IPIC LIFO Overview

IPIC LIFO Overview

  • Overview

    The Inventory Price Index Computation (IPIC) method allows taxpayers to use published external indexes to calculate inflation for the purpose of valuing LIFO inventories. The IPIC method was first authorized by the IRS in 1982 in order to provide an approved method that would simplify LIFO calculations & make LIFO more accessible to smaller taxpayers.

    A taxpayer using the IPIC method must assign appropriate Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) or Producer Price Index (PPI) categories to inventory items in order to measure the amount of inflation used for LIFO calculations. Manufacturers & wholesalers are required to use PPI while retailers are allowed to use either CPI or PPI. These indexes are used to calculate category inflation indexes. Category inflation indexes are then weighted by inventory dollars (taxpayers using the optional 10% Method must also use BLS weights) to compute a current year inflation index for each pool. Taxpayers using the IPIC method can use the IPIC pooling method for which pools are created using broad CPI or PPI major groups (and not the individual categories). Use of the IPIC pooling method is not mandatory & other authorized pooing methods may be used. The pool cumulative indexes are used to deflate the inventory current-year cost (FIFO or average cost) to base period prices, which is then compared to the prior year’s inventory valued at base period prices. If the current year’s inventory at base is greater than the previous year’s inventory at base, the increment is multiplied by the pool cumulative inflation index to price the LIFO layer. If the current year’s inventory at base is less than the previous year’s inventory at base, the decrement erodes a previous layer (or multiple layers) & is priced using the index(es) originally used to price the layer(s).

  • Origins

    On March 16, 1982 the Department of Treasury published IRS Reg. § 1.472-8(e)(3) as Treasury Decision 7814 regarding the IPIC method. This IPIC method is commonly referred to as “Simplified LIFO”. The Simplified LIFO term was first used by the IRS to refer to a method of using published indexes authorized by IRS Code §474 that could be used by very small businesses, originally defined as companies with three-year average annual gross receipts of $2 million (later revised to $5 million) or less. Very few taxpayers ever used this method & now the Simplified LIFO term is used by CPAs to describe the IPIC method. The purpose of the IPIC method is to simplify the use of LIFO accounting by allowing companies to use published indexes.

    Since the 1940s the IRS has allowed broad line retailers (i.e., department stores & discount chains) to use published government indexes. The National Retail Federation contracted with the BLS to compile a special set of Department Store Indexes (DSI) as a subset of the Consumer Price Indexes (CPI). Broad line retailers could then use pools corresponding to the DSI categories & utilize one index per pool, which greatly simplified their LIFO calculations.

    The prospect of using published indexes was very appealing to food retailers. In 1975 the Food Merchandisers LIFO Advisory Committee of the Food Marketing Institute (FMI) began to work towards the goal of gaining IRS approval for their members to use published indexes. The concept of using published indexes was appealing to food retailers for the same reasons it was to the broad lines retailers, i.e., because of the great difficulty in calculating internal inflation indexes. The cost to develop indexes specifically for food retailers was deemed to be too great & the use of a single Food at Home CPI for all goods would not have provided sufficient accuracy, so the committee devised what resulted in the IPIC Method regulations using existing published indexes & establishing rules to provide a good balance between precision & simplicity. In January 1983, the FMI published a booklet entitled Handbook for LIFO Tax Valuations Inventory Price Index Computation Method (IPIC) which was a guide for use of the IPIC Method for supermarket chains. Use of the IPIC method has allowed companies to avoid the onerous task of calculating internal indexes which is particularly difficult for smaller firms. The IPIC Method is not without its drawbacks. The 10 Percent method, which was mandatory in the original 1982 IPIC Regs., requires a complicated two-tiered weighting calculation in which multiple indexes for each pool were first weighted by BLS Weights of Relative Importance & then by actual inventory dollars. While small taxpayers were allowed to use 100% of the inflation calculated with the IPIC method, all other taxpayers were allowed to use only 80% for tax purposes.

