A.B.C.

analysis
A.B.C. analysis is a selective technique of controlling different items of inventory. In
actual practice, thousands of items are included in business as inventories. But all
these items are not equally important. According to this technique, only those items
of inventory are paid more attention which are significant for business. According to
this technique, all items are classified into 3 categories A.B. and C. In ‘A’ category
those items are taken which are very precious and their quantity or number is small.

(ii) In ‘B’ category those items are reserved which are less costly than the items of
category ‘A’ but their number is greater.

(iii) In category ‘C’ all those items are included which are low priced but their
number is highest.

The rate of use of items of category ‘A’ is the highest and that of category ‘C’ is the
lowest. In a manufacturing organisation, the items of inventory can be classified as
under:-

Example:-

Class Number of items in % as per their

terms of their % value

A 15 70

B 30 20

C 55 10

100 100

Thus, the number of items of category ‘A’ are 15% but their value is 70% of total
inventory. Therefore, inventory management can be made more effective by
concentrating control on this category. Effort are made to minimise investment items
of this category. The % of number of items in category ‘B’ is 30 but their value is 20%.
Therefore this category will be paid less attention. The items in category ‘C’ is 55%
but their value is just 10% of total. Therefore, management need not spend much
time for control of this class of inventory because very little investment is made in
them. These items are purchased in bulk quantity once in 2-3 years. The management
must be aware that theses items may be less important in terms of value but their
non-availabetety can break down the production process. Therefore, these item
should available in time A.B.C. analysis can be presented by following diagram also.

Advantages of ABC
Analysis

(1) A Close and strict

control is facilitated on
the most important
items which constitute
a major portion of
overall inventory
valuation or overall
material consumption
& due to this, costs
associated with inventories maybe reduced.

(2) The investment in inventory can be regulated in proper manner & optimum
utilisation of available funds can be assured.
(3) A strict control on inventory items in this manner help in maintaining a high
inventory turnover rates.