Retail Inventory-Level Planning

Retail Inventory-Level Planning consists of retail inventory method (RIM) which is an accounting procedure whose objectives are to maintain a perpetual. It also can book inventory in retail dollars amounts and to maintain records that make it possible to determine the cost value of the inventory at any time without taking a physical inventory. Also known as book inventory system or perpetual book inventory. Retailers also have another important choice to make the stock to sales ratio. The stock to sales ratio is derived directly from the planned inventory to determine monthly additions to stock in the merchandise budget plan.

Retailers generally think of their inventory at retail price levels rather than at cost. Retailers use their initial markups, additional markups, and markdowns, and so forth as percentages of retail. When retailers compare their prices to competitors’, they use retail prices. The problem is that when retailers to design their financial plans, evaluate performance, and prepare financial statements, they need to know the cost value of their inventory. Retailers use physical inventories. This process is time consuming and costly. Retailers take physical inventories once or twice a year.

Many retailers use point of sale terminals that keep track of every item sold its original cost, and its final selling price. The rest of the retailers face a problem of not knowing the cost value of their inventory at one time. These retailers with either computerized or manual systems can use retail inventory method.

Their are five advantages for using RIM over a system of inventory at cost. The does not have to “cost” each time. When retailers have many SKUs, keeping track of each item becomes difficult and expensive. It is easier to determine the value of inventory with the retail prices marked on the merchandise than unmarked or at coded cost prices.

The second advantage for using RIM is that it follows the accepted accounting principal of valuing assets at cost or market value, which is lower. This system lowers the value of inventory when markdowns are taken but does not allow inventory’s value increase with additional markups.

When using RIM, the amounts and percentages of initial markups, markdowns, and shrinkage can be identified. This information can then be compared with historical records or industry norms.

RIM is useful for determining shrinkage. The difference between the book inventory and the physical inventory can be attributed to shrinkage.

The book inventory determined by RIM can be used in an insurance claim in case of a loss.

The disadvantages of RIM are system that uses average markup. When markup percentages change during a period or when the inventory on hand at a particular time is not representative of the total goods handled in terms of markup, the resulting cost may be distorted. The inventory turnover, merchandise budget planning, open to buy, all these should be applied to the RIM category basis to avoid the problem.

There are four steps in when calculating RIM. Calculate total goods handled at cost and retail, calculate retail reductions, calculate the cumulative markup and cost multiplier, and determine ending book inventory.

Calculating the total goods handled in at cost and retail to determine the total goods handled at cost and retail:

1. Record beginning inventory at cost and at retail. The initial markup is reflected in the retail inventory.

2. Calculate net purchases by recording gross purchases and adjusting for merchandise returned to vendor.

3. Calculate net additional markups by adjusting gross additional markup cancellations. Note: These are recorded only at retail because markups affect only the retail value of inventory.

4. Record transportation