In: Accounting
Retail Inventory Method
Beginning Inventory | |
At cost | $100,000 |
At retail | $125,000 |
Net purchases | |
At cost | $300,000 |
At retail | $360,000 |
Net markups | $15,000 |
Net markdowns | $10,000 |
Net sales at retail | $280,000 |
Average cost per unit | $8.00 |
Average selling price per unit | $10.00 |
Using the gross profit inventory estimation method:
1. Compute gross profit on sales.
2. Compute cost of goods sold.
3. Compute the estimated cost of ending inventory.
Using the conventional (average LCM) inventory estimation method:
1. Compute the ending inventory at retail.
2. Compute cost-to-retail ratio.
3. Compute the estimated cost of ending inventory.
Solution : Gross profit inventory estimation method
1). Computation of gross profit on sales :
Average selling price per unit = $ 10
Average cost per unit = $ 8
Gross profit = $ 2
Gross profit (%) on sales = $2 / $ 10 X 100 = 20%
Hence it's cost of goods sold would be 80% of sales.
2). Cost of goods sold = Sales X 80%
= $ 2,80,000 X 80%
= $ 2,24,000
3). Estimated Cost of ending inventory = Cost of goods available for sale - Cost of goods sold
= $ 4,00,000 - $ 2,24,000
= $ 1,76,000
Working :
Cost of goods available for sale = Begning inventory at cost + Net purchases at cost
= $ 1,00,000 + $ 3,00,000
= $ 4,00,000
Conventional inventory estimation method :
1). Computation of ending inventory at retail :
Begning inventory at retail = $ 1,25,000
Add : Net purchases at retail = $ 3,60,000
Add: Net markups. = $ 15,000
Less : Net markdowns. = $ 10,000
_________________
$ 4,90,000
Less: Net Sales at retail. $ 2,80,000
_____________________
Estimated ending inventory $ 2,10,000
at retail
2). Computation of cost to retail ratio :-
Begning inventory at cost. = $ 1,00,000
Add: Net purchases at cost = $ 3,00,000
__________________
$ 4,00,000
Cost to retail ratio = $ 4,00,000 / $ 4,90,000 X 100 = 81.63%
3). Computation of estimated cost of ending inventory :
= Estimated ending inventory at retail x cost to retail ratio
= $ 2,10,000 X 81.63%
= $ 1,71,423