Gross Margin Method

Under this method, we estimate the ending figure of the closing inventory based on the gross profit percentage. In this approach, we assume that the gross profit % remains constant during the reporting period. This method is also known as Gross Profit Method.

Procedure to calculate ending inventory under the Gross profit method

  1. Calculate cost of goods available for sale by adding opening inventory cost and cost of purchases during the reporting period
  2. Calculate estimated cost of goods sold by multiplying sales figure with 1 – gross profit percentage.
  3. Now, subtracts figure calculated in step 2 from the figure calculated in step 1 to arrive at ending/ cosing inventory figure. 

Gross margin method is not an acceptable method in International Financial Reporting Framework and US GAAP (Generally accepted accounting principles.

Example

                                                 Amount in US $

Opening balance – inventory 30,000

Total purchases in the period 370,000

Import duties on purchases 10,000

Cost of goods available for sale 410,000

Sales for the period 400,000

Gross Profit – 45% 180,000

Estimated cost of sale 220,000

Estimated cost of closing inventory 190,000