Sunday, July 8, 2018

ABC Analysis

What is ABC Analysis?

It is form of Inventory Control or Material cost control wherein we will be exercising control over materials by classifying them into 3 categories namely

Category A

Category B

Category C.

Why we should classify them into 3 categories?
Its because
Category A would generally be called as highly important materials.
Category B would be called as Moderately Important Materials.
Category C would be called as Least Important Materials.

If you see the value of materials in %, let's say the highly important materials constitutes 70% in value, moderately important materials constitutes 20% in value and least important material constitutes 10% in value. 

But if you take the % in Quantity, the highly important material which are 70% in value would be only 10% of total Quantity and moderately important materials may be 20% in Quantity and least important material which are 10% in value would be 70% in Quantity.

So now, we understand that there are 3 categories of material and certain material would be too huge in quantity but they are very less in value and certain materials are very less in quantity and too huge in value. 

So now, we can decide how we should place our control. It is not going to reward us if all our attention is on this 70%, because its value is only 10%. 

Our more attention should be on those materials though they are only 10% in Quantity, their value is 70%.

How our control should be?

To know more, view this lecture.

Please Note:
This video is part of my Online course

Cost Accounting A Comprehensive Study

 Click here


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