  • 2002 IPIC Regulations

    On May 19, 2000 the IRS published proposed changes to the IPIC LIFO Regulations under Treasury Regulations Section 1.472-8(e)(3) & solicited comments regarding the proposed regulations. A public hearing was held in Washington, D.C. on September 15, 2000 on the proposed regulations.


    On January 8, 2002 the IRS issued final Regulations § 1.472-8(e)(3) in Treasury Decision 8976. The following is a synopsis of most important changes encompassed in the new Regs:

    • 100% inflation – All taxpayers may now use 100% of inflation calculated using IPIC for tax purposes. The elimination of the”20% haircut” should encourage more widespread use of IPIC.
    • Use of 10% categories & BLS Weights – The use of this method was mandatory under the old Regulations but is now optional. Taxpayers now have the option of using only their actual FIFO inventory balances to calculate weighted average pool indexes. Having this option provides for simplification of pool index calculations for companies that can sort their inventories into the Most Detailed CPI or PPI categories the new Regulations require & taxpayers for whom assigning BLS categories to their inventory in greater detail would be burdensome or impossible can still use the IPIC method.
    • Elimination of requirement to use cost complements – The requirement to make stage of production index conversions using gross margin percentages, (i.e., convert the CPI retail selling price indexes to a cost basis for companies not using Retail LIFO) was well intentioned by the IRS but created numerous problems in practical application. This change is greatly welcomed by any company to whom this applied under the old Regulations.
    • Use of CPI categories by retailers – Many retailers using CPI categories who do not use the Retail Inventory Method would have been forced to use PPI categories under the proposed Regulations. Under the final new Regulations, these companies can still use CPI categories & can do so without making cost complement adjustments that the old Regulations required. The use of PPI categories for these retailers would have been burdensome because the CPI categories correlate much better with their inventory mix than the PPI categories.
    • Use of Weighted Harmonic mean – Since the great majority of taxpayers have used the Weighted Arithmetic Mean in the past, this will require a change for most taxpayers. The new method always produces less inflation or greater deflation than using the Weighted Arithmetic Mean method. The decrease in LIFO benefits this produces is relatively small for most taxpayers (much less compared to using 100% vs. 80% of inflation), though this difference will be significant for some. A likely source of confusion will be the requirement that the Weighted Harmonic Mean is to be used only for pool index FIFO dollars weighting calculations & not for the Category Index BLS weighting calculations required for calculations using the 10 percent categories & BLS Weights method.
    • Change in definition of 10% categories – Most taxpayers who continue to use the 10 percent categories & BLS Weights method under the new Regulations will need to sort their inventories in greater detail. This is because the new Regulations definition of the 10% categories threshold is the sum of each pool’s FIFO inventory values. The old Regulations specified that the denominator for the 10% categories was “total inventory value” which almost all taxpayers interpreted to mean either the sum of their FIFO inventory values, the sum of their FIFO inventory values on LIFO, or the sum of their FIFO inventory values for which the IPIC method was used. A small minority of taxpayers used the sum of each pool’s FIFO inventory values as the 10% categories threshold. Not only does the new definition of 10% categories require more detailed BLS category assignment, it makes this process more complicated because instead of there being one threshold amount for all inventories, there will now be as many different 10% thresholds as there are pools.
  • Advantages & Disadvantages


