For highlighting the inventory costing model in Microsoft Dynamics AX in order to understand the inventory valuation methods, there are three main concepts— physical and financial update, inventory recalculation and closing, and marking.
The physical and financial update considers real-life business scenarios where there is a difference between the reception costs and invoices. It works in uncertain business environments.
The physical update represents the inventory transaction, whether it is a product receipt for a purchase order or a packing slip for a sales order. The reception price inherits from the item purchase price in the purchase order and identifies the item cost price in the warehouse. The cost of goods sold is retrieved from the inventory cost price and the physical issuance that occurred from the sales order. The following figure shows the physical and financial updates:
