What is ABC Analysis | Free Cost Accounting Articles

What is ABC Analysis?

What is ABC Analysis
What is ABC Analysis?

ABC Analysis

A most useful guide to devising a stock control system is often known as ‘Pareto Analysis’ (after the name of an Italian Philosopher). The term is also known as ABC analysis because it analyses the range of stock items held into three sectors, known as A, B, and C.

ABC analysis is a new technique of classifying and controlling production and store inventories both purchased and manufactured in accordance with the value of the item. It is the starting point for material management. It is the basic analytical management tool that enables top management to place the effort where the results will be greatest. The technique is popularly known as Always Better Control or the Alphabetical approach. The technique tries to analyze the distribution of any characteristic by the money value
of importance in order to determine its priority. In materials management, the technique has been applied in areas needing selective control such as inventory, the criticality of items, obsolete stocks, purchasing orders, receipt of materials, inspection, storekeeping, and verification of bills.

ABC analysis or classification is the principle of Selective Control of inventories and a technique of grouping thousands of stock items handled by an organization. The principle involved is that the degree of control on stock items and the amount of safety stock carried should vary directly with the consumption value of the item involved.

Advantages of ABC Analysis

The following are the advantages of ABC Analysis :

1) Selective Control

This approach helps the materials manager to exercise selective control and focus his attention only on a few items when he is concerned with lakhs of store items.

2) Control Inventories

By concentrating on ‘A’ class items, the materials manager is able to control inventories and show visible
results in a short span of items.

3) Obsolete Stocks

By controlling the ‘A’ items obsolete stocks are automatically pinpointed.

4) Clerical Cost

The system also helps in reducing the clerical cost and better planning and improved inventory turnover.

5) Equal Attention

ABC Analysis has to be resorted to because equal attention to A, B, and C items will not be worth while and
would be very expensive.

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