Estimation methods approximate inventory and COGS without frequent physical counts, useful for interim reports or losses (e.g., fire):
Uses historical gross profit rate to estimate COGS. Steps: (1) Calculate cost of goods available for sale (COGAS = beginning inventory + purchases); (2) Estimate COGS = net sales × (1 – gross profit rate); (3) Ending inventory = COGAS – COGS. Example: COGAS = $90,000, sales = $100,000, gross profit rate = 30%, COGS = $70,000, ending inventory = $20,000.
Use: Quick, confirms physical counts, not a substitute for actual counts.
Tracks goods at cost and retail prices, applying a cost ratio. For Ski Valley, COGAS cost = $450,000, retail = $1,000,000, cost ratio = 45%. Ending inventory at retail = $300,000, so cost = $300,000 × 45% = $135,000; COGS = $450,000 – $135,000 = $315,000.
Use: Common in retail, approximates average cost, adaptable to LIFO. Both methods save time but rely on assumptions (stable profit rates or ratios), making periodic physical counts still essential.