Question

Bach Co. adopted the dollar-value LIFO inventory method as of January 1, 2006.

A single inventory pool and an internally computed price index are used to compute Bach's LIFO inventory layers. Information about Bach's dollar-value inventory follows:

	Inventory
Date	at base-year cost	at current-year cost
1/1/06	$90,000	$90,000
2006 layer	20,000	30,000
2007 layer	40,000	80,000

What was the price index used to compute Bach's 2007 dollar-value LIFO inventory layer?

The answer is 1.33. However, I do not understand how.

Answer 1

Price index used to compute Bach's 2007 dollar-value LIFO inventory layer
Price Index	Total at current year cost/Total at base year cost
Price Index	200000/150000
Price Index	1.33

	Inventory
Date	at base-year cost	at current-year cost
01-01-2006	$ 90,000	$ 90,000
2006 layer	20,000	30,000
2007 layer	40,000	80,000
Total	$ 150,000	$ 200,000

The total of current year cost is nothing but the value of ending inventory at the end of 2007 at cost i.e., $ 200,000. In the similar way, total of base year cost is nothing but value of ending inventory at base cost at the end of 2007 i.e., $150,000