    • Index calculation simpler than internal index in certain cases – Use of a published index precludes the need to calculate an internal index unless companies switch for tax LIFO only. Internal index calculations can be a major undertaking for manufacturers & can be avoided altogether if companies use the IPIC method.
    • IRS audit exposure reduced for past years – Companies switching to the IPIC method are provided a “Safe Harbor” by the IRS with respect to methods used in years prior to the change. IRS audit exposure may be eliminated in these areas:
      • Pooling – Many companies use pooling methods not authorized by the IRS. Taxpayers may elect the optional IPIC pooling rules thereby establishing an acceptable pooling method.
      • Statistical sampling – Many companies use internal index sampling methods not acceptable to the IRS. For example, a company’s sampling method may exclude new items.
      • Other – Some manufacturers still use the components-of-cost method despite its prohibition by the IRS. Some manufacturers also incorrectly apply raw materials only indexes to total inventory dollars including labor & overhead dollars. Companies can eliminate exposure from use of these methods by adopting IPIC.
    • Easy means of switching from the double-extension method – The IRS has been reluctant to permit changes from this submethod to the link-chain method, especially for companies whose annual turnover of inventory items is not rapid. Taxpayers can make this change without IRS consent when electing the IPIC method & electing the link-chain submethod as an automatic approval change.
    • Higher inflation indexes possible – Some companies have found CPI or PPI inflation rates to be consistently higher than their internal index inflation. For most large supermarket chains the advantage of using CPI vs. internal indexes has been substantial. An annual positive differential of 1% between CPI or PPI inflation & a company’s internal index inflation would reduce taxable income by $1 million annually for a company with $100 million in total inventory at FIFO cost at the beginning of a year.
    • Fewer pools possible – Supermarket chains not using IPIC LIFO are required to maintain as many as 12 pools. Supermarket chains using IPIC LIFO use between 3 & 6 pools because IPIC LIFO allows pooling based on the 8 different CPI Major Groups & this is the number of pools typically required using this method. Having fewer pools will produce additional LIFO benefits because layer erosions are fewer since decreases in formerly separate pools will be offset by increases in others when pools are combined.
    • IPIC LIFO need not be also used for financial reporting – Companies may adopt IPIC for tax purposes while continuing to use internal indexes for book LIFO. Higher tax LIFO expense may result without increasing the amount of the book LIFO expense if the internal indexes used for financial reporting are less than the IPIC tax indexes.


    • Implementation time – Developing a means to sort inventory by the appropriate CPI or PPI categories can require considerable time & effort. The annual BLS CPI or PPI category assignment task is often time-consuming for companies with any of the following situations:
      • Large amount and variety of items
      • Multiple stages of production
      • Significant percentage of new items introduced into product mix annually
    • Separate Book & Tax calculations for companies required to continue using internal indexes for Book & IPIC for Tax – Although there are hundreds (if not thousands) of companies that use IPIC LIFO for Book & Tax, most publicly-traded companies along with some larger private corporations are required to maintain internally-calculated inflation indexes for financial reporting while using IPIC LIFO for Tax, meaning a company must maintain separate Book & Tax LIFO layer histories.
    • Certain goods are difficult or unable to be mapped to a BLS category – The BLS has multiple BLS PPI categories for certain items, and determining the “correct” category is dependent on material composition. For example, there are often two possible PPI categories for plumbing fitting, and determining the correct code requires knowing if the product is made of plastic or metal. For many various items, this is often burdensome or impossible to determine, meaning judgement calls must often be made. Furthermore, the BLS has limited or no coverage for certain types of inventories, meaning a “catch-all” category must be used in the absence of a more applicable one.
    • Higher inflation not guaranteed – Higher CPI or PPI inflation than for internal indexes historically is no guarantee that it will in the future.
  • LIFO Calculation Procedures
    1. BLS Category Assignment – all items on LIFO are required to be assigned a Consumer or Producer Price Index category. Some companies assign these categories by product hierarchy (category, class, departments, groups, lines etc.) to preclude doing so on an item-by-item basis.
    2. Inflation Index Calculation – front-end exercise to compute the following input variables required to complete the back end of the LIFO calculation:
      1. Current-year cost balance (CYC) – total average-cost or FIFO on LIFO balance.
      2. Current year inflation index – involves comparing current vs. prior period BLS price indexes. The detailed IPIC LIFO inflation index steps are described later in this guide.

