End-of-period vs. continuous accounting of inventory-related costs

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.