The Dollar Value LIFO Pooling Decision: The Conventional Wisdom Is Too General.

This article specifies factors and procedures that are required to be analyzed and considered while making a pooling decision, using the LIFO (last in, first out) method. More than 60 percent of large firms in the U.S. use dollar value LIFO. The central decision when using this method is the arrangement of the inventory pools. It is suggested that the decision maker needs to analyze how the company's budgeting decisions are affected by inventory price changes, determine whether inventory prices tend to move together, investigate how goods are stocked in relation to one another, and consider the likelihood that inventory layers will be liquidated. The argument supporting a single pool approach rests on the advantage the approach offers when inventory quantities are reduced and on lower bookkeeping costs. Using a multiple pool approach, the cost of goods sold deduction can, suggestively, be substantially higher, and the tax bill lower, than if a single pool approach is used. From a tax standpoint, a multiple pool approach can be more beneficial whenever the quantities a firm purchases are sensitive to inventory price changes. Specifically, a multiple pool approach should be considered when a firm tends to purchase more of those items whose price changes are comparatively low and fewer of those items whose price changes are comparatively high.