How to use the lower of cost or nrv inventory calculator
- Add a row for each inventory item or group, with its quantity and cost per unit.
- Enter the expected selling price per unit, any cost to finish the item, a fixed selling cost per unit and a selling cost as a percent of the price.
- Read the net realizable value per unit, the carrying value per unit and the write-down for each item.
- Use the journal entry preview for the total, then adapt the account names to your own chart of accounts.
Formula
NRV per unit = expected price - cost to complete - fixed selling cost - price x selling percent
carrying value per unit = lower of cost and NRV, never below zero
write-down = (cost per unit - carrying value per unit) x quantity
Only items whose NRV is below cost are written down. Items whose NRV is above cost stay at cost; gains are not recorded under this rule.
One item with shipping and commission
An item costs $1,000 and is expected to sell for $1,100. Shipping is $80 and the sales commission is 5% of the price, or $55. NRV = 1,100 - 80 - 55 = $965, so each unit is written down by $1,000 - $965 = $35.
The default table has three items. Item A is 10 units of that item, a write-down of $350. Item B is well above cost and is not written down. Item C costs $9 and has an NRV of $7.18 per unit, so 120 units are written down by $218.40. The total write-down is $568.40, which takes inventory from $12,080.00 to $11,511.60.
Which inventory this rule applies to
Lower of cost and net realizable value is the measurement used for inventory valued under first-in first-out or average cost. Inventory valued under last-in first-out or the retail method is measured at the lower of cost or market, which uses replacement cost and is not modeled here. To value the stock first, use the FIFO LIFO Inventory Valuation Calculator.
Slow stock is the usual candidate for a write-down. The Inventory Turnover Calculator helps you find it.
Grouping items
The test is normally done item by item, but similar items with related selling prices can be grouped. Enter a group as one row with a total quantity and average figures, and be consistent from one period to the next.
Assumptions and limits
- The expected selling price is a reasonable estimate of what the item will sell for in the ordinary course of business.
- Costs to complete and to sell are entered per unit, plus an optional percent of the price.
- The carrying value is never reduced below zero, even if selling costs exceed the price.
- Reversals of earlier write-downs, tax effects and disclosures are not modeled.
- The journal entry is a preview, and your accounting policy decides the account names. This is not accounting advice.
Frequently asked questions
What is net realizable value?
It is the price you expect to get for an item minus the costs of finishing it and selling it. If that is below what the item cost, the item is carried at the lower figure.
Do I write inventory back up when prices recover?
This tool only shows the write-down. Whether a write-down can be reversed, and how much, depends on the accounting rules you follow, so check them before recording a reversal.
Why is my carrying value zero?
If selling and completion costs are larger than the expected price, NRV is negative. The tool carries the item at zero instead of a negative amount.
Can I enter a group of items as one row?
Yes. Use the total quantity and average cost and price for the group, and apply the same grouping every period.