Lower of Cost or Market Decision Matrix.

Abstract This article presents information on a decision matrix which has been designed to assist accounting students to determine which factor is to be used in lower-of-cost or market valuations. The U.S. Committee on Accounting Procedure has said that a departure from the cost basis of assigning amounts to stock-in-trade inventory is required when the utility of any given inventory is not as great as the cost. Utility may be less than cost when the net realizable value of any given inventory, when reduced by an approximately normal profit margin, is an amount less than cost, however determined. The amount of loss to be recognized when such utility has been impaired is found by pricing inventory at lower-of-cost or market. The matrix is applicable only for conditions under which lower-of-cost or market decisions can be applied. That is, where net realizable value less normal profit margin equals or exceeds cost, lower-of-cost or market is not applicable and the decision matrix should not be consulted.