Answer to Question #48792 in Accounting for Felisia Fitri Anita Aritonang

Question

On the basis of the following data, determine the value of the inventory at the lower
of cost or market. Assemble the data in the form illustrated in Exhibit 8.
Inventory Unit Unit
Commodity Quantity Cost Price Market Price
Aquarius 20 $ 80 $ 92
Capricorn 50 70 65
Leo 8 300 280
Scorpio 30 40 30
Taurus 100 90 94

Answer 1

Lower of cost or market (LCM or LOCOM) is a conservative approach to valuing and reporting inventory. The lower of cost or market rule states that a business must record the cost of inventory at whichever cost is lower – the original cost or its current market price. Normally, ending inventory is stated at historical cost (what was paid to obtain it). However, there are times when the original cost of the ending inventory is greater than the cost of replacement, and thus the inventory has lost value. If the inventory has decreased in value below historical cost, then its carrying value is reduced and reported on the balance sheet. The criterion for reporting this is the current market value. Any loss resulting from the decline in the value of inventory is charged to "Cost of goods sold" (COGS) if non-material, or "Loss on the reduction of inventory to LCM" if material.