Estimating Inventory Cost Retail Method of Inventory CostingRetail Method of Inventory Costing –based on the ratio of the cost of merchandise available.

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Presentation transcript:

Estimating Inventory Cost Retail Method of Inventory CostingRetail Method of Inventory Costing –based on the ratio of the cost of merchandise available for sale & the retail price of that merchandise (Cost/Retail.. Value of Merchandise Sold) Gross Profit Method of Estimating InventoryGross Profit Method of Estimating Inventory –Based on the estimated gross profit percentage (GP/Sales)

Retail Method of Inventory Costing Example Cost Retail Beginning Inventory 5001,000 + Net Purchases1,5003,000 = Goods Available for Sale2,0004,000 Ratio of Cost to Retail = 2,000/4,000 = 50% -Net Sales (at retail)3,500 = Ending Inventory (at Retail) 500 * the Ratio of Cost to Retail (above) *.50 = Estimated Ending Inventory (at Cost) $250

Calculating the Cost-to-Retail Ratio Assumption A: Compute the Cost:Retail Ratio after markups (& markup cancellations) but before markdown (& markdown cancellations & normal shortages) (conventional method since it approximates LCM)Assumption A: Compute the Cost:Retail Ratio after markups (& markup cancellations) but before markdown (& markdown cancellations & normal shortages) (conventional method since it approximates LCM) Assumption B: Compute the Cost:Retail Ratio after both markups and markdowns (& cancellations)Assumption B: Compute the Cost:Retail Ratio after both markups and markdowns (& cancellations)

Gross Profit Method of Estimating Inventories Example when GP% = 50% Beginning Inventory$ Net Cost of Purchases 700 = Goods Available for Sale1,000 Sales for the period Estimated Gross Profit 50%)-750 = Estimated Cost of Merchandise Sold 750 Estimated Ending Inventory 250