A Dynamic Programming Approach to the Analysis of Different costing Methods in Accounting for Inventories.

This article presents information on the use of dynamic programming in analyzing two accounting methods for inventories and their potential effect on manager decisions. The objectives are to consider the viability of dynamic programming in considering alternative accounting methods and their potential decision effects and the potential decision effects of variable and absorption cost inventory methods. These objectives are met by developing quantitative statements of the alternative methods in a decision-making context, transforming these statements to a dynamic programming formulation, solving these mathematical programs via the computer and analyzing the results in view of past research in the area. Inventory valuation methodology alternatives were selected because of the longtime interest of accountants in utilizing and comparing these systems, the resulting literature made available by that interest, and most important the failure of that literature to disclose a general model capable of fully investigating the decision alternatives in either an analytic or empirical manner. The dynamic programming solution technique is employed as the only viable optimizing methodology in existence.