    LIFO Reserve Calculation – computation of increments/decrements, LIFO inventory, reserve & expense (income) values (detailed steps shown in LIFO Inventory Training Basics & Audit Guide

  • BLS Inflation Indexes

    The Regs. permit retailers to choose either Consumer Price Indexes (CPI) or Producer Price Indexes (PPI). All other taxpayers must use PPI. The Table 2 CPI for All Urban Consumers (CPI-U): U. S. city average, by detailed expenditure category is used for CPI. The Table 9 PPIs for commodity and service groupings and individual items or Table 11. PPIs for the net output of industries and their products can be used for PPI. Use of PPI Table 11 indexes rather than Table 9 PPI is extremely rare because the main difference between these tables is in the organization (Table 9 is by commodity type & Table 11 is by industry) & there are Table 9 index categories corresponding to almost every Table 11 index category. The references in the Regs. to the PPI Detailed Report tables are Table 6 for commodities & Table 5 for industries. The BLS changed the numbers of these tables in 2014 so that Table 9 is now the commodities table & Table 11 is now the industries table.

  • Pooling Method Options

    Use of the IPIC pooling method is not mandatory for companies using the IPIC method. The following are alternative pooling methods provided by the IRS:

    • By line, type, or class of goods – Wholesalers & retailers can use separate pools for each major line, type, or class of goods. Customary business practices for a trade or industry determine what constitutes a major line, type, or class of goods. Authorized by Regs. § 1.472-8(c).
    • Natural business unit pooling – A pooling method authorized by Regs. § 1.472-8(b)(1) for manufacturers & processors. A Natural Business Unit (NBU) includes all inventory items related to a product line or related product lines, including raw materials, work in process, & finished goods. Distinct business units require separate pools. A natural business unit may be defined based on divisions established by internal management, separate production facilities or processes, or separate financial records. Manufacturers that also purchase goods for resale are required by the IRS in Rev. Rul. 79-290, Rev. Rul. 82-192 & PLR 8842061 to use separate pools for manufactured goods & goods purchased for resale.
    • Multiple pools – Companies may group together similar items in a pool even if they are not all within the same natural business unit. Grouping goods together to form a pool may be based on such factors as the similarity or interchangeability of raw materials, the similarity of the production processes, the similarity of the use of the products, standard practices within the trade or industry, & whether the goods are treated similarly by a company’s management. Authorized by Regs. § 1.472-8(b)(3)(i).
    • Raw materials content – Goods with similar raw materials, including the raw material content of work-in-process & finished goods may be grouped together to form a pool for manufacturers or processors. Raw materials that are not similar in nature may not be grouped together in the same pool even if they are processed or manufactured into the same finished product. Authorized by Regs. § 1.472-8(b)(3)(ii).

    To maximize tax savings, companies should use as few pools as possible because this will reduce the likelihood of decrements because decreases in inventory values will be offset by increases in others for groupings of inventory items included in the same pool. Decrements result in lower-cost goods being included in cost of goods sold which increases taxable income.

  • IPIC Pooling Method Guidelines

    The IPIC method Regs. allow for IPIC LIFO taxpayers to optionally elect to use the IPIC LIFO pooling method. This method is referred to as the IPIC 5% pooling method. Under this method, pools are established for each PPI Table 9 2-digit category or CPI Major Group which includes 5% or greater of the taxpayer’s total FIFO inventory balances on LIFO. A single de minimis or all other pool will include the inventory balances represented by the less than 5% 2-digit PPI codes or CPI Major Group. If the total FIFO inventory balances for this all other pool is less than 5%, these 2-digit PPI codes or CPI Major Groups may be included in the largest pool. This determination is made upon election of the IPIC method & the Regs. provide for review of the pools used every other year in which case more or less pools may be required as determined by the same 5% rule.

  • CPI IPIC Pools

    Unlike for the PPI, the BLS does not introduce new CPI categories & discontinue old ones every three months. The BLS restructured the entire CPI series beginning in January 1998, though & similar restructurings may occur in the future.

