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The retail inventory method 101: Principle, applications, and calculator included

21 Jul, 2022 | Business Tips

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Retailers use the retail inventory method (RIM) as an accounting method to estimate the ending inventory balance for reselling purposes. This method is an approximation of the ending inventory derived from the cost of inventory relative to the cost of merchandise. This is popular with retailers since it saves the labor costs of doing frequent inventory counts. We’ll explore the conceptual background of RIM, its formula, and its applications. 

 

Conceptual understanding of RIM

In simple words, RIM is the approximation of costs constituting the retail price of goods available for sale. It uses the historical cost percentage markup of the inventory items to assign cost-to-retail price relationships. This method relies on a consistent purchase price of the item. For instance, if you’re selling avocado face masks, their purchase price in the previous sales period and the current sales period should remain the same in order to get accurate results. 

Beginning inventory and new purchases are summed to get the total cost of goods available for sale. The total sales in the given period are deducted from this figure, and the resulting amount is multiplied by the cost-to-retail ratio. In this method, there is no physical count of the inventory. The figure is used when an inventory management system isn’t used. 

Here’s a RIM calculator:

Ending inventory

Just fill in the boxes to get the estimated ending inventory balance using DEAR System’s online RIM calculator.

 

Example of applying RIM

Consider the case of the avocado face mask:

  • Cost price after paying for branding work on a white-labeled product: $20.
  • Retail selling price: $35.
  • Cost-to-retail ratio: 57%.
  • Beginning inventory for the sales period: $3,500.
  • New purchases: $10,500.
  • Total sales for the period: $7,700.
  • Cost of goods available for sale: $14,000.
  • Ending inventory: $9,600.

Thus, this method gives an approximation for ending inventory without manually counting the products.

 

Limitations of RIM

RIM is widely used and is approved by the Generally Accepted Accounting Principles (GAAP), but there are a few limitations. Here are some disadvantages of RIM: 

  • The figures obtained through RIM can’t be used for generating financial statements.
  • This method requires the cost price and selling price to remain constant between sales periods to stay valid.
  • The need for a physical inventory count can’t be completely removed.
  • It doesn’t take inventory shrinkage into consideration.

 

RIM is useful for following use cases

Here are some scenarios where RIM is useful in commercial organizations:

  • Wholesalers dealing in large volumes of similar products with a consistent markup for all products being considered.
  • Warehouses and storage facilities with low inventory turnover.
  • Businesses with accurate demand forecasting and long-term price negotiated deals.
  • Firms with hedge contracts for supplied materials and sold items.

 

Try DEAR Systems to manage your retail inventory

To ease your inventory counting and stocktaking process, try DEAR Systems. It’s a cloud-based retail inventory management software that will help you track your inventory in real time. This way, you’ll get an accurate representation of your available inventory, so you can place purchase orders efficiently. 

DEAR Systems also comes with a barcode scanning feature to reduce your stocktaking time. Instead of manually counting and adding inventory, you can simply scan it, and it’ll be recorded in the system.

If you’re interested in boosting your retail business’ efficiency with DEAR Systems, book a free demo session with our experts today.

 

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