The lower of cost or market (LCM) rule states that a corporation must record the cost of inventory at the lower of the original cost and the current market price.
How do you calculate lower of cost or market value?
- Inventory Valuation at the Lower of Cost or Market (LCM)Find out the inventory's previous purchase cost first.Next, figure out the replacement cost of the inventory.Comparing net realizable value to replacement cost and net realizable value less a typical profit marginInventory costs should be compared to replacement costs.
- A business must record the cost of inventory at whatever cost is lower—the original cost or its current market price—according to the lower of cost or market rule.This problem often occurs when inventory deteriorates, becomes outdated, or when market prices fall.
- According to the lower of cost or market (LCM) technique, a company's inventory is valued and recorded on the balance sheet at the lower of its historical cost or its market value.The price at which the inventory was purchased is referred to as the historical cost.
- This problem often occurs when inventory deteriorates, becomes outdated, or when market prices fall. A good's worth might change over time.
- The amount included in the inventory will be $60.00 as the cost of a single item of inventory is $60.00 and the current market price, which is the replacement cost, is $75.00.
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