    The 2002 New Regs specified that LIFO taxpayers using Consumer Price Indexes & the IPIC Pooling Method should use the CPI major expenditure categories (i.e., major groups) as their IPIC pools. These Major Groups are not defined in the Regs. but appear to be these:

    Pool #

    CPI Code CPI Major Expenditure Group

    Pool Name

    1 SAF Food & Beverages Food & Beverages
    2 SEHE Fuel Oil & Other Fuel Housing
    2 SAH3 Household Furnishings & Operations Housing
    3 SAA Apparel Apparel
    4 SAT1 Private transportation (Inc. gasoline) Transportation
    5 SAM1 Medical Care Commodities Medical Care
    6 SAR Recreation Recreation
    7 SEEA Educational Books & Supplies Education & Communication
    7 SEEE Information & Information Processing Education & Communication
    8 SAG Other Goods & Services Other Goods & Services
    8 SEGA Tobacco & Smoking Products Other Goods & Services
    8 SEGB Personal Care Products Other Goods & Services
    8 SEGE Miscellaneous Personal Goods Other Goods & Services
  • PPI IPIC Pools

    Similar to IRS CPI Regs., taxpayers using Producer Price Indexes & the IPIC pooling Method should use the PPI major commodity groups as their IPIC LIFO pools, and are as follows:

    Pool # PPI Code BLS PPI Major Commodity Group & Pool Name
    01 Farm Products
    02 Processed Foods & Feeds
    03 Textile Products & Apparel
    04 Hides, Skins, Leather & Related Products
    05 Fuels & Related Products & Power
    06 Chemicals & Allied Products
    07 Rubber & Plastic Products
    08 Lumber & Wood Products
    09 Pulp, Paper, & Allied Products
    10 Metal & Metal Products
    11 Machinery & Equipment
    12 Furniture & Household Durables
    13 Nonmetallic Mineral Products
    14 Transportation Equipment
    15 Miscellaneous Products

    BLS PPI Code Hierarchy

    Each two-digit General Category is comprised of successively more-detailed three-digit, four-digit, six-digit, & eight-digit categories. For example, the 02 – Processed foods & feeds PPI category includes 9 three-digit categories:

     Three-digit 02 – Processed foods & feeds categories

    PPI Code PPI Commodity Name
    021 Cereal & bakery products
    022 Meats, poultry, & fish
    023 Dairy products
    024 Processed fruits & vegetables
    025 Sugar & confectionery
    026 Beverages & beverage materials
    027 Fats & oils
    028 Miscellaneous processed foods
    029 Prepared animal feeds


    Four-digit 021 – Cereal & bakery product categories

    PPI Code PPI Commodity Name
    0211 Bakery products
    0212 Flour & flour base mixes & doughs
    0213 Milled rice
    0214 Other cereals


    Six-digit 0211 – Bakery product categories

    PPI Code PPI Commodity Name
    021101 White pan bread
    021104 Other bread
    021105 Bread type rolls
    021107 Sweet yeast goods
    021108 Soft cakes
    021109 Pies
    021121 Cookies, crackers, & related products


    Eight-digit 021104 – Other bread categories

    PPI Code PPI Commodity Name
    02110401 White hearth bread
    02110402 Dark wheat bread
    02110404 Other variety bread

    There are changes made every three months in the PPI codes published by the BLS. Some of the PPI codes shown in this section have been discontinued since this guide was first written but they are used here to illustrate how the hierarchy of PPI codes is organized.

    PPI Most-Detailed Categories

    A most-detailed category is one that does not include any other categories. Eight-digit categories are always most-detailed categories. There are numerous most-detailed categories, however, that have fewer than eight digits. 021101 White pan bread is a six-digit category that does not include any eight-digit categories, hence it is a most-detailed category. 0232 Butter & 0234 Ice cream & frozen desserts are each examples of four-digit categories that are most-detailed categories because they do not include any six-digit categories. Sometimes three-digit categories are considered most-detailed categories because they include only four-digit & six-digit categories with the same category name (e.g., 138 Glass containers consists entirely of 1381 Glass containers & 138101 Glass containers); in these cases, the three, four, & six-digit categories will have identical indexes & BLS weights. Because of this, which categories are most-detailed categories cannot be determined based simply on the number of digits in the commodity code.

