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

Step 1 : Dollar value method of LIFO inventory valuation

Dollar value method of LIFO inventory valuation uses dollars instead of units to measure increments, or reductions in a LIFO inventory. After converting the closing inventory to the same price level as the opening inventory, the increases in inventories, priced at base year costs, is converted to the current price level and added to the opening inventory. Any decrease is subtracted at base year costs to determine the ending inventory.  

Step 2 : Advantage of Dollar value method

The principal advantage is that it requires less record keeping. It is not necessary to keep records or make calculations of opening and closing quantities of individual items. Also, the use of a base inventory amount gives greater flexibility in the makeup of the base and eliminates many detailed calculations.

Step 3 :   Traditional LIFO inventory and the dollar-value LIFO inventory costing method

The unit LIFO inventory costing method is applied to each type of item in an inventory. Any type of item removed from the inventory base (e.g., magnets) and replaced by another type (e.g., coils) will cause the old cost (magnets) to be removed from the base and to be replaced by the more current cost of the other item (coils).

The dollar value LIFO costing method treats the inventory base as being composed of a base of cost in dollars rather than of units. Therefore a change in the composition of the inventory (less magnets and more coils) will not change the cost of inventory base so long as the amount of the inventory stated in base year dollars does not change.