This article complements the Purchased Item record training article. Click here to learn more about the Purchased Item record.

The Cost Update Method determines how the Inventory Cost of each Item will be calculated in R365 and is **required** for all Purchased Items. This is selected on the 'Inventory Cost' tab of the Purchased Item record and lists the following options:

This article reviews Weighted Average and then each Cost Update Method.

**Weighted Average Overview**

The Weighted Average considers both the cost and the quantity of an item at the time the data is pulled. This will result in a per-unit weighted average to provide a more accurate Inventory Cost for the item. Click here to learn more about Weighted Average.

**Weighted Average (Last Count)**

The Weighted Average (Last Count) costing method pulls an item's cost from the last approved Inventory Count and all subsequent costing transactions to calculate its weighted average and, in return, its inventory cost. Costing transactions used in this calculation include inventory counts, invoices, item transfers (receiving location only), and commissary fulfillments (receiving location only).

For each location in an instance, R365 calculates the Weighted Average (Last Count) using only that locations transactions between the last count and the current date. Weighted averages are broken down into a per-unit cost divided by the total, which follows the Weighted Average algorithm. It is important to note that the following will be excluded from the Weighted Average (Last Count) calculation:

- $0 entries on Inventory Counts
- Negative quantity or amounts on Inventory Counts
- Transactions that have all line item details applied to a different location than the header location

**Weighted Average (Last 3)**

The Weighted Average (Last 3) costing method pulls an item's cost from the last three days of approved costing transaction activity for each item to calculate its weighted average and, in return, its inventory cost. Costing transactions used in this calculation include invoices, commissary fulfilments (receiving locations only), and item transfers (receiving locations only).

For each location in an instance, R365 calculates the Weighted Average (Last 3) using only that location's last 3 transactions.

Weighted averages are broken down into a per-unit cost divided by the total, which follows the Weighted Average algorithm. It is important to note that the following will be excluded from the Weighted Average (Last 3) calculation:

- $0 entries on inventory counts
- Negative quantity or amounts on inventory counts
- Transactions that have all line item details applied to a different location than the header location

**Last Received**

The Last Received costing method pulls the item's cost from the last approved costing transaction to determine its Inventory Cost. If there are more than one approved invoice on the 'last day', then the system will take the weighted average of the item's cost by breaking it down into a per-unit cost divided by the total.

It is important to note that the following will be excluded from the Last Received calculation:

- Transaction activity with $0 contributions
- Negative quantity or amounts on transactions

**Manual**

The Manual costing method is all custom-entered by your Organization. R365 will not use any calculations to update Inventory Cost but rather rely on your team to update Inventory Costs as needed. While this option is available, it is rarely used.