Question

Maxi Corporation uses the unit LIFO inventory method. The costs of the company’s products have been steadily rising since the company began operations in 2008 and cost increases are expected to continue. The chief financial officer of the company would like to continue using LIFO because of its tax advantages. However, the controller, Sally Hamel, would like to reduce the record-keeping costs of LIFO that have steadily increased over the years as new products have been added to the company’s product line. Sally suggested the use of the dollar-value LIFO method. The chief financial officer has asked Sally to describe the dollar-value LIFO procedure. 

 

Required: 

 

Describe the dollar-value LIFO procedure.

Answer 1

Dollar-Value LIFO (DVL)

Under DVL system, different variety of goods are combined into one pool and viewed as quantity of value instead of physical quantity of goods.

Following are the steps of dollar-value LIFO method of inventory estimation as suggested by S, the controller of M Corporation to its chief financial officer, in this case:

 

• The first step of DVL is to determine the value of the ending inventory for the current year in terms of year-end costs. The companies need not trace and track various purchases made during the year but only takes into account the physical quantities on the yearend balance of the inventory and apply the yearend costs to it.
• The second step is to convert the yearend inventory to the base year costs by dividing it by current year’s cost index. The cost index represents the transition of cost costs to current year from the base year and results in reduction of current year costs from the base year.
• The third step is to identify the layers accumulated in the ending inventory with the years they are acquired by comparing ending inventory at base year cost with that of beginning inventory at base year cost. According to LIFO method, if it is found that the inventory has increased, then it must be the result of ending inventory is a mixture of beginning inventory layer and the current year purchase layer.
• Fourth and final step is to multiplying the identified layers with base year cost with the cost index of the layer. The costs thus obtained layer wise are added to determine the ending inventory at DVL cost.

Dollar-Value LIFO (DVL)

 

Under DVL system, different variety of goods are combined into one pool and viewed as quantity of value instead of physical quantity of goods.