Retail Method of Inventory Estimation

Retail method is a technique used to estimate the value of ending inventory using the cost to retail price ratio. Retail method involves the following steps:

  1. Determine the retail value of goods available for sale during the period by adding the retail value of beginning inventory and retail value of goods purchased.
  2. Subtract total sales during the period from the retail value of goods available for sale.
  3. Calculate the cost to retail price ratio (formula given below).
  4. Multiply the difference obtained in 2nd step and the cost to retail ratio to obtain estimated cost of ending inventory.

Cost to retail ratio is calculated using the following formula:

Cost to Retail Ratio = A + B
C + D

Where,
   A is the cost of beginning inventory;
   B is the cost of inventory purchased including incidental costs such as freight-in;
   C is the retail value of beginning inventory; and
   D is the retail value of goods purchased during the period

The formula given above implies that records of a business using the retail method must show the beginning inventory both at cost and at retail price. Since such information is readily available to retail merchandising businesses, retailers commonly opt to use retail method to estimate the value of ending inventory.

Example

 CostRetail
Beginning Inventory$36,000$46,000
Purchases$140,000200,000
Freight-In$8,160 
Packing Cost$5,440 
Cost of Goods Available for Sale$189,600$246,000
Cost to Retail Ratio = $189,600 = 0.7707
$246,000
 CostRetail
Cost of Goods Available for Sale$189,600$246,000
− Sales $198,000
Ending Inventory$48,000
× Cost to Retail Ratio0.7707
Ending Inventory$36,994 

Written by Irfanullah Jan