When Using The Retail Method Of Inventory Costing, The Ending Inventory Cost Is Estimated By

The correct option of this multiple choice (mcq) is a, as under retail method of inventory, we multiply the ending inventory at retail price by the cost-to-retail ratio in order to calculate the estimated cost of Ending Inventory (EI) without going into inventory details for physical counting. This method is suitable for businesses which have large volume of inventory.

The formula used for the calculation of ending inventory at cost under Retail Inventory Method (RIM) is divided into two parts which are shown below:

Ending Inventory At Retail = Retail Value of Goods Available For Sale - Net Sales

Now, multiply EI at retail price by cost-to-retail ratio as shown below:

Ending Inventory At Cost = Ending Inventory At Retail X Cost-To-Retail Ratio

Examples:

We have the following data to calculate EI at cost

Beginning Inventory (BI) = $5,000

Purchases at cost = $15,000

BI at Retail = $10,000

Purchases at retail = $30,000

Net Sales = $35,000

Here Cost price of goods available for sale = BI at cost + Purchases at cost = $5,000 + $15,000 = $20,000

Retail price of goods available for sale is BI at retail price + Purchases at retail price = $10,000 + $30,000 = $40,000

So,

EI at Retail = Retail price of goods available for sale - Net Sales = $40,000 - $35,000 = $5,000

Now, we need to calculate cost-to-retail ratio which is calculated as shown below:

Cost-To-Retail Ratio = Cost price of goods available for sale / Retail price of goods available for sale X 100 = $20,000 / $40,000 X 100 = 50%

Now EI at cost is shown below:

EI at cost = EI at Retail X Cost-To-Retail Ratio = $5,000 X 50% = $2,500

This is an estimated cost price of EI without taking physical count.

The other options (b, c and d) of this mcq are incorrect choices here.