  • BLS Category Assignment

    10 Percent Method vs. Most-Detailed Categories Method

    The IRS Regs. describe an optional method that taxpayers may use for assigning inventory items to BLS categories & for determining category inflation indexes called the 10 Percent method. The 10 Percent method is intended to simplify the use of the IPIC method by allowing taxpayers to sort their inventories into fewer, less-detailed categories than are required for the alternative Most-Detailed Categories method. While the 10 Percent method makes the task of assigning inventory to BLS categories less burdensome, there is a trade-off involved because the math required to calculate category inflation indexes is more complex. The Regs. require taxpayers electing to use the 10 Percent method to first weight inflation indexes with BLS weights, then with inventory dollars. Taxpayers using the Most-Detailed Categories method only use inventory dollars to weight inflation indexes.

    Taxpayers are allowed to select either the 10 Percent method or the Most-Detailed Categories method for assigning BLS categories to their inventory dollars & calculating pool indexes. Many retailers still use the retail inventory method & do not have inventory systems that allow them to track the actual costs of specific goods at their stores. Requiring taxpayers to sort inventory into most-detailed categories, therefore, would have been a formidable burden for most retailers. The real value of the 10 Percent method is that it allows taxpayers carrying many different inventory items to reduce the burden of assigning all of their IPIC LIFO inventories to BLS categories.

    LIFO-PRO, Inc. has performed numerous pro-forma calculations comparing the results of the two methods & over time there is little difference. As a practical matter, taxpayers should consider the following when deciding which index calculation method to use:

    1. Time & cost associated with assigning less (10% method categories) or more-detailed categories
    2. Whether they have software that automates the 10 Percent method pool index calculations

    Most-Detailed Categories Method

    Regs. § 1.472-8(e)(3)(iii)(C)(1) states that taxpayers using the Most-Detailed Categories method “must assign each item in a dollar-value pool to the most-detailed BLS category of the selected BLS table that contains that item.” This simply means that all inventory items must be assigned to each most-detailed category of the BLS table selected by the taxpayer (CPI or PPI) for items that are present in inventory. To think of it more simplify, BLS category assignment under this method must be performed on an item by item basis.

    BLS Category Assignment Considerations

    • Companies that sort their inventory balances using 10% categories are required to use the 10 Percent method
    • Companies that sort their inventory by most-detailed CPI or PPI categories may also use BLS Weights & 10% rollups in performing their pool index calculations
    • Taxpayers may switch from one IPIC pool index calculation method to the other after the initial adoption of the IPIC Method, but this requires filing a Form 3115
    • Once this change in this method is made, the taxpayer cannot change to the alternative method for a five year period
      10% Method Most-Detailed
    Consideration Pro Con Pro Con
    BLS category assignment simplification
    BLS category assignment complexity
    Pool index calculation complexity
    Pool index calculation simplification

    10 Percent Method BLS Category Assignment

    IPIC Regs. § 1.472-8(e)(3)(iii)(C)(2) describe a three-step process to assign inventory items to BLS categories when using the 10 Percent method:

    1. First, when the current-year inventory value of a specific item is 10% or more of the pool total, that item must be assigned to the most-detailed category that includes that item.
    2. Second, for items not assigned to BLS categories in the first step, the taxpayer must examine successively less-detailed categories to determine whether the combined value of the categories included within them is 10% or greater, a process known as “rolling up,” or performing “10% roll-ups.” This step must be repeated until all items in the pool have been rolled up to a less-detailed category level where the 10% threshold is met. The highest level that items can be rolled up to is the General Category level.
    3. Third, items not assigned after the previous two steps (i.e., due to the hierarchical structure of BLS categories) must be identified & segregated.


    In addition, Regs. § 1.472-8(e)(3)(iii)(D)(5) defines a less-detailed category (in the context of determining a category inflation index) as a BLS category that:

    A) subsumes (i.e., includes, or incorporates in a more comprehensive category) two or more BLS categories;

    B) does not have a single assigned item whose current-year cost is 10% or more of the current-year cost of all items in the dollar-value pool;

    C) has at least one item in at least one of the subsumed BLS categories; and

    D) has at least one subsumed BLS category that either does not have any assigned items or is a separate 10% BLS category.


