Inventory Valuation and the Short-Run Cost Function.

Abstract To relate cost and sales we must value inventory changes at marginal cost. The accounting equation, using this concept, is based on two estimates: (a) volume of inventory at successive points of time (b) marginal cost of the physical inventory change. Errors in these two estimates are relatively more important as the period is shortened. We can eliminate the necessity of making these estimates by introducing purchases and production into the regression calculations as independent variables. For certain purposes it is desirable to convert the equation into a function expressing cost as dependent on sales (or any one of the independent variables). This requires coefficients of physical relationship among the independent variables, purchases, production, and sales. These coefficients may be estimated directly, from long term averages, or from first differences derived from data on input-output quantities in successive periods.