Diane Company, a retailer and wholesaler of national brand-name household lighting and fixtures, purchases its inventories from various suppliers.

Required:

(a) What criteria are used to determine which of Diane's costs are inventoriable? (b) Are Diane's administrative costs inventoriable?

(a) Diane uses the lower of cost or market rule for its wholesale inventories. Explain the theoretical arguments for that rule. (b) The replacement cost of the inventories is below the net realizable value less a normal profit margin, which, in turn, is below the original cost. Explain the amount that is used to value the inventories.

Diane calculates the estimated cost of its ending inventories held for sale at retail using the conventional (lower of average cost or market) retail inventory method. Explain how Diane would treat the beginning inventories and net markdowns in calculating the cost ratio used to determine its ending inventories.