Question

The inventory of Royal Decking consisted of five products. Information about the December 31, 2021, inventory is as follows:Per UnitProduct Cost Selling PriceA $ 120 $ 140B 160 180C 80 160D 80 120E 20 40Costs to sell consist of a sales commission equal to 10% of selling price and shipping costs equal to 5% of cost.Required:What unit value should Royal Decking use for each of its products when applying the lower of cost or net realizable value (LCNRV) rule to units of ending inventory

Answer 1

Royal Decking

Ending Inventory Valuation, using the lower of cost or net realizable value:

Unit Product Cost Selling Price Net Realizable Value Valuation

A $ 120 $ 140 $120 ($140 - 14 - 6) $120

B 160 180 154 ($180 - 18 - 8) $154

C 80 160 140 ($160 - 16 - 4) $80

D 80 120 104 ($120 - 12 - 4) $80

E 20 40 35 ($40 - 4 - 1) $20

Product A is valued at $120 which is the same for cost and NRV.

Product B is valued at $154 NRV.

Product C is valued at $80 cost.

Product D is valued at $80 cost.

Product E is valued at $20 cost.

Step-by-step explanation:

Valuing ending inventory by applying the lower of cost or net realizable value rule ensures that ending is conservatively and prudently valued. This makes it possible to ensure that the value placed on ending inventory is not more than it can realize when sold.

This method is one of the inventory valuation methods. Other methods include Last in, First out (LIFO), First in, First out (FIFO), and Weighted Average Cost.

The net realizable value is the price that would be obtained after deducting the expenses incurred for sales to take place. In this case, the sales commission and shipping cost is deducted from sales price before arriving at the net realizable value.