End-of-Period vs. Continuous Accounting of Inventory-Related Costs

Nils Rudi (), Harry Groenevelt () and Taylor R. Randall ()
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Nils Rudi: INSEAD, 77305 Fontainebleau, France
Harry Groenevelt: Simon School of Business, University of Rochester, Rochester, New York 14627
Taylor R. Randall: David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112

Operations Research, 2009, vol. 57, issue 6, 1360-1366

Abstract: This paper investigates the effect of using an end-of-period accounting scheme for inventory-related costs when costs actually accrue in continuous time. Using a simple model, we show that (i) the end-of-period scheme results in higher than optimal order-up-to levels and inventory cost if the cost and demand parameters are unchanged, and (ii) it is possible to replicate both the optimal base-stock level and its cost by selecting the values of the cost or demand parameters judiciously. The cost adjustments often require extreme values, and no systematic cost parameter adjustment scheme is robust. However, we find a systematic adjustment to the demand parameters that serves as a good approximation and is robust. We therefore conclude that end-of-period cost accounting without parameter adjustments is in general inappropriate when costs are incurred continuously, but there are adjustments that can make it work well.

Keywords: accounting; inventory cost; inventory/production; periodic review; sensitivity analysis; stochastic (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:57:y:2009:i:6:p:1360-1366

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