Lower of cost or market (LCM or LOCOM) is a
conservative Conservatism is an aesthetic Aesthetics, or esthetics (), is a branch of philosophy that deals with the nature of beauty and taste (sociology), taste, as well as the philosophy of art (its own area of philosophy that comes out of aest ...
approach to valuing and reporting
inventory Inventory () or stock () refers to the goods and materials that a holds for the ultimate goal of resale, production or utilisation. is a discipline primarily about specifying the shape and placement of stocked goods. It is required at differen ...
. Normally, ending inventory is stated at
historical cost In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been called ...
. However, there are times when the original cost of the ending inventory is greater than the
net realizable value Net realizable value (NRV) is a measure of a fixed or current asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non ...
, and thus the inventory has lost value. If the inventory has decreased in value below historical cost, then its carrying value is reduced and reported on the balance sheet. The criterion for reporting this is the current market value. Any loss resulting from the decline in the value of inventory is charged to "
Cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortizatio ...
" (COGS) if non-material, or "Loss on the reduction of inventory to LCM" if material.


The lower of cost or market concept first became part of normal accounting practices in England during the nineteenth century. Lower of cost or market was considered fair because assets were valued on a going-concern basis, rather than the price at which the assets were purchased. During the nineteenth century, lower of cost or market was not common practice for valuation of factory inventory in the United States. The concept was not easy for the Academic Accountants to accept due to its lack of logic. Despite the criticism, lower of cost or market quickly caught on in practice and by the early twentieth century was described as the most commonly accepted method for inventory valuation according to the Report of the Special Committee on Co-operation with Stock Exchanges. Although it lacked accounting logic, lower of cost or market survived because of its conservative approach to valuation and because it addressed opposing principles of cost and value. Its conservatism allowed users to value the inventory at the price for which the inventory could be sold.


Three possible values can represent the market value: the replacement cost of the inventory, the net realizable value (also known as the "ceiling"), and the "floor" (the difference between the net realizable value and the normal profit).Wampler, Bruce; Holt, Travis (January 2013)."Valuing Inventory at the Lower of Cost or Market." ''CPA Journal''. 83: 34–9.
ISSN An International Standard Serial Number (ISSN) is an eight-digit serial number used to unique identifier, uniquely identify a serial (publishing), serial publication, such as a magazine. The ISSN is especially helpful in distinguishing between ...
/ref> In the lower of cost or market approach, companies must determine these three values and find the median of the values. The companies then compare the median value, which is called the designated market value, to the inventory cost that is recorded. The lower of these two values is subsequently reported on the balance sheet. Because the lower of cost or market approach requires companies to use three possible market values, the companies' financial statements can be difficult to compare.

Contemporary usage

The term "lower of cost or market" is now obsolete and is officially replaced by "lower of cost and net realizable value". According to the FASB Accounting Standards Update, This FASB update makes usage consistent with the IFRS wording and removes the use of "or" in a context where "and" was always the correct one.FASB Accounting Standards Update, No. 2015-11, July 2015, p. 1. However, the update does not apply to all companies. Companies that use the FIFO (first-in, first-out) and average-cost methods of inventory valuation are required to implement the changes, whereas companies that use the LIFO (last-in, first-out) and retail inventory methods are not affected by the update.

See also

* Inventory valuation *
Impaired assetAn impaired asset is an asset which has a market value less than the value listed on its owner's balance sheet. According to U.S. accounting rules (known as Generally Accepted Accounting Principles (United States), US GAAP), the value of an asset is ...
Fair market value The fair market value of property is the price at which it would change hands between a willing and informed buyer and seller. The term is used throughout the Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code ...
Value (economics) In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societi ...


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