What is the advantage of the retail method inventory?

Inventory helps ensure that an organization will have the right products available at the right time so consumers can make purchases on demand. An inventory system that has an accurate count can evaluate the monetary value of an organization’s inventory. The method of inventory management used by the organization can help assess the proper management of the organization’s inventory. Organizations use the retail inventory method to determine the ending inventory value in retail.

An inventory system provides an organization with a comprehensive account of available items and the monetary value of these inventory items. The retail price is the price the consumer pays when purchasing an inventory item. Therefore, the retail inventory method values the inventory according to this retail value. The retail inventory method evaluates the ending inventory or cost of goods sold for the organization. This inventory system also requires the organization to consider different factors such as discounts, sales, markups, markdowns and loss of inventory.

An advantage of the retail inventory method is that it does not require a physical inventory. The retail inventory method only requires an organization to record the retail prices of inventory items. If an organization has multiple locations in different cities and states, performing a physical inventory can become a costly and time-consuming undertaking. By using retail inventory, an organization can prepare an inventory for a centralized location. The retail inventory method also allows the organization to create an inventory value report for budgeting or the preparation of financial statements.

On the other hand, the retail inventory method is only accurate if all pricing across the board is the same and all pricing changes occur at the same rate. In most cases, this is not realistic in retail because of the many variations that exist in merchandise pricing. For example, depreciation, markdowns, product damage and theft can affect the price of the retail inventory. For this reason, any calculations made using the retail inventory method should serve only as an estimate.

The retail market changes constantly, and no organization can accurately predict how consumers will behave. Basing the value of inventory on the retail inventory method is, therefore, more of an educated guess than an exact science. Using this method, organizations will find that it is not possible to fully account for many inventory items such as unrecorded markdowns, returns, merchandise waiting approval, merchandise in transit and unsold merchandise. This makes the retail inventory method unreliable for many organizations.