# Retail Method of Inventory Estimation

Retail method is a technique used to estimate the value of ending inventory using the cost to retail price ratio. Retail method involves the following steps:

1. Determine the retail value of goods available for sale during the period by adding the retail value of beginning inventory and retail value of goods purchased.
2. Subtract total sales during the period from the retail value of goods available for sale.
3. Calculate the cost to retail price ratio (formula given below).
4. Multiply the difference obtained in 2nd step and the cost to retail ratio to obtain estimated cost of ending inventory.

Cost to retail ratio is calculated using the following formula:

 Cost to Retail Ratio = A + B C + D

Where,
A is the cost of beginning inventory;
B is the cost of inventory purchased including incidental costs such as freight-in;
C is the retail value of beginning inventory; and
D is the retail value of goods purchased during the period

The formula given above implies that records of a business using the retail method must show the beginning inventory both at cost and at retail price. Since such information is readily available to retail merchandising businesses, retailers commonly opt to use retail method to estimate the value of ending inventory.

## Example

 Cost Retail Beginning Inventory \$36,000 \$46,000 Purchases \$140,000 200,000 Freight-In \$8,160 Packing Cost \$5,440 Cost of Goods Available for Sale \$189,600 \$246,000

Cost to Retail Ratio
= \$189,600 ÷ \$246,000
= 0.7707

 Cost Retail Cost of Goods Available for Sale \$189,600 \$246,000 − Sales \$198,000 Ending Inventory \$48,000 × Cost to Retail Ratio 0.7707 Ending Inventory \$36,994