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