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.

You may also be interested in other useful articles from “controlling and costing materials” chapter:

1. Purchases of productive material
2. Purchases of supplies, services, and repairs
3. Materials purchasing forms
4. Receiving materials
5. Invoice approval and data processing
6. Correcting invoices
7. Electronic data processing (EDP)  for materials received and issued
8. Cost of acquiring materials
9. Storage and use of materials
10. Issuing and costing materials into production
11. Materials ledger card – perpetual inventory
12. First-in-First-Out (FIFO) Costing Method
13. Average Costing Method
14. Last-in-First-Out (LIFO) Costing Method
15. Other Methods-Month end average cost, last purchase price or market price at date of issue, and standard cost
16. Inventory valuation at cost or market whichever is lower
17. American Institute of Certified Public Accountant (AICPA) cost or market rules
18. Adjustments for departures from the costing method used
19. Inventory pricing and interim financial reporting
20. Transfer of materials cost to finished production
21. Physical inventory
22. Adjusting Materials Ledger Cards and Accounts to Conform to Inventory Accounts
23. Scrap and waste
24. Spoiled goods
25. Defective work
26. Discussion Questions and Answers about Controlling and Costing Materials