Final answer:
Inventory falls below its recorded cost when market prices drop due to changes in demand and supply, not based on production cost. This can happen during sales or when there's an excess supply on the market.
Step-by-step explanation:
The question deals with why inventory can sometimes fall below its recorded cost. A primary reason for this phenomenon is the fluctuation of market prices due to changes in demand and supply, which are independent of the cost of production. For instance, if demand for a product decreases or supply increases, market prices may drop, and occasionally, they may fall below the cost of production. This is evident when a local store has a going-out-of-business sale, selling goods for less than what it cost to produce them. Similarly, when international companies notice an excess supply of goods like steel, computer chips, or machine tools, the resultant market action can push prices down below their cost of production due to the low demand.