Pooled LIFO
One of the problems with using the LIFO costflow assumption is the problem of "involuntary LIFO liquidation". One cause of this is if the unit LIFO method is used and the inventory is not replenished because a change in product mix occurs (for example, the company sells less oil based paint and more latex paint). If the inventory has been kept on a unit LIFO basis, eventually, the entire beginning inventory (of oil paint) will have been sold, resulting in lower cost of goods sold and higher taxes. One method to avaid this problem is to use a "pooled LIFO" approach. Under this method, similar goods are grouped into "pools" and the individual components of the pool (and the change in composition of the pool) are ignored. The focus is entirely on the total dollar value of the pool. Using this approach helps to reduce the problem of involuntary LIFO liquidation, but it requires constant update and vigilance. It may also cause charges of income manipulation. To eliminate the problems caused by suing pools, the dollar value LIFO approach was developed.
