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Disadvantages of LIFO
Disadvantages of LIFO
The LIFO method we have discussed so far is called unit LIFO because we apply the concept of "last-in, first-out" to individual units of inventory. However, there are two disadvantages to implementing LIFO in this fashion.
The recordkeeping costs of unit LIFO are significant. To implement it, a company needs solid inventory tracking software. It also requires a lot of employee time.
There is always the possibility of LIFO liquidation.
Dealing with disadvantages: LIFO inventory pools
Dealing with disadvantages: LIFO inventory pools
One way to reduce recordkeeping costs and reduce the likelihood of LIFO liquidation is to using inventory "pools". A LIFO inventory pool is a group of inventory units that are physically similar.
Dealing with disadvantages: Dollar-value LIFO
Dealing with disadvantages: Dollar-value LIFO
Dollar-value LIFO (DVL) is an inventory costing method comprising layers of dollar value from different periods and using cost indexes to adjust for changes in price levels over time.
Advantages of dollar-value LIFO (DVL)
Advantages of dollar-value LIFO (DVL)
It simplifies record-keeping.
It minimizes the probability of LIFO liquidation.
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