How to Calculate the Lower of Cost or Market (LCM)
We will use the information in the following table to calculate the net realizable value and the lower of cost or market for five products:
Recall the lower of cost or market (LCM) rule: LCM is the lower of cost or replacement cost, with the replacement cost being no higher than NRV and no lower than NRV minus the normal profit.
Since the replacement cost was given, we will begin by calculating the net realizable value (NRV) of each of the products. Recall that net realizable value is the expected selling price in the ordinary course of business minus the cost to complete and dispose. NRV will be the upper limit (the ceiling) for the replacement cost.
Next we will calculate the NRV minus the normal profit. This amount will be the lower limit (the floor) for the replacement cost.
The following chart displays the four relevant amounts used in the lower of cost or market rule: (1) cost, (2) the upper limit, or ceiling, for the replacement cost, (3) replacement cost, and (4) the lower limit, or floor, for the replacement cost. The lower of cost or market amount appears in bold font:
Let's review the lower of cost or market for each of the five products shown in the above table: