ABC Analysis: Definition

ABC analysis (or proportional parts value analysis) is a technique used to exercise control over materials based on their importance or value.

ABC Analysis: Explanation

Under this system, all items of material are classified into three categories—A, B, and C—according to their value.

Category A consists of 5% to 10% of the total items in the store and accounts for 70% to 85% of the total store value. Category B consists of 10% to 20% of the total items in the store and 10% to 20% of the store’s value.

Finally, category C consists of the remaining 70% to 85% of the total items and accounts for 5% to 10% of the store’s value.

As described above, category A covers items with a small quantity but high value; category B covers items with medium quantity and value; and category C covers items with high quantity but small value.

It’s worth noting that the percentages used above are only guidelines; these numbers are not fixed in practice. They can be modified based on the management’s needs.

Under the ABC analysis of materials, items of material that fall into category A must be closely controlled at all stages of handling, namely, purchasing, receiving, inspecting, storing, and issuing.

For items in category C, elaborate control procedures are not necessary. Therefore, the routines used for recording, purchasing, storing, and issuing materials can be simplified for these items.

The items under category B receive as much attention as items under category A but the frequency of purchases and issues are planned so as to keep them at the minimum.

Having described what ABC analysis entails, it’s noteworthy that the approach is also known as the Always Better Control method.

This is because it aims to ensure maximum control over materials and minimum cost of control through the equitable distribution of time, attention, and cost involved in material control with reference to value.

Advantages of A.B.C. Analysis

The main advantages of ABC analysis of materials include:

  1. Ensures closer control over expensive materials in which substantial capital may be locked
  2. Can reduce carrying costs.
  3. Ensures enough safety stock is kept for items in category C
  4. Enabled a high stock turnover rate to be maintained

Frequently Asked Questions

How is A.B.C. Analysis carried out in manufacturing?

In manufacturing, suppliers are not involved when it comes to the distribution of material because material control procedures are mostly done in-house.

What is an example of an item considered for analysis under A.B.C.?

In a shoe manufacturing company, leather is used as the raw material for making shoes.

Why is A.B.C analysis also called “Always Better Control”?

It is called "Always Better Control" because it ensures maximum control over materials and minimum cost of control with reference to value.

What is the difference between A, B, and C categories of items under ABC analysis?

The A category consists of 5% to 10% of the total items in store and accounts for 70% to 85% of total store value. The B category consists of 10% to 20% of the total items in store and 10% to 20% of the store's value. The C category consists of 70% to 85% of the total items and accounts for 5% to 10% of the store's value.

Can I consider my company’s sales volume as an input criterion for determining whether I should take ABC analysis on my company’s material control?

No, this is a wrong practice. Always keep in mind that the numbers of items included in ABC analysis do not depend on the volume of your business.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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