Merchandise Budget III

Merchandise Control

Estimating Monthly
Reductions
Markdowns are part of merchandising,
particularly in apparel or fashion lines
impossible to match all consumers
needs with certainty with respect to sizes
and styles.
Employee discounts are important in
building selling confidence in
merchandise.
Shortages, such as errors in recording
sales, receiving goods, recording
markdowns, employee theft, and

Reductions
Historically, department store
reductions (markdown, discounts)
exceed specialty store reductions
(NRMA statistics).
Initial markon, or initial markup
percentage must cover reductions:
(Gross margin $s + Markdowns $s)
(Net sales $s + Markdowns $s)
Determine the dollar amount, and
then allocate to various months,

Retail Inventory Method

Retailers must maintain accurate
records of inventory investments,
such as a perpetual book inventory.
Practicality and conservative
approach.
Pre-established initial mark-up and
cost-complement (cost-multipliers),
procedures.

As markdowns become a
larger part of the business,

Inventory Movements Tracked at Retail at Initial Markup

Total Goods Handled

Cost

Retail

Beginning inventory
$ 40,000
$
70,000
Purchases
144,000
240,000
- Returns
(6,000)
(11,000)
Net Purchases
138,000
229,000
Transfers in
2,000
3,200
- Transfers out
(3,000)
(4,800)
Net Transfers
(1,000)
(1,600)
Freight in
3,000
Markups
1,400
- Markup cancellations
(400)
Net Markups
1,000
Total Goods Handled
$180,000
Initial
markon = $300,000 180,000 =$120,000
$300,000

or 40%

In-Season Adjustment to Inventory All Completed at

Retail, or at the Sales Register
Total Goods Handled

Cost

Gross Sales
- Consumer Returns
& Allowances
Net Sales
$230,000
Markdowns
- Markdown Cancellation
Net Markdown
18,000
Employee Discounts
2,000

Total Reductions to Inventory

$250,000

Retail
$240,000
(10,000)

20,000
(2,000)

Applying the Cost Multiplier,

Cost Complement, Cost to Retail Ratio
Cumulative Markon =

(total retail - total cost) / total retail:

($300,000 - $180,000) / $300,000 = 40%

The Cost Multiplier =

total retail -cumulative markon

(100% - cumulative markon%) =60%

Ending book
inventory at retail

= total goods handled at retail - total

reductions: $300,000 - $250,000 = $50,000

Ending book
inventory at cost

= ending book inventory at retail x cost

multiplier: $50,000 x 60% = $30,000

Components of Retail
Inventory
Markon, initial % markup
Reductions: Markdowns, discounts,
and shortages.
Cost complement (cost multiplier)
Public Accounting Firm Audit

Initial Markup & Cost

Complement
A retailer with a maintained margin
(gross margin) of 35%, has planned
sales of $230,000 for a season, with
total reductions (markdowns) of
$20,000.
What is the retailers initial markup %
?

What
is the cost complement, cost
multiplier?

Sample Test Question 1

A department store has planned
sales of $500,000, with $300,000 in
gross margins for a season, and
expects no markdowns.
What is the retailers initial markup
%?

Sample Test Problem 2

A retailer with a maintained margin
(gross margin) of 25% has planned
sales of $400,000 for a season, with
total reductions (markdowns) of
$50,000.
What is the retailers initial markup
%?
What is the retailers cost

Sample Test Question 3

A department store forecasts gross
margins $70,000 on planned sales of
$180,000 for a season, with total
reductions (markdowns) of $20,000.
What is the retailers initial markup
%?

Sample Test Question 4

A retailer adds $120,000 markon to
goods that cost the retailer
$180,000. What is the initial markup
%?
What is the retailers cost
complement?
If markdowns of $60,000 are needed
to sell all the goods, what are the net

Sample Test Question 5

A department store with a
maintained margin (gross margin) of
40% has planned sales of $500,000
for a season, with total reductions
(markdowns) of $100,000.
What is the retailers initial markup %
?

