Abstract Inventory should be valued either at net realizable value or at replacement cost, and that the choice between these two measures should depend upon the nature of the constraint which limits the level of activity of the firm holding the inventory. In the usual case, where sales are limited by demand rather than supply and where selling price exceeds replacement cost, the value of inventory to the firm owning it is equal to its replacement cost. Where the level is controlled by supply rather than demand e.g., where production capacity is the limiting factor, it is net realizable value which represents the value of inventory to the firm and which should, therefore, be used as the accounting measure. Net realizable value is also the appropriate accounting measure when it lies below replacement cost. The value of inventory to the firm will now be investigated more rigorously with the aid of the duality theory of linear programming. For completeness, we shall consider, in an appendix, certain knife-edge cases not previously discussed, such as the case where net realizable value exactly equals replacement cost, or demand exactly equals supply.
F. Kenneth Wright (Thu,) studied this question.