Estimating Inventory Cost

1
Estimating Inventory Cost

• Retail 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 Inventory
• Based on the estimated gross profit percentage
  (GP/Sales)

2
Retail Method of Inventory Costing Example

• Cost Retail
• Beginning Inventory 500 1,000
• Net Purchases 1,500 3,000
• Goods Available for Sale 2,000 4,000
• 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

3
Calculating the Cost-to-Retail Ratio

• Assumption A Compute the CostRetail Ratio
  after markups ( markup cancellations) but before
  markdown ( markdown cancellations normal
  shortages) (conventional method since it
  approximates LCM)
• Assumption B Compute the CostRetail Ratio
  after both markups and markdowns (
  cancellations)

4
Gross Profit Method of Estimating Inventories
Example when GP 50

• Beginning Inventory 300
• Net Cost of Purchases 700
• Goods Available for Sale 1,000
• Sales for the period 1500
• - Estimated Gross Profit (_at_ 50) -750
• Estimated Cost of Merchandise Sold 750
• Estimated Ending Inventory 250