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1 Erica would like to perform an ABC inventory analysis. She has gathered the following annual figures for her jewelry design business: Metals (gold/silver), $25,000;

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1 Erica would like to perform an ABC inventory analysis. She has gathered the following annual figures for her jewelry design business: Metals (gold/silver), $25,000; Beads, 54,800; Clasps/closures, $3,500; Semi-precious stones, S8,500; Jeweler's tools/supplies, $1,800, Bags/boxes, $425; Ribbon, $250; Misc., $100 Hint: You already have the total cost for each item, start by listing the inventary items in descending order, based on cost. See pages 225- 226. Item Annual Cost Percentage % Cumulative % ABC Classification a. Her efforts on negotiation contracts, obtaining competitive bids and establishing control procedures should be spent on which items? Explain. b. How should she handle C items? Explain. ( Flet Ave Made in HP 225 2. Work-in-process inventones conut of those items that are in the midst of the transformation process just mentioned, for example, the com puter manufacturer takes microchips, disk drives, and other raw materi als out of storage and put them into the wembly proces. These item are considered a work in process until the finished computer is ready for chipment 3. Finished goods inventores consist of those items that are actually cold by the business-heet steel for the steel company, computers for the com puter manufacturer, or bread for the bakery. Finished goodsabo include spare parts and repair parts for the end item. For example, a computer man factuning firm also has disk drives, motherboards, and other items that might tail in me and therefore it sells repair parti to authorized computer repat facilities 4. Maintenance, repair, and operating (MRO) inventores con- sest of those items that are used by the firm in usual operations but that are not manufactured or sold by the firm. These can range, for example, from lubricating oil and spare parts for machinery to business forums and paper clips ABC Inventory Analysis In evaluating inventory for financial purposes, the cost of inventory items is an important consideration. It is difficult to determine which inventory items to emphasize unless we have some idea of the importance of these items with rela tionship to the overall operation of the business. One useful method of inven tory analysis is ABC analysis. In most business operations, 5 to 10 percent of the inventory items (ie, individual stock numbers or stock-keeping units) make up approximately 75 percent of total costs (A item); 10 to 15 percent of the inventory stock numbers make up 10 to 15 percent of the total costs (Bitems), and the remaining 75 to 80 percent of the stock numbers account for only 10 to 15 percent of total costs (Citems). For manufacturing firms. A items are usually raw materials for retail stores, the items are the best-selling items and are finished goods The Bitems are mtermediate raw materials and next best-selling items, whereas Citems are usually MRO types of items. Table 7-3 gives a partial inventory for Hannah's Donut Shop, the company used in our case study in Chapter 6. Table 7-4 shows the ABC analysis for that partial inventory The method of determining A, B, and C items is to take the total quantity purchased and multiply it by the unit cost to determine total cost for the item. as shown in Table 7-3. Notice that the total cost is a function of both quantity and price. For example, Hannah uses 104 bottles of bleach per year, but bleach only costs 60 cents a gallon, so the total cost is only 562.40 a year. However, she uses only 45 cases of urn coffee a year, but each case costs $46.50, therefore 226 Chapter Home Capital Mama 9000 9900 3050 come SAF Instantys B Raspberry filing TABLE 7-4 Hannah's Donut Shop ABC Analysis om Number Anual on Description Demand Unit Cost Shortening 9500 $22.80 Raised me 2150 Cake doughout me 6250 Bread flour for raised doughnuts 5 Um 6 10 450 6 Bavarian cream titing 4650 1000 2 15.00 450 WM 1 sought towy 33.15 600 9 Chocolate doughnutma 22.00 a 52.0 10 10 12 doughnut trays 0 25.10 11 Chocolate fudge base 20 2150 12 Buttermilk mix 26.0 3760 350 23.30 13 14 500 1444 Outbran 16 260 15 Old fashioned doughnuts 26.0 16 White frosting base 2259 15.0 17 HAR all purpose flour 29,90 520 18 6.99 Cherry fruit bits 280 13.80 19 Chunky apple 16.95 20 208 21 Bluebiny filling 156 Dishwashing lotion 20.10 52.0 22 Lemon mistilling 3.99 104 23 Trash bags 10.4 24 Degreaser 10.4 25 Bleach 6.40 Sugarpackets 0.60 27 8.90 Sarrers, coffee 52 10.4 2.49 Sweet N Low 26 8.39 Straws wrapped 52 400 30 Comet 26.0 0.40 Total inventory cost Total Cost $21660.00 21.285.00 19.06250 6.039.00 2.092 50 1.500.00 1.491.75 1.320.00 130528 1.118:00 QUEEN 977.60 81550 722.00 67470 58630 36348 JOS 35256 31356 20748 13728 90.48 6656 95 106.44 358,60 Cumulative Percentage Percentage 28.04 26.04 25.50 51.62 2291 7458 720 8.79 252 84.31 1.80 86 11 000 1.79 87.00 1.59 89 49 1:57 91.00 134 9240 1.18 9350 0.98 94.50 0.87 SON 95.43 081 96 24 0.70 96.94 056 97.50 044 97 94 0.43 9837 0.42 98 79 038 99.17 99.42 0.17 99.59 0.11 99 60 0 08 AN 99 77 0.08 9985 0.06 99.91 0.00 99.94 99.96 0.03 99 99 001 100.00 10000 025 13.20 870 1040 62.40 828282 46.75 25.90 003 2181 20.80 10.40 $83.1947 the annual cost of coffee is $2,092.50. Once we determine the total cost of each inventory item, we are ready to perform an ABC analysis, as shown in Table 7-4. We take the inventory items and list them in descending order. based on total cost. We add the total cost of our inventory and then compute the percentage of total cost that each inventory item consumes by dividing each individual item's total cost by the total cost of the inventory. For example, to determine the percentage of total cost consumed by shortening, we take the annual cost of shortening, divide it by the total cost of inventory, and multiply the result by 100 (521,660.00)(100) Shortening percentage = 26,04% $83,194,75 We continue this procedure with each inventory item, listing the per centage consumed in a separate column. We then determine ABC by adding

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