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

Answer 1

The dollar-value LIFO method is a variation on the last in, first out cost layering concept. In essence, the method aggregates cost information for large amounts of inventory, so that individual cost layers do not need to be compiled for each item of inventory. Instead, layers are compiled for pools of inventory items. Under the dollar-value LIFO method, the basic approach is to calculate a conversion price index that is based on a comparison of the year-end inventory to the base year cost.

Advantages :

If your business sells merchandise from inventory, your choice of cost flow assumption can affect your gross profits. The Internal Revenue Service allows you to use the first-in, first-out method or the last-in, first-out method -- FIFO and LIFO. If you choose LIFO, you can further select from one of several submethods, including dollar-value LIFO, or DVL.

This approach is considered more effective than the specific goods approach

As the pools are determined and measured in terms of total dollar value, this method allows companies to include a broader range of goods in a pool.
Under specific goods pooled LIFO approach, an item can be replaced only with an item that is substantially identical whereas in a dollar-value LIFO pool, an item can be replaced with an item that is similar in use or interchangeable.

Dollar value method is based on changes in dollar value... And traditional lifo method is in which company assumes that the company sells latest goods before the previous goods so that .. there will be different inventory valuations if the composition of the inventory bases changes