Standard cost and retail methods

Learning objectives

• Explain that the standard cost method and the retail method may be used if the results approximate cost, with standards reviewed regularly.L2
• Calculate the cost of inventories using the retail method (sales value less the appropriate percentage gross margin, taking markdowns into account).L2, L3

Normative references

• IAS 2 §21Techniques for the measurement of cost, such as the standard cost method or the retail method, may be used for convenience if the results approximate cost. Standard costs take into account normal levels of materials and supplies, labour, efficiency and capacity utilisation; they are regularly reviewed and, if necessary, revised.
• IAS 2 §22The retail method, often used in the retail industry for large numbers of rapidly changing items with similar margins, determines cost by reducing the sales value of the inventory by the appropriate percentage gross margin. That percentage takes into consideration inventory that has been marked down to below its original selling price; an average percentage for each retail department is often used.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

8 questions

• Plasturgie du Vercors measures its finished goods using the standard cost method. This technique is permitted for convenience if its results approximate cost, and the standards must be regularly reviewed and revised where necessary.L2
• Ferronnerie Valmont sets standard costs for its steel gates, which it uses to measure its finished goods inventories. On what basis must those standards be set?L2
• Comptoirs Sauvelin, a chain of convenience stores, is considering measuring its inventories using the retail method. Which statements are correct?L2
• The DIY store Bazar Ondine applies the retail method to its tools department, whose items turn over quickly and have similar margins. At 31 December 20X1, the counted inventory is valued at {retail_value} at the displayed selling prices. The appropriate gross margin percentage of the department, which takes into account items marked down, is {gross_margin} of the selling price (case data). The method is assumed to give a result that approximates cost. Calculate the cost of the department's inventory.L2
• The bookshop and stationer Hespéride measures the inventory of its school supplies department, made up of many fast-moving items with comparable margins, using the retail method. The year-end physical count, taken at selling prices, totals {shelf_value}. Management has determined for this department a gross margin rate of {margin_rate} of the selling price, markdowns included. Assuming that this technique gives a reliable approximation of cost, what is the cost of the school supplies inventory?L2
• Galeries Morvane applies the retail method department by department. At 31 December 20X1, the inventory of the delicatessen department is valued at {grocery_retail} at selling prices, with an appropriate gross margin percentage of {grocery_margin}; that of the perfume department is valued at {perfume_retail}, with a percentage of {perfume_margin}. These percentages, determined by the entity, take markdowns into account. The average margin of the whole store is 38%. Calculate the cost of each department's inventory and the total cost.L3
• The home decoration retailer Maison Tilleul measures its inventories using the retail method. Its management accountant proposes applying a single margin rate to the whole inventory; however, the household linen department earns a gross margin of {linen_margin} and the tableware department a margin of {tableware_margin}, these rates taking markdowns into account. Year-end inventory represents {linen_retail} of sales value for linen and {tableware_retail} for tableware. Determine the cost of each department's inventory, then the total cost, applying to each its own percentage.L3
• Atelier Corbières measures its furniture inventory using the standard cost method. The standards have not been reviewed for three years; in the meantime, timber prices have risen by 25% on a lasting basis. At the reporting date, the furniture in inventory amounts to 410,000 at standard cost, whereas its estimated actual cost, under current normal conditions, is 520,000. What should the entity do?L2