What Is the Retail Inventory Method Used For?
What is the retail inventory method? This retail process is applied to estimate your stock levels. It is based on the relationship between the Cost of Goods Sold (COGS) and the Average Selling Price (ASP), so it’s a useful tool for stores.
The retail inventory method is not entirely accurate and should be supplemented with periodic physical counts. Its results are inadequate for year-end financial statements that require a higher level of accuracy.
What is the Retail Inventory Method?
What is the retail inventory method and how is it used to calculate the cost of ending inventory?
- Calculate the cost-to-retail percentage: Cost ÷ Retail Price.
- Calculate the cost of goods available for sale: Cost of Beginning Inventory + Cost of Purchases.
- Calculate the cost of sales during the period: Sales x Cost-to-Retail Percentage.
- Calculate ending inventory: Cost of Goods Available for Sale – Cost of Sales During the Period.
When to Implement the Retail Inventory Method
The frequency at which you run this will depend on your internal processes. You may choose to do it quarterly, yearly, or whenever it’s convenient.
The markdowns you’re calculating may not be accurate during certain times of the year, so we recommend not doing this during seasons when markups are volatile.
For certain products or product lines, it’s best to use a different method of calculating the cost of goods sold. This is because your costs-to-retail ratios will vary from product to product, and this formula will give you inaccurate results.
Retail Inventory Method Advantages and Disadvantages
The Retail Inventory Method is a quick way to calculate an estimated closing stock. But, there are several issues with it.
The Retail Inventory Method is only an estimate of your stock levels. It should not be used as an absolute measure of your true quantities.
The Retail Inventory Method will only work if you have the same markup for all products. If not, the Ending Cost may differ from what you calculated.
The historical basis of the markup (or discount) is the basis for calculating the present value. If the percent-off is different, then the result of the calculations will be wrong.
If the acquisition was made and the acquired company owns a significant amount of stock, then this method may not be appropriate. However, if the acquiring company is relatively small, then it may make sense to instead use the wholesale method of accounting.
Additional retail inventory method tips
If you’re planning on using the Retail Inventory Method, keep these tips in mind.
Always have the right data at your fingertips
The Retail Inventory Method requires pulling a few specific figures, such as your cost of goods sold, your starting stock, and your sales.
You need to have accurate numbers on hand to ensure that the calculation works for you. This means having a POS and retail management system with strong reporting and analytics capabilities.
Such a system can provide real-time data and help you make informed decisions about your inventory, pricing, and other important factors.
Your software should be able to produce real-time data and run the numbers quickly and easily.
If you’re a retailer with multiple stores, your solution should be able to show your data at both a macro and micro level. This way, you can get a big-picture view as well as see the details of what’s happening at each individual store.
Your stock management system should help you determine inventory values for one location or a group of stores.
Don’t abandon physical inventory counts
Don’t get us wrong, the retail inventory method can be a helpful tool for estimating your ending inventory value. But it’s important to remember that it’s just an estimate. It’s not a substitute for physically counting and reconciling your inventory.
It’s important to schedule physical inventory counts regularly. A full inventory count may require you to close your store or to count products after business hours.
If you’re not able to do a physical inventory count, then cycle counting is a good option.
Cycle counting is an effective way to keep track of your inventory levels continuously. By picking a group of products to count each day, you can systematically work through your entire catalog. This method is often preferable to conducting a physical inventory count all at once, as it allows you to more easily identify any discrepancies.
Use it as part of your overall stock management strategy
The Retail Inventory Method is a method of keeping track of your inventory. It is useful, but keep in mind that it is not a perfect system. Keep these pros and cons of the RIM in mind when using it.
If you want to make the most of the retail inventory method, it’s important to use it alongside other practices that will help you keep track of your stock. A retail management system and barcode scanner app can make stock reconciliation easy while keeping an eye on sales, stock, and inventory performance will help you identify any issues early on.
Regular physical inventory counts are also a good idea, as they can help you spot any discrepancies in your records.
What is the retail inventory method? The retail inventory method is a stock management strategy that can be used by retailers to effectively keep track of their inventory levels and costs. This guide has shown you how to calculate the cost of ending inventory using this method, as well as some advantages and disadvantages of using it. Overall, I believe that a retail inventory method is a valuable tool for any retailer looking to improve their stock management.