The Least Cost or Market Value Method (LCM) is based on the fact that when investors value a company’s inventory, these assets must be shown on the balance sheet either at market value or historical cost.
Historical cost refers to the value of inventory at the time it was originally purchased.
The LCM method takes into account that the cost of goods may fluctuate. Under this scenario, if the price at which the inventory can be sold falls below the net realizable value of the item, and therefore results in a loss, the LCM method can be used to record the loss.
The LCM method is a principle of generally accepted accounting principles (GAAP).