The A-B-C Approach to Inventory Classification

Read the overview below and complete the activities that follow.

An important aspect of inventory management is that items held in inventory are not of equal importance in terms of dollars invested, profit potential, sales or usage volume, or stockout penalties. It would be unrealistic to devote equal attention to every item. Instead, a more reasonable approach is to allocate control efforts according to the relative importance of various items in inventory. CONCEPT REVIEW: The A-B-C approach classifies inventory items according to some measure of importance, usually annual dollar value (i.e., dollar value per unit multiplied by annual usage rate), and then allocates control efforts accordingly. Typically, three classes of items are used: A (very important), B (moderately important), and C (least important). However, the actual number of categories may vary from organization to organization, depending on the extent to which each wants to differentiate control efforts. With three classes of items, A items generally account for about 10 to 20 percent of the number of items in inventory but about 60 to 70 percent of the annual dollar value. At the other end of the scale, C items might account for about 50 to 60 percent of the number of items but only about 10 to 15 percent of the annual dollar value. These percentages vary from firm to firm, but in most instances a relatively small number of items will account for a large share of the value or cost associated with an inventory, and these items should receive a relatively greater share of control efforts.

1.

The A-B-C approach typically classifies inventory items according to:

select

select

The relative quantity

The warehouse space available

The physical size of items

The First In First Out rule

The annual dollar value

selectThe relative quantityThe warehouse space availableThe physical size of itemsThe First In First Out ruleThe annual dollar value

2.

The annual dollar value used in the A-B-C approach refers to:

select

select

Production plan cost

Dollar value per unit multiplied by annual usage rate

Storage cost of inventory multiplied by average annual inventory

Price of the final product multiplied by year-end inventory

Price of the inventory item multiplied by average annual inventory

selectProduction plan costDollar value per unit multiplied by annual usage rateStorage cost of inventory multiplied by average annual inventoryPrice of the final product multiplied by year-end inventoryPrice of the inventory item multiplied by average annual inventory3.

Items classified as A using the A-B-C approach generally account for about:

select

select

Top 35% of items according to annual dollar value

Top 5% of items according to annual dollar value

Bottom 50% of items according to annual dollar value

Top 50% of items according to annual dollar value

Top 15% of items according to annual dollar value

selectTop 35% of items according to annual dollar valueTop 5% of items according to annual dollar valueBottom 50% of items according to annual dollar valueTop 50% of items according to annual dollar valueTop 15% of items according to annual dollar value4.

Items classified as B using the A-B-C approach generally account for about:

select

select

Bottom 50% of items according to annual dollar value

Middle 50% of items according to annual dollar value

Middle 15% of items according to annual dollar value

Middle 35% of items according to annual dollar value

Top 35% of items according to annual dollar value

selectBottom 50% of items according to annual dollar valueMiddle 50% of items according to annual dollar valueMiddle 15% of items according to annual dollar valueMiddle 35% of items according to annual dollar valueTop 35% of items according to annual dollar value5.

Items classified as C using the A-B-C approach generally account for about:

select

select

Bottom 15% of items according to annual dollar value

Bottom 35% of items according to annual dollar value

Top 50% of items according to annual dollar value

Bottom 50% of items according to annual dollar value

Middle 35% of items according to annual dollar value

selectBottom 15% of items according to annual dollar valueBottom 35% of items according to annual dollar valueTop 50% of items according to annual dollar valueBottom 50% of items according to annual dollar valueMiddle 35% of items according to annual dollar value6.

The main reason for classifying inventory is:

select