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Merchandising Week 6
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Financial Merchandise Management Cost and Retail Methods of Accounting Merchandise Forecasting and Budgeting Process
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3 Source : Barry Berman, Joel R. Evans, Retail Management A Strategic Approach (11th Edition), Prentice Hall, 2010
specifies exactly which products are purchased when products are purchased how many products are purchased 2 kinds of controls:
Dollar control - involves planning and monitoring a retailers merchandise investment over a stated time period Unit control - monitors the quantities for merchandise handled during a stated time period
Dollar controls usually precede unit control, because the retailer must make dollar investment decision
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Retail inventory accounting systems can be complex since they involve a great amount of data There are two accounting systems cost accounting system values merchandise at cost plus in-bound transportation charges retail accounting system values merchandise at current retail prices In a profit and loss statement, the following information should be included:
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Profit-and-Loss statement
Sales less cost of goods sold: Beginning inventory (at cost) Purchase (at cost) Transportation charges Merchandise available for sale Ending inventory Cost of goods sold Gross profit Less operating expenses Net profit 1 2 3 4 (2+3+4)= 5 6 (5-6)=7 (1-7)=8 9 (8-9)=10
Profit-and-Loss statement
7 Source : Barry Berman, Joel R. Evans, Retail Management A Strategic Approach (11th Edition), Prentice Hall, 2010
each items cost is recorded when it is purchased, when it is sold, and when an inventory is conducted to determine total inventory value this method is good for firms whose turnover is low and sell the big-ticket items such as furniture can be used in i) determining physical (actual count) ii) book (record-keeping entries) inventories
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Inventory decrease = Closing inventory (End-of-month Inventory) (Monthly Sales) closing inventory of this month becomes the beginning inventory next month
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TOTAL
$205,900
$260,400
(as of 12/31/06)
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13 Source : Barry Berman, Joel R. Evans, Retail Management A Strategic Approach (11th Edition), Prentice Hall, 2010
Assume old merchandise is sold first, while newer items remain in inventory Assume new merchandise is sold first, while older stock remains in inventory
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Require that a cost be assigned to each item in stock Do not adjust inventory values to reflect style changes, end-of-season markdowns, or sudden surges of demand
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closing inventory value is determined by calculating the average relationship between the cost and retail value of merchandise for sale during the period overcomes the disadvantage of the cost method, but requires a detailed bookkeeping system ending inventory is first valued in retail dollars and then converted to cost in order to determine gross margins
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Calculating the cost complement Calculating deductions from retail value Converting retail inventory value to cost
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it is calculated by examining beginning inventory and purchase figures at both retail and cost levels cost complement = total cost valuation / total retail valuation
$299,892
$496,126
if it is 60.45%, it means that for each retail sales dollar , 19 an average of 60.45 cents is made on the merchandise cost
value
ending retail value of inventory must reflect all deductions from the total merchandise available for sale at retail
markdowns (e.g.. on sales , end-of-seasons, discontinued items) employee discounts stock shortages (e.g. pilferage, unrecorded breakage and spoilage etc)
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value
markdown and employee discounts can be monitored through book inventory, shortages cannot be assessed until a physical inventory is conducted. If book value exceeds the physical inventory, shortages exists So both shortages and overages are estimated monthly the retail book value is then adjusted after a physical inventory is taken
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ending inventory (at cost)= adjusted ending retail book value x cost complement $56,470 x 0.645 = $34,136 this is for the purpose of calculating the gross profit it is not the exact amt. but approximates
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Profit-and-Loss Statement
Sales Less cost of goods sold: Total merchandise available for sale Adjusted ending inventory ($56,470 x 0.645 ) Cost of goods sold Gross profit Less operating expenses: Salaries Advertising Rental Other Total operating expenses Net profit before taxes $ 70,000 25,000 16,000 28,000 139,000 $ 17,784
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$422,540
$299,892
Valuation errors are reduced when conducting a physical inventory since merchandise value is recorded at retail and costs do not have to be decoded Because the process is simpler, a physical inventory can be completed more often Profit-and-loss statement can be based on book inventory Method gives an estimate of inventory throughout the year and is accepted in insurance claims
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Bookkeeping burden Ending book inventory is correctly computed only if the following are accurate: Value of beginning inventory Purchases Shipping charges Markups Markdowns Employee discounts Transfers Returns Sales Cost complement is an average based on the total cost of merchandise available for sale and total retail value
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The merchandise categories for which data are gathered the units should be narrow enough to isolate opportunities and problems with specific lines of merchandise Record data on dollar allotments separately on each category can be set on the base of : Set up the merchandise classification -this includes skirts, pants, sweaters etc
