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

More than 60% of large firms use dollar value LIFO. The central decision when using this method is the arrangement of the inventory pools. This paper specifies exactly what to analyze and what to consider when making a pooling decision. When adopting dollar value LIFO, the basic managerial decision is how to arrange the inventory pools. The Internal Revenue Code regulates how broadly defined a pool may be. Hence, the decision maker is only constrained when he or she attempts to place a range of different items into one pool, i.e., follow a single pool approach. By adopting a single pool approach, the firm is effectively locking itself into paying for a permanent insurance policy. Specifically, the manager should analyze how inventory purchases are affected by price changes, how goods are stocked, how goods are used in the manufacturing process, and if future liquidations are likely.