What is the Cost Ratio?

The cost ratio is the proportion of the cost of goods available to the retail price of those goods. The ratio is a component of the retail method, which is used to estimate the amount of ending inventory. This approach only works if a business maintains accurate cost records for its inventory. The concept is used by retailers.

What is the Retail Method?

The retail method is sometimes used by retailers that resell merchandise to estimate their ending inventory balances. This method is based on the relationship between the cost of merchandise and its retail price. To calculate the cost of ending inventory using the retail inventory method, follow these steps:

Calculate the cost-to-retail percentage, for which the formula is (Cost ÷ Retail price).
Calculate the cost of goods available for sale, for which the formula is (Cost of beginning inventory + Cost of purchases).
Calculate the cost of sales during the period, for which the formula is (Sales × cost-to-retail percentage).
Calculate ending inventory, for which the formula is (Cost of goods available for sale - Cost of sales during the period).