A Stochastic Inventory Model Incorporation Intra-Year Purchases and Accounting Tax Incentives

Management Science, Vol. 32, No. 6, 1986

17 Pages Posted: 9 Nov 2010

See all articles by Gary C. Biddle

Gary C. Biddle

University of Melbourne - Faculty of Business and Economics; Columbia Business School; HKU Business School; London Business School

Kipp Martin

University of Chicago - Booth School of Business

Date Written: June 1, 1986

Abstract

It has been observed that firms alter year-end inventory policies in response to accounting tax incentives. This study proposes a stochastic ordering policy model which quantifies these effects. An innovative feature is its use of two decision variables: an initial order-up-to-level at the beginning of each year and a desired year-end inventory level. The ability to place a second order after demand has been assessed allows for an explicit consideration of the effects of tax incentives on order quantity decisions. Separate formulations are developed for the two most widely-used inventory accounting methods, LIFO and FIFO. The model provides new implications for choices between LIFO and FIFO, the forms of optimal ordering policies under each and for year-end inventory levels. A procedure is given for calculating the optimal FIFO policy. Calculating optimal LIFO policies is very difficult so myopic approximate policies are given which bound the optimal policy.

Keywords: accounting, Inventory/production-stochatic models, inventory/production-approximations

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JEL Classification: M40

Suggested Citation

Biddle, Gary C. and Martin, Kipp, A Stochastic Inventory Model Incorporation Intra-Year Purchases and Accounting Tax Incentives (June 1, 1986). Management Science, Vol. 32, No. 6, 1986, Available at SSRN: https://ssrn.com/abstract=1656245

Gary C. Biddle

University of Melbourne - Faculty of Business and Economics ( email )

Level 8, Dept of Accounting
198 Berkeley Street, Carlton
Melbourne, Victoria 3010 3010
Australia
61-3-8344-9807 (Phone)
61-3-9349-2397 (Fax)

HOME PAGE: http://https://findanexpert.unimelb.edu.au/profile/774767-gary-biddle

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

HKU Business School ( email )

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Hong Kong

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Kipp Martin (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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