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# The Retail Inventory Method

Retail Inventory Method Overview

The retail inventory method is sometimes used by retailers that resell merchandise to estimate their ending inventory balances. This method is based on the relationship between the cost of merchandise and its retail price. It is not entirely accurate, and so should be periodically supplemented by a physical inventory count.

Retail Inventory Method Calculation

To calculate the cost of ending inventory using the retail inventory method, follow these steps:

1. Calculate the cost-to-retail percentage, for which the formula is (Cost ÷ Retail price).
2. Calculate the cost of goods available for sale, for which the formula is (Cost of beginning inventory + Cost of purchases).
3. Calculate the cost of sales during the period, for which the formula is (Sales × cost-to-retail percentage).
4. Calculate ending inventory, for which the formula is (Cost of goods available for sale - Cost of sales during the period).

For example, Milagro Corporation sells home coffee roasters for an average of \$200, and which cost it \$140. This is a cost-to-retail percentage of 70%. Milagro’s beginning inventory has a cost of \$1,000,000, it paid \$1,800,000 for purchases during the month, and it had sales of \$2,400,000. The calculation of its ending inventory is:

 Beginning inventory \$1,000,000 (At cost) Purchases + 1,800,000 (At cost) Goods available for sale = 2,800,000 Sales - 1,680,000 (Sales of \$2,400,000 x 70%) Ending inventory \$1,120,000