What is Retail Inventory Method?
The retail inventory method is a technique used by retailers to estimate the cost of ending inventory by applying the cost-to-retail ratio to inventory measured at retail prices. It is widely used when physical counts are impractical between periods.
How It Works
- Calculate goods available for sale at both cost and retail.
- Compute the cost-to-retail ratio = cost of goods available ÷ retail value of goods available.
- Subtract sales (at retail) from retail goods available to get ending inventory at retail.
- Multiply ending inventory at retail by the cost-to-retail ratio to estimate ending inventory at cost.
- Reconcile the estimate with periodic physical counts to detect shrinkage.
Saudi Context
Saudi retailers reporting under IFRS may use the retail method as a costing technique under IAS 2 if results approximate cost. ZATCA examiners typically accept the method during VAT audits when supported by a robust inventory system and consistent application.
Example
Goods available at cost SAR 700,000 and at retail SAR 1,000,000 give a ratio of 70%. Sales for the period at retail are SAR 800,000, leaving ending inventory at retail of SAR 200,000. Estimated ending inventory at cost = 200,000 × 70% = SAR 140,000.