Retail Inventory Method: Definition, Calculation, and Example

While consistent mark-ups sound nice in theory, the reality is, they rarely come to fruition since different mark-ups happen in response to market fluctuations. Because the RIM assumes the previous mark-up percentage will remain true for the current selling period, any changes to this mark-up (i.e. post-holiday markdowns) will cause major inaccuracies in the calculations. This issue is not one to be overlooked, and should instead be met with careful consideration. It is important to remember the retail inventory method provides estimations, not concrete data.

• Finally, recognize that the retail inventory method is a technique that should be used as part of a larger inventory management and retail success strategy.
• Retailers can use the retail inventory method to get a quick estimate of their inventory value without having to do a time-consuming physical inventory count every time period.
• These insights likely include identifying trends with inventory costs and buying patterns — information that will largely influence the way your business scales.
• Because your older inventory has already been sold and shipped out, your newer products remain on your warehouse shelves.
• The retail inventory method is also known as the retail method and the retail inventory estimation method.

The retail inventory method is often used by retailers who are short on time, since this is a helpful strategy to estimate their merchandise value on the fly. The best way of making sure you don’t run out of products or lose any money is by mastering the retail inventory method. If your products consistently have the same cost-to-retail ratio, meaning your product markups are mostly the same across all your merchandise, the retail inventory method is a reliable solution.

Retail Inventory Method: A How-To Guide

It also helps you forecast inventory and demand more accurately, so you can make the most informed decisions and optimize inventory purchasing and budgeting. Whether or not to use the retail inventory method largely depends on the type of business you run. In this article, we’ll discuss what the retail inventory method is, how to use it, and how to calculate it. As a retailer, you’re hurtling towards growth — you have hundreds of customers, and thousands of units of inventory in storage. Production orders are a necessary yet sometimes tricky part of running a DTC business.

And when your inventory value is low, it’ll free up more working capital, which you can use to invest in product development, marketing campaigns, or wherever else you see fit. You can preserve https://accounting-services.net/retail-method-of-inventory-costing/ optimal inventory levels by ordering only what you need to meet demand. This, in turn, keeps your inventory value low (without the inventory risk of being unable to meet customer expectations).

Free Templates to Better Understand Your Inventory

Below, we’ll walk you through each piece of information, and apply it to an example. Having a handle on your inventory is an important step in managing a successful business. As you get closer to your reorder point, Cogsy will automatically send you a replenish alert, reminding you it’s time to (re)stock your shelves. Thanks to these reliable alerts, you can feel confident you’re ordering the right products at the right time to avoid a stockout.

Weighted average cost (WAC) helps to calculate the average cost of your inventory per unit. Cost of sales (COS) is the amount spent on products purchased from a supplier. Meaning, it’s only used by companies who do not manufacture their own inventory. For example, if your sneaker brand marks up every pair of shoes by 100% of the wholesale price, you could successfully use the retail inventory method.

1 Retail inventory method overview

This method is based on the relationship between the cost of merchandise and its retail price. The method is not entirely accurate, and so should be periodically supplemented by a physical inventory count. Its results are not adequate for the year-end financial statements, for which a high level of inventory record accuracy is needed. While the retail inventory method can give an estimate on your ending inventory balance, it cannot guarantee complete accuracy. That’s why it’s necessary for retailers to cross-check if the RIM is right, by using another form of inventory accounting.

To ensure that the calculation works for you, you need to have the most accurate numbers on hand. So equip your business with a POS and retail management system that has strong reporting and analytics capabilities. To avoid stalling operations, many retailers rely on the retail inventory method to account for their inventory. While not identical to a physical count, the retail inventory method can help retailers get an idea of how much inventory they have without getting bogged down counting every unit. All in all, the retail inventory method has several stipulations that make it difficult to rely on.

reasons to use a retail inventory method alternative

Now it’s time to calculate your cost-to-retail percentage, which can be found by dividing the cost of goods sold by retail price. Based on your POS reports, the average cost of goods sold for a pair of jeans in your store is $20. These retail analytics reports also inform you that the average retail price at which you sell jeans at your shop is $80. Therefore, retailers should not use the retail inventory method as a replacement for manual inventory counts, and only use it when a rough estimate is needed quickly.

The retail inventory method calculates the ending inventory value by totaling the value of goods that are available for sale, which includes beginning inventory and any new purchases of inventory. The difference is multiplied by the cost-to-retail ratio (or the percentage by which goods are marked up from their wholesale purchase price to their retail sales price). One of the most substantial drawbacks of the retail inventory method is that the numbers are just estimates, nothing more.