Answer
The Dollar-Value LIFO approach utilizes the total dollar value when determining whether a pool of inventory is increasing or decreasing. Unlike other methods, this methodology does not utilize physical quantities of inventories in specific pools. The method is advantageous when compared to the specific goods approach because it allows for the inclusion of a wide range of inventory. Besides, the methodology allows similar items to be interchanged or to be replaced. Consequently, erosion of layers is averted when the dollar-value technique is employed.
The divergent inventory valuations arise because the inclusion of more goods (under Dollar-value LIFO) allows for the offsetting of goods that may decrease within the same pool, and this reduces the chances of LIFO layers being liquidated.
Work Step by Step
The Dollar-Value LIFO approach utilizes the total dollar value when determining whether a pool of inventory is increasing or decreasing. Unlike other methods, this methodology does not utilize physical quantities of inventories in specific pools. The method is advantageous when compared to the specific goods approach because it allows for the inclusion of a wide range of inventory. Besides, the methodology allows similar items to be interchanged or to be replaced. Consequently, erosion of layers is averted when the dollar-value technique is employed.
The divergent inventory valuations arise because the inclusion of more goods (under Dollar-value LIFO) allows for the offsetting of goods that may decrease within the same pool, and this reduces the chances of LIFO layers being liquidated.
