Retail Method
• Weighted Average
• FIFO
• Conservative/ Lower of Cost and Market
GOAL: ESTIMATE ENDING INVENTORY / COST OF
GOODS SOLD
Weighted Average Cost Formula
Total Goods Available for sale at cost
Total Goods Available for Sale at Sales
Price/Retail
IMPORTANT TERMS
a) Beginning Inventory
b) Net Purchases
(Purchases + Freight- in – Purchase Discount – Purchase Returns )
c.) Departmental Transfer In ( Debit ) and
Transfer Out ( Credit )
d.) Net Markups / (Markdowns) * only @ retail
(Markup – Markup cancellation or Markdown- Markdown cancellation)
FORMULA FOR COMPUTING COST OF GOODS
AVAILABLE FOR SALE - COST
BEGINNING INVENTORY
+ NET PURCHASES
+ DEPARTMENTAL TRANSFER IN
- DEPARTMENTAL TRANSFER OUT
- ABNORMAL SPOILAGE
COST OF GOODS AVAILABLE FOR SALE - COST
FORMULA FOR COMPUTING COST OF GOODS
AVAILABLE FOR SALE - RETAIL
BEGINNING INVENTORY
+ NET PURCHASES
+ NET MARKUPS
- NET MARKDOWNS
+ DEPARTMENTAL TRANSFER IN
- DEPARTMENTAL TRANSFER OUT
- ABNORMAL SPOILAGE
COST OF GOODS AVAILABLE FOR SALE - RETAIL
Computing for “ net sales “
Sales
(Sales Returns)
+ Employee Discounts
+ Normal Spoilage
Net Sales
Treating for Abnormal Spoilage
DEDUCT FROM BOTH COST AND RETAIL
DIFFERENCE IF CONSERVATIVE APPROACH
/LOWER OF COST OR MARKET
• Do not Include Markdowns for computing the
cost ratio.
Total Goods Available for sale at cost
Total Goods Available for Sale at Sales
Price/Retail less Markdowns
DIFFERENCE IF FIFO METHOD
• Do not Include Beginning Inventory ( Both for
Cast and Retail ) for computing the cost ratio.
Total Goods Available for sale at cost
less Beginning Inventory at cost
Total Goods Available for Sale at Sales
Price/Retail less Beginning Inventory at Retail
TOTAL GOODS AVAILABLE FOR SALE XXX
NET SALES XXX
ENDING INVENTORY AT RETAIL XXX
X AVERAGE COST RATIO XX
= ENDING INVENTORY AT COST XXX
SAMPLE PROBLEM :
The following information relating to inventory was gathered :
Cost Retail
Beginning Inventory 190,000450,000
Purchases 2,990,000 4,350,000
Purchase Discounts 40,000
Freight-in 150,000
Mark-ups 300,000
Markdowns 400,000
Sales 4,400,000
Sales Return 100,000
Sales Discount 50,000
Sales Allowance 30,000
Compute for the Ending Inventory using:
FIFO
WEIGHTED AVERAGE
LOWER OF COST AND MARKET
* Compute for NET SALES
Sales 4,400,000
Sales Return (100,000)
Net Sales 4,300,000
FIFO Retail Method
FIFO
Cost Retail
Beginning Inventory 190,000 450,000
Purchases 2,990,000 4,350,000
Purchase Discounts ( 40,000)
Freight-in 150,000
Mark-ups 300,000
Markdowns (400,000)
NET PURCHASES 3,100,000 4,250,000
Cost Ratio * 3,100,000/ 4,250,000 = 73 %
Goods Available for Sale 3,290,000 4,700,000
Net Sales (4,300,000)
Ending Inventory Retail 400,000
Ending Inventory - cost 400,000 x 73% = 292,000
Weighted Average Method
Weighted Average Method
Cost Retail
Beginning Inventory 190,000 450,000
Purchases 2,990,000 4,350,000
Purchase Discounts ( 40,000)
Freight-in 150,000
Mark-ups 300,000
Markdowns (400,000)
Goods Available for Sale 3,290,000 4,700,000
Cost Ratio * 3,290,000/ 4,700,000 = 70 %
Net Sales (4,300,000)
Ending Inventory Retail 400,000
Ending Inventory - cost 400,000 x 70% = 280,000
Conservative Approach/ Lower of
Cost and Market
Conservative Approach/ Lower of Cost and Market
Cost Retail
Beginning Inventory 190,000 450,000
Purchases 2,990,000 4,350,000
Purchase Discounts ( 40,000)
Freight-in 150,000
Mark-ups 300,000
3,290,000 5,100,000
Cost Ratio* 3,290,000/ 5,100,000 = 65%
Markdowns (400,000)
Goods Available for Sale 3,290,000 4,700,000
Net Sales (4,300,000)
Ending Inventory Retail 400,000
Ending Inventory- cost 400,000 x 65% = 260,000
