Chapter 3.4® - Methods of Applying Lower of Cost and Market - Item by Item Basis, Category Basis & Total Inventory Basis

• Part 3.1 - Inventory Valuation & Estimation – Lower of Cost or Market, Example & Illustration of Net Realizable Value, Market Replacement Cost
• Part 3.2 - Example of Net Realizable Value less a Normal Profit Margin, Market equals = Net Realizable value or Market equals net realizable value minus a normal Profit Margin
• Part 3.3 - How Lower of Cost or Market Works - Acceptable Historical Cost Flow Method & Comparisons of Market versus Cost, US Designated Market Value
• Part 3.4 - Methods of Applying Lower of Cost and Market - Item by Item Basis, Category Basis & Total Inventory Basis
• Part 3.5 - Recording Inventory Valuation at Market instead of Cost - Direct & Indirect Methods assuming Periodic & Perpetual Inventory Systems
• Part 3.6 - Income Statement Presentation - Direct & Indirect Method and Advantages & Disadvantages of Using Lower of Cost and Market
• Part 3.7 - Gross Profit Method of Estimating Inventory - Using the Gross Margin Method, Annual Inventory Counts, Gross Profit on Selling Price Method
• Part 3.8 - Glossary of Important Inventory Valuation Terms

In the above electronics inventory cost & market method, we assumed that the lower of cost and market rule was applied to each type of electronic. However, lower of cost and market rule can be applied on an item-by-item basis, category basis or a total inventory basis. Increases in market prices of some electronics will offset decreases in market prices of other inventory if a major category or total inventory approach is used. To illustrate the use of major categories, we use the example below, and we categorize the different types of electronics in to Computers and “Other Electronics.”

Thus, if the lower of cost and market rule is applied to individual items, the cost would be $550,000. If the lower of cost and market rule is applied to categories, then the cost will be $563,000 and if the lower of cost and market rule is applied to total inventory, then the final inventory would be $563,000. Notice in all these cases we are comparing the categories with Net Realizable Value column.

This graph above shows a break down of the inventory costs of Other Electronics & Computers sub-categories & their totals with a break down of the Original Cost, Net Realizable Value, Individual Items & by Categories.