CA Foundation · Accounting · Inventories
As per AS 2, the retail method of measuring the cost of inventories is most appropriate for:
The retail method suits a retail business holding a large number of rapidly changing items with similar margins, where other costing methods are impracticable. The cost is found by reducing the selling price of stock by an appropriate gross margin percentage. It does not suit unique goods or items with widely differing margins.
- AA jeweller dealing in a few unique, high-value ornaments, each with a different margin
- BA large retail store with a big number of rapidly changing items having similar margins, where other costing methods are impracticableCorrect
- CA shipbuilder whose goods are produced to customer specification over several years
- DA manufacturer whose raw material is bought under long-term contracts at fixed prices
Explanation
AS 2 says the retail method is often used in the retail trade to measure inventories of a large number of rapidly changing items that have similar margins and for which it is impracticable to use other costing methods. It is unsuitable for unique items with differing margins or for made-to-order production.
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