5.6 Retail Method

Retail Method of Inventory Valuation

The retail method is a simplified inventory valuation technique primarily used by retail stores that deal with a large volume of diverse items.

Key Characteristics:

• Simplified Approach: Suitable for businesses where detailed physical inventory counts and individual cost tracking are impractical.
• Focus on Retail Value: Primarily relies on the retail value of inventory (selling price) rather than cost.
• Gross Margin Percentage: Calculates the cost of goods sold based on the estimated gross margin percentage.

Example:

• Opening stock (cost): 20 lakhs
• Purchases (cost): 300 lakhs
• Sales revenue: 280 lakhs

• Gross margin percentage: 5%

• Cost of goods sold: 280 lakhs - (280 lakhs * 5%) = 266 lakhs

• Ending inventory: 20 lakhs (opening stock) + 300 lakhs (purchases) - 266 lakhs (cost of goods sold) = 54 lakhs

Limitations:

• Assumes Uniform Gross Margin: The accuracy of the method relies on the assumption that the gross margin percentage is consistent across all product lines. This assumption may not always hold true.
• Approximation: The retail method provides an estimate of the cost of goods sold, not the exact value.