Retail Inventory Method (RIM or RMA)
In certain business operations, taking a physical inventory is impossible or impractical. In such a situation, it is necessary to estimate the inventory cost. (Figure 1) Two very popular methods are:
- Retail inventory method, and
- Gross profit (or gross margin) method.
The retail inventory method uses a cost to retail price ratio. The physical inventory is valued at retail, and it is multiplied by the cost ratio (or percentage) to determine the estimated cost of the ending inventory. Note that both the gross margin and the retail inventory methods can help you detect inventory shortages.
The advantage of this method is that companies can estimate ending inventory (at cost) without taking a physical inventory. Thus, the use of this estimate permits the preparation of interim financial statements (monthly or quarterly) without taking a physical inventory.
Because RIM only provides an approximation of inventory value, physical inventory must also be performed periodically to ensure the accuracy of inventory estimates due to issues such as shoplifting.
How to find the ending inventory with RMA
The steps for finding the ending inventory by the retail inventory method are:
- Total the beginning inventory and the net amount of goods purchased during the period at both cost and retail prices.
- Divide the cost of goods available for sale by the retail price of the goods available for sale to find the cost/retail price ratio.
- Deduct the retail sales from the retail price of the goods available for sale to determine ending inventory at retail.
- Multiply the cost/retail price ratio or percentage by the ending inventory at retail prices to reduce it to the ending inventory at cost.