    Based on these Regs. sections, three types of index categories may be identified:

    • Most-Detailed 10% Categories – Any most-detailed category with a FIFO balance greater than 10% of the pool sum of FIFO balances is an index category by itself. BLS weights will not be applied to these categories when performing index calculations; only actual inventory dollar weighting will be used. Also, these categories are excluded from the roll-ups used to create Other 10% Categories. Most-Detailed 10% Categories are those that are assigned inventory dollars in Step 1 of Regs. § 1.472-8(e)(3)(iii)(C)(2).
    • Other 10% Categories – These categories, which are always less-detailed categories, are those with aggregated FIFO balances (for the categories they include) that exceed 10% of the pool sum of FIFO balances. BLS weighting is used for Other 10% Categories in category index calculations. Other 10% Categories are those that are assigned inventory dollars in Step 2 of Regs. § 1.472-8(e)(3)(iii)(C)(2).
    • Remaining Categories Grouping – This is the aggregation of all categories which remain after the procedures described above. Due to the hierarchical structure of the BLS categories it is possible that some categories may not be rolled up so that they are included in an Other 10% Category. There might not be any Remaining categories for a given pool. BLS weighting is used for remaining categories in category index calculations. Remaining categories are those that are identified & segregated in Step 3 of Regs. § 1.472-8(e)(3)(iii)(C)(2).

    Category Representation

    A taxpayer that uses the 10 Percent method does not need to break down their inventory dollars to the level of greatest detail but it is necessary to account for whether the most-detailed categories actually have items present in inventory. The reason for this is that only the indexes & BLS weights of categories actually present are used for pool index calculations. If category representation is not performed, the BLS weights for items present within a company’s product mix may not be included in the LIFO calculation. Similarly, failing to perform category representation may cause BLS the BLS weights for items not present within a company’s product mix to be included in the LIFO calculation. For this reason alone, it’s highly recommended to use software when using the 10 Percent method.

    10 Percent Categories Determination

    Assigning inventory dollars to BLS categories is a data-gathering process that precedes pool index calculations. The mechanics of the 10 Percent method pool index calculations determines the appropriate BLS category assignments when using the 10% method. This means that changes in the inventory mix or pooling may require assigning different BLS categories if using the 10% method.


    Example 1 – CPI: This company uses CPI & does not have fuels on LIFO. The following CPI Major Groups each include at least 5% of the total FIFO inventory balances:


    BLS IPIC CPI Pools:

    Pool # CPI Code CPI Category Name CPI Major Expenditure Group
    1 SAF Food & Beverages Food & Beverages
    2 SAG Other Goods & Services Other Goods & Services
    2 SEGA Tobacco & Smoking Products Other Goods & Services
    2 SEGB Personal Care Products Other Goods & Services
    2 SEGE Miscellaneous Personal Goods Other Goods & Services
    3 All Other Goods All Other Goods*

    *The sum of the other six Major Groups’ FIFO inventory balances is greater than 5% of total inventory, so they will be combined in a third All other goods pool.


    Pool 1 Food & Beverages BLS CPI 10% Categories

    CPI Code CPI Category Name
    SAF111 Cereals & bakery products
    SAF112 Meats, poultry, fish & eggs
    SEFJ Dairy & related products
    SAF113 Fruits & vegetables
    SAF114 Nonalcoholic beverages & beverage materials
    SEFN01 Carbonated drinks
    SAF115 Other food at home
    SEFR02 Candy & chewing gum
    SEFT03 Snacks
    SEFW Alcoholic beverages at home


    Pool 2 Other Goods & Services BLS 10% Categories

    CPI Code CPI Category Name
    SEGA01 Cigarettes
    SEGA02 Tobacco products other than cigarettes
    SEGB Personal care products
    SEGE Miscellaneous personal goods


    Pool 3 All Other Goods 10% Categories:

