Lower Of Cost Or Market Ceiling And Floor

This market value is to be compared to the original cost of inventory which is 900.

Lower of cost or market ceiling and floor.

Accounting for inventory costing using lower of cost or market to value inventory calculating ceiling and floor limits and inventory value the limits ceil. The market value of an item is usually its replacement cost. Net realizable value nrv which is the estimated selling price in the ordinary course of business minus costs of completion disposal and transportation commonly called the ceiling. But if price floor is set above market equilibrium price immediate supply surplus can.

Under lcm reported inventory value row 9 is taken as the 72 000 cost row1 because cost is lower than the market value 75 000 row 8. However price floor has some adverse effects on the market. Cost is how much the company pays for the item if it buys the item or if the company is the manufacturer how much it costs to make the item. Since the original cost is 15 the lcm equals 14.

The lower of cost or market lcm method relies on the fact that when investors value a company s inventory those assets shall be recorded on the balance sheet at either the market value or the. Or nrv less an approximately normal profit margin commonly called the floor. Since the replacement cost of 880 lies within the limits set by lcm rule it is allowable market value of the inventory. However this assumption has one caveat.

Market floor replacement cost market ceiling therefore market replacement cost. Price floor is enforced with an only intention of assisting producers. The term market refers either to replacement cost. The upper ceiling and lower floor limits for the value of the inventory are intended to prevent the inventory from being reported at an amount in excess of the net realizable value or at an amount less than the net realizable.

Explain the rationale for the ceiling and floor in the lower of cost or market method of valuing inventories. If price floor is less than market equilibrium price then it has no impact on the economy. Market can t go above the item s net realizable value ceiling or below the item s floor.