Colonial uses the retail method to estimate its monthly cost of goods sold and month-end inventory. At 31 August, the accounting records indicate the cost of goods available for sale during the month (beginning inventory plus purchases) totaled $270,000. These goods had been priced for resale at $675,000. Sales in August totaled $450,000. The estimated inventory at 31 August is:

Question

Quizplus · Accepted Answer

To estimate the month-end inventory using the retail method, we need to calculate the cost-to-retail percentage (i.e., the ratio of the cost of goods available for sale to the selling price of these goods) and multiply it by the estimated ending inventory at retail.

Cost-to-retail percentage = Cost of goods available for sale ÷ Retail price of goods available for sale 
Cost-to-retail percentage = $270,000 ÷ $675,000 = 0.4 or 40%

Estimated ending inventory at retail = Retail price of goods available for sale - Sales in August 
Estimated ending inventory at retail = $675,000 - $450,000 = $225,000

Estimated ending inventory at cost = Estimated ending inventory at retail × Cost-to-retail percentage 
Estimated ending inventory at cost = $225,000 × 0.4 = $90,000

Therefore, the estimated inventory at 31 August is $90,000 (choice B).

Colonial Uses the Retail Method to Estimate Its Monthly Cost