Chapter 8 explains two methods for reporting inventory using process costing: FIFO and weighted average. But what if a company wants to use LIFO to report its inventory because of the significant tax benefit?
How could a dollar-value LIFO help them use FIFO for managerial purposes but LIFO for financial statement reporting?
Process Costing includes the methods of First-In-First-Out and Weighted Average Methods for valuation of inventory. The Last-In-First-Out Method is not used in the process of costing because it is difficult to implement. However, it can be used if the company can have a substantial tax advantage by using it. If the costs are expected to rise shortly, then the firm is bound to go for the strategies to have maximum tax benefits. It can be done by treating the units which were last started as though they were the first ones to be completed and sold. However, this method does not help in internal decision making. But, through the analysis of the impact of adopting the LIFO method can help companies reduce costs for their processes (Gibson, 2008).
More specifically, the Dollar-Value LIFO method can help the company to use the LIFO method for its reporting and the FIFO method for its management decisions. This method follows the LIFO method, but all the figures are used in dollar amounts (Nikolai, Bazley, & Jones, 2009). The effect of using this method can help the company by showing the true value of the COGS as represented in Dollars amount. By using this method, the company would be able to show higher COGS as the prices would increase, which would cause lower net income and needed tax benefits. The use of the highest cost inventory for production increases the cost of manufacturing (Bloom & Cenker, 2009). The FIFO method can be used for managerial purposes, as it corresponds to the physical flow of goods and the manipulation of income is not possible in it. It will give the company the clear position of its inventory and profits for internal decision making. The disadvantage of the tax burden is coped with the use of the Dollar-value LIFO method (Bragg, 2005).
References
Bloom, R., & Cenker, W. J. (2009). The Death of LIFO? Retrieved from https://www.journalofaccountancy.com/issues/2009/jan/deathoflifo.html
Bragg, S. M. (2005). Inventory Accounting: A Comprehensive Guide. John Wiley & Sons.
Gibson, C. (2008). Financial Reporting and Analysis: Using Financial Accounting Information. Cengage Learning.
Nikolai, L. A., Bazley, J. D., & Jones, J. P. (2009). Intermediate Accounting Update. Cengage Learning.
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