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Under the last-in first-out (LIFO) inventory valuation method, a price index for inventory must be established for tax purposes. The quantity weights are based on year-ending inventory levels. Use the beginning-of-the-year price per unit as the base-period price and develop a weighted aggregate index for the total inventory value at the end of the year. What type of weighted aggregate price index must be developed for the LIFO inventory valuation?
Solutions
Verifiedmust be developed for the LIFO inventory valuation. The weighted aggregate index in period is calculated by the following formula:
Therefore,
Let and be, in order, the quantity, the base (earlier) years price and the current price for items . Especially when the quantities come in a wide range, use weighted index. Its formula is:
All the values are given, substitute them to obtain:
So, the current cost is 104% of the earlier years cost, a 4% increase.
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