Dollar Value LIFO Method

The dollar value of LIFO method is an inventory method that is a minor variation of the Last In and First Out method of inventory costing. With the help of this method a business can aggregate the cost of large bundle of inventories. In this method the cost layers are determined that are applied to the pool of the inventory items in order to calculate conversion price index that is based on the comparison to the last year ending inventory to the cost of the base year.

The basic concept of the dollar value LIFO method is the calculation of the conversion index. There are three steps involve in calculating the index

  • The extended cost of ending inventory is calculated at the base year prices
  • The extended cost of ending inventory is also calculated on the biases of recent prices
  • The total extended cost of the recent year is divided with the extended cost of the base year

With the help of these calculations an index is determined on the biases of base year prices of the inventory. These calculations are maintained and derived for every year in which the LIFO method is used. After calculating the index the additional steps are taken to calculate the cost of LIFO cost layer in each successive period within the business. These additional steps are:-

  • The incremental increase in the inventory units is determined
  • extended cost of these incremental units is calculated on the biases of base year cost
  • The extended cost amount is multiplied with conversion price index to calculate the cost of LIFO layer for the next reporting period

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