DV LIFO

Dollar Value LIFO:

Inventory is measured at current prices with increases added to the historical cost of beginning inventory, using current prices, and decreases measured on the basis of the most recent goods purchased, at their historical cost.

• Inventory is measured in terms of $, not units, & is adjusted for changing price levels. 
• A price level index is used to convert the inventory value from LIFO to Dollar-value LIFO.

LIFO - best matching pricing policy: b/c replacement cost, most recent purchases as cost of sales in GAAP methods. 

2 potential difficulties: 

• Keep track of the different unit costs for items acquired on diff dates- cumulative accurate records
• Costs can be enormous - for record-keeping costs over times with diff types of products 
• Distortion may occur when inventory levels decline temporarily and older costs previously inventoried will become a part of COGS (which is diff than the replacement costs)

Therefore, a useful solution is "Dollar-Value LIFO (DV LIFO)" - so that related inventory items are grouped in pools.

Pools - an overall price index to approximate changes in inventory costs can address some problems:

1. Keep track of annual layers of inventory cost and price indexes for each inventory pool (vs. retaining detailed records of each unit cost of each item puchased over the life of company) - lower record-keeping cost
2. Items are grouped together and layers are computed annually - reductions in the level of a certain type of item in inventory can offset the the increase in the level of other items in the pool - won't result in the use of older costs in COGS calculation

To apply the DV LIFO - 2 figures are needed:

1. Total Current Cost of the inventory in the pool @ year end (= replacement costs or End Inv under FIFO)

2. Price Index of overall price level compared to the base date (= date the method was 1st adopted)