The Effects of LIFO Inventory Costing on Resource Allocation: A Comment.

Abstract In this article, the author comments on an article by the analyst Robert Halperin related to effects of last in first out (LIFO) inventory costing on resource allocation that was previously published in the journal "The Accounting Review." The author says Halperin claims that since a LIFO firm will want to avoid a liquidation of inventories it will maintain excess inventory. He that an income tax system which permits the use of LIFO introduces an inefficiency into the allocation of an economy's productive resources. Halperin argues that firm that uses FIFO will choose an optimal inventory level each year. However, as Halperin points out, the LIFO firm will not determine the inventory levels independently. The author further says that the flaw in this line of reasoning is that it assumes, with no proof, that resources must be used to keep ending inventory from decreasing. The error stems from problems with the definition of the term P. Clearly, the term P there means total purchases, not extra purchases.