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

Abstract In this article, the author responds to comments by the accounting expert Harry Zvi Davis, on his article "The Effects of LIFO Inventory Costing on Resource Allocation," that was previously published in the journal "The Accounting Review." The author says Davis suggests that his paper's conclusion is that a firm that uses LIFO will necessarily expend more resources to maintain year-end inventory levels than will a firm that does not use LIFO. Based on the mathematical development of the argument contained in the appendix to my article, this is, in fact, the conclusion. However, notwithstanding Davis' correction, the conclusion as set forth in the paper may still be correct when viewed from other perspectives. In order for Davis' conclusion to be correct, LIFO firm's ending inventory for each year must be identical with that of the non-LIFO firm, not merely non-decreasing. The probability that LIFO has no effect on resource allocation becomes even smaller when one takes into account all LIFO pools that exist in any given year.