[Anonymous]

This is the example given in Ninja Notes. Calculate each of these and the number in the middle is Market and used to compare vs. Cost Example: Lower of Cost or Market

Cost: $50

Replacement Cost: $55

Selling Price: $75

Selling (including Disposal) Cost: $2.50

Normal Profit Margin: 25%

NRV = $75 – $2.50 = $72.50

Replacement Cost = $55

NRV – Normal Profit Margin = $60

[$72.50 – ($50 Cost x 25% = $12.50)]

NRV = $72.50

NRV-Normal Profit Margin = $60 = Market

Replacement Cost = $55

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So because the cost is 50, is 50 the answer, since it is the “lower of cost or market?” Also, why is 60 the market price? Shouldn’t 60 be the floor?

[NYCaccountant]

Well 60 can't be the floor because by definition it's the market price, so it must be in the middle. If market is 60, and cost is 50, then lower cost or market is 50.

Ceiling 72.50

NRV- Normal profit = 60 this is the normal in the middle, so this is market.

Replacement cost = 55

60 Market vs 50 cost.

FAR - 93
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[Kimboroni]

The ceiling and floor terms confused me, too, so maybe this will help.

The “ceiling” is NRV, meaning that what you use for “market” can't be any higher than the NRV.

The “floor” is NRV minus normal profit margin. What you use for “market” can't be any lower than the NRV minus normal profit margin.

The third option for market is the replacement cost. Often that will be market, if it falls between the ceiling and the floor. But replacement cost could come in at higher than NRV or lower than NRV minus normal profit margin, in which case it can't be market, since those other 2 items set up the ceiling and the floor.

So at that point, the easiest way to figure out market is to throw out the ceiling and floor terms and just rank the three numbers in order, then use the one in the middle for market.

Then you're comparing that one number that was determined to be “market” and comparing it with the original cost. Then pick the lower one.

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[Sept2021]

Just to unload some frustration, when I graduated 25 years ago LCM meant lower of cost or market. Nothing like corporate interests dictating unnecessarily complicated accounting rules for their own benefit.

[jbarwick]

Market Cost: $50.00 (Given)

Ceiling: $72.50 ($75.00 – $2.50)

Replacement: $55.00 (Given)

Floor: $53.75 ($75.00 x 75% = $56.25 – $2.50)

Profit Margin = Net Profit / Revenue = 25% = $18.75 / $75.00

It looks to me like it should be Market is $50 compared to a replacement cost of $55 not $60. Thus LCM = $50.

Journey Started - January 2015
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AUD - 7/2015 - Passed
BEC - 8/2015 - Passed
REG - 11/12/2015 - Passed

[Author]

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