Ending inventory estimation is a difficult task to carry out. Ending inventory is the amount of ending units of inventory at the end of a month or fiscal year.
There are two methods to calculate/estimate ending inventory:
- Gross Profit Method
- Retail Method
Gross Profit Method
Gross profit involves few steps to calculate ending inventory. Let’s describe all steps:
- Calculate Gross Profit: To calculate gross profit subtract the cost of a product from its selling price.
- Calculate Gross Profit Percentage: Divide gross profit with selling price to find out the gross profit percentage
- Calculate estimated cost of goods sold: Find out an estimated cost of goods by multiplying sales from last inventory with gross profit percentage
- Find out the assigned cost of goods sold: To calculate the assigned cost of goods sold add all sales from last period up to last ending inventory
- Calculate ending inventory: Subtract assigned cost of goods sold from the estimated cost of goods sold to find out ending inventory
Retail method is generally used by retailers to find value of ending inventory. This method is also constituted of following steps:
- Estimate the retail value of goods available for sale: To find out the retail value of goods available add the retail value of opening inventory with the retail value of purchased goods
- Subtract total sales from retail value of goods available for sale
- Find out the cost to retail price ratio: (cost of opening inventory + cost of goods purchased) / (retail value of initial inventory + cost of goods purchased during the period)
- Estimate cost of ending inventory: To estimate ending inventory multiply the subtraction value mentioned in the second point with the price ratio
This whole process requires a huge time, resource & cost input but it can be done easily by using cloud software. The best inventory management software is SlickAccount. It provides a complete inventory management solution.
Read more accounting terms here: https://blog.slickaccount.com/category/accounting-words/