Abc analysis generally divides on-hand inventory into three classes based upon
A. item quality
B. unit price
C. the number of units on hand
D. annual demand
E. annual dollar volume
The Correct Answer Is:
- E. annual dollar volume
Abc analysis generally divides on-hand inventory into three classes based upon annual dollar volume. Businesses benefit from ABC analysis when it comes to better understanding and managing their inventory. In order to improve their inventory management processes and ultimately increase profitability, businesses can categorize inventory according to dollar volume and consumption rate.
There are the following classes:
- Class A: Among the inventory items in this class, the biggest dollar volume and the highest consumption rate are represented. Business critical items are closely monitored and managed since they are crucial to the business’s operations.
- Class B: Inventories in this class represent items whose dollar volume and consumption rate are moderate. In contrast to class A items, these items are considered important to the business, but not as critical.
- Class C: Inventory items in this category have the lowest dollar volume and consumption rate. As a result, these items are usually not given as much attention and resources as other items that are considered to be less important to the business.
Businesses can maintain adequate levels of inventory on the less critical items while still managing the most critical items by dividing inventory into these three classes. As a result of this approach, inventory turnover can be improved, carrying costs can be reduced, and profitability can be increased.
The ABC analysis can also be used to identify potential issues or improvements within an organization’s inventory management process. It may indicate that the business is carrying too much obsolete or slow-moving inventory when a significant portion of its inventory is classified as class C items. For better management of these items, the business may need to review its purchasing and stocking practices.
Moreover, ABC analysis can be used to determine the appropriate level of safety stock to maintain for each inventory item. Generally, items in class A require a higher level of safety stock to ensure they are available at all times, whereas items in class C require less safety stock because they are less important.