Lower of Cost of Market

The lower of cost or market method is an inventory valuation method to write down inventory to its lower utility value, if the market value of the inventory is lower than its cost. The purpose of the lower of cost or market method is to recognize a decline in value of inventory in the period it occurs. Cost in the lower of cost or market formula is the original cost. Market starts at current replacement cost. Market cannot be greater than the selling price less the cost to complete (the ceiling) or less than the selling price less the cost to complete and less a normal profit margin (the floor).