ABC analysis about the companies

1. ABC
ANALYSISYASHIKA
BANSAL
SOUMYA MITTAL
UTTAM KUMAR

2. INVENTORY CONTROL
• INVENTORY CONTROL – A systematic control and regulation
of purchase , storage and usage of materials in such a way as to
maintain an even flow of production, at the same time avoiding
excessive investment in inventories. Efficient material control cuts
out losses and wastes of materials that otherwise pass unnoticed.
• OBJECTIVE- To ensure stock is sufficient to meet the production
requirements so that uninterrupted production flow can be
maintained.
• It maintain a trade off between stock out and over stocking.

3. TECHNIQUES OF INVENTORY CONTROL
ABC ANALYSIS OR ALWAYS BETTER CONTROL METHOD- ON THE BASIS OF VALUE AND
FREQUENCY OF INVENTORY
This is value based system of material control which exercises discriminating control over
different items of inventory on the basis of investment involved. Materials are analyzed according
to value so that costly and more valuable material are given more attention and care.
OBJECTIVE- Concentrate efforts on those material where attention is needed most as it is
unwise to give equal attention to all items in stock.
PROCESS- All items are classified according to their value- high, medium and low value, which
are known as A, B and C items respectively. Management focuses on A items where sophisticated
controls should be installed items may be given less attention and C items least attention.

4. A Items- These are high value items about 70% of inventory
value. which may consist of only a small percentage of total
items handled i.e. about 10% of total items handled by the
stores. On account of their high cost, these material should be
under tightest control and responsibility of most experienced
personnel. These are controlled by fixing certain levels like
maximum level, minimum level and re- order level.
B CATEGORY- The category of items is relatively less important;
they may be 20% of total items of materials handled by stores and the
sum involved is moderate i.e. about 20% of total investment in
inventories. The order for re items, belonging to this category may be
placed after reviewing their situation periodically.

9. DISADVANTAGES
1. It Ignores GAAP : This method does not follow the rules of GAAP (generally accepted accounting
principles). Therefore, it is suitable for internal use only.
2. Complex And Time Consuming : It is very complicated task to categorize materials in different
groups. It consumes more resources such as time, labor and cost to group materials in case of large group
of inventory.
3. Static In Nature: Value of materials may change according to the market trend. It means category A
product may move to B and C may move to A with the change in value of product in the market. In such
situation, ABC inventory system may become outdated because of the lack of dynamism.
4. Based On Financial Value :This analysis is based completely on the dollar value of materials and does
not consider other important factors.
5. Not Suitable For : ABC analysis is not suitable for small business houses which does not require large
volume of inventories. It is also not applicable for materials which cannot be standardized.
6. Possibility Of Loss: It gives less attention to B and C grouped materials. Therefore, there is a chance of
loss because of over stock, damage and wastage of these items.

10. ILLUSTRATION
ITEM UNITS UNIT COSTS (₹)
1 7000 4.450
2 4000 19.140
3 1500 8.900
4 29000 0.180
5 10000 8.190
6 40000 0.450
7 60000 0.180
8 13000 0.980
9 10000 0.205
10 29000 0.360
11 11500 6.320
12 4000 5.220
From the following details draw a plan of ABC selective control

11. STEP 1 : STATEMENT OF TOTAL COST AND RANKING
ITEM UNITS % of total
units
UNIT
COSTS
TOTAL
COST
% OF
TOTAL
COST
RANKING
1 7000 3.1963 4.450 31,150 8.7557 4
2 4000 1.8265 19.140 76,560 21.5195 2
3 1500 0.6849 8.900 13,350 3.7524 7
4 29000 13.2420 0.180 5,220 1.4672 11
5 10000 4.5662 8.190 81,900 23.0205 1
6 40000 18.2648 0.450 18,000 5.0594 6
7 60000 27.3973 0.180 10,800 3.0357 9
8 13000 5.9361 0.980 12,740 3.5810 8
9 10000 4.5662 0.205 2,050 0.5762 12
10 29000 13.2420 0.360 10,440 2.9345 10
11 11500 5.2511 6.320 72,680 20.4289 3
12 4000 1.8265 5.220 20,800 5.8690 5
2,19,000 100 3,55,770 100

12. STEP 2 : BASIS FOR SELECTIVE CONTROL
• ₹50,000 & above – ‘A’ items
• ₹ 13,000 to 50,000 – ‘B’ items
• Below ₹13,000 - ‘C’ items
On this basis a plan of ABC selective
control will be drawn

13. Ranking Item No.s % of total units Cost (₹) % of total cost Category
1 5 4.5662 81,900 23.0205
2 2 1.8265 76,560 21.5195
3 11 5.2511 72,680 20.4289
TOTAL 3 11.6438 2,31,140 64.9689 A
4 1 3.1963 31,150 8.7557
5 12 1.8265 20,880 5.8690
6 6 18.2648 18,000 5.0594
7 3 0.6849 13,350 3.7524
TOTAL 4 23.9726 83,380 23.4365 B
8 8 5.9361 12,740 3.5810
9 7 27.3973 10,800 3.0357
10 10 13.2420 10,440 2.9345
11 4 13.2420 5,220 1.4672
12 9 4.5662 2,050 0.5762
TOTAL 5 64.3836 41,250 11.5946 C
GRAND TOTAL 12 100 3,55,770 100