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Retail method On the basis of the following data, estimate the cost of the inventory at June 30 by the retail method:
Financial And Managerial Accounting
Solutions
Financial And Managerial Accounting
Retail method
On the basis of the following data, estimate the cost of the inventory at June 30 by the retail method:
Compute the estimated cost of merchandise inventory at June 30.
Explanation of Solution
Retail method
This method of estimating cost of inventory requires cost and retail prices to be maintained for goods available for sale. The ending inventory cost is estimated by converting ending inventory at retail using ratio of cost to retail price.
Firstly, the total merchandise available for sale at cost and retail prices is determined. Then ratio of cost to retail ratio is determined by dividing merchandise available for sale at cost by merchandise available for sale at retail. The ending inventory cost is estimated by multiplying ending inventory at retail by the cost to retail ratio.
Working note 1: Compute the merchandise inventory at retail price is calculated as follows:
| Â | Cost ($) | Retail ($) |
| Merchandise inventory, June 1 | 165,000 | 275,000 |
| Purchases in the month of June (net) | 2,361,500 | 3,800,000 |
| Â | 2,526,500 | 4,075,000 |
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