Background documentationRetail Method of Accounting

 

The traditional or classic retail method of accounting (RMA) is an averaging method that is still commonly practiced in the retail industry across multiple segments (fashion, grocery, hardlines) and in certain regions. It is a philosophy or mindset regarding tracking and calculating inventory information that drives margins, compensation, reporting, buying, pricing, and other merchandizing decisions. It was developed before the advent of perpetual inventory systems and remains in use today because of perceived advantages, tradition, merchant familiarity, and switching costs. Under RMA, inventory is managed primarily in retail dollars at aggregated levels, such as merchandise category or department. In retail, focusing on individual items can be challenging because of the large assortments and many stores, so the focus under RMA is to manage the category or department margin. Throughout the defined period, inventory transactions are collected into buckets (for example, purchases, sales, markdowns). The approximate ending inventory at cost (asset on the balance sheet), and cost of goods sold (expense on the income statement), are derived from applying a cost-to-retail ratio – or “cost complement” – to the retail value of the inventory reductions throughout the period. These results are calculated periodically and used as a basis for the subsequent period. See the example RMA calculation formula illustrated below:

This graphic is explained in the accompanying text.

Retail Method of Accounting is a traditional retail method and is used to value the inventory of many retailers. Inventory is managed at aggregated levels, such as, merchandise category or even department. It is more common in situations where there are many different types of merchandise at low unit cost with a large number of transactions. The current value of inventory is unknown until it is calculated periodically or at the end of the period, such as at the end of a month. Inventory is stated at cost on the books but that and cost of goods sold is derived from applying a cost-to-retail ratio to the retail value of the inventory. RMA provides the following possibilities for the customer:

  • Manage the inventory at retail at category or department level

  • Organize the inventory at retail

  • Plan, organize, and analyze the inventory at retail in dollars

  • Simplified support, planning, and tracking

  • Simplified assignment of certain calculated costs and the application of vendor reduction

  • Cost exchange

This new development effort builds a standard RMA solution that enhances the current solution and addresses several functional gaps. It will be rolled-out in multiple deliveries.

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