This document discusses ABC analysis, a classification technique that categorizes inventory items into groups A, B, and C based on their cost. Group A items have the largest monetary value but smallest number, accounting for 70% of total inventory cost while being only 15% of items. Group C items have the smallest monetary value but largest number, comprising 55% of items but only 10% of total cost. The document provides an example applying ABC analysis to classify seven inventory items for a firm. It notes that while ABC analysis is useful, it has limitations as some low-cost but critical items may be overlooked.

1. ABC ANALYSIS
DR ANURAG KUMAR
ASSOCIATE PROFESSOR
ABES ENGINEERING COLLEGE GHAZIABAD.

2. ABC Analysis
The ABC system is a widely-used classification technique for the
purpose. On the basis of the cost involved, the various
items are classified into three categories:
1) A, consisting of items with the largest investment.
2) C, with relatively small investments, but fairly large number
of items.
3) B, which stands mid-way between category A and C.
Category A needs the most rigorous control, C requires minimum
attention, and B deserves less attention than A but
more than C.

3. TABLE 1 Inventory Breakdown between Number of Items and Inventory Value
Group Number of items (per cent) Inventory value (per cent)
A 15 70
B 30 20
C 55 10
Total 100 100
Some points stand out from Table 1. While group A is the least important in
terms of the number of items, it is by far the most important in terms of the
investments involved. With only 15 per cent of the number, it accounts for as
much as 70 per cent of the total value of inventory. The firm should direct most
of its inventory control efforts to the items included in this group. The items
comprising B group account for 20 per cent of the investments in inventory.
They deserve less attention than A, but more than C, which involves only 10
per cent of the total value although number-wise its share is as high as 55 per
cent. The A B C analysis is illustrated in Example 1.

4. Example 1 A firm has 7 different items in its inventory. The average number of
each of these items held, alongwith their units costs, is listed below. The firm
wishes to introduce an A B C inventory system. Suggest a breakdown of the
items into A, B, and C classifications.
Item number Average number of units in inventory Average cost per unit
1
2
3
4
5
6
7
20,000
10,000
32,000
28,000
60,000
30,000
20,000
Rs 60.80
102.40
11.00
10.28
3.40
3.00
1.3
Solution The A B C analysis is presented in Table 2.

5. TABLE 2 ABC Analysis
Item Units Per cent of
total
Unit cost Total cost Per cent of
total
(1) (2) (3) (4) (5) (6)
1 20,000 10 Rs 60.80 Rs 12,16,000 38.00 70
2 10,000 5 15 102.40 10,24,000 32.00
3 32,000 16 11.00 3,52,000 11.00 20
4 28,000 14 30 10.28 2,88,000 9.00
5 60,000 30 3.40 2,04,000 6.38 10
6 30,000 15 55 3.00 90,000 2.80
7 20,000 10 1.30 26,000 0.82
Total 2,00,000 100 32,00,000 100.00
The A B C system of classification should, however, be used with caution. For
example, an item of inventory may be very inexpensive. Under the A B C system it
would be classified into C category. But it may be very critical to the production
process and may not be easily available. It deserves the special attention of
management. But in terms of the A B C framework, it would be included in the
category which requires the least attention. This is a limitation of the A B C
analysis.