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.
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