Which inventory estimation method uses a percentage based on both cost and retail prices?

The Retail Method of Estimating Inventory is indeed the correct answer because it estimates inventory by applying a cost-to-retail percentage to the ending inventory at retail prices. This method allows businesses to estimate the value of their ending inventory without conducting a physical count, which can be time-consuming and costly.

The underlying principle is that a company can determine the overall cost of its inventory by comparing the cost of goods available for sale with the total retail value of those goods. By calculating a cost-to-retail percentage (how much of the total retail value is actually cost), the company can then apply this percentage to the inventory measured at retail prices to arrive at an estimated cost of the ending inventory.

This method is particularly useful in retail industries where the inventory consists of numerous items with varying costs and retail prices. It simplifies the inventory estimation process and helps in financial reporting while maintaining a reasonable accuracy level.

In contrast, the Gross Profit Method estimates inventory based on the gross profit margin derived from previous sales, rather than using both cost and retail prices directly. The Direct Inventory Method focuses on counting the physical inventory to determine its value. The Conservative Inventory Method emphasizes a more cautious approach to reporting inventory value, but does not specifically relate to the estimation based on both cost