A company has the following per unit original costs and replacement costs for its inventory: Part A: 50 units with a cost of $5, and replacement cost of $4.50
Part B: 75 units with a cost of $6, and replacement cost of $6.50
Part C: 160 units with a cost of $3, and replacement cost of $2.50
Under the lower of cost or market method, the total value of this company's ending inventory is:
A) $1,180.00.
B) $1,075.00.
C) $1,075.00 or $1,112.50, depending upon whether LCM is applied to individual items or the inventory as a whole.
D) $1,112.50.
E) $1,180.00 or $1,075.00, depending upon whether LCM is applied to individual items or to the inventory as a wholE.

Question

Quizplus · Accepted Answer

Under the lower of cost or market (LCM) method, inventory is valued at the lower of its cost or current replacement cost. The current replacement cost is the cost of replacing the inventory with new inventory at the current market price.

For Part A, the original cost per unit is $5 and the replacement cost per unit is $4.50. Thus, the inventory will be valued at the replacement cost of $4.50 per unit since it is lower than the original cost. The total value of Part A inventory will be 50 units x $4.50 = $225.

For Part B, the original cost per unit is $6 and the replacement cost per unit is $6.50. The inventory will be valued at its original cost since it is lower than the replacement cost. The total value of Part B inventory will be 75 units x $6 = $450.

For Part C, the original cost per unit is $3 and the replacement cost per unit is $2.50. Thus, the inventory will be valued at the replacement cost of $2.50 per unit since it is lower than the original cost. The total value of Part C inventory will be 160 units x $2.50 = $400.

The total value of the inventory under LCM method will be $225 + $450 + $400 = $1,075.

Note: Since the LCM method can be applied to individual items or the inventory as a whole, some confusion can arise. If the LCM method is applied to individual items, the total value of the inventory will be $1,112.50, which is the sum of the replacement costs of Part A and Part C inventories ($4.50 x 50 + $2.50 x 160) and the original cost of Part B inventory ($6 x 75).

A Company Has the Following Per Unit Original Costs and Replacement