Retail Inventory Method
What Is the Retail Inventory Method?
The retail inventory method is an accounting method used to estimate the value of a store's merchandise. The retail method gives the ending inventory balance for a store by measuring the cost of inventory relative to the price of the merchandise. Alongside sales and inventory for a period, the retail inventory method utilizes the cost-to-retail ratio.
Understanding the Retail Inventory Method
Having a handle on your inventory is an important step in dealing with a fruitful business. It permits you to figure out your sales, when to order more inventory, how to deal with the cost of your inventory, as well as the amount of your inventory is making it into the hands of consumers, rather than being taken or broken.
The retail inventory method ought to possibly be utilized when there is a reasonable relationship between the price at which merchandise is purchased from a wholesaler and the price at which it is sold to customers. For instance, in the event that a dress store increases each thing it sells by 100% of the wholesale price, it could accurately utilize the retail inventory method, however assuming that it increases a few things by 20%, some by 35%, and some by 67%, applying this method with accuracy can be troublesome.
The retail method of esteeming inventory just gives an estimation of inventory value since certain things in a retail store will no doubt have been shoplifted, broken, or lost. It's important for retail stores to perform a physical inventory valuation periodically to guarantee the precision of inventory estimates as a method for supporting the retail method of esteeming inventory.
Ascertaining Ending Retail Inventory
The retail inventory method ascertains the ending inventory value by totaling the value of goods that are ready to move, which incorporates beginning inventory and any new purchases of inventory. Total sales for the period are deducted from goods ready to move. The difference is duplicated by the cost-to-retail ratio (or the percentage by which goods are increased from their wholesale purchase price to their retail sales price).
The cost-to-retail ratio, likewise called the cost-to-retail percentage, gives how much a decent's retail price is comprised of costs. In the event that, for instance, an iPhone costs $300 to fabricate and it sells for $500 each, the cost-to-retail ratio is 60% (or $300/$500) * 100 to move the decimal.
Disadvantages of the Retail Inventory Method
The retail inventory method's primary advantage is the simplicity of calculation, however a portion of the downsides include:
- The retail inventory method is just an estimate. Results can never contend with a physical inventory count.
- The retail inventory method possibly works on the off chance that you have a predictable markup across all products sold.
- The method expects that the historical basis for the markup percentage go on into the current period. In the event that the markup was unique (as might be brought about by an after-occasion sale), then, at that point, the consequences of the calculation will be inaccurate.
- The method doesn't work if a acquisition has been made, and the acquiree holds large measures of inventory at an essentially unique markup percentage from the rate utilized by the acquirer.
Illustration of the Retail Inventory Method
Utilizing our previous model, the iPhone costs $300 to produce and it sells for $500. The cost-to-retail ratio is 60% ($300/$500 * 100). Suppose that the iPhone had total sales of $1,800,000 for the period.
- Beginning inventory: $1,000,000
- New Purchases: $500,000
- Total goods ready to move: $1,500,000
- Sales: $1,080,000 (Sales of $1,800,000 x 60% cost-to-retail ratio)
- Ending inventory: $420,000 ($1,500,000 - $1,080,000)
Features
- The retail inventory method is just an estimate and ought to continuously be supported by period physical inventory counts.
- The retail inventory method is an accounting method used to estimate the value of a store's merchandise.
- The retail method of esteeming inventory just gives an estimate of inventory value since certain things in a retail store will in all likelihood have been shoplifted, broken, or lost.
- The retail method gives the ending inventory balance to a store by measuring the cost of inventory relative to the price of the goods.
- Alongside sales and inventory for a period, the retail inventory method utilizes the cost-to-retail ratio.
