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Lower of Cost or Market (LCM)

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The lower of cost or market rule states that a business must record the cost of inventory at
arises when inventory has deteriorated, or has become obsolete, or market prices have

Accounting Controls

declined. The rule is more likely to be applicable when a business has held inventory for a

Accounting for Managers

long time, since the passage of time can bring about the preceding conditions. The rule is

Accounting Procedures

set forth under the Generally Accepted Accounting Principles accounting framework.

Bookkeeping Guidebook
Budgeting
Business Ratios
Cash Management
Closing the Books
Controller Guidebook
Corporate Finance
Cost Accounting
Cost Management Guidebook

The current market price is defined as the current replacement cost of the inventory, as
long as the market price does not exceed net realizable value; also, the market price shall
not be less than the net realizable value, less the normal profit margin. Net realizable value
is defined as the estimated selling price, minus estimated costs of completion and disposal.
Additional factors to consider when applying the lower of cost or market rule are:

Credit & Collection Guidebook

Analysis by category. You normally apply the lower of cost or market rule to a specific

Financial Analysis

inventory item, but you can apply it to entire inventory categories. In the latter case, an

Fixed Asset Accounting

LCM adjustment can be avoided if there is a balance within an inventory category of

GAAP Guidebook

items having market below cost and in excess of cost.

Hospitality Accounting

Hedges. If inventory is being hedged by a fair value hedge,

then add the effects of the

IFRS Guidebook

hedge to the cost of the inventory, which frequently eliminates the need for a lower of

Interpretation of Financials

cost or market adjustment.

Inventory Accounting

Last in, first out layer recovery. You can avoid a write-down to the lower of cost or

Investor Relations

market in an interim period if there is substantial evidence that inventory amounts will

Lean Accounting Guidebook

be restored by year end, thereby avoiding recognition of an earlier inventory layer.

Mergers & Acquisitions

Raw materials. Do not write down the cost of raw materials if the finished goods in which

Nonprofit Accounting

they are used are expected to sell either

at or above their costs.

Payables Management

Recovery. You can avoid a write-down to the lower of cost or market if there is

Payroll Management

substantial evidence that market prices will increase before you sell the inventory.

Public Company Accounting

Sales incentives. If there are unexpired sales incentives that will result in a loss on the
sale of a specific item, this is a strong indicator that there may be a lower of cost or

Operations Bestsellers

market problem with that item.

Constraint Management
Human Resources Guidebook
Inventory Management
Purchasing Guidebook

accounting CPE courses & books

whichever cost is lower the original cost or its current market price. This situation typically

Accountants' Guidebook

CFO Guidebook

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Lower of Cost or Market Overview

Accounting Bestsellers

About

Lower of Cost or Market Example

Mulligan Imports resells five major brands of golf clubs, which are noted in the following
table. At the end of its reporting year, Mulligan
calculates the lower of its cost or net
realizable value in the following table:

Quantity

Inventory

Market

Lower of Cost

Product Line

on Hand

Unit Cost

at Cost

per Unit

or Market

1,000

$190

$190,000

$230

$190,000

Golf Elite

750

140

105,000

170

105,000

Hi-Flight

200

135

27,000

120

24,000

Free Swing

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Lower of Cost or Market - AccountingTools

Iridescent
Titanium

1,200

280

336,000

160

192,000

800

200

160,000

215

160,000

Based on the table, the market value is lower than cost on the Hi-Flight and Iridescent
product lines. Consequently, Mulligan recognizes a loss on the Hi-Flight product line of
$3,000 ($27,000 - $24,000), as well as a loss of $144,000 ($336,000 - $192,000) on the

Iridescent product line.

If the amount of a write-down caused by the lower of cost or market analysis is minor, then
charge the expense to the cost of goods sold. If
the loss is material, then you may want to
track it in a separate account (especially if such losses are recurring), such as Loss on LCM
adjustment. To use the information in the preceding example, the journal entry would be:

Debit

Loss on LCM Adjustment

Finished Goods Inventory

Related Topics
Accounting inventory methods
FIFO vs. LIFO accounting
How do I report an inventory write down?
Journal entries for inventory transactions
Obsolete inventory accounting

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