Lower of Cost or Market

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Lower of Cost or Market (LCM) is an approach to valuing and reporting inventory. Normally ending inventory is stated at historical cost (what was paid to obtain it) but there are times when the original cost of the ending inventory is greater than the cost of replacement thus the inventory has lost value. If the inventory has decreased in value below historical cost then its carrying value is reduced and reported on the balance sheet. The criterion for reporting this is the lesser of the value of the original cost or the market value. Any loss resulting from the decline in the value of inventory is charged to Cost of Goods Sold (COGS) if non-material, or Loss on the reduction of inventory to LCM if material.