Proper Per Unit Inventory Price Calculation Using Lower of Cost or Market (LCM) Method
What is the significance of the Lower of Cost or Market (LCM) method in inventory valuation?
The data shows that the acquisition cost, net realizable value, normal profit, and market value for product Dominoe are provided. How can we determine the proper per unit inventory price for product Dominoe when applying the LCM method?
Importance of LCM Method in Inventory Valuation
The Lower of Cost or Market (LCM) method is a key principle in inventory valuation that ensures companies report inventory at the lower of its cost or its market value. This method helps prevent overvaluing inventory, thus providing a more accurate representation of a company's financial position.
Calculation of Proper Per Unit Inventory Price Using LCM
Given the data for product Dominoe, where the market value is $27 and the acquisition cost is $28, we apply the LCM method. Since the market value ($27) is lower than the acquisition cost ($28), we choose the market value as the per unit inventory price.
When using the LCM method, the key is to compare the market value with the acquisition cost. If the market value is lower than the acquisition cost, the market value is chosen as the proper per unit inventory price. This is because LCM requires inventory to be valued at the lower of its cost or its market value.
Therefore, in the case of product Dominoe, the proper per unit inventory price when applying the LCM method is $27. This decision ensures the inventory is reported at a more conservative value, reflecting its true economic value in the market.
By understanding the significance of the LCM method and how to calculate the proper per unit inventory price using this approach, companies can maintain accurate financial reporting and make informed decisions based on the true value of their inventory.