Inventory Costing Basics
Quick guide: inventory costing basics.
Last updated: January 2, 2026 • Public quick guide
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Inventory costing is how you decide what your inventory is ‘worth’ on paper and how COGS is recognized when you sell. Keep it simple and consistent.
- Inventory costing affects reported profit and decision-making.
- Consistency matters more than sophistication at your stage.
- Always track rejects and write-offs—those are real costs.
Decision path
- If you need simplicity, use a consistent average cost method.
- If prices/inputs swing wildly, tighten tracking before choosing a method.
- If you can’t explain your method, it’s too complex.
- Define inventory units (grams, units, SKUs) and stick to them.
- Track costs by batch: inputs, packaging, labor time.
- Record sellable output after QC as inventory.
- Choose a costing approach (average cost is often simplest).
- When inventory is sold, move its cost to COGS.
- Log write-offs and rejects immediately.
Inventory is not ‘value.’ Inventory is potential value. QC and compliance gates decide what’s real.
Quick example
Common costing approaches (high level):
| Approach | What it does | Why operators use it |
|---|---|---|
| Average cost | Smooths cost across batches | Simple and stable. |
| FIFO | Oldest costs go first | Matches physical flow in many ops. |
| Specific ID | Tracks cost per batch/lot | Best for tight traceability. |
Pick one method you can maintain. Switching methods constantly breaks comparability.
- Treating pre-QC output as inventory.
- Not tracking write-offs (phantom profits).
- Mixing units (grams vs units) inconsistently.
- Changing methods midstream without notes.
- Letting inventory sit without cycle counts.
FAQ
Do I need an accountant for this?
Eventually, yes. But you can start with consistent batch logs and a simple costing method.
What’s a ‘write-off’?
Inventory that can’t be sold (quality fail, damage, compliance issue). It must be removed from inventory.
How often should I count inventory?
Monthly minimum. More often if you have frequent movement.
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