Answer
Advantages of the dollar-value methods over Last In First Out (LIFO) method:
a. The dollar value method allows greater flexibility because each pool is made up of dollars rather than quantities therefore simplifying the maintenance of inventory.
b. Application of the LIFO method is simplified because, under the pooling practice, it is not necessary to assign costs to opening and closing quantities of individual items. As a result, companies with a large inventory comprised of thousands of items may adopt the dollar-value method and minimize their bookkeeping costs.
Disadvantages of the dollar-value methods over Last In First Out (LIFO) method
a. The year-end index, which is very commonly used, can only be utilized with the FIFO method. Other indexes may be average index and beginning-of- year index.
b. Conversion of the ending inventory to base-year prices may be difficult to calculate or to justify conceptually. This is mainly because of technological innovations and improvements over time, material changes in the composition of inventory may occur. Items found in the ending inventory may not have existed during the base year.
c. Determination of the level of similarity between items for the purpose of grouping them into pools can be difficult and may be based upon arbitrary management decisions.
Work Step by Step
Summarily, determination of which of the two methods above is to utilized is subject to the nature of inventory, effect on price and revenue as well as the market responsiveness.
