ending Inv
$495.00
45 x $11.00
💡 FIFO in Inflationary Periods

When prices rise, FIFO results in lower COGS (oldest/cheapest costs used first) and higher ending inventory (newest/higher costs remain). This means higher reported profit but also higher taxes. Ending inventory better reflects current replacement cost.

Section T.6

Side-by-Side Comparison

Comparing the same transactions across all three methods reveals significant differences in COGS, gross margin, and ending inventory valuation.

Metric Standard Average FIFO Range
Sale #1 COGS (80 units) $800.00 $853.33 $800.00 $53.33
Sale #2 COGS (100 units) $1,000.00 $1,083.79 $1,130.00 $130.00
Total COGS $1,800.00 $1,937.12 $1,930.00 $137.12
PPV / Variance $175.00 $0.00 $0.00 -
Total Cost Impact $1,975.00 $1,937.12 $1,930.00 $45.00
Ending Inventory Value $450.00 $487.88 $495.00 $45.00
Ending Inventory Unit Cost $10.00 $10.84 $11.00 $1.00

Gross Margin Impact (Assuming $20/unit Sales Price)

Standard Cost
Revenue: $3,600
COGS: $1,800
PPV: ($175)
$1,625
45.1% Gross Margin
Average Cost
Revenue: $3,600
COGS: $1,937
PPV: $0
$1,663
46.2% Gross Margin
FIFO
Revenue: $3,600
COGS: $1,930
PPV: $0
$1,670
46.4% Gross Margin
ℹ️ Verification: COGS + Ending Inv = Total Purchased

Standard: $1,800 + $450 + $175 (PPV) = $2,425
Average: $1,937.12 + $487.88 = $2,425
FIFO: $1,930 + $495 = $2,425

Section T.7

Method Selection Guide

Choosing the right costing method depends on your industry, operational needs, and financial reporting objectives.

✓ Choose Standard Cost When...
  • Manufacturing environment with production variances
  • Need to track purchasing efficiency (PPV)
  • Want consistent product margins for analysis
  • Budget-to-actual cost comparison is critical
  • Products have stable, predictable costs
✗ Avoid Standard Cost When...
  • Costs fluctuate significantly and unpredictably
  • No resources to maintain and update standards
  • Simple distribution without manufacturing
  • Variance tracking adds complexity without value
✓ Choose Average Cost When...
  • Distribution/wholesale business model
  • Homogeneous products (commodities)
  • Want to smooth out price fluctuations
  • Simple costing without layer tracking
  • Moderate price volatility
✗ Avoid Average Cost When...
  • Need to track specific lot costs
  • Products have very different costs per purchase
  • Inventory turns slowly with large price swings
  • Perishable goods requiring oldest-first rotation
✓ Choose FIFO When...
  • Perishable goods with expiration dates
  • Want inventory to reflect current costs
  • Need to match physical flow (oldest first)
  • Inflationary environment (lower COGS, higher profit)
  • Serialized items without lot tracking
✗ Avoid FIFO When...
  • Want to minimize taxable income in inflation
  • Layer tracking complexity is undesirable
  • Products are fungible with no age preference
  • System performance concerns with many layers
✓ Choose Lot/Serial Cost When...
  • High-value items requiring specific cost tracking
  • Regulatory traceability requirements
  • Each unit has truly unique cost
  • Serialized equipment or vehicles
  • Pharmaceutical or food safety tracking
✓ Choose Group Average When...
  • Multi-location with different landed costs
  • Want location-specific costing
  • Transfer between locations at different costs
  • Bin-level cost tracking needed
⚠️ Tax Implications

Your costing method affects taxable income. In the US, if you use LIFO for tax purposes, you must also use LIFO for financial reporting (LIFO conformity rule). NetSuite doesn't support LIFO natively. Consult with your tax advisor before selecting a costing method.

Section T.8

Summary

Key takeaways for selecting and implementing inventory costing in NetSuite.

Feature Standard Average FIFO Lot Cost
Complexity High (maintain stds) Low Medium (layers) High (tracking)
Variance Tracking Yes (PPV, Prod) No No No
Price Smoothing Complete High None None
Ending Inv Reflects Standard cost Blended cost Latest cost Actual cost
Best For Manufacturing Distribution Perishables High-value items
💡 Key Takeaways
  • Method lock-in: Cannot change after transactions are posted
  • Different methods per item: You can mix methods across items
  • Standard cost requires maintenance: Update standards annually or when costs change significantly
  • FIFO layers: Can grow large; consider layer retention settings
  • All methods balance: COGS + Ending Inv = Purchases (just allocated differently)
  • Tax impact: Higher COGS = lower taxable income
  • Test thoroughly: Use sandbox to model before go-live