Cost or Market Whichever is Lower–Inventory Valuation
Cost or Market Whichever is Lower–Inventory Valuation:
American costing tradition follows the practice of pricing year-end inventories at cost or market, whichever is lower (lower of cost or market). This departure from any experienced cost basis is generally defined on the grounds of conservatism. A more logical justification for cost or market inventory valuation is that a full stock is necessary to expedite production and sales. If physical deterioration, obsolescence, and price declines occur, or if stock when finally utilized cannot be expected to realize its stated cost plus a normal profit margin, the reduction in inventory value is an additional cost of the goods produced and sold during the period when the decline in value occurred.
You may also be interested in other useful articles from “controlling and costing materials” chapter:
- Purchases of productive material
- Purchases of supplies, services, and repairs
- Materials purchasing forms
- Receiving materials
- Invoice approval and data processing
- Correcting invoices
- Electronic data processing (EDP) for materials received and issued
- Cost of acquiring materials
- Storage and use of materials
- Issuing and costing materials into production
- Materials ledger card – perpetual inventory
- First-in-First-Out (FIFO) Costing Method
- Average Costing Method
- Last-in-First-Out (LIFO) Costing Method
- Other Methods-Month end average cost, last purchase price or market price at date of issue, and standard cost
- Inventory valuation at cost or market whichever is lower
- American Institute of Certified Public Accountant (AICPA) cost or market rules
- Adjustments for departures from the costing method used
- Inventory pricing and interim financial reporting
- Transfer of materials cost to finished production
- Physical inventory
- Adjusting Materials Ledger Cards and Accounts to Conform to Inventory Accounts
- Scrap and waste
- Spoiled goods
- Defective work
- Discussion Questions and Answers about Controlling and Costing Materials
Other Related Accounting Articles:
- Physical Inventory – Inventory Valuation
- Transfer of Materials Cost to Finished Production–Inventory Valuation
- Other Materials Costing Methods – Month End Average Cost | Market Price at Date of Issue | Standard Cost
- Inventory Pricing and Interim Financial Reporting – Inventory Valuation
- First In First Out (FIFO) – Materials and Inventory Costing Method
- American Institute of Certified Public Accountants (AICPA) Cost or Market Rules–Inventory Valuation
- Electronic Data Processing System (EDP System) for Materials Received and Issued
- Receiving Materials
- Storage and Use of Materials
- Materials Ledger Card–Perpetual Inventory
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