ABC analysis

ABC analysis:-

Usually a firm has to maintain several types of inventories. It is not desirable to keep same degree of control on all the items. The firm should pay maximum attention to those items whose value is highest. The firm should therefore classify inventories to identify which items should receive the most effort in controlling. This classification is done by the ABC analysis.

The ABC analysis technique is based is based on the assumption that a firm should not exercise the same degree of control on all items of inventory. It should rather keep a more rigorous control on items that are most costly, while items that are less expensive should be given less control effort.

On the basis of the cost involved, the various inventory items are categorized into three classes:

1. ‘A’ category.
2. ‘B’ category.
3. ‘C’ category.

·               Category ‘A’ Items - More costly and valuable consumption items are classified as A items. But the ‘A’ category items are very less in volume (generally 20%) when compared to the total volume of inventory.

·               Category ‘B’ Items - The items having average consumption value items are classified as B items. But the ‘B’ category items are very average in volume (generally 30%) when compared to the total volume of inventory.

·               Category ‘C’ Items - The items having less consumption value items are classified as C items. But the ‘C’ category items are very high in volume (generally 50%) when compared to the total volume of inventory.