Question

What is the dollar-value method of LIFO inventory valuation? What advantage does the dollar-value method have over the specific goods approach of LIFO inventory valuation? Why will the traditional LIFO inventory costing method and the dollar-value LIFO inventory costing method produce different inventory valuations if the composition of the inventory base changes?

Short answer

The dollar value LIFO method is an alternative to the traditional LIFO method to overcome the issue of LIFO liquidation. This method allows goods replacement and prevents erosion of LIFO layers. Difference in inventory value arises because dollar-value method considers the index and base price.

Step-by-step solution

Dollar-value LIFO method

The dollar value LIFO method is the measure to determine the ending inventory value in dollar (value) terms and not in physical quantity terms. In this method, total pool values of inventories are taken instead of valuing inventories individually.

Advantage of dollar-value LIFO method over specific goods method

The dollar value LIFO method has an added advantage over specific goods method in the term that –

a) Dollar value LIFO method consists of a larger pool of similar goods.

b) This method permits the replacement of goods.

c) This method prevents the erosion of LIFO layers.

Difference in results between dollar value LIFO and traditional LIFO

The dollar value LIFO method provides the result after taking into effect of price index and base prices. Thus LIFO liquidation is minimum in this approach. In contrast, traditional LIFO does not address these issues and the LIFO layers get erosion due to the lesser range of goods in the pool.