Retail (RIM) vs Cost (CMA) – which method is “right” for your business?



It is not uncommon for Retail companies to go back and forth between the merits of cost and retail method of accounting (but not to make frequent changes to their accounting methods….) The question of which is the “best” method continues to be a topic of debate.  Technology has come a long way, tracking inventory at both cost andretail but how to decide when to use retail vs cost?
Understanding the fundamental differences between the two methods will support the Retailer’s decision and help them choose the method most appropriate for their particular business model.

Inventory tracking with the retail method is at a level higher than SKU, usually department and category or class, whereas the cost method assigns a true cost (usually weighted average) to each individual selling SKU.  In the retail method inventory valuation at both retail and cost is impacted by markdowns/markups. The price change decision has an immediate impact. In the cost method, there is no cost of recording markdowns, hence the cost value of the inventory remains unchanged. The “hit” so to speak takes place in the future, sometimes slowly as product sells down.

Cost Method
The cost method assigns a cost to sales based on the actual cost or sometimes weighted average of each individual SKU.  The cost remains the same no matter what the market value is or when markdowns are taken.


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