Retail Inventory Method

Calculating the cost of current goods that have been stored in a warehouse, is an important responsibility of a cost and works accountant. Depending upon the business model of the organization, the inventory is made and periodic statements depicting the costs of goods in storage are issued to the management. Retail inventory is one such method of calculating costs.

Inventory methods, inventory costing, or inventory valuation are all techniques and application of theories used in the process of cost accounting. The basic intention of such techniques is very simple, i.e., evaluation of the value of stock.

This evaluation is also done in two channels, namely, evaluation of total stock cost, and evaluation of stock of every individual unit. Thus, such a type of accounting and valuation has a broader scope than normal accounting. Such accounting is more beneficial for forecasting and predictions.

The first thing that we need to know is, what is 'inventory'. A very simple definition of inventory tells us that inventory is basically a detailed list of items in stock, giving the status of their costs. The meaning of retail is also quite simple; it means selling goods to customers. The term retail price has been derived from this concept.

The retail price is the price at which the goods are sold to the customers. Both the terms, retail as well as inventory, are important aspects of the cost method of accounting. The method of retail inventory is, thus, a valuation of stock according to its retail value.

The specialty of such a statement is that when it is included in the managerial accounting statements, it shows the management two columns, namely the one depicting 'cost', which is the cost at which goods are purchased, and 'retail', which is the cost at which goods are to be sold.

Here is a list of Particulars with its Cost (in USD) and Retail (in USD).

Opening Balance
$ 15,000
$ 20,000

Purchases
$ 30,000
$ 50,000

Markups/Appreciation
nil
$ 5,000

Current Balance/Available Stock
$ 45,000
$ 75,000

Less: Sales
$ 48,000

Less: Markdown/Depreciation
$ 1,000

Inventory at Retail
$ 26,000

Cost to Retail Ratio
60%

Inventory at Cost (in accordance with conventional method of retail inventory)
26,000 X 60% = $ 15,600

You must have noticed that the retail price is always compared with the cost price of the stored unit. In retail inventory, cost that is comparative to each other holds an added importance. For example, all the cost of operations and storage must be covered within the difference of the cost price and retail price.

You will also notice that the markup and markdown prices are also added and subtracted, respectively from the retail cost, as the market price and age of a particular inventory unit affects its retail price. The cost to retail ratio is calculated in order to depict a comparative difference in both the prices.

It must be noted that this method is generally used in sales organization where the basic business model is based on the activity of purchase and sale of goods. One cannot use this method for production-based business models.