Running average cost is one of the most widely used costing methods in Dynamics 365 Supply Chain Management. It continuously updates the cost of an item based on actual financial updates—such as purchase invoices, production postings, and inventory adjustments. This method ensures that inventory valuation reflects the most current and realistic cost picture, especially in environments where prices fluctuate frequently.
This blog explains how running average cost works, why it matters, and how Dynamics 365 recalculates and applies cost changes throughout the supply chain.
Running average cost is recalculated every time a financial update occurs. This includes:
Purchase invoice postings
Production order financial settlements
Inventory adjustments
Cost corrections
Each time a new financial transaction updates the item cost, the system recalculates the running average using the formula:
New Running Average Cost = (Inventory Value + Value of New Receipt) / (Inventory Quantity + Quantity of New Receipt)
This ensures that the cost reflects the weighted average of all financially updated receipts.
When items are issued (sold, consumed in production, transferred), the system uses the current running average cost at the time of issue. This means:
Issues do not change the running average cost
Issues only consume inventory at the current calculated cost
If a purchase order was received physically at an estimated cost and later invoiced at a different cost, the running average is recalculated when the invoice is posted. This variance is absorbed into the new average.
Physical updates (e.g., product receipt) do not affect running average cost.
Financial updates (e.g., purchase invoice) trigger cost recalculation.
If a financial update is posted for a past period, the system recalculates the running average and may adjust inventory values accordingly.
Running average cost is dynamic. It changes with every financial update, ensuring that inventory valuation stays accurate.
Because running average cost affects:
Cost of goods sold (COGS)
Inventory value on the balance sheet
Profitability analysis
…it is a critical component of financial accuracy.
When items are received physically, no cost change occurs yet.
When the purchase invoice or production settlement is posted, the system recalculates the running average.
Users can review cost changes in the Cost Management workspace.
The updated running average cost is applied to all future issues.
Ensure all financial postings are correct to maintain accurate costing.
If purchase prices vary, the running average smooths out cost volatility.
If an invoice is posted with a different price than expected, the running average adjusts automatically.
Production order settlements may increase or decrease the running average.
Any financial adjustment triggers a recalculation.
Running average cost is a powerful and flexible costing method in Dynamics 365 Supply Chain Management. It ensures that inventory valuation reflects real-world cost changes and provides accurate financial reporting. By continuously recalculating costs based on financial updates, organizations gain a more precise understanding of inventory value and profitability.
graph TD
A[Start] --> B[Receive Inventory]
B --> C[Post Financial Update]
C --> D[Recalculate Running Average Cost]
D --> E[Issue Inventory]
E --> F[Apply Cost to Issues]
F --> G[Update Inventory Valuation]
G --> H[End]