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Explain the concept of “lower-of-cost-or-market.”

Explain the concept of “lower-of-cost-or-market.”

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Lower of cost or market is a valuation technique in respect of the inventory management which is focused at valuation of inventory at the lower of the cost price or the market value of the inventory.

it is a conservative technique in which the cost price will be taken at the purchase price of the inventory and the market value will be taken as the replacement cost of those inventory. The replacement cost cannot exceed the net realizable value of the company.

This method is used in order to to utilise the correct valuation of inventory with changing times because inventory is generally measured at the cost price in the balance sheet so they are changed accordingly Eand valued according to lower of cost and market value in order to match the the current scenario.

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