The net realizable value is a valuation technique that is used to value inventory. With the help of this technique you tend to calculate the market value of the inventory items subtracting all the predictable costs associated with the inventory such as manufacturing and completing the inventory, transporting the inventory and disposing it.
Net realizable value is important to calculate as it helps the company to calculate the cost of the inventory and to record it at the lower of the cost or the market cost. It is important to record the cost of the inventory on regular biases and as an ongoing process as the inventory value may alter due to a number of factors such as damage to the inventory, spoiling of the inventory or obsolescence of the products of the inventory. There are a number of steps that are involved in calculating the net realizable value of the inventory that can be determined as follows:-
- In the first step the market value of the inventory item is determined by the business
- All the costs associated with the completion and the selling of the certain item are complied and calculated
- The selling cost is subtracted from the market cost of the inventory item to reach at the net realizable value of the inventory.
The formula of the Net Realizable Value of the inventory can be shown as under:-
Net Realizable Value = Inventory Market Value – The cost associated with completion and selling of inventory
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