Lower Of Cost Or Market (Net Realizable Value, Ceiling & Floor Limits, LCM Costing)

Accounting for inventory costing using lower of cost or market to value inventory, calculating ceiling and floor limits and inventory value, the limits (ceiling and floor) prevents over or under valuing inventories, inventories are recorded at their cost, if inventory declines in value below its original cost (what ever the reason, obsolescence, price-level changes or damaged goods), write down the inventory to market to report this loss, require limits establishing (ceiling and floor) to prevent over or under valuing inventories, upper limit is the Net Realizable Value which is the estimated selling price in the normal course of business less reasonably predictable costs of completion and disposal (net selling price), the lower limit is the Net Realizable Value less profit margin, designated market value is the amount compared to replacement cost, it is always the middle value of the three amounts: (1) replacement cost, (2) NRV or (3) NRV less normal profit margin, general lower-cost-or-market rule (LCM), value inventory at lower-cost-or-market to the amount that is not more than NRV (ceiling) or less than NRV less normal profit margin (floor), compare designated market value to cost to determine the lower-cost -or-market (lower value is selected, acquisition cost versus market value), may apply lower-of-cost-or-market either directly to each item, to each category or to total of inventories (usually item-by-item basis is used), detailed calculations by Allen Mursau

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