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accurate sales forecast is very important statistical forecasting technique include trend analysis, time series analysis, and multiple regression and small retailers rely on guesstimates a storewide forecast is made and then broken down further external factors should be considered:
consumer demographic life-style trends competitors actions- what other store sells by doing comparison shopping state of the economy employment condition fashion factors
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after a 6 months sales is projected, it is broken into quarterly or monthly planning period a beat last years sales approach may be appropriate for the store as a whole, but it is not an appropriate method for individual category variable adjustment method - starts with an examination of the past sales history determine a % change that appears reasonable adjust the figure upward or downward by a degree that depends on the nature of the merchandise and its exposure and sensitivity to environmental influences Seasonal planned sales = last year (LY) sales x planned increase % determine the monthly sales by using the past record on the % distribution of sales by month
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Lawn movers/snow blowers Paint and supplies Hardware supplies Plumbing supplies Power tools Garden supplies/chemicals Housewares Electrical supplies Ladders Hand tools Total year
Sales by Month
Month January February March April May June July August September October November December Total yearly sales Average monthly sales Average monthly index Monthly Actual Sales ($) 46,800 40,864 48,000 65,600 112,196 103,800 104,560 62,800 46,904 46,800 66,884 94,792 840,000 70,000 100
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73,423 * 1.60 = 117,477 73,423 * 1.48 = 108,666 73,423 * 1.49 = 109,400 73,423 * 73,423 * 73,423 * 73,423 * .90 = .67 = .67 = .96 = 66,081 49,193 49,193 70,486 99,121 881,080 73,423
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73,423 * 1.35 =
inventory must be sufficient to meet sales expectations, allowing a margin for error avoid out-of-stock conditions guard against overstock conditions keep inventory investment at an acceptable level
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Basic stock (at retail) = Avg. monthly stock at retail- Avg. monthly sales =(73,423*1.10) - $73,423 =7,342 (want extra stock = 10% of its average monthly forecast) BOM (Jan) planned stock level (at retail ) = Planned monthly Sales + Basic stock =$49,193 + $7,342 = $56,535
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Beginning of month (BOM) planned inventory level (at retail) = Average estimated weekly sales x Number of weeks to be stocked
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It stimulates sales of slow-moving or inactive stock Dispose of broken assortments, discontinued lines and damaged or shopworn merchandise Provide additional OTB for the purchase of new merchandise Meet competitors' prices of the same or similar merchandise Increase customer traffic Markdown = Previous Price New reduced Price Markdown percent = Dollar markdown/Dollar Net Sales For advertising record, markdown % is referred as a reduction from original retail, but for internal record, 42 markdown percentage use net sales as the base
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44 Source : Barry Berman, Joel R. Evans, Retail Management A Strategic Approach (11th Edition), Prentice Hall, 2010
a retailer should study the following in planning total reductions for the budget period: past experience with reductions markdown data for similar retailers changes in company polices -a retailer expands its assortment of seasonal and fashion merchandise would probably lead to an increase in markdowns merchandise carryover from one budget period to another price trends stock-shortage trends - generally 1/4 of shortage is from clerical or handling error 45
after total reductions are determined, they must be planned by month because reductions as a % of sales would not be same during each month e.g. stock shortages may be much higher during busy periods, when stores are more crowded and transactions happened more quickly sell-through analysis should be carried out for markdown category - a comparison between actual and planned sales a check on retailer buyers estimation on: the demand schedule - how many units would be sold at a certain price
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Planned purchases (at retail) = Planned sales for the month + planned reductions for the month + Planned end of month stock - Beginning-ofmonth stock Planned purchase (at cost) =Planned purchases at retail x Merchandise costs as a % of selling price Open to buy (at retail) = planned purchase for the month purchase commitments for that month OTB (at cost) =OTB at retail x merchandise costs as a % of selling48 price
it maintains a specified relationship between inventory and planned sales is maintained, which avoids overbuying and under-buying it is better to keep at least a small OTB figure for as long as possible because: new lines or items may appear that the buyer wishes to purchase reorders may need to be placed to fill in staple stock or replace fast-selling items special promotions from vendors may become available sometimes an OTB limit must be exceeded due to underestimates of demand (low sales forecasts)
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Retail = Cost + Markup Required initial mark-up % =(Planned retail expenses + planned profit + planned reductions) / (Planned net sales + planned reductions) It is a companywide average Retailers do not apply the same markup % to all merchandise, individual items may be priced according to the demand and other factors, as long as the average is met A lower markup may be applied to promotional goods but a higher markup on exclusive or unique items Markup can be used for individual item but an average markup is determined by the total cost 50 and total retail
Sources
Chapter 15 & 16 - Barry Berman, Joel R. Evans, Retail Management A Strategic Approach (11 Edition), Prentice Hall, 2010 Chapter 10 - Lusch. Dunne, Carver, Introduction to Retailing, South-western (7th edition), Cengage Learning, 2011
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ENDS
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