Decentralized Inventory
Retail Inventory should be in the
storesnot in distribution centers
If inventory were in a single location,
tracking inventory movement, or
costing out each sale, might not be
a problem, such as at an auto
dealership.
Consider if you had highly trained
specialists versus the reality of highly
untrained generalists.

Markdowns
Frequency of
Early markdowns
Markdown cancelations
Additional mark-ons for price increases
Vendor mark-down money for close out

Without markdowns, or highly

frequent markdowns, the RIM is less
important.
A source of negotiation between
buyer and seller.

Self-Serving Reasons for

Markdowns
Markdowns provide motivations to
move obsolete merchandise.
Markdowns are usually associated
with advertisements, or announced
events.
Markdown money provides a
reason for negotiations between a
buyer and seller.
Markdown money provides an
incentive to new sellers (or

Stock-to-Sales Ratios
Ratio of inventory (at retail) to
monthly planned sales.
The inverse of a one-month
turnover ratio.
Historical ratios are maintained
to keep store in-stock of
merchandiseprovided to
buyers, or embedded in
software.

Basic Stock Method

Basic Stock is an inventory amount
added to planned sales and
reductions to create a BOM Inventory.
The difference of two components:
Average stock: (Total sales
+reductions)/turnover

Average monthly sales: (Total sales

+reductions)/months

Basic Stock Method

Calculations for a six month
merchandise budget
BOMstock Basic stock (Planned monthly sales reductions )
Basic stock Average stock season - Average monthly sales
Total planned sales reductions 146,500
Average stock

78,000
Targettur nover rate
1.88
146,500
Ave. monthly sales
24,416
6
Basic stock 78,000 - 24,416 53,564or54,600

BOMstock Basic stock (Planned monthly sales reductions )

Basic stock Average stock season - Average monthly sales
Total planned sales reductions
Average stock
Targettur nover rate
146,500

78,000
1.88
146,500
Ave. monthly sales
24,416
6
Basic stock 78,000 - 24,416 53,564or54,600

54,600isaddedtoeachmonthsprojectedsales+reductions
tocreateBOMinventory

Cautions: Stock-to-Sales
Ratios
Retailer specific
Reported as averagesa retailer
does not mind sharing their ratios as
it does not have divulge planned
sales nor dollar amounts of inventory
at retailer.
The multiplier effects will
exaggerate any anticipated shifts
in planned sales without
readjustments for the season.

Stock-to-Sales Ratios
Ratio of inventory (at retail) to monthly
planned sales.
The inverse of a one-month turnover ratio.
Historical ratios are maintained to keep
store in-stock of merchandiseprovided to
employees, or embedded in software.
Once widely reported measure of
inventory levels (National Retail Federation
surveys) for benchmarking.

Merchandise Control
Process of collecting and evaluating data
on all aspects of each retail merchandise
category, including sales, costs, shrinkage,
profits, and turnover. Control is achieved
through the maintenance of an inventory
book where all data are evaluated.
The determination and direction of
merchandising activities, both in terms of
dollars (dollar control) and in terms of
units (unit merchandise control).
Control begins with a plan, and for the
merchandise category this begins with the

Merchandise Budget
Provide the plan for determining
store inventorieswhat inventories
should be.
Purchases and shipments of goods to
stores are required to follow this
plan.
Reductions to inventory, sales,
returns, markdowns, and discounts
are tracked with regard to the plan.
Shortages are deviations from the

Cost Complement
Used to convert EOM Inventory
from Merchandise Budget
(@retail) to cost
Initial markup=45%,
Cost complement=55%

Turnover: Retail versus Cost

A retailers 6 month budget has
planned sales for season of
$200,000, a maintained margin of
30%, an average EOM inventory of
80,000 and an initial markup of 45%.
By estimating markdowns, what is
the turnover for period?
Using cost of goods sold, what is the
turnover for the period?

 Initial markup = (Gross margin +

markdowns)
(Planned sales + markdowns)

Cost complement = 1 Initial

markup
Cost of goods = 1 - Maintained
markup (gross margin)

Turnover = Planned/Inventory@retail

Estimate markdowns and

determining turnover

Grossmargin markdowns
Initial markon45%
Sales markdowns
60,000 x
.45
;
200,000 x
(.45 200,000) .45 x 60,000 x
30,000 .55 x;
54,545 markdowns
200,000 54,545 254,545
Turnover

3.18
80,000
80,000

Turnover is identical to cost

method

Costof goods sold

Turnover
Inventory @cost

Costof goods sold Netsales -gross margin

Inventory @cost Inventory @retail * Costcomplement
200,000 - 60,000 140,000

3.18
80,000 * .55
44,000

Seasonality: Why We Need a

Buying Process
If demand were predictable
If demand didnt change with style
and fashion trends
If there was no complications due to
reductions
If there werent differences among
suppliers to changing styles or
demand
If there was no differences among
competitors

Intertype Competition
Single-line, limited line, specialty
retailers
Kiosk based specialists
Category specialist, category killer
Family clothing stores
Department store
Discount department stores
Warehouse club or supercenter
Local seasonality combined with
seasonality of the merchandise line tends
to favor

Assumptions
Change in the seasonal
characteristics of consumer demand
for a merchandise line is negligible,
or geological
Intertype competition shifts in
demand are revolutionary in
comparison
Management of the merchandise
budget may vary slightly from
retailer-to-retailer, however, the
nature of supply provides

Seasonal Characteristics
Predictable, recurrent seasons
Back to school, school supplies
Christmas Holiday, outdoor decorations
Lawn mowers, lawn fertilizer, bedding
plants

Less predictable
Mens swimwear, shorts
Sweaters, sweater vests
Childrens dressy clothes

Intertype Competition
Generalists
Discount Department Stores
Supercenters & Warehouse Club
Conventional Department Stores
Dollar Stores, Big Lots
Home Centers (Lowes, Home Depot)

Specialists or Limited Line Retailers

Mens, Womens, & Family Clothing Stores
Limited-line sporting goods
Home electronics
Toy, hobbies, and games

We typically, we assign
certain product to
classifications:
Mens underwear versus womens
underwear?
Mens dress shirts, collars, sizes
expectancy of standards of fit,
neck size.
Mens shoes versus womens shoes

What are the implications of seasonal merchandise and

seasonal geography on retailing structure and
competition?

What conditions would be hardest for

a year-round specialty retailer
(limited assortment)?
What combinations of seasonality
favor a general merchandise, wide
assortment retailer?

Inventory Control
The validity of all of the prior discussion is
contingent on merchandise that was
ordered actually making it into retail
display space and remaining there until
the sale is recorded at cash register.
Opportunities for fraud and theft are
abundant on and off the sales floor.
How can the buyer be assured that the
planned purchases arrive, and are
displayed, on the selling floor?

Monitoring Issues
Monitoring is important when
employees are in charge of
operations and separated from
ownership.
When the owner of the store is
also the manager, the buyer, and
inventory control manager
there is no need to monitor.
When the manager of the store is
also the buyer and responsible for

Avoid the following practices as a

buyer:
Spending time with vendors outside
of the buying offices.
Spending too much time receiving
goods at the stores.
Fraternizing with individuals within
your own firms accounting division.

Retailer

Accounts Payable

Purchasing
Purchas
e Order

Receiving
Financial
Carrier
Intermediary

Sales

Shipping

Accounts Receivable
Supplier

Invoice

Bill of
Lading

Three areas of concern

Planned purchases from merchandise
budget become purchase ordersdo
purchase orders follow the planor
exceed plan?
Purchases orders become invoicesdo the
quantities and prices match the purchase
orders? Is vendor allowed to substitute?
Receiving: Do the goods received match
the goods invoiced? Are they in saleable
condition? Who determines if
merchandise is returned?

Merchandise Budgets are Plan for

Control
Do purchases orders correspond to
budget plans?
Can all accounts payable be assigned
to specific budget plans and from
vendors in the plan?
Do actual goods in stock in stores
correspond to planned BOM
inventories and sales.