    CPI Code CPI Category Name
    SAH Housing
    SEHN01 Household cleaning products
    SEHN02 Household paper products
    SEHN03 Miscellaneous household products
    SAA Apparel
    SETC02 Vehicle accessories other than tires
    SAM Medical care
    SEMB01 Internal & respiratory over-the-counter drugs
    SAR Recreation
    SERG Recreational reading materials
    SAE Education & communication


    Example 2 – PPI

    This company uses PPI & has fuels on LIFO. The following PPI 2-digit codes each include at least 5% of the total FIFO inventory balances:

    BLS IPIC Pools:

    Pool # PPI Code PPI Major Commodity Group/Name
    1 02 Processed foods & feeds
    2 05 Fuels & related products & power
    3 06 Chemicals & allied products
    4 15 Miscellaneous products

    The sum of the other 11 PPI 2-digit codes inventory balances is less than 5% of total inventory balances so they will be included with the largest pool.


    Pool 1 Processed Foods & Feeds (02) & All Other 10% Categories

    PPI Code PPI Commodity Name
    01 Farm products
    02 Processed foods & feeds
    025503 Candy & nuts
    0261 Alcoholic beverages
    02620609 Noncarbonated soft drinks
    026207 Bottled carbonated soft drinks
    02890172 Chips (potato, corn, etc.)
    03 Textile products & apparel
    04 Hides, skins, leather & related products
    07 Rubber & plastic products
    08 Lumber & wood products
    09 Pulp, paper & allied products
    10 Metal & metal products
    11 Machinery & equipment
    12 Furniture & household durables
    13 Nonmetallic mineral products
    14 Transportation equipment

     025503 Candy & nuts, 02620609 Noncarbonated soft drinks, 026207 Bottled carbonated soft drinks, & 02890172 Chips (potato, corn, etc.) will each probably include at least 10% of Pool 1’s inventory balances. 0261 Alcoholic beverages includes canned & bottled beer & other malt beverages, wine, & distilled spirits. If any of those categories of alcoholic beverages is likely to include 10% of the pool total, then more detailed categories should be used for BLS category assignment to inventory items. 02 Processed foods & feeds can be used for BLS category assignment to inventory items that are all other food & beverage categories because the pool’s 10% threshold is not likely to be met by aggregating (“rolling up”) inventory balances at any four-digit or three-digit level included in the 02 PPI 2-digit code. Similarly, all other inventory in Pool 1 can be sorted at the 2-digit level because no other PPI 2-digit code will likely include 10% or more of the pool total. In fact, some of these PPI 2-digit codes will probably not have any inventory balances—10 Metal & metal products & 13 Nonmetallic mineral products, for example.


    Pool 2 Fuels & Related Products & Power (05) 10% Categories

    PPI Code PPI Commodity Name
    057103 Unleaded premium gasoline
    057104 Unleaded regular gasoline
    057105 Unleaded mid-premium gasoline
    057303 #2 diesel fuel
    057604 Lubricating & similar oils

    Each of these are likely to include 10% of the pool total.


    Pool 3 Chemicals & Allied Products (06) 10% Categories

    PPI Code PPI Commodity Name
    06 Chemicals & allied products
    0638 Pharmaceutical preparations
    0675 Cosmetics & other toilet preparations

    It may be necessary to use one or more 8-digit category included in 0638 for BLS category assignment to inventory items. For example, if 063802 Central nervous system, 063805 Respiratory system, & 063807 Vitamins, nutrients & hematinic preparations were each more than 10% of the pool total then those would be used as BLS categories & all other pharmaceutical preparations would be assigned into 0638.


    Pool 4 Miscellaneous Products (15) 10% Categories

    PPI Code PPI Commodity Name
    15 Miscellaneous products
    152101 Cigarettes
    15250101 Other tobacco products

    152101 Cigarettes & 15250101 Other tobacco products are most detailed categories that are likely to include 10% of the pool total. All other goods in this pool can be can be assigned 2-digit BLS PPI codes.


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