Dollar value LIFO is a modification of the traditional LIFO method in which the ending inventory is measured based on the monetary value of the units rather than the quantity of units held.
While learning about LIFO and discussing its pros and cons, one issue was the incompatibility of LIFO when a company uses FIFO for internal reporting purposes. However, this was solved with a workaround called LIFO Reserve or LIFO Allowance. Another big problem with LIFO isdelayor better known as LIFO liquidation or erosion. To solve the delay problem, we use the modified approach of the traditional LIFO, calledDollarwert-LIFO.
It has two major advantages over traditional onesunit LIFOMethod.
- Unlike unit LIFO, whichgroupspecific units based on quantities and corresponding rates. This makes the calculation cumbersome. Dollar Value LIFO bundles the items and measures the value byChange in the total value of the pooland not the crowd.
- The unit LIFO method is prone to delays because it records and maintains the specific quantity being purchased at a given rate as each individual shift. When old units are consumed, it can seriously skew the winning numbers and make them appear as more. Dollar value solves this by grouping goods based on value rather than individual quality and rate. Also, properly accounting for the inflation effect in relation to the value of money reduces the inflation effect.
Calculation of values below dollar value LIFO
It is worth noting again that LIFO with dollar value pools inventory. In simple terms, we have a total of all the different types of inventory that we like to have in a pool. A pool can have multiple types of items that are mostly similar.
Once the pool is set up, the work begins to determine the base year and price index to calculate the effect of inflation so we can find out unequivocally whether the increase in inventory value is actually due to an increase in volume or simply due to inflation.
Once the actual increase is calculated, it is adjusted to current year prices and then we can know the total value of the ending inventory under dollar value LIFO.
The dollar value LIFO calculation steps are summarized as follows:
- Determine the base year value. It can be the beginning of the year or any other year. The inflation index is measured in relation to this year.
- Calculate ending inventory values at base year prices by applying inflation or price index
- Calculate the increase or decrease in value by comparing the values in steps 1 and 2. This gives us the inventory change due to the quantity change.
- Once the change is noticed, re-enter the value according to the current year's prices.
- Calculate the ending inventory value by summing the shift values.
Example 1 - Dollar value LIFO calculation
Suppose the company had an opening inventory with a total value of 100,000. At the end of the year the total value of the stock was 120,000. Assume further that prices have increased by 20% over the year.
Comparing 120,000 to 100,000, it appears inventory has increased by 20%. But is it really? Let's see after the inflation effect wears off.
Adjust the closing inventory value for inflation as follows:
120.000 x 100 / 120 = 100.000
Once the inflation effect is adjusted, we can see that the ending inventory value is equal to the opening inventory value, meaning that there has been no real change in the quantity of units and the increase in value is only due to inflation.
Therefore, the change is ZERO and after adjusting to the current year's prices, ie 120%, it remains ZERO
Therefore, according to the dollar value method:
| Opening stock – early in the year Real increase over the year [0 x 120%] | 100.000 0 |
| Closing stock – end of year | 100.000 |
Example 2 - Dollar Value LIFO Calculation
ABC Inc. started the year with 300,000 worth of inventory. At the end of the year, the warehouse manager reported that 520,000 worth of stock was being held. If prices are up 25% over the year, what is the dollar value LIFO inventory cost?
Solution:
As prices have increased by 25% over the year. If we assume that the prices at the beginning of the year are 100%, then the prices at the end of the year are 125%.
Step 1: Calculate the value of the ending inventory by taking out the effect of inflation, i.e. H. at the starting prices of the year, as follows:
520.000 x 100/125 = 416.000
Step 2: Compare the number calculated in Step 1 to the opening inventory value to determine the increase or decrease
= 416,000 - 300,000 = 116,000. So much is the actual increase in value due to the increase in volume.
Step 3: extrapolate the change determined in step 2 to current year prices, i. H. 125%
= 116.000 x 1,25 = 145.000
Step 4: Now calculate the ending inventory value by adding the value determined in step 3 to the opening inventory value:
| Open Inventory - First Layer 125% increase over the year – Second shift | 300.000 145.000 |
| Closing stock according to doll value LIFO | 445.000 |
Example 3 - Dollar Value LIFO Calculation
The following information is available for Not-so-viable Inc.
[Table-ID=24/]
Calculate the value of each year's ending inventory using the dollar value LIFO method
Solution:
First, we need to determine the ending inventories of each year at base year prices:
[Table-ID=25/]
Inventory at the end of 2013:
Comparing the 2012 and 2013 year-end inventory values at base year prices, we see that the change is only 100,000 (250,000 – 150,000).
Adjustment of the price change from 2013, i. H. 120% = 100,000 x 120% = 120,000
| inventory at base year | Index | inventory at Present year | |
| First layer - Inventory 2012 Second Shift – increase by 100,000 | 150.000 100.000 | 100 120 | 150.000 120.000 |
| Inventory value 2013 | 250.000 | 270.000 |
Inventory at the end of 2014:
Comparing the base year values of 2013 and 2014, we see that the values have decreased by 2,000 (248,000 – 250,000).
If there is a reduction in value, this will be offset against the most recent shift. In our case, it's the second tier added in 2013 from 100,000 at base year prices. After adjusting the decrease, it is 98,000 (100,000 – 2,000). After that we will restate the change to 2013 prices, i.e. H. 120%NOT 125%
| inventory at base year | Index | inventory at Present year | |
| First layer - Inventory 2012 Second layer - corrected for the 2000 decline | 150.000 98.000 | 100 120 | 150.000 117.600 |
| Inventory value 2014 | 248.000 | 267.600 |
Note here that no new level will be added if the inventory decreases. A new shift is added ONLY if the ending inventory at base year prices is greater than the beginning inventory of that year at base year prices.
Inventory at the end of 2015:
In 2015, the inventory value in base year prices continues to decrease by 33,000 (215,000 – 248,000). This in turn is subtracted from the most recentsecondLayer. After the adjustment, the reduction balance of the second layer is 65,000 (98,000 - 33,000).
| inventory at base year | Index | inventory at Present year | |
| First layer - Inventory 2012 Second layer – adj. for 33,000 decrease | 150.000 65.000 | 100 120 | 150.000 78.000 |
| Inventory value 2015 | 215.000 | 228.000 |
Inventory at the end of 2016:
Comparing the base year values of 2015 and 2016 we see an increase of 95,000 (310,000 – 215,000)
Since the ending inventory at the base year price level is higher than the 2015 inventory, a new layer with a value of 95,000 is added. This is calculated using the 2016 price index, i. H. 135%, adjusted, so the 95,000 increase in the 2016 price level is 95,000 x 1.35 = 128,250
| inventory at base year | Index | inventory at Present year | |
| First layer - Inventory 2012 second shift Third Shift - Increase by 95,000 | 150.000 65.000 95.000 | 100 120 135 | 150.000 78.000 128.250 |
| invent 2016 | 310.000 | 356.250 |
Example - Unit LIFO vs Dollar Value LIFO
The All Things Company had the following holdings at the beginning of the year:
[Table-ID=22/]
The following purchases were made during the year:
[Table-ID=23/]
At the end of the year, the company had 1000 units of item 1 and 5000 units of item 2.
Calculate the cost of units sold and the cost of ending inventory at:
- unit LIFO
- Dollar-Wert-LIFO