Question

The U.S. GAAP lower of cost or market rule for inventories may be applied to total inventory, to groups of similar items, or to each item. Which application generally results in the lowest inventory amount?

Answer 1

The inventory has to be recorded separately to each item and this will generally result in the lowest inventory amount.

Explanation:

LCM- the Lower of Cost which is also called as Market rule is the theory for valuating the inventory in accounting. According to the LCM rule, in a business the cost of inventory must be recorded at lower cost (it can be either the current market price or the original cost)

Reason for recording at lower cost:

Aggregating the items results in the incorporation of some items at amounts greater than LCM.

Example:

If product X (cost = 2 dollars, market = 1 dollar) and product Y (cost = 3 dollars, market = 4 dollars) are aggregated for LCM, the inventory measurement will be 5 dollars. If the rule is applied separately to both the products, the LCM measurement